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anyone sell index puts for cash flow?

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  •  untargetedtherapy 
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    I realize this is probably anathema to most on this board, but I’ll ask anyway: anyone routinely sell naked puts for cash flow?

    I’ve been selling SPX puts for the last year and looking to compare notes/share ideas on strategy.  Not much of value elsewhere on the interwebs.

    I’m an upper 40s MD who “has enough” with 95% of liquid investments held in index funds.  Use the portfolio buying power to sell naked puts to enhance returns.  Looking for others with interest in the same with whom to chat and compare notes….

    #170791 Reply
    fatlittlepig fatlittlepig 
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    High risk low reward strategy
    Yes I have dabbled in options

    #170823 Reply
     Dont_know_mind 
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    There was a fellow on this forum called crazyroadtodublin who bought apple on margin and sold naked puts from what I remember and had an account of 20M or something crazy. But it sounds like he was an experienced investor and his account was down 80% or something during 2009.

    Out of curiosity, say on SP500 index etf value 1M, what naked put option face value have you averaged this year and what was the total net annual option value gained ?

    #170826 Reply
    hatton1 hatton1 
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    Earnest refinancing bonus

    Seems a bit like gambling.  I used to sell covered calls when I invested in individual stocks.  I have found that just the income from my portfolio is plenty without doing this.

    #170870 Reply
     untargetedtherapy 
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    As you know, there are many variables that will influence returns with an options strategy.  But to give you rough numbers, selling SPX 10-15 delta puts around 90 DTE approximately 1x/week, harvesting gains at 50-75% and defining position size to use no more than 25% of total buying power yielded another 6-7% total return (pretax) this year.  with the SPX volatility.

    I’m a bit of a “quant” with this strategy, and my trading rules are evidence based.  There is very little data-driven discussion of options strategies available on the internet.  My intent is not to convince anyone to consider a similar strategy….quite the contrary.  I would dissuade most from pursuing this given the complexity and potential risk involved.  I’m just looking for other like minded, experienced individuals who understand this space and have interest in discussing ideas and experiences.

    #170872 Reply
     Dont_know_mind 
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    As you know, there are many variables that will influence returns with an options strategy.  But to give you rough numbers, selling SPX 10-15 delta puts around 90 DTE approximately 1x/week, harvesting gains at 50-75% and defining position size to use no more than 25% of total buying power yielded another 6-7% total return (pretax) this year.  with the SPX volatility.

    I’m a bit of a “quant” with this strategy, and my trading rules are evidence based.  There is very little data-driven discussion of options strategies available on the internet.  My intent is not to convince anyone to consider a similar strategy….quite the contrary.  I would dissuade most from pursuing this given the complexity and potential risk involved.  I’m just looking for other like minded, experienced individuals who understand this space and have interest in discussing ideas and experiences.

    Click to expand…

    What would the drawdown of your strategy have been in 2008-9 ?

    Have you been involved in options/futures just in the last 1-2 years ?

    #170892 Reply
     untargetedtherapy 
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    What would the drawdown of your strategy have been in 2008-9 ?

    Have you been involved in options/futures just in the last 1-2 years ?

    Generally speaking, I have different rules based on whether the SPX is in a bull or bear market.  Although the biggest potential drawdowns from selling naked puts can occur in the meltdown phase of a bear market, some of that risk is actually mitigated by the increased volatility premium and wider strikes priced into any given option at the time.

    However, I utilize different rules for a bear market to limit exposure and risk.  I used 08-09 time period to define the rules I will be using in the next bear market.  I really don’t put a lot of stock in specific P+L curves from back tests, b/c it doesn’t reflect the psychology of live trading.  I simply use to get a sense of whether the strategy is generally profitable or not and by how much relative to other strategies.

    I’ve been investing for over 25 years.  Studying options markets for the last 2-3 and starting actively trading in just the last year.  So I haven’t traded through a bear market (partly reason for my desire to find others who were actively trading similar strategies through 08-09), but the volatility experienced this year has provided a decent testing environment for what I suspect we will see in the next bear market.

    Again, not advocating that others should utilize this strategy…simply looking for any others who know and play in the space that are interested in objective strategy discourse…..

     

     

     

    #170903 Reply
    Zaphod Zaphod 
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    What would the drawdown of your strategy have been in 2008-9 ?

    Have you been involved in options/futures just in the last 1-2 years ?

    Generally speaking, I have different rules based on whether the SPX is in a bull or bear market.  Although the biggest potential drawdowns from selling naked puts can occur in the meltdown phase of a bear market, some of that risk is actually mitigated by the increased volatility premium and wider strikes priced into any given option at the time.

    However, I utilize different rules for a bear market to limit exposure and risk.  I used 08-09 time period to define the rules I will be using in the next bear market.  I really don’t put a lot of stock in specific P+L curves from back tests, b/c it doesn’t reflect the psychology of live trading.  I simply use to get a sense of whether the strategy is generally profitable or not and by how much relative to other strategies.

    I’ve been investing for over 25 years.  Studying options markets for the last 2-3 and starting actively trading in just the last year.  So I haven’t traded through a bear market (partly reason for my desire to find others who were actively trading similar strategies through 08-09), but the volatility experienced this year has provided a decent testing environment for what I suspect we will see in the next bear market.

    Again, not advocating that others should utilize this strategy…simply looking for any others who know and play in the space that are interested in objective strategy discourse…..

     

     

     

    Click to expand…

    I would highly highly dissuade you from selling naked anything unless these puts are cash backed and you’re looking to own these or you are “ok” with owning them at that price (you’ll find you were usually wrong and it was the premium speaking). It doesnt sound like they are cash backed.

    Youre wise to disregard backtests as these are always only showing held to expiration without any of the very real limitations on brokerage accounts. Depending on sizing, almost all of those backtests would be blown up intraday on a vol spike and the brokerage will liquidate your positions as the risk goes above their desires (theyre ultimately on the hook) and they dont care at all that you’ll probably be fine at expiration. Get a somewhat out of the blue crash, correction and you will not believe the power of the vega unleashed gammadelta tsunami that will blow your account out.

    Selling naked options is simply flirting with disaster. You will win most of the time, hell nearly every time depending on the delta/sizing, but one day you will blow up and years or more than you’ve ever made will be wiped from your account. It is a certainly. Low probability events have a habit of becoming certainties over a long enough time frame. There are numerous examples this year. XIV and most recently optionsellers.com who was selling naked calls on nat gas and the spread known as the “widowmaker”, this idiot had no excuse, but what can you do.

    I GUARANTEE you will get blown to smithereens and owe money if you do this consistently. If you think 2008-2009 market tells you anything about the risks of this newer, faster market you’re kidding yourself. Do some research on volatility, liquidity, and you’ll see that during this bull market and even in 2017-2018 we’ve had moves that eclipse anything that ever happened in 09. The VIX blew up Feb 5th with an increase that was only ever bested by 1987. This is a different market, things get hairier faster and for much less.

    Why dont you do something safer like covered calls or put spreads? You could even go with wider strikes and some safety with a backspread, use calendars/futures (VX or the options are some of the cheapest hedges) but I dont really know where you’re at or what risks youre taking. Choose something where the asymmetry is in your favor and the risk is defined.

    Ive been selling some covered calls on my positions in this market (had to buy them back this week), and yesterday I strangled my whole account (who knows what will happen this wknd) with a tad upside bias. Always remember you never know what will or could happen, and low probability is not zero probability.

    Some good books:

    Trading Volatility: Colin bennet

    Volatility trading: euan sinclair

    Trading options for edge: Mark Sebastian

    Those are not necessarily great total beginner books though. Mark and Euan (also has a good blog), are both on twitter and are generally nice guys that will answer questions, etc…I have a volatility list that has a bunch of great people in this area with all kinds of good info. Feel free to subscribe.

     

    #170968 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 305
    Joined: 01/26/2017

    What would the drawdown of your strategy have been in 2008-9 ?

    Have you been involved in options/futures just in the last 1-2 years ?

    Generally speaking, I have different rules based on whether the SPX is in a bull or bear market.  Although the biggest potential drawdowns from selling naked puts can occur in the meltdown phase of a bear market, some of that risk is actually mitigated by the increased volatility premium and wider strikes priced into any given option at the time.

    However, I utilize different rules for a bear market to limit exposure and risk.  I used 08-09 time period to define the rules I will be using in the next bear market.  I really don’t put a lot of stock in specific P+L curves from back tests, b/c it doesn’t reflect the psychology of live trading.  I simply use to get a sense of whether the strategy is generally profitable or not and by how much relative to other strategies.

    I’ve been investing for over 25 years.  Studying options markets for the last 2-3 and starting actively trading in just the last year.  So I haven’t traded through a bear market (partly reason for my desire to find others who were actively trading similar strategies through 08-09), but the volatility experienced this year has provided a decent testing environment for what I suspect we will see in the next bear market.

    Again, not advocating that others should utilize this strategy…simply looking for any others who know and play in the space that are interested in objective strategy discourse…..

     

     

     

    Click to expand…

    LOL, reading your post reminds me of the saying a fool and his money…

    #170979 Reply
     untargetedtherapy 
    Participant
    Status: Physician
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    Zaphod- I completely agree with the spirit of your post.  For almost everyone, trading options is a loser’s game.

    If one studies the models of how insurance companies and casinos make money, it provides an interesting perspective.

     

    #170981 Reply
    Zaphod Zaphod 
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    Status: Physician, Small Business Owner
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    Zaphod- I completely agree with the spirit of your post.  For almost everyone, trading options is a loser’s game.

    If one studies the models of how insurance companies and casinos make money, it provides an interesting perspective.

     

    Click to expand…

    I have traded options for a while, so I know where you’re coming from and its crazy but people seem to have to learn these things by their own experience. Someone told me the same early when I started, but I thought I was smarter than that and of course it wouldnt happen to me. Yes, hedging of any nature reduces overall winning % and money. However, it allows you to avoid bankruptcy.

    My biggest loss ever was on a position that didnt come within 50% of the strike and ultimately expired 6 months early with 100% profit (as planned but early). Again though, brokerages have no issues changing rules during the middle of trading days, etc…and can ruin well planned trades due to their own risk management practices (which should be a sign that you’re way too at risk).

    You should never put on a position that could bankrupt your account without some kind of disaster hedge. Sadly, most only learn this after the fact.

    Again, go ahead and look at my twitter from Feb 2nd, saying the same thing to people shorting UVXY naked calls, while I was short SVXY and long UVXY via options. Something like 50% of volatility traders/options players on twitter have disappeared since that day.

    Any one way view or strategy (selling vol or some structure in all environments) is destined to fail. You take what the market gives and structure the best trade in that environment within your goals/strengths. Right now for me thats pretty much collaring my main account if we continue to range trade or even enter recession or bear market.

    #170988 Reply
     untargetedtherapy 
    Participant
    Status: Physician
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    Joined: 12/01/2018

    My biggest loss ever was on a position that didnt come within 50% of the strike and ultimately expired 6 months early with 100% profit (as planned but early). Again though, brokerages have no issues changing rules during the middle of trading days, etc…and can ruin well planned trades due to their own risk management practices (which should be a sign that you’re way too at risk).

    Click to expand…

    This is huge.  I’m aware of this.  Anyone giving serious consideration to selling naked “vol” should take note of what he is saying here very carefully.  Thank you for sharing this experience.

    Curious are you willing to share what the loss was as a multiple of the premium you received?  If not, totally understand.   Tremendous wisdom shared in this comment, folks….

    #170995 Reply
    Zaphod Zaphod 
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    Joined: 01/12/2016
    WCICon18

    My biggest loss ever was on a position that didnt come within 50% of the strike and ultimately expired 6 months early with 100% profit (as planned but early). Again though, brokerages have no issues changing rules during the middle of trading days, etc…and can ruin well planned trades due to their own risk management practices (which should be a sign that you’re way too at risk).

    Click to expand…

    This is huge.  I’m aware of this.  Anyone giving serious consideration to selling naked “vol” should take note of what he is saying here very carefully.  Thank you for sharing this experience.

    Curious are you willing to share what the loss was as a multiple of the premium you received?  If not, totally understand.   Tremendous wisdom shared in this comment, folks….

    Click to expand…

    I’ve never looked at it that way but I guess I lost all the premium of course since you dont take a loss if this isnt true, and then 78% more.

    There are tons of ways to profit from selling volatility (what anyone selling options is doing whether they know it or not) that come with different risks. This is why XIV/SVXY was so popular before XIV died (RIP), it had a lot of the premium capture and was basically a high beta SPX play with “only” 100% loss possible, which is pretty good for exposure to those kinds of returns. Inverse vol funds when levered -1 were great, but those are gone now. They had good r/r during certain term/skew structures, but at times didnt offer good r/r, like dec/jan/feb of last year.

    You were better served, and likely the whole time so being in a levered index fund instead. You got similar returns with far less volatility and less draw downs. Any leveraged fund is going to be somewhat a volatility play given that volatility drag increases to the levered integer squared for daily resetting funds. For example:

    2017 returns:

    SVXY (-1x 30d vol): 181.8%

    UPRO (3x spx): 71.4%

    TQQQ (3x qqq): 118% (this is a different underlying than svxy/spx ofc)

    5y returns:

    SVXY: -61%

    UPRO: 217%

    TQQQ: 433%

    Max (2011 ish):

    SVXY: 138% (impressive since it lost 95% this year)

    UPRO: 685%

    TQQQ: 1340%

    One time direct volatility events take a fund that was absolutely crushing other ones and dramatically alters its long term returns. Slightly slower and steadier wins the race. We always get greedy when winning too much, its nearly impossible not to. Then you size too big and eat it bigger.

    #171018 Reply
     StarTrekDoc 
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    Naked puts are simply dangerous.   My brother and  father do it, but there are on the computer all the time monitoring their options.

    It’s the antithesis of what most folk do here.

    #171035 Reply
     untargetedtherapy 
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    I’ve never looked at it that way but I guess I lost all the premium of course since you dont take a loss if this isnt true, and then 78% more.

    Click to expand…

    Maybe I misunderstood your prior comment, but I interpreted you to say you were forced out of a trade by the broker due to intraday change in margin requirement in fast moving market.  Is that not correct?

    Your total loss on the trade was approx 178% of the premium collected?  Should be no big deal if you were positioned small.  Apologies if I misunderstood your comments.

    #171036 Reply

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