This has not been my experience. I tend to buy LEAPS aka Long-Term Equity Anticipation Securities aka options with an expiration period >1 year of cyclical stocks. Sure, these are not as exciting and fun as trading weeklies on SPX or VIX and bragging about your "juicy tendies" on reddit, but the long time horizons give the positions quite a bit of opportunity to fall and rise as needed. I'm great at buying in too high and selling out too soon, but at least I usually sell out positive. Nice cyclical sectors are energy, metals, electronics, etc. For example, stocks like Shell (SHELL) or ArcelorMittal (MT) have options with expiration in Dec-2026 which provide a lot of wiggle room (although perhaps not right now). Note: I am not offering any buying or selling advice here. Also note that I hold positions in both Shell and MT.
Just wanna give a quick shout out to you - I've been a fan of your way, simplicity at its best, though I tweaked a lil to suit to my style. Keep enlightening. Thank you!
You are welcome. Good trading is simple. The more complex a trading system, the more apt for mistakes. Mistakes only cost you monies. The less mistakes, the better your results.
Yeh...I wouldn't do that. That 18% margin was chosen for that specific expiration. There is no earnings between now and the April expiration. If there was, I would have chosen a higher strike and would have been able to get good premium further out because the option market prices in earnings. Could it still rally 20% between now and 40 days away? Sure. But I don't think it will. We'll see. Btw, how would buying whatever delta the 450 call at 40 days out throughout NFLX history performed?
I think I asked you this...Do you want to backtest buying one 15 Delta call,or do you want to test buying apx 6 in order to compare Delta equivialants?? Or Something in between?? Obviously,buying one could never outperform stock.. I
The assumption in this hypothetical scenario was that you were continuously long stock, but sold far OTM calls. So I was curious how continuously buying a call approx 41 days out at strike 18% higher than current price of underlying would perform. In this case, it looks like that would actually be a profitable strategy. I don't have the historical option pricing, but here are the days where NFLX was at least 18% higher than 41 days ago: Note that the performance indicated by that list is heavily front-loaded. Most of the growth happened over 5 years ago. And of course, this is with hindsight on a stock that has performed very well. That same strategy would have performed horribly on most other stocks. Also, in your backtest, if I sold a put and it got assigned, I would not take the loss and sell another put. I would simply sell a higher priced call and basically implement a wheel strategy. I love backtests, but the problem with them is that past performance doesn't always translate to future.
I said that I agree with you that Netflix will be rangebound. A volatility view is a view on the volatility of the asset on some timeframe (daily, monthly, or the duration of the contract). Implied volatility is just the market’s perception on the future expected volatility.
What's the economic difference between taking the loss and selling another 85 delta put vs taking down the stock and selling a 15 delta call ?? I'll test it,but im pretty dam sure buying 15 Delta calls is usually a losing game..I also wouldn't buy one,I would probably buy Delta equivalent..but I would buy stock if I played that game... Backtests are unfortunately as good as it gets in a game of probability
Say ABC is trading at 240. Let's say the 85 delta put is 280 at the time I sold it. ABC releases catastrophic earnings with a hint of creative accounting and drops to $20/sh. Now the 85 put is 45 (and that would be generous and reflect a big expansion in IV). If I take a loss and then short a new 85 put and the stock turns around fast, that put can expire worthless and I'll be left chasing the stock after getting shook out. And yes, it would be the same outcome if I sold the 15 delta call...put call parity. But even if I did that, I would not just let it sit and do nothing until expiration. Note that I said "higher priced call", not necessarily 15 delta call. After such a huge drop like that and given that it's a volatile stock to begin with, I would just hold and hope for a recovery. I would probably still sell a call, but at a higher strike or if the premium was too small to not be worth it, I'd hold and hope. And while 240 to 20 is an extreme case, NFLX has dropped up to 77% before within a 90 day period of time. Note though that recently, the realized volatility has decreased quite a lot, typical of most companies as they get bigger. Constantly buying the 15 delta calls on any random stock won't work out over a large number of occurrences. With NFLX, it might work, but only because it has been an amazing growth stock over the past 2 decades. How do you incorporate chart patterns into your backtest? How do you incorporate economic factors such as stimulus, consumer confidence, inflation expectations, fed policy into backtests? That stuff is pretty hard. If knowing how to calculate probabilities alone was an edge, then statisticians and data scientists would be making all the money...although there is probably some truth to that. Beyond that, I actively manage all my positions. If I was short a 450 NFLX call, I would adjust it if NFLX started trading around there...depending on how much time until expiration. The only way I would get burned is if it gapped up overnight before I could adjust. But there's no way to put that into the backtest as it's purely discretionary. I agree with that definition.
I am fundamentally against trading straight direction and option repair. Its wrong on many levels. When you say constantly buying 15 delta calls wont work over a large number occurences,you are really asking for 2 things 1) A well diversified portfolio of stocks to run a backtest on in varying market conditions 2) A Delta equivalant amount of options to measure against stock number of shares.. Its not a question of whether "it will work"..For a directional trade,its a question of outperforming the underlying...No long directional bet will work in a meltdown,but some strategies work better than others,and some offer a much better R/R and "appear" to offer significantly more edge given ones chosen market scenario... Forget economic factors..Its meaningless if you have a plan,ie Momo,Swing,Mean Reversion etc..Focus on Money Management(preservation) and getting as much edge as possible if you use options..Simple example,buy stock vs sell put vs buy a boatload of flys.. My reccomendation would be to get a realy good scanner