Which is Better? ATM Puts or Straddles or 16 Delta Strangles

The average profit as a percent of the trade credit is 15%, 8% and 21% for ATM puts, straddles, and 16 delta strangles respectively.

Hence, 16 Delta Strangles are the best followed by ATM puts with Straddles coming in last.

When should I manage trade?

When implied volatility rank is high, we tend to see greater profits across the board. However, we have different management strategies that can vary our performance. In periods of high IV Rank, what management strategy works best?

We find that managing at 21 days to expiration yields the highest P/L per day while having the lowest risk profile in all environments and when implied volatility is high.

 

Sell in High IV to Maximize Theta

As tastytraders, we like to sell premium 45 days to expiration and manage our trades 21 days to expiration. The reason is to maximize our theta while minimizing risk.

Let's explore the unique relationship between theta and implied volatility to see if we can maximize theta using IV.

We see a clear correlation between theta and IV. As IV increases, so does your theta as percent of capital used.

This implies that to maximize theta in our portfolio, sell in periods of high implied volatility.

 

Theta Decays more slowly towards expiry.

A current theta of 9 means that theoretically, all other variables equal, the strangle will get $0.09 cheaper by tomorrow, thus yielding a profit to option sellers of $0.09 x 100 = $9.00.

So, what percent of that $9 do we actually see in our daily P/L historically?

We find that in the first ½ of the trade, on average, we collect 52% of our theta in our daily P/L… but in the second half, we only collect 11%.

So Manage Early as theta no longer becomes a reliable metric in the second half of the trade.

 

Trade Small for Success

Trading small enables a large number of independent occurrences which we can use to combat the randomness of the market.

The average P/L and volatility of P/L of selling one contract a day is significantly more desirable than selling contracts in bulk when managed at expiration or 21 DTE.

So Trade Small and Trade Often

 

Why to be a seller of Options?

Implied volatility is a measure of future price movement of underlying while realized volatility measures the historical price movement.

The fact that implied volatility generally overstates the realized volatility encourages us to sell rather than buy premium.

Implied volatility overstating realized volatility means that option market expects higher underlying volatility and is overpriced on average, which encourages us to sell premium.

Manage Early to Reduce Volatility of Portfolio

https://ontt.tv/2Hv5xvv

 

Reducing Volatility by Managing Early

New traders may be misled by the lower buying power of tight vertical spreads relating to lower risk, but when comparing these differently sized trades, it's important to normalize by this buying power amount. One way to compare these trades is to look at the return on capital.

 

Even though tighter spreads appear to have less risk because of their lower buying power requirement, when comparing the return on capital volatility of varying width spreads we see that the wider the spread, the lower the return on capital volatility. Another way to reduce this volatility is to manage the trade at 21 days. When managing at 21 days the return on capital volatility is reduced by roughly 50% for all width spreads.

 

https://ontt.tv/2Hv5xvv

 

Comparing Risk, traders need to normalize by BPR

Video Link https://t.co/uu1O2KnKwy

5G Rolllout

https://www.speedtest.net/ookla-5g-map

Using Theta to Measure Size of a portfolio

https://www.tastytrade.com/tt/shows/the-skinny-on-options-abstract-applications/episodes/using-theta-to-measure-size-05-13-2019?utm_campaign=archive&utm_medium=link&utm_source=social-share

UBER IPO

 

https://equity.simplecast.com/episodes/why-om-malik-thinks-the-vc-subsidized-l

 

IV Rank

https://tastytradenetwork.squarespace.com/tt/blog/iv-rank-extravaganza

Trade logic unlocked

https://www.tastytrade.com/tt/shows/trade-logic-unlocked/episodes/ballparking-a-beta-weight-05-09-2019?utm_campaign=archive&utm_medium=link&utm_source=social-share

Support Solutions

https://tastyworks.freshdesk.com/support/solutions/folders/43000342985

Options workshop

https://www.tastytrade.com/tt/shows/options-workshop/episodes/options-workshop-05-08-2019?utm_campaign=archive&utm_medium=link&utm_source=social-share

Guide to theta

https://www.tastytrade.com/tt/shows/research-specials-live/episodes/a-simple-guide-to-theta-05-08-2019?utm_campaign=archive&utm_medium=link&utm_source=social-share

Covered Calls

tastytrade (@tastytrade) tweeted at 1:15 AM on Wed, May 08, 2019:
Covered calls are a popular strategy for traders with long stock positions. Can we replicate the performance by selling calls on $SPY? #tradingstrategy https://t.co/Yv8e33ZNy7 https://t.co/xPEox7VdjP
(https://twitter.com/tastytrade/status/1125849042897002496?s=03)

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What is BPR?

tastytrade (@tastytrade) tweeted at 4:56 AM on Tue, May 07, 2019:
We use the term "buying power reduction" (aka BPR) quite often. BPR is obviously important because it helps us better visualize how much capital a given position will require. Read more about BPR in our latest blog. https://t.co/weLvCNV6lB https://t.co/iWTHcQ1C94
(https://twitter.com/tastytrade/status/1125542263763947521?s=03)

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PMCC

tastytrade (@tastytrade) tweeted at 7:50 PM on Sun, May 05, 2019:
There are lots of ways options can be used to synthetically replicate desired positions. A Poor Man's covered call is one of those. Check out Research Specials LIVE from Friday to see how to set up a PMCC, the advantages & cost associated with it. https://t.co/HC6aQsmzhF https://t.co/tXlrDP2lre
(https://twitter.com/tastytrade/status/1125042468611854339?s=03)

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Diagonal Spreads

tastytrade (@tastytrade) tweeted at 0:40 AM on Sat, May 04, 2019:
What are some of the most common questions that @TraderKatie & @tastytraderMike get about Diagonal Spread's, otherwise known as poor man's covered calls & poor man's covered puts? Check out their Diagonal Spread 101 for the answers! https://t.co/uaDvUBzNxK https://t.co/oz0WEIAXtD
(https://twitter.com/tastytrade/status/1124390789012963328?s=03)

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Covered Calls

tastytrade (@tastytrade) tweeted at 9:15 PM on Fri, May 03, 2019:
Covered calls are a great strategy to reduce portfolio volatility. Can they be constructed to remove the upside profit cap? #tradingstrategy https://t.co/oOHw0sS6lJ https://t.co/yycPMKicdD
(https://twitter.com/tastytrade/status/1124339230564671488?s=03)

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How did Apple and Qualcomm Settle Finally?

https://www.cnbc.com/video/2019/04/17/watch-cnbcs-full-interview-with-qualcomm-ceo-steve-mollenkopf.html

 

How to Improve?

Self Improvement is a big part of a Trader's Job if he/she wants to succeed.

But how does one improve....Here are some ways.

 

1. Keep a Journal of things you do. You will know what works well and what does not. Keep doing more of what works well.

 

2. Keep SMART goals. Small Measurable Achievable Realistic Trackable. Work towards achieving them using your Journalling from point above

 

3. Take time away to think of new ideas out of the box. Always try to see if a particular algorithm can be shortened or improved.

 

4. Be prepared for the opportunity can arise anytime. Success is only when preparation meets opportunity.

 

5. Keep a close track on your finances(Income, Balance Sheet etc.) preferably over a quarter just like corporations

 

6. Be a student for life and keep learning each day by reading or talking to others.

 

 

Options Strategies by Randy Frederick from Charles Schwab

https://www.schwab.com/active-trader/insights/author/randy-frederick