Either I am thick or you're referring to strangles. I personally can't imagine investing in a manager due to the fact that their distribution of returns beats Gaussian. Max Ansbacher satisfied your criteria prior to losing 44% in one month in 2008.
Yes, I know. I have researched it to death. Since then I started to implement the "skewness" (Kurtosis) as my tool to offset Delta and Vega in my option strategies. It is the fastest indicator to cope with gamma in my opinion. The Vega compensation is a big trick though.
Haha sorry, you're not thick, and I am referring to strangles. I think beating the Gaussian (with statistical significance) is enough for me. You can't state that Max Ansbacher beat the Gaussian significantly without knowing the probability distribution he was targeting. Do you know the strikes he was selling? (I'm asking seriously, not rhetorically.)
Sure, but it's only useful when you're right. A 500bp 25-delta skew looks good (until last week), but it never trades flat, and probably never will. You earn just as much in an up-market with a bull reversal as you will in a down-market with a bear reversal. IMO, the utility of skew is on delta-bets, and not much else.
This quote from Ansbacher makes me think he isn't the sharpest knife in the drawer: http://www.ansbacherusa.com/files/optionstrader0106article.pdf "OT: Is it fair to say that your strategy is basically selling volatility? MA: I donât know if weâre selling volatility. We like to think weâre selling time value." But back to the question we were discussing... how far out is he selling: "OT: Could you describe a previous trade? MA: We sold May 1,195 puts and 1,050 calls when the S&P 500 traded at 1,129.49 on April 14, 2004 (see Figure 3)." They sold a strangle 6.5% away from the underlying, with a month out, when the implied volatility (based on VIX) was ~16%. That means std dev for 1 month would've been about 4.6%. So, they were about 1.4 sigma away. Assuming that's what they were doing consistently, they would be expected to be profitable 84% of the time. Based on their IASG numbers here: http://www.iasg.com/groups/group/ansbacher-investment-managemen/program/option-writing In the 12 years (144 months) from 1996-2007, they had 36 losing months... they were only profitable 75% of the time (versus expected 84%). So they were being *beat* based on the probability distribution they had designed for. I would've never invested in them.
There is no alpha associated with strike selection. It's all the same animal. Fine, find a passive strangle-seller on SPX to compare. My guess is that there aren't any that satisfy your criteria.
I use it for delta compensation techniques, not for delta bets. There is meat there that I believe many have overlooked.
You're completely missing my point. Please go back and reconsider what I'm saying. The point isn't strike selection. The point isn't whether a passive "short straddle" is a winning strategy (I'm ABSOLUTELY not stating this). The point is how you *determine* whether any particular manager (or STRATEGY) has alpha. I think it'd be a ludicrous statement to state that it's impossible to generate alpha with a short option strategy. (If it were, the opposite would be true: you could "always" generate alpha in a long options strategy.) I'm potentially "okay" with occasional DDs of 40%; you can't use that alone as your manager selection criteria. You can look at returns for John Henry (or even John Paulson)... they've all had significant DDs at some point. The point is, given a specific set of historical returns... how do you determine whether they are actually generating "alpha", and/or "beating the market"? You obviously can't use CAPM, annualized returns, or anything similar for an options based strategy. My very basic filter using % of winning months shows that Max Ansbacher was a manager with no provable skill even BEFORE 2008. Naive investor who didn't understand the implications of the trades Ansbacher are putting on would've easily been misled. And I think a passive straddle strategy would, over time, prove to be fairly priced... no alpha at all.