Interesting. How long have you been doing this? One would imagine that a strategy where you sell the wings that far out would be super-leveraged to the level of implieds and you should see some pretty nasty losses every once in a while. I don't see how setting a stoploss would help, as you could wake up in the morning and see implieds go up 50%. It does not mean that there is no alpha in these trades, just means that you are getting paid for vol convexity. I know a few people that run similar strategies, but they sell much closer to the money (10-20 delta) and they do see some pretty serious drawdowns.
I pay zero attention to volatility. When I was trading equity options, I definitely was paying attention, and I took some losses that disillusioned me so much I liquidated and found something else to trade. Futures options. It's a breath of fresh air. I have witnessed volatility hardly being a factor in my success doing this. I hate equity options precisely for the uncertainty that the volatility function of equity option pricing entails. Futures options are far more about price action and time decay than volatility. I do not enter a stop loss order. It's a mental stop loss. I watch my positions daily, and nightly/weekendly (lol). It's not hard at all knowing when one of my short options has reached the value at which I want to cut my loss. When I have to take a haircut, it's never overwhelming; it's as easy as entering a buy back order, and it's always completely within my risk parameters. The key is the discipline to stick to it like that. I have been employing this particular strategy for about 6 months and my financial backers love me for it. I have been making about 5% per month and haven't had a bad month yet. I have been trading for 5 years now doing many other things. I can't say it's for everyone. Just those who can sell the right futures options for time value and with the appropriate risk management techniques. Without risk management, you're spinning a roulette wheel.
I can see this ending in tears. I'd also be very curious to find out how long you've been running this strategy.
It certainly can if you don't have the proper risk management strategy in place. "I have been employing this particular strategy for about 6 months and my financial backers love me for it. I have been making about 5% per month and haven't had a bad month yet. I have been trading for 5 years now doing many other things. "
Well, the question is really about how you perceive you can risk manage smth that leveraged and prone to potentially discontinuous "jumpy" prices. I remember being short some stupid teeny outstrikes once in 2007 (this was in Eurodollars). Wasn't pretty. Thank god it was a very small position.
Thank you for all your expertise and advice about forex formula: as someone new to forex, I am overwhelmed by the intense amount of learning ahead ; this was a certainly a helpful start !!
This strategy you can win most of the time; but when you lose you can lose big. If you're making good money on selling wings, that means you are probably selling a number of contracts. Your positive theta strategy can be crushed by a big move against you and a corresponding increase in negative vega even with a fair degree of time left to expiration. Even if there is little time left to expiration and it moves way big against you, there can be a lot of negative gamma to cover. Having said that, you can still be a net seller by doing a ratio write, which will mitigate the unlimited risk somewhat. Or you can sell a credit spread - which has a defined risk. Now, I used to say I would never sell naked. There may be situations where I'd do it (I haven't for years). But, to make a living selling OTM options, scares the heck out of me. This forum and the well respected books on options are replete with examples of famous traders that got killed that depended on this strategy for their bread and butter. But even then, maybe there are traders out there who have done this strategy for decades and have risk management procedures in place (possibly buy or sell stops on the underlying futures to hedge a major move), that can win doing it. It just scares me to try to depend on this strategy - to sell wings.