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anyone sell index puts for cash flow?

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  •  LIFO 
    Participant
    Status: Physician
    Posts: 94
    Joined: 01/27/2018
    Fundrise eREIT

    Selling options is not smart.

    Learn from this guy (can fast forward to about minute 6):

    https://www.youtube.com/watch?v=VNYNMM0hXXY

    #171038 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4739
    Joined: 01/12/2016

    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.

    Click to expand…

    Yes that is true on why. Its slightly worse than that in reality, since as I preached, I did indeed start out hedged. In an effort to get out of the position and free up margin, as the broker changed requirements effectively locking my account, I sold the hedge (which turned out to be perfectly sized and matched during the move but was expiring in 7 or so days) making things worse.

    I was not positioned small, which is part of the lesson. The market move was not that serious, the volatility market had an insane day compared to the market and combined with brokerage changes made things insane. I think the market was down 0.4% or something the first day, which is ho hum forgettable. It was simply the result of poor position sizing, too much risk, peculiarities of market traded, etc…and forces which you do not control. People fail to give these forces that you have zero say over enough respect.

    On paper, and outside of the pressures of intraday moves and realities of brokerage decisions, this was a massive winner that was well constructed. In reality it was a disaster. Treat all backtests similarly. Theres a reason they dont seem to work once they go into live trading.

    #171039 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4739
    Joined: 01/12/2016

    Selling options is not smart.

    Learn from this guy (can fast forward to about minute 6):

    https://www.youtube.com/watch?v=VNYNMM0hXXY

    Click to expand…

    Selling blindly is not smart as you are taking on extreme tail risk that will manifest itself inevitably and you will be broke.

    Selling volatility in some, way shape or form is a long term profitable strategy if done reasonably, which means you dont try to get rich fast which is what happened to the above group.

    If you are long equities you are essentially implicitly short volatility just via a less direct mechanism. You can do anything wrong.

    #171041 Reply
     untargetedtherapy 
    Participant
    Status: Physician
    Posts: 8
    Joined: 12/01/2018
    I was not positioned small, which is part of the lesson.

    Click to expand…

    Respectfully, that IS the lesson with this strategy. Must keep the trade sizes small.

    Anyway, thanks for sharing your experience.  Illustrates key points to understand.

     

     

     

     

    #171045 Reply
    Liked by Zaphod
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    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…

    I think your strategy of discretionary naked put selling is problematic. I can’t see what edge you would have over hedge funds or even CTA’s.

    I would get out now before you blow up your account. I think almost everyone blows up their account at least once trading options or futures. If you do keep trading, keep the account size extremely low. I think to survive long term, you need to either have a non-discretionary system or participate very infrequently. There will be a time when you move house, have stress in your life, get sick, or some life stress and make a bad decision which will potentially become a massive mistake if you have a discretionary system.

    I am not a systems developer and I don’t have time to check markets regularly. I like to try different things to see if they are profitable. I love speculating and a good gamble. With futures and options, it is very easy to get into bad gambling due to the intoxicating amount of leverage available. Also, people severely underestimate that they could be wrong. Winners will reinforce that you are right. For instance, your belief that your Vol selling strategy is viable in the next 3 years may turn out to be false. How will you know when you are wrong and what will be your loss ? There is a reason 95% of options traders are not profitable. How do you know you are not one of those 95% ? And why not play a game where the odds are better ?

    2 main options I see in a bear market (there could be others I have not seen too):

    1. Buy levered underlying indexes as Zaphod mentions

    2. Buy liquidated equity selling at option value – what i will be looking at

    Selling volatility I can’t see how that could be a robust strategy due to vol spikes but I haven’t looked at it in much detail. For the return you mention, the risk is way too high. I want at least a 1:5 RR and 50% or more probability of occuring before I participate. This comes around every 5-10 years or so, so it would have to be something that can be held for multiyear periods.

    I am not interested in short selling equities or trades that generate 5-10%.

    What I would be interested in is buying a basket of common equity stocks in whatever gives the best beta leverage at the end of a bear market. This is a potential 10 bagger in a 3 year space. I have seen liquidated stock selling for not much more than 1 year call option value in bear markets. Owning the underlying means you are not path dependent or time dependent.

    3 edges I think I have:

    1. Can take the other side of wholesale institutional liquidation – yes, I’m not an institution…

    2. More patient than other participants – I could wait for years. If I did nothing in the next 5 years, I would be OK with that.

    3. Longer potential holding period – a decade would not phase me.

    I would be deluding myself to think I have any edge over research, analysis, technique or anything else because it’s not my 9-5 job and my research resources are puny.

    Also, when I think I have found the next 10 bagger, I will set aside 5% of my portfoilio value to that strategy only. Because there is always the chance I could be spectacularly wrong, as I have been a number of times in the past, particularly when I thought I was right.

     

     

    #171046 Reply
    Liked by BarterJ
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4739
    Joined: 01/12/2016

    I was not positioned small, which is part of the lesson.

    Click to expand…

    Respectfully, that IS the lesson with this strategy. Must keep the trade sizes small.

    Anyway, thanks for sharing your experience.  Illustrates key points to understand.

    Click to expand…

    Trade sizes being small leads to small amounts overall, so boring and not very contributory. There can be safer ways to make similar or even more money out there. Like I said right now if we’re range trading and you’re holding a large amount of index funds, its not hard to sell covered calls on the whole shebang and do well, you can even collar it by buying some OTM puts with some of the covered call profits.

    If we spike nicely soon, and econ data gets at a minimum soft, I’ll be selling some longer term options with a ton of theta that would likely coincide with a recession or soft patch giving me like a 20% haul for the next year or so and softening the blow.

    Its easy to keep position sizes small initially. However, keep winning and have yourself a few 30, 40, and 50% total return months and you can all the sudden find yourself getting too big before you know it because obviously you’re brilliant and its free money.

    If you can make a similar amount of money, but be taking less risk, you have to think hard about why you’d not do that instead. Remember put/call parity equation and think about the different ways to structure the same bet, delta hedging, etc….Other things to note are important technical (yes these are garbage but algos seem to know them) levels, option open interest, market makers gamma exposure etc…

    Ideally you want convexity to be in your favor not the other way around. There are definitely options that will never get close to spot, but in the end they have such a small premium its not even worth the mythical risk involved.

    #171064 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 294
    Joined: 01/26/2017

    Fatlittlepig has had some success in the past waiting for a pullback in aapl then buying some plain old ITM calls then waiting. Simple strategy nothing fancy and you know up front a fixed amount exactly how much you can lose.  If aapl goes to a 52 wk low I’ll likely do it again.

    #171070 Reply
    Liked by Zaphod
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    #171131 Reply
    Liked by Zaphod
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 2650
    Joined: 01/11/2016

    Interesting thread.  The incredible rush that you feel when money is made very quickly leads most people down a very slippery slope.  If you do this with a small part of your portfolio you will be ok.

    #171136 Reply
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4739
    Joined: 01/12/2016
    early retirement for doctors

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    Click to expand…

    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

    #171191 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    Click to expand…

    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

    Click to expand…

    Very interesting Zaphod and thanks for sharing that. The VIX spike in Feb didn’t register on my radar because it didn’t correlate with any other movements to indicate systemic risk so I ignored it and never looked into who died and why.

    I guess with these things, it is easy to look in hindsight, but very hard to have a position with enough size to make any difference in real time. I think the informational, research and computational advantage is the key and I’m afraid we are not really in the game. A funny thing is that if there is a big enough difference in the time player A computes the outcome and player D computes the outcome, player A will have set a trap for player D by this time.

    You sometimes see this in very highly anticipated events where the opposite occurs. The main players have figured it out long beforehand and play along to profit from the anticipation of the news before reversing their positions and profiting further by burning the computationally weaker or slower players. The most clear example I can think of this in the last few years was when Mario Draghi announced Euro QE (around 2015). I can’t find a youtube clip of it, but I remember watching it and in the middle of his speech announcing the long expected euro QE a short squeeze started, and the EURO ended 500 pips higher than at the beginning of his speech, which is the opposite of what was expected and pretty hilarious.

    The problem with short term setups that look very attractive is that you never know if it will turn out to be a trap and whether you are truly computationally ahead of the game. Usually, it would be a fluke in my case to be truly ahead of the game, given how much analytic resources I have compared to larger players. Then there is the tax effect of holding anything for shorter than a 1 year holding period, which is very unattractive. You basically have to get double the return for the same effect with the short term stuff.

    I find systemic risk very interesting because that is where the strong hands will get shaken. My strategy is to do nothing until they’ve all knocked themselves out. This requires a very big shock. Which seems to occur every 5 years or so. And then things can get very mispriced. And it allows for a 1+ year holding period which is more efficient tax-wise.

    So in the case of VIX earlier this year, what stopped you from re-entering shorting VIX after the spike at 50 ? How do you know if it is the beginning of a spike further. Like Bitcoin shorting at 20k, you know it will very likely be lower in the next year, but the path could involve a move to 200k first. I think in real time, it is very hard to scale sufficiently in a low risk manner, to make the profit worthwhile.

    To the OP: with selling naked puts, other then the tail that will get you one day, there is the risk of the 1 day flash crash. You will wonder what happened, then realize you just got killed. That risk is not worth taking. Like selling EUR-CHF puts on the peg, profitable until one day it breaks.

     

    #171315 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    Fatlittlepig has had some success in the past waiting for a pullback in aapl then buying some plain old ITM calls then waiting. Simple strategy nothing fancy and you know up front a fixed amount exactly how much you can lose.  If aapl goes to a 52 wk low I’ll likely do it again.

    Click to expand…

    FLP, why do you have confidence in AAPL ?

    I don’t understand where people get their confidence in it. I wish I had it 5 years ago in retrospect !

    #171316 Reply
     Dont_know_mind 
    Participant
    Status: Physician
    Posts: 566
    Joined: 11/21/2017

    Interesting thread.  The incredible rush that you feel when money is made very quickly leads most people down a very slippery slope.  If you do this with a small part of your portfolio you will be ok.

    Click to expand…

    Possibly, but even with a 10% allocation, 3X leverage and 100% appreciation, you will be up 30% for the year which can still get you into gambling in a bad way. I think the only way around it is to drink the wine, lose your brain and money and come out the other side hopefully a wiser gambler. This sort of money-losing, going broke, transformational experience either has you turning into a hopeless gambler or a shrewd one.

    #171317 Reply
    Liked by hatton1, Zaphod
    Zaphod Zaphod 
    Participant
    Status: Physician, Small Business Owner
    Posts: 4739
    Joined: 01/12/2016

    Small consistent gains are easier to raise FUM than long tail asymmetric pay-off. Cognitively, people like small, consistent gains and regular activity.

    Sometimes there are times when the tail is poorly priced. I would look at buying options in these situations. The classic example is the peg break. It is in retrospect inevitable, but the wait for years just takes it off everyone’s radar. Sometimes the pricing is never right.

    Option sellers didn’t price the EURO move even when the SNB removed the peg.

    The equity equivalent was when equities were still not bottomed after TARP and the Fed went all in. They did after a further 4 months.

    The environment in the last 2 years has had very little volatility. It is like a midsummer afternoon.

    I don’t know how option sellers went during times of very high volatility. During these times, I remember there was at times no reliable price for the underlying. At one stage in 2015 the price of NZD-USD (usually a liquid pair) moved 700 pips in the space of around 10 seconds. You actually had no idea where your fill would be if you had to execute anything during that. 2008, 2012 and 2015 were the main years that I remember. Once you experience a fast market, you will be amazed. It is a thing of great beauty. Prices can jump around like crazy.

    The other interesting phenomena is the slow dribble meltdown or melt-up, like the 2008 VW short squeeze or the 2014 Russian Rouble meltdown. Also amazing to watch.

    https://www.youtube.com/watch?v=S93tMWka9-4

     

    Click to expand…

    Another example is the accelerated wind down event of XIV. It had a clause in the prospectus that said it would be closed if it ever lost 80% in a day, and it lost 95% on feb 5th. I remember everyone jumping in to buy XIV after hours on twitter because of its large decline that day (like 20-30%) which in the past was a setup for a huge long term win. However, less knowledgeable investors in this space didnt understand market close vs. NAV close for assets like this (4pm vs. 415pm), the rebalancing process or that you need to keep an eye on the calculated intrinsic value of ETN/ETFs to know what the real price is if the market ‘breaks’ like it did then. People were buying hand over fist at 100, 90, 70, 60, etc…all the while the XIV.IV closed at $4 or something. It was insanity. In retrospect, I probably should have spent less time trying to convince people the fund blew up and stop throwing money away and more time selling it for as large as my account would allow, it was literally free money.

    Given some of what I’ve said above, and the mechanisms of the fund (it was an index note with swaps not necessarily holding the underlying) it was going to eventually go bust. Especially since the short vol negative carry trade had gotten so large as to be a huge proportion of the futures market, they ended up blowing themselves up in the end of day rebalance (Im sure there was more than a bit of help from hedge funds front running the obvious).

    Unfortunately XIV didnt have options, but its ETF counterpart SVXY did. The smart play would have been (and several funds and individuals did this) to buy far OTM puts to capture this eventual event. Even if it seems like it’s unlikely to happen, if its at all probable, and you can get convexity cheap, theres no reason not to.

    The most annoying thing about options is that liquidity evaporates in these times and bid/ask spreads get huge. This is a big pet peeve and market structure issue that just seems like MMs gratuitously digging into your pockets. My UVXY calls should have been worth a fortune in after hours trading, but they werent anywhere near their theorhetical value (which is common at the extremes). I always adjust expectations for that bit of reality.

    These type of structurally unsound situations with eventual busts are what I find most interesting.

    EDIT:

    I actually had went long volatility via SVXY puts and UVXY calls the friday before, however these were weeklies and lose significant value if not ITM as gamma/theta rapidly decay. On monday morning things were quite stable to start and I did not want to lose my fairly significant profit in these positions, and sold them. The market went south fast and each of those svxy puts (i started with 8 the friday before), were worth 11K each, and the UVXY calls 12/15 should have been worth 30 bucks or so but never came close, I saw prints in 16-20 range but they did not want to trade. Thats a total bummer if you had those.

    Still one of the best days I ever had, but pales in comparison to what I let go by not hanging on, of course it could have done the far more likely and stabilized and slowly bled profit.

    Click to expand…

    Very interesting Zaphod and thanks for sharing that. The VIX spike in Feb didn’t register on my radar because it didn’t correlate with any other movements to indicate systemic risk so I ignored it and never looked into who died and why.

    I guess with these things, it is easy to look in hindsight, but very hard to have a position with enough size to make any difference in real time. I think the informational, research and computational advantage is the key and I’m afraid we are not really in the game. A funny thing is that if there is a big enough difference in the time player A computes the outcome and player D computes the outcome, player A will have set a trap for player D by this time.

    You sometimes see this in very highly anticipated events where the opposite occurs. The main players have figured it out long beforehand and play along to profit from the anticipation of the news before reversing their positions and profiting further by burning the computationally weaker or slower players. The most clear example I can think of this in the last few years was when Mario Draghi announced Euro QE (around 2015). I can’t find a youtube clip of it, but I remember watching it and in the middle of his speech announcing the long expected euro QE a short squeeze started, and the EURO ended 500 pips higher than at the beginning of his speech, which is the opposite of what was expected and pretty hilarious.

    The problem with short term setups that look very attractive is that you never know if it will turn out to be a trap and whether you are truly computationally ahead of the game. Usually, it would be a fluke in my case to be truly ahead of the game, given how much analytic resources I have compared to larger players. Then there is the tax effect of holding anything for shorter than a 1 year holding period, which is very unattractive. You basically have to get double the return for the same effect with the short term stuff.

    I find systemic risk very interesting because that is where the strong hands will get shaken. My strategy is to do nothing until they’ve all knocked themselves out. This requires a very big shock. Which seems to occur every 5 years or so. And then things can get very mispriced. And it allows for a 1+ year holding period which is more efficient tax-wise.

    So in the case of VIX earlier this year, what stopped you from re-entering shorting VIX after the spike at 50 ? How do you know if it is the beginning of a spike further. Like Bitcoin shorting at 20k, you know it will very likely be lower in the next year, but the path could involve a move to 200k first. I think in real time, it is very hard to scale sufficiently in a low risk manner, to make the profit worthwhile.

    To the OP: with selling naked puts, other then the tail that will get you one day, there is the risk of the 1 day flash crash. You will wonder what happened, then realize you just got killed. That risk is not worth taking. Like selling EUR-CHF puts on the peg, profitable until one day it breaks.

     

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    I did reshort the VIX the very next day and continued to do so for several months. It never reached that high again. The beauty of volatility is its easily computed, and you can see things like that coming, or at least the probability being elevated and adjust sizing or positions that are best suited.

    In fact there were many that did. Like I said, shorting VIX is the usual easy way to make money as its the most common outcome, but I was long given the R/R was obvious (ie, once the term structure gets to a certain level and flatness, there is only so much upside and only downside risk). Also, when it starts moving it needs to be respected. Everyone was on the same side of the boat in Feb, and it was kind of a tail wagging the dog event.

    It can be hard, but theres no need to make it all at once. This is more of a systematic thing, and its not difficult to make a decent amount given the triple digit IVs of the instruments. Position sizing and defined risks are key of course.

    #171336 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 2650
    Joined: 01/11/2016
    FLP, why do you have confidence in AAPL ? I don’t understand where people get their confidence in it. I wish I had it 5 years ago in retrospect !

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    I own a bunch of Apple stock.  I no longer reinvest any dividends.  Hopefully just a short term problem with iPhone pricing.  I bought my position in 2008-9 timeframe.  Maybe I should be selling or maybe it is a great entry point for someone else.  No one knows right now.

    #171371 Reply

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