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  1. mark31408394
    May 8, 2019 @ 3:06 pm

    Great series of posts. Here are a few more questions:

    1. How exactly was allocation calculated?

    2. How was “percentage of delta overstatement” calculated?

    3. How do you position size in your trading? Do you trade as an overlay on top of marginable securities?


      May 8, 2019 @ 11:32 pm

      Welcome back Mark 🙂

      1. My understanding is allocation was calculated as a % of notional portfolio value with the portfolio being held in cash. I.e. cash-secured puts.

      2. It’s the ratio of estimated volatility and realized volatility charted in 10-delta increments.

      3. Yes. I ladder in ~15% of my available capital (defined as 20-30% of notional value of my portfolio collateral) per day. The portfolio is held in SPY equivalents plus a nominal amount of cash to buffer for losses. More details of the mechanics are in the part 4.


  2. mark31408394
    May 9, 2019 @ 9:33 am

    1. As an example, how would you determine a 30% allocation for SPY at 290?

    2. Are you sure? The caption on the slide says nothing about volatility. In fact, none of the slides in that segment mention volatility. The summary reads “in this piece, we explore the overstatement of price moment [sic] based on how far out of the money options are based on their delta values.”


      May 9, 2019 @ 11:57 pm

      1. I would define it as 1 SPY 290 position held in a portfolio consisting of 96.6k in cash

      2. I’m sure :). Price movement [over time] is the definition of volatility. We agree the edge in selling options is the fact option premium is overstated. That is, implied volatility is higher than realized. The chart suggests the overstatement is not consistent across the board but is concentrated, or even understated (i.e. having a disadvantage as opposed to an edge), depending on the delta traded.


      • mark31408394
        May 10, 2019 @ 9:16 am

        1. On 5/8/19, the SPY 301/268 (~16 delta) strangle sold for $2.94 (yesterday was $2.93 for 44 DTE). If you collect 50% of that in 22 days, then that’s $293 * 0.5 / 22 = $6.66 per day * 365 days/year = $2,431, which is ~ 2.5% annualized return on this $100,000 account. The graph for 30% allocation shows roughly a 65% annualized return over 11 years. Does this add up?

        2. I don’t think that’s the case. I watched the segment again and I don’t didn’t hear any talk about volatility. Here’s my guess at what they did:

        –Every trading day from 2005-present (stated to be 13 years), record option closest to 10-50 delta (by increments of 10).
        –Score 1 (0) for option ITM (OTM) at expiration.
        –Calculate A = total score / total occurrences
        –For each delta, calculate |actual – expected| / expected.

        As an example, consider the 30-delta puts. If A = 19.5% then |19.5 – 30| / 30 = 35% overstatement.


          May 11, 2019 @ 7:41 pm

          1. Great catch! No, it doesn’t, even if they’re using 30% of available buying power as opposed to 30% notional. Using napkin math that would be a 5x boost on the 6.66/day bringing annual return to ~12.15%. Rule of 72 suggests it takes ~6 years to double your money at that rate. Coming from what looks to be 500k in 2009 and almost tripling to 1.4M in 5 years doesn’t seem right. Plus, the 293 in premium collected should be cut in half to reflect the roughly 50% lower NAV of SPY back in those years.

          This definitely needs some peer review!

          2. Suppose your hypothesis is right. Since they’re talking about premium overstatement / collected and P/L (1:00 in video), how does that get factored into the boolean ITM/OTM calculation?


  3. mark31408394
    May 12, 2019 @ 11:54 am

    1. Agreed!

    2. Good question. Reading closely on Slide 3, “premium is overstated” could be one point and “different deltas are histocially more/less overstated” could be another. Premium is then brought into play on Slide 5 where they actually tabulate average PnL.


  4. OM
    January 17, 2020 @ 2:46 pm

    Hi Spin,

    If you are only using ~30% of your margin(your notional exposure is ~1.5?) why are you trading options? Seems like buy and hold would be more tax efficient and get you just as good of a return.


      January 27, 2020 @ 6:57 pm

      I agree with you completely. Several months after this post was published and I had more data I stopped trading SPY options for exactly that reason. Risk-adjusted and total returns are superior for buy/hold or basic asset allocation vs a systematic option strategy. I may dabble when VIX >20, but I’ve largely stopped.


  5. Cesar Espinoza
    September 11, 2022 @ 10:24 pm

    You can’t do /ES, SPX, or MES on robinhood right?


      September 12, 2022 @ 1:11 pm

      Off the top of my head, I’m not sure. Might need to call them to find out.


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