Short Straddle Option Strategies on SPX and RUT

Based on Short Straddle Option Strategies Dave published some highly interesting information about his straddle backtests.

So far, it supports my understanding, that Straddles are a great way to earn consistent income from options.

Being an Option Seller, all factors come down on managing risk and premium income well enough to earn profits on a regular basis.

Source: DTR Trading

Let me quote some results from Daves statistical research:

In general, we can see in the table that, to collect 10% of the credit received (10% profit taking level) required a trade duration of roughly 30% of the entry DTE. At the 25% profit taking level you needed to stay in the trade around 60% of the entry DTE. For the 35% profit taking level it was about 70% of the entry DTE; 45% profit taking took your trade duration to about 80% of the entry DTE. These estimates are for the non-IVR filtered strategy variations.

First of all, you can generally show that higher profit targets force you to stay longer in your position. If you think about it, that result make totally sense. Profits are usually coming from time decay and a loss of volatility. While time will pass by automatically, you have a a fifty fifty chance on rising or falling vola (unless you enter the trade at very high implied volatility levels).

So the more you want to earn -- the longer you will have to wait.

Now for the last table...total non-compounded returns by strategy variation. The non-IVR filtered variations had the highest returns, which is related to these variations having the most trades (100+, see table above). In general, the trend is for higher returns with higher DTE.

At the same time more days to expiration (DTE) increase your profit propability and your returns. Longer DTEs increase the time value of your sold options giving you more time to hold your position. At the same time, longer option plays are less volatile and reduce risk on larger stock market swings.

The third table shows the win rate for all of the strategy variations. The highest win rates occurred at the 10% profit taking level, regardless of IVR filter level. Most of these particular win rates were in the 90% + range. For the IVR > 50% filter, the high win rates spanned multiple profit taking levels. For the non-IVR filtered variations and the 25% profit taking level, we see many win rates at or above 80% across most DTE. For a monthly straddle trader, this isn't a bad win rate.

If you only go with 10% profit target, your chance of winning is almost always at least 90%. The problem of volatilty flips at the same time, if you do those trades on a regular basis with a high stop loss level. The reason is, that volatility is high and you can earn huge premiums here. But high vola also means huge swings in the underlying that will increase your risk of getting kicked out of the trade with a loss before you can earn your profit. A profit target that is too low also needs more time to earn back your losing trades.

So far from what I learned, a good profit target is around 25% to 35% of the received option premium. At the same time, I would put a stop loss target that is around double or triple of your profit target. Let's say, you take profit at 25% than my maximum loss to take would be 50% to 75% at best. For a profit of 35% you should give space for up to 100% of the premium received.

Short Butterfly Dec 2015 - Performance Report Week 43/2015

We ended last week with a strong run up on 3,450 points which is kind of over my preferred range of 3,400 points. From here I am already in the zone of losses. Having 3 short call options open means, with every point up from here I lose 30 EUR. That is kind of the situation I would like to avoid.

Because of that I have opened the next short put option at 3,550 points on Friday to give me a little room to breath. But after crunching the numbers on the weekend I figured out, that this step does not really do the trick yet. One put option still means there is 2 naked call options costing me money on the upside. In fact, my protection begins at 3,700 points where I have bought my long call options. Running up another 250 points would mean a loss of 2,500 EUR alread for those 2 options plus another 2,000 EUR for the third call starting after 3,550 points.

To understand the positioning to the fullest, you can have a look at my position table down below. So far, I am delta negative, which means, on markets moving higher I lose money. Markets going down will make me some money.

As we are already in Tuesday night as I am typing those lines, I have to admit, that the strategy was not optimal for this period once again. The market made a strong move from less than 3,000 points up to 3,450 points leaving me with a wide range and no clear restistance at the current level.

So far, I will close out the low call at 2,950 points and take profit an the lowest naked put option at 3,150 points. That means, my range moves a bit higher. At the same time, due to my payments to close the call option, I am running out of premium to get my complete position in a win.

What are my possibilies now? At first, I could sell another straddle at 3,450 points to narrow the net and earn round about 200 points here. That would offer me a nice buffer. My new range would be between 3,300 points and 3,500 points. If we moved down again, I could sell another straddle at 3,250 points. So my range would widen again a bit from 3,200 to 3,500 points.

What I do not like with that idea is the essential risk on the upside. I really have to think through if I try to work that out or if I cut losses and focus on the next month.

As I will be on holiday in the Philippines with my wife in November, I feel that closing out and having a good off time would be the better choice. I will have to decide until Friday...

Short Butterfly Dec 2015: Position Update

This week I have closed the short put options at 2,750 points that will expire end of October. Now, there is only 2 October long put options at 2,950 that are almost worthless for my December strategy. The premium is already very low and I wanted to reduce risk on the downside a bit.

At the moment it looks like we will keep on moving higher -- but as usual -- things can change from one day to another.

That is why I will keep the ball low and make sure to reduce risks as fast as possible.

Currently my break even points are around 2,900 and 3,400 points in EuroStoxx 50. So looking at a price of 3,200 at the moment, we are pretty comfortably situated in the range!

Short Butterfly Dec 2015 - Performance Report Week 40/2015

The EuroStoxx 50 closed last week at 3,137 and the VSTOXX closed at 31 points. Compared to the week before we are up more than 100 points. Related to the range for my options we are doing great at the moment. Break even points in December are between 2,900 and 3,400 points with maximum profit at 3,150 points at the strike of the middle short option straddle.

The put spread at 2,750/ 2,950 will expire in two weeks. So does the long call option at 3,400 points. At the moment, volatility is high and a direction is far from obvious. I am still afraid of further drops down. That keeps me holding my put spreads that extend the range at least for 2 weeks down to 2,750 points before I will have pressure for adjustments. The long call is meant to reduce margin requirements, because I hold 1 short call at 2,950 more than short puts (the 2,950 short put option is still missing).

The current positions hold are described as follows (click to zoom):

At the levels of 3,150 points and 3,350 points the straddles are still open and doing just fine. At the time when I have to sell my next short put at 2,950 points, I will close the highest strike straddle -- or put a short future against it to cut losses.

The payoff diagram can show quite clear what is the range of profit at the moment (click to zoom):

Based on that, I feel with my current holdings quite comfortable. As long as we do not see chances of more than 10 percent in any direction that short butterfly should ba nice holding to earn time premium.

Next steps have to be taken in following situations:

ESTX50 falling below 2,950 points: Sell missing short put option, sell future to over 3,350 put option.
ESTX50 rising above 3,400 points: Sell short call option at 3,550 points.
Expiration of October Put-Spread: Buy of November or December positions based on volatility.

Based on both scenarios we can move 6 percent down or 8 percent up. We are in the middle of my current range and I will do my best to keep that sitation going.

Start of the Butterfly Strategy for December

At the end of August I have startet the next trade for my strategy with expiration in December 2015. Due to the catastrophe with my September positions I did not find the time to describe the trade yet.

On August 21st just before the crash I started with a straddle at 3,350 points. Just after the weekend, on August 24, the market dropped further and reached the second trigger at 3,150 points. At that strike I sold the next straddle for an even higher premium. At the same time I bought insurance with expiration in September: 2 long put options at 3,000 strike.

As the market moved lower, I added one long call option at 3,700 points for December as protection for a possible rebound to the upside. I liked t he low premium and took the chance to reduce the risk for the whole time to expiration. If the markets go up again, the call can pay for further options to buy in case.

Lets have a look at the open positions (click to zoom in):

After all transactions, the premium received totals 698 points. 64 points have been paid for insurance.

The current break even points are 3,550 on the upside and around 2,950 on the downside. Further adjustments will be made if the market moves below 3,000 or above 3,500. Depending on the possible premium, the new straddle will be sold or just the in the money option.

The resulting payoff diagram looks as following (click to zoom in):

Based on my experience, I will close the position when it is possible to take 50 percent of the maximum profit. At this time, the maximal profit possible will be reached between 3,150 and 3,350 points with 434 points of profit. So the trade will be closed with a profit of 217 points.

Alternatively the position will be tied up 6 weeks before expireation -- that is after half of the trading period -- so that no bigger losses can be made after that point in time. I will have to decide who I will treat that exactly. I prefer to close the whole trade at all.