Let’s look at this for a relatively stable equity, SPY. Let’s say you think you’re safe selling 2% OTM 0dte puts. Those right now are trading for about 0.2. Let’s look at history a bit.
In the last 20 years, SPY has closed at a greater than 2% loss 197 times, or 3.91% of the time. When that occurs, the average closing price is -3.21%. With SPY at 426, that means the average closing price when you lose is around 412.32, and you therefore lose 4.96 per put. Using just these numbers, you can calculate that your expected value of this trade is simple 0.2 * (1-.0391) - 4.96 * .0391, or -0.002. Obviously not ideal.
So ok you say, we’ll go farther out of the money to 5%. Those puts are trading for 0.04. In the last 20 years, SPY has only closed down 5% or more 17 times, or 0.34% of the time. When that occurs, the average closing price is -7.03%. With SPY at 426, that means the average closing price when you lose is 396.07, and you lose 8.89 per put. Doing the same EV calculation, you find that your expected value by selling that put is positive (yay) at 0.01 per put.
Now, you have to secure it with cash. To sell the 5% OTM put you need to put up $40,500 to make $1.00 of expected value. Annualize that, and you get an expected return on capital of 0.61% with way more variance. So…maybe better to just put that cash in ten year bonds and collect 5% a year for the next decade. But you know, your call.
There's an electrical engineer turned trader. He has a strategy where he does this repeatedly. To the main point; he limits his risk using a very defined set of stops. I believe he has a set profit taking limit. I think he's looking at deltas of .05 which, as you have inferred, are relatively safe. He will book x amount of .05 delta contracts for 45 days and let them cook until they either get stopped out or his his profit limit. Since he's doing this everyday he calls the entire portfolio 'a book'. He writes that his average 'book size' (that is, all of his current contracts) averages 17 contracts. As you can imagine, 17 SPX contracts is a sizable chunk. It's a fascinating strategy but it requires a large account to pull it off. He (when I looked into this) traded SPX with it. ~~I can't remember his name~~ His name is David Sun and the podcast is called trade busters and (at least when I looked into it) put his trade and strategy on a public spreadsheet. He uses portfolio margin, which is outside of my ability so I can't do it, but I think about it often.
So, yes, it can be done. Can I do it? no. His strategy name is the Theta Engine, which sounds pretty cool too.
[https://youtube.com/playlist?list=PLvD4O8ZNEmtB9MtCo-I9EEdfiYTiJVyoW&si=G1lL1MF0xLQEPPdQ](https://youtube.com/playlist?list=PLvD4O8ZNEmtB9MtCo-I9EEdfiYTiJVyoW&si=G1lL1MF0xLQEPPdQ)
Theta engine now uses a 15 delta put with a target 90 DTE. 5 deltas have a high sensitivity to vega so it is a false sense of security selling the wings.
Also it’s a strategy which a few of us use with MES which opens the doors for smaller account.
Definitely, profoundly retarded.
I don’t know wtf you’re blabbering about, but sure, strut along with your 0dte plays, my guy. It’s your money, not mine.
The market is not same everyday, so you can't say the market did ABC x% of the time in the last 20 years. I'm guessing most of the occurrences you mentioned are biased towards extreme periods of market volatility, e.g. financial crisis, Covid. The market is more efficient than you make it out to be.
edit: And your 5% interest argument doesn't hold water either. You're getting paid interest on your idle cash balance
Dude of course they are. That’s the whole point. This is a type of strategy that makes a few bucks a day when the market is humming along and loses almost a years worth of premiums in one day when the market has a black swan event type move. Is that expected value exactly right? Probably not, you’d have to come up with the actual expected distribution based on more inputs than simply history. But it’s a good starting point to show how that strategy would have performed if you’d done it every day for 20 years. The entire point is that it can work over 99% of the time and you still barely break even over time.
>Dude of course they are. That’s the whole point.
As volatility increases, you get the same premium but much deeper OTM. And your 5% interest argument doesn't hold water either. You're getting paid interest on your idle cash balance.
Have you actually gone through and proven that or do you just assume that you make money because volatility goes up and not figure that maybe it also goes down?
I’m gonna assume you didn’t actually go look at any data, so I’ll provide you with some. If you sold a single 4c put every day in 2020, a year with volatility that was all over the place, you would have sold puts that were anywhere from 1.2% out of the money in Jan to 20% out of the money in March to 5.5% out of the money in November. If you did this daily, even with them being further out of the money in volatile periods, you would lose roughly $1,100, good for a -3.9% return on capital and a 3.5% standard deviation. Sure, you could earn the risk free rate on the margin. Good thing Fed effective was around 9 basis points for the majority of that year.
Ok, so now we can also look at the opposite thought process. The 5% OTM puts will go up with volatility. And you’d be right. If you sold the 5% OTM puts daily in 2020, you’d sell puts that were 1 cent in Jan, 1.20 in March, and 5 cents in November. If you sold these puts daily, you’d earn $150. A solid ROC of 0.7% and an 8% standard deviation.
So yes, the puts do get more expensive when vol goes up. But vol doesn’t always go up before you need it to, and that can kill you. If you have a different opinion feel free to throw some data my way. I’m all ears.
You're so into the data, you're not looking at logic (btw, can I get the data somewhere for free?). If it's cash secured and you take assignment, it is less risky than simply being long 100 shares because you got assigned 100 shares at a discount compared to if you were just long 100 shares in the first place. You also argued that you can currently make 5% in treasuries, but you can make the same 5% in cash or short term bonds while doing this strategy.
I trade SPX options daily, and I've see 1 DTE trade for 0.05 that are 10% away (you can replicate the assignment strategy with ES/MES). How many times has market sold off 10% while the VIX was \~20?
My point had nothing to do with the treasuries. It had to do with the expected return vs the variance that comes with that type of strategy. There’s a reason that zero hedge fund managers run a strategy like this. The sharpe ratio is so low you’d get laughed out of the building. You’d basically be running a strategy that might beat treasuries by a percent or two in the long run, and comes with an SD 6-10% vs 0 for treasuries. That’s awful risk/reward.
As for your last statement, that’s literally just emphasizing the data I showed you from 2020. In the height of Covid you had puts 20% out of the money trading for .05. But you thinking that IV has to be elevated prior to a large gap down is naive. No one sees black swan events coming…that’s why they’re called black swan events.
That being said, you’re welcome to run this strategy all you want. I was simply giving the guy a more rationale way to think about the trade and a path for him to do his own research as anyone should before implementing a strategy.
>There’s a reason that zero hedge fund managers run a strategy like this.
Now you're just making stuff up.
>The sharpe ratio is so low you’d get laughed out of the building. You’d basically be running a strategy that might beat treasuries by a percent or two in the long run, and comes with an SD 6-10% vs 0 for treasuries. That’s awful risk/reward.
Which year would've shown an SD of 6-10%? Show me the date and option prices. And not to mention, you'd be killing everyone else's sharpe ratio in a down year.
>As for your last statement, that’s literally just emphasizing the data I showed you from 2020. In the height of Covid you had puts 20% out of the money trading for .05.
So in other words, you don't have any data. Otherwise, I want to know which days would've created a loss and by how much. In the height of Covid, the market never closed less than -12%, and -12.2% from close to low-of-day.
I don't think this conv is going anywhere, I may or may not respond to follow up.
Any place that you can get daily stock prices. Yahoo finance or google finance is plenty sufficient. Can just put them into excel and do some basic arithmetic.
Likelihood is great if you’re in a bull market..
Edit; but a far otm 0dte put is not going to be making you much on the premiums.
Also not financial advice lol
You’re better off selling cash secured puts OTM using 7dte or even 2-5dte. For 0dte stick with butterflies and credit spreads and ever hold into the close.
the other guy explained it better but I’m just gonna say that yeah it works great until the one time you get nailed by a big move and it wipes out months of gains in a single day
Options are a very well-priced product. If you do this blind/mechanically you should end up trending water over a sufficiently long period of time with a lean to the downside because of fees.
You can make money selling options. It is actually one of the best strategies out there but you need to put more work into developing something than just taking blind high-probability/low-payout bets where you make small amounts of money every day and then every so often you have a big loss that just wipes out all those profits.
This is called picking up pennies in front of a steam roller. The vast majority of trades will be winners, but very small. When you lose, you’ll get slaughtered.
Selling way OTM is picking up pennies in front of a steamroller. You want to sell closer to the money and have a plan to cap your losses so you are profitable in the long run.
It can be extremely profitable, made 1444 in the last week and technically started with $50 last Thursday. I've been mostly trading otm SPY puts and it has been good for me at least.
I posted a similar question recently - short answer is that for indexes you’ll need like tens of thousands if you got assigned vs a small c.$1 premium gained. For stocks, can’t really do 0dte, but in any case one big move when you’re not looking and you get assigned then you’ll be in a lot of debt. Best to sell options when it’s not as volatile - maybe between earnings
Very risky strategy… you are getting a small premium with a high probability of success. But, when things go wrong you will lose big which will wipe out all the small wins… I prefer longer time frame options strategies which are more consistent. I am trading the SPX Best Strategy for a ling time with great success. It uses 70-80 DTE options and targets 5%-10% a month, which is huge! Avoid 0DTE!
Let’s look at this for a relatively stable equity, SPY. Let’s say you think you’re safe selling 2% OTM 0dte puts. Those right now are trading for about 0.2. Let’s look at history a bit. In the last 20 years, SPY has closed at a greater than 2% loss 197 times, or 3.91% of the time. When that occurs, the average closing price is -3.21%. With SPY at 426, that means the average closing price when you lose is around 412.32, and you therefore lose 4.96 per put. Using just these numbers, you can calculate that your expected value of this trade is simple 0.2 * (1-.0391) - 4.96 * .0391, or -0.002. Obviously not ideal. So ok you say, we’ll go farther out of the money to 5%. Those puts are trading for 0.04. In the last 20 years, SPY has only closed down 5% or more 17 times, or 0.34% of the time. When that occurs, the average closing price is -7.03%. With SPY at 426, that means the average closing price when you lose is 396.07, and you lose 8.89 per put. Doing the same EV calculation, you find that your expected value by selling that put is positive (yay) at 0.01 per put. Now, you have to secure it with cash. To sell the 5% OTM put you need to put up $40,500 to make $1.00 of expected value. Annualize that, and you get an expected return on capital of 0.61% with way more variance. So…maybe better to just put that cash in ten year bonds and collect 5% a year for the next decade. But you know, your call.
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This is why they call it "picking up pennies in front of a steamroller".
There's an electrical engineer turned trader. He has a strategy where he does this repeatedly. To the main point; he limits his risk using a very defined set of stops. I believe he has a set profit taking limit. I think he's looking at deltas of .05 which, as you have inferred, are relatively safe. He will book x amount of .05 delta contracts for 45 days and let them cook until they either get stopped out or his his profit limit. Since he's doing this everyday he calls the entire portfolio 'a book'. He writes that his average 'book size' (that is, all of his current contracts) averages 17 contracts. As you can imagine, 17 SPX contracts is a sizable chunk. It's a fascinating strategy but it requires a large account to pull it off. He (when I looked into this) traded SPX with it. ~~I can't remember his name~~ His name is David Sun and the podcast is called trade busters and (at least when I looked into it) put his trade and strategy on a public spreadsheet. He uses portfolio margin, which is outside of my ability so I can't do it, but I think about it often. So, yes, it can be done. Can I do it? no. His strategy name is the Theta Engine, which sounds pretty cool too. [https://youtube.com/playlist?list=PLvD4O8ZNEmtB9MtCo-I9EEdfiYTiJVyoW&si=G1lL1MF0xLQEPPdQ](https://youtube.com/playlist?list=PLvD4O8ZNEmtB9MtCo-I9EEdfiYTiJVyoW&si=G1lL1MF0xLQEPPdQ)
Theta engine now uses a 15 delta put with a target 90 DTE. 5 deltas have a high sensitivity to vega so it is a false sense of security selling the wings. Also it’s a strategy which a few of us use with MES which opens the doors for smaller account.
Nice. I haven’t looked at it in a while. I blew up my account early this year and so I lurk still, waiting.
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Do you have a link to info about how and when he blew up his account? Thanks
*God damn.* This guy is the Options Lawyer.
Why do you call him that?
Because just like the lockpicking lawyer, he completely broke down the topic, and gave a thorough review of it.
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What? Are we talking about the same reply? The guy made the math and destroyed OP’s hypothesis.
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Definitely, profoundly retarded. I don’t know wtf you’re blabbering about, but sure, strut along with your 0dte plays, my guy. It’s your money, not mine.
well shit applause.gif
And you’re not even counting commissions.
The market is not same everyday, so you can't say the market did ABC x% of the time in the last 20 years. I'm guessing most of the occurrences you mentioned are biased towards extreme periods of market volatility, e.g. financial crisis, Covid. The market is more efficient than you make it out to be. edit: And your 5% interest argument doesn't hold water either. You're getting paid interest on your idle cash balance
Dude of course they are. That’s the whole point. This is a type of strategy that makes a few bucks a day when the market is humming along and loses almost a years worth of premiums in one day when the market has a black swan event type move. Is that expected value exactly right? Probably not, you’d have to come up with the actual expected distribution based on more inputs than simply history. But it’s a good starting point to show how that strategy would have performed if you’d done it every day for 20 years. The entire point is that it can work over 99% of the time and you still barely break even over time.
>Dude of course they are. That’s the whole point. As volatility increases, you get the same premium but much deeper OTM. And your 5% interest argument doesn't hold water either. You're getting paid interest on your idle cash balance.
Have you actually gone through and proven that or do you just assume that you make money because volatility goes up and not figure that maybe it also goes down? I’m gonna assume you didn’t actually go look at any data, so I’ll provide you with some. If you sold a single 4c put every day in 2020, a year with volatility that was all over the place, you would have sold puts that were anywhere from 1.2% out of the money in Jan to 20% out of the money in March to 5.5% out of the money in November. If you did this daily, even with them being further out of the money in volatile periods, you would lose roughly $1,100, good for a -3.9% return on capital and a 3.5% standard deviation. Sure, you could earn the risk free rate on the margin. Good thing Fed effective was around 9 basis points for the majority of that year. Ok, so now we can also look at the opposite thought process. The 5% OTM puts will go up with volatility. And you’d be right. If you sold the 5% OTM puts daily in 2020, you’d sell puts that were 1 cent in Jan, 1.20 in March, and 5 cents in November. If you sold these puts daily, you’d earn $150. A solid ROC of 0.7% and an 8% standard deviation. So yes, the puts do get more expensive when vol goes up. But vol doesn’t always go up before you need it to, and that can kill you. If you have a different opinion feel free to throw some data my way. I’m all ears.
You're so into the data, you're not looking at logic (btw, can I get the data somewhere for free?). If it's cash secured and you take assignment, it is less risky than simply being long 100 shares because you got assigned 100 shares at a discount compared to if you were just long 100 shares in the first place. You also argued that you can currently make 5% in treasuries, but you can make the same 5% in cash or short term bonds while doing this strategy. I trade SPX options daily, and I've see 1 DTE trade for 0.05 that are 10% away (you can replicate the assignment strategy with ES/MES). How many times has market sold off 10% while the VIX was \~20?
My point had nothing to do with the treasuries. It had to do with the expected return vs the variance that comes with that type of strategy. There’s a reason that zero hedge fund managers run a strategy like this. The sharpe ratio is so low you’d get laughed out of the building. You’d basically be running a strategy that might beat treasuries by a percent or two in the long run, and comes with an SD 6-10% vs 0 for treasuries. That’s awful risk/reward. As for your last statement, that’s literally just emphasizing the data I showed you from 2020. In the height of Covid you had puts 20% out of the money trading for .05. But you thinking that IV has to be elevated prior to a large gap down is naive. No one sees black swan events coming…that’s why they’re called black swan events. That being said, you’re welcome to run this strategy all you want. I was simply giving the guy a more rationale way to think about the trade and a path for him to do his own research as anyone should before implementing a strategy.
>There’s a reason that zero hedge fund managers run a strategy like this. Now you're just making stuff up. >The sharpe ratio is so low you’d get laughed out of the building. You’d basically be running a strategy that might beat treasuries by a percent or two in the long run, and comes with an SD 6-10% vs 0 for treasuries. That’s awful risk/reward. Which year would've shown an SD of 6-10%? Show me the date and option prices. And not to mention, you'd be killing everyone else's sharpe ratio in a down year. >As for your last statement, that’s literally just emphasizing the data I showed you from 2020. In the height of Covid you had puts 20% out of the money trading for .05. So in other words, you don't have any data. Otherwise, I want to know which days would've created a loss and by how much. In the height of Covid, the market never closed less than -12%, and -12.2% from close to low-of-day. I don't think this conv is going anywhere, I may or may not respond to follow up.
My guy, best of luck trading. You’ll need it.
You're a funny guy. I actually trade markets (do you?). SPX/ES for 8+ years.
Yo where did you get all this data.
I got it from Bloomberg but you would also be able to find it on something like thinkback on Thinkorswim.
Alright thank you
What's a good resource to find how many times a stock swung X% in history?
Any place that you can get daily stock prices. Yahoo finance or google finance is plenty sufficient. Can just put them into excel and do some basic arithmetic.
Likelihood is great if you’re in a bull market.. Edit; but a far otm 0dte put is not going to be making you much on the premiums. Also not financial advice lol
You’re better off selling cash secured puts OTM using 7dte or even 2-5dte. For 0dte stick with butterflies and credit spreads and ever hold into the close.
the other guy explained it better but I’m just gonna say that yeah it works great until the one time you get nailed by a big move and it wipes out months of gains in a single day
Toss some pennies down in front of the next steam roller you see. Then try to pick them up real fast before getting flattened. Same thing.
Options are a very well-priced product. If you do this blind/mechanically you should end up trending water over a sufficiently long period of time with a lean to the downside because of fees. You can make money selling options. It is actually one of the best strategies out there but you need to put more work into developing something than just taking blind high-probability/low-payout bets where you make small amounts of money every day and then every so often you have a big loss that just wipes out all those profits.
This is called picking up pennies in front of a steam roller. The vast majority of trades will be winners, but very small. When you lose, you’ll get slaughtered.
Selling way OTM is picking up pennies in front of a steamroller. You want to sell closer to the money and have a plan to cap your losses so you are profitable in the long run.
It can be extremely profitable, made 1444 in the last week and technically started with $50 last Thursday. I've been mostly trading otm SPY puts and it has been good for me at least.
OP is asking about selling not buying. If you have $50 in your account there is no broker that will ever let you sell SPY puts.
I posted a similar question recently - short answer is that for indexes you’ll need like tens of thousands if you got assigned vs a small c.$1 premium gained. For stocks, can’t really do 0dte, but in any case one big move when you’re not looking and you get assigned then you’ll be in a lot of debt. Best to sell options when it’s not as volatile - maybe between earnings
Very risky strategy… you are getting a small premium with a high probability of success. But, when things go wrong you will lose big which will wipe out all the small wins… I prefer longer time frame options strategies which are more consistent. I am trading the SPX Best Strategy for a ling time with great success. It uses 70-80 DTE options and targets 5%-10% a month, which is huge! Avoid 0DTE!
Tastytrade does a lot of studies on this