Which option strategy to apply for this market outlook?

[hhse]

My point is that it with without context. Nothing wrong if it is framed by other trading vectors as mentioned, but worthless without.

Please don't take offence, but it must be framed by those other things.

No offence taken.

But I don't understand what you mean by "other trading vectors".

 

[wayneL]

Tom Sosnoff's team also likes you to trade condors and butterflies as much as possible - more legs, more brokerage fees for them.

Good to see ya Mazza, how goes it?

 

[wayneL]

No offence taken.

But I don't understand what you mean by "other trading vectors".

Risk

Probabilities

Money management

 

[hhse]

Risk

Probabilities

Money management

Cool. Point taken.

 

[minwa]

Probability of profit of an options strategy is misleading. It assumes you hold until expiry, no matter the profit/draw down (even wiped account). At the time of putting any trade on, your probability is 50% (actually less after commissions). It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.

Also just note Tastytrade crowd had a very tough time last month when volatility exploded. The forum i visited had people who've had built up profits past few months and wiped it all and more just that one week, and discussion of options selling has died down significantly, lol. I'm sure there are more that didn't post who would've suffered major draw downs.

 

[hhse]

Probability of profit of an options strategy is misleading. It assumes you hold until expiry, no matter the profit/draw down (even wiped account). At the time of putting any trade on, your probability is 50% (actually less after commissions). It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.

Also just note Tastytrade crowd had a very tough time last month when volatility exploded. The forum i visited had people who've had built up profits past few months and wiped it all and more just that one week, and discussion of options selling has died down significantly, lol. I'm sure there are more that didn't post who would've suffered major draw downs.

I just felt that comment was very ill-informed on many levels... either that or poorly phrased.

 

[minwa]

I just felt that comment was very ill-informed on many levels... either that or poorly phrased.

Do elaborate.

 

[wayneL]

Probability of profit of an options strategy is misleading. It assumes you hold until expiry, no matter the profit/draw down (even wiped account). At the time of putting any trade on, your probability is 50% (actually less after commissions). It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.

It's a good point not to use expiry payoff diagrams as an indicator of probability, agree, unless fully intending to hold til expiry (which in some cases may be the intention).

But you have made an equally egregious assumption that greeks don't immediately, or very quickly, come into play, or for instances of delta neutrality.

Your comments do raise the issue of the complexity in assessing and estimating probabilities.

Also just note Tastytrade crowd had a very tough time last month when volatility exploded. The forum i visited had people who've had built up profits past few months and wiped it all and more just that one week, and discussion of options selling has died down significantly, lol. I'm sure there are more that didn't post who would've suffered major draw downs.

Which is why I'm big on those other 'vectors' I've mentioned. Robust money management, that gold standard of technical and trend traders of underlying securities, is seldom mentioned or used amongst option traders, especially sellers. Hence the risk of ruin is often way into the freakin' red line.

Pennies in from of steam rollers indeed.

 

[hhse]

Like I said you've either carelessly phrased things, or are very ill-informed of the product.

Probability of profit of an options strategy is misleading. It assumes you hold until expiry, no matter the profit/draw down (even wiped account)

- you are assuming that people think and trade like yourself with 100% of their bankroll in concentrated correlated trades... otherwise, I don't understand how you got to an account being wiped? A draw down is a draw down, how does that affect POP?
- I believe that is how options pricing model works? You put in a DTE and you can deduce POP based on that DTE? How is that misleading?
- Over the last ten years, it has been shown that implied volatility has been above actual volatility in the SPY. And test, after test, after test of different US ETFs has shown that implied volatility has exceeded actual volatility.

At the time of putting any trade on, your probability is 50% (actually less after commissions).

- Are you claiming that the options pricing model used by the world is wrong? You should submit your thesis and you may be up for a Nobel prize. Last time I checked, if I was putting on a 0.30 delta Put, my POP would be higher than a 0.50 delta put.

It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.

- I agree. But who said that movements it delta was the only way you'd profit from options? You are forgetting Theta and Vega.

Also just note Tastytrade crowd had a very tough time last month when volatility exploded

- Sure. I'm sure people holding stock had a fantastic time.
- And considering you've taken the time to understand the domain and their teachings, I'm sure you are spending 100% of your bankroll all on bullish trades, short premium trades at a VIX of 12-13 because that is precisely what they have been preaching (in case you did not realise, that was sarcasm, and it is the exact opposite of the teachings).

The forum i visited had people who've had built up profits past few months and wiped it all and more just that one week and discussion of options selling has died down significantly, lol. I'm sure there are more that didn't post who would've suffered major draw downs.

- they will learn from their mistakes.
- they will understand the need to stay small and uncorrelated.
- they will understand why an SPY beta weighted short delta is important, when short premium.
- the above is preached show, after show, after show, after show... if people don't heed their warning, nothing they can do, that is on the trader, not the teachings.

Anyway, we obviously share different views, and I won't go on. I'll keep my posts only to 'theoretical'/'dictionary' and refrain from what I believe to be practical comments going forward

 

[aarbee]

hhse,

Very well said. I had a significant intra-trade drawdown during that volatility spike but ended up just fine mainly due to holding my nerve and having been small to begin with. Tried to exploit the high vol by selling more premium but found that the liquidity had all but dried up. The market was in panic mode. Great learning experience trading through that phase with a portfolio with net long deltas and short premium.

best regards

 

[minwa]

- you are assuming that people think and trade like yourself with 100% of their bankroll in concentrated correlated trades... otherwise, I don't understand how you got to an account being wiped? A draw down is a draw down, how does that affect POP?
- I believe that is how options pricing model works? You put in a DTE and you can deduce POP based on that DTE? How is that misleading?
- Over the last ten years, it has been shown that implied volatility has been above actual volatility in the SPY. And test, after test, after test of different US ETFs has shown that implied volatility has exceeded actual volatility.

It is how it is ADVERTISED and how people MISUSE it that makes it misleading. A draw down certainly affects REAL WORLD PoP. What use is a 95% PoP at expiry, a far OTM sold option, if at some point during the duration of the move you get a pop in vol, you would most certainly have stopped it out or got margin called.

- Are you claiming that the options pricing model used by the world is wrong? You should submit your thesis and you may be up for a Nobel prize. Last time I checked, if I was putting on a 0.30 delta Put, my POP would be higher than a 0.50 delta put.

Nop I don't claim they're wrong or right, they are all "models", not absolutes. Otherwise there wouldn't be a Binomial AND a Black-Scholes model (and many others). So which one do you claim is right and which is wrong ? Did you even know that there was more than one pricing model since you seem pretty convinced the one you watch is "right" ?

- Sure. I'm sure people holding stock had a fantastic time.
- And considering you've taken the time to understand the domain and their teachings, I'm sure you are spending 100% of your bankroll all on bullish trades, short premium trades at a VIX of 12-13 because that is precisely what they have been preaching (in case you did not realise, that was sarcasm, and it is the exact opposite of the teachings).

People holding stocks don't have exponential losses compounded during the big drop like short naked options will. In their "research" they show "Over the past 5 years, had you sold XX strangle/straddle, with XX stop, you would've made XX% return, with XX number of weeks wins and XX number of week losses" which is absolutely giving the impression that you should be in the market, all the time.

- they will learn from their mistakes.
- they will understand the need to stay small and uncorrelated.
- they will understand why an SPY beta weighted short delta is important, when short premium.
- the above is preached show, after show, after show, after show... if people don't heed their warning, nothing they can do, that is on the trader, not the teachings.

A good trader will, unfortunately many have suffered major draw downs and have walked away from options selling. There lies the problems of the show - most people will take the exciting bits and not the bits to handle when black swans happen. They will try to imitate Karens strategy, yet they cannot manage like Karen, so when vol explodes, they freeze and watch their accounts deteriorate.

or are very ill-informed of the product.

Perhaps..

But I did manage to pick up an entry level employee's yearly salary this week so my misinformation are paying off. Would you like to see previous few week's/month's ? When I see bruised up put sellers (T2W, ET, BMT forums ie a lot of Tastytrader/Karen imitators) is my signal to jump in.

 

[CanOz]

Boooyaaah! Nice work minwa!

 

[hhse]

You still have not explained how you go to these calculations:


At the time of putting any trade on, your probability is 50% (actually less after commissions). It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.


Whether it be under black scholes or binomial pricing models, all trades are clearly not equal and clearly not 50/50 chance of success or less. So please do explain your calculations.

And you clearly keep talking about things being misleading. None of them are misleading. If you are saying that people misinterpret and inappropriately apply concepts then that's fine I agree but you should be more specific and say so - check your original post.

But when you claim that things are misleading or that people misrepresent information, that is a big, big accusation that you need to justify.

When studies are performed, you need decent sample sizes and assumptions are laid out. These are clearly stated in the studies. And as I've mentioned before, if people ignore them, that is on the trader, not the teachings.

You keep talking about all these put options being sold and people suffering from them. That is on them - the trader. Segment, after segment, after segment they reiterate the importance of staying small, being short deltas, small sizes and not being complacent about the low VIX. People ignore these warnings, are hurt, and then you make a generalisation...

We clearly don't see eye to eye. I'll leave these forum to 'experts' like yourself.

 

[minwa]

You still have not explained how you go to these calculations:


At the time of putting any trade on, your probability is 50% (actually less after commissions). It can go in your favor or against you, by selling a far OTM strike does not make it more likely for the underlying to move away from that strike.


Whether it be under black scholes or binomial pricing models, all trades are clearly not equal and clearly not 50/50 chance of success or less. So please do explain your calculations.

Read it again, note this part "At the time of putting any trade on".

And you clearly keep talking about things being misleading. None of them are misleading. If you are saying that people misinterpret and inappropriately apply concepts then that's fine I agree but you should be more specific and say so - check your original post.

But when you claim that things are misleading or that people misrepresent information, that is a big, big accusation that you need to justify.

When studies are performed, you need decent sample sizes and assumptions are laid out. These are clearly stated in the studies. And as I've mentioned before, if people ignore them, that is on the trader, not the teachings.

You keep talking about all these put options being sold and people suffering from them. That is on them - the trader. Segment, after segment, after segment they reiterate the importance of staying small, being short deltas, small sizes and not being complacent about the low VIX. People ignore these warnings, are hurt, and then you make a generalisation...

Not a generalisation - it is a statistic that is close to a fact that many agree on - that 90% of traders fail. Reflected in many posts on different forums options selling threads. Except in options selling it gives a false sense of confidence/hope first until everything falls apart. Why do you think there are so many spruikers/educators in the options selling education business ? Platinum Pursuits/Daniel Kercher/Traderscircle/Jamie Mcintyre/21st Century/Elite Traders/Aussie Rob..I'm sure theres many I missed. They all teach mainly OTM naked puts/covered calls/credit spreads - very similar to Tastytrade. Do you see many glowing reviews of them on this forum ?

We clearly don't see eye to eye. I'll leave these forum to 'experts' like yourself.

Ok cya - any hope of this being a civilised discussion ended when you started with the sarcasm about Nobel Prizes. I am very arrogant and prone to those type of insult bait. We are way off topic anyway.

 

[aarbee]

Platinum Pursuits/Daniel Kercher/Traderscircle/Jamie Mcintyre/21st Century/Elite Traders/Aussie Rob..I'm sure theres many I missed. They all teach mainly OTM naked puts/covered calls/credit spreads - very similar to Tastytrade. Do you see many glowing reviews of them on this forum ?

Hmmm...with due respect minwa, mentioning tasty trade with your exalted list of spruikers is a drawing a long bow, is it not?? None of them trade or teach to trade like tastytrade. None of them are transparent like tastytrade. For starters tastytrade is not asking anyone for a penny for whatever they are doing for their viewers. Unless I get evidence to the contrary, I consider them to have that rare in trading world commodity "integrity"

Most option sellers failure is not indicative of the failure of that strategy or the teaching thereof. Yes it has traps, yes one can blow out and that's why it is important to first gain knowledge and experience with baby steps. You will be well aware that most trend followers fail too. It is said of the traders in general or for that matter, business start-ups too. Trading is a hard gig. No one at tastytrade ever said it is easy unlike the others on your spruikers list. Good on you for making those profits during "that week". If that performance you showed is typical of your long options strategies, consistent and not an outlier, I congratulate you whole-heartedly on your success. There isn't a reason for you to change a thing and in your place, I perhaps would have the same view as yours.

For most mere mortals, that sort of performance would be either an outlier or selective and perhaps, plodding along building "numbers of occurrences" to let probabilities work in your favour, over time might not be the worse thing to do.

Cheers

 

[minwa]

Hmmm...with due respect minwa, mentioning tasty trade with your exalted list of spruikers is a drawing a long bow, is it not?? None of them trade or teach to trade like tastytrade. None of them are transparent like tastytrade. For starters tastytrade is not asking anyone for a penny for whatever they are doing for their viewers. Unless I get evidence to the contrary, I consider them to have that rare in trading world commodity "integrity"

Hi aarbee, yes I agree that comparison might be a bit extreme. They certainly have more integrity than the spruikers. However it is not totally without ulterior motive. They are brokers. Tastytrade show was initially closed to public viewing, only open ToS/Ameritrade clients(I think there was a subscription service too for non clients). They are broker first - educator seccond. Options selling generates lots of commissions. Throw in spreads and it doubles. Throw in their highly pushed "close at X% of profit", it doubles commissions again. I would bet all their % are calculated WITHOUT commissions.

They cannot escape the fact that they are a broker and by showing their platforms functions utilization in that style of trading is advertisement promoting their business. Also they have no results to show besides theoretical backtests. It is a long running show - they can easily manage a portfolio live week to week to demonstrate their methods. I personally doubt their personal trading ability. They got famous for broking, not managing funds. At the seccond or third Karen video where they got her back for follow up, she updated that she was up 11% for the year, it was in the last quarter. Tony exclaims that is an excellent return, given the market condition - and he wished he could do that. This suggest his personal return was closer to 0% than 11%. Tom was a market maker to broker, he never got famous as a trader. Market making is very different to retail speculation.

Most option sellers failure is not indicative of the failure of that strategy or the teaching thereof. Yes it has traps, yes one can blow out and that's why it is important to first gain knowledge and experience with baby steps. You will be well aware that most trend followers fail too. It is said of the traders in general or for that matter, business start-ups too. Trading is a hard gig. No one at tastytrade ever said it is easy unlike the others on your spruikers list.

I do reckon they mean well for their viewers overall, as profitable traders also means continual business. But by promoting options selling to mostly uneducated (at least in options) retail traders is risky. Options selling losses are EXPONENTIAL, not linear like other long/short futures/stocks etc. Coupled with difficulty of putting in a hard stop as far OTM/spreads don't have the best bid/ask - they also vanish in a true panic like we had in August. The recovery that day certainly was lucky for many people. Had it kept going down the battlefield would've been even more bloodied.

I have a good relation with a head broker of a 30 years firm I do some automated trading with. I've chatted with him about options selling and he tells me in 30 years of broking he's never seen a retail options selling only account last over the long term at his firm. The ones who do employ options selling also change strategy according to market conditions or trade other systems. That is just one firm although I'm sure there are successful ones but that is a good representation of the statistics of retail accounts.

Good on you for making those profits during "that week". If that performance you showed is typical of your long options strategies, consistent and not an outlier, I congratulate you whole-heartedly on your success. There isn't a reason for you to change a thing and in your place, I perhaps would have the same view as yours.

For most mere mortals, that sort of performance would be either an outlier or selective and perhaps, plodding along building "numbers of occurrences" to let probabilities work in your favour, over time might not be the worse thing to do.

Thank you but it is not something I do "consistenly" every week. I do both long and short options strategies - only during spikey volatility levels. I am mainly a day trader (FX & futures) when markets are calm most of the time until we get opportunities that happens usually every few months then I jump into options. I've only traded options this year maybe 2 or 3 times this year, before the start of September but I have been very busy in options every week since then. Imagine them teaching that - guys just trade 1-3 months of the year rest the year take the time off options, we'll try make our commissions elsewhere. I am not suggesting you can't make money with options in other conditions - you certainly can - just my personal opinion is risk:reward is better in other instruments.

hint: be alert at end of July to first week of Nov

A very saavy trader (no you won't find him teaching on youtube or seminars LMAO) shared this with me..Time + movements in COT (commitment of traders) + Dow Theory = VOL SPIKES/panic stop raids/engineered moves.

 

[aarbee]

Hi minwa,
Many thanks for taking the time to write your response.
Very valuable indeed.

Cheers

 

[minwa]

 

[mazzatelli]

Good to see ya Mazza, how goes it?

Hiya Wayne, it has been some time Seems we have switched continents, I've been based in London for work past few years and you are back in the Southern hemisphere. Oh how I miss the weather How have you been? and thanks for asking!

How about ...
Sell future + sell an OTM put and buy OTM call......do you see any issue with Strategy ?

Basically you are long the risk reversal and hedging with short spot. The risk reversal you quoted can be thought of as a long position, but not exactly. It's a vol skew trade.

I'm assuming you don't understand the vol surface for equity markets (strip, skew and tenor) so I'd advise you best stay away from trying this trade.

As I said, was not advice, just an opinion.
Opinion is based on studies from Tom Sosnoffs research team. Closing early also reduces gamma risk.

minwa has touched on this, ToS is broker first. It's in their interest for clients to have high trading volume hence the encouragement to trade multi-leg instruments like condors and high turnover by closing early and opening new positions. While most of their material isn't scamming, it isn't new or revolutionary either.

Like I said you've either carelessly phrased things, or are very ill-informed of the product.

- I believe that is how options pricing model works? You put in a DTE and you can deduce POP based on that DTE? How is that misleading?
.
- they will understand why an SPY beta weighted short delta is important, when short premium.

Anyway, we obviously share different views, and I won't go on. I'll keep my posts only to 'theoretical'/'dictionary' and refrain from what I believe to be practical comments going forward

If we keep it theoretical, then PoP calculated from pricing models is really only in a risk neutral world - i.e. the drift of the stock is the risk free rate. PoP in real world is a different matter.

Whether they calculate using delta as a approximation or Monte Carlo simulation with underlying stochastic process per BSM, risk neutral is just a convenient change in measure of probability space to get nice martingales so that the option price can be expressed in analytical form instead of being solved numerically like many other complex math problems. So I'd take the PoP with a grain of salt.

Beta weighted deltas is spouted for retail who don't know how to model correlation and greeks like cross gamma/vega etc. No desk in any bank uses this because it is too reliant on correlations &/or optimizing. It can pass if trading a few indices with high correlation which is what ToS generally advocate(S&P, Russell, Nas).

Probably a good thing most skim past beta weighted bs lol

 

[minwa]

ToS is broker first. It's in their interest for clients to have high trading volume hence the encouragement to trade multi-leg instruments like condors and high turnover by closing early and opening new positions.

Just had a browse at their more recent videos..

"Forget waiting until 50% profit - 25% is the way to go ! (it also doubles our commissions..so guys please cut your profits short, dont let them run"

They also had another guest on few weeks ago who presented a long volatility trade.

I have a feeling the producers would not allow her to simply do a VIX call, instead have to push a 3 legged spread because it gives 3x the revenue. Capping your upside to 18% while establishing a long volatility trade in a cheap premium environment .