is selling weekly straddles a good strategy? I know some traders who sell weekly straddles .They keep it delta neutral buy selling more straddles until they have huge short straddle position on the expiry day.They make on an average 2%-3% weekly.max loss i have seen in a week is 6%.yearly return close to100%. How dangerous this straegy is? PS: trade is done on index
I think everybody believes the market is headed for a period of higher volatility. Selling straddles in low vol markets that are transitioning into high vol is going to test your mettle. You familiar with inverted strangles?
I guess inverted strangles is a part of the strategy which the prop desk follow in managing their position.Also the number of short options for a weekly increase from x on a friday to atleast 10x on the expiry next thursday. On a very volatile week they do lose but over the past 2 years they have generated 150% plus net return.
Over how long ? We've been in a strong bull with declining vol since 2009 and if it continues, then yes it is generally a good strategy. If those traders traded through 07/08 and still maintained 6% max loss and continued delivering 100%+ then they are among the very elite.
I have seen their results from 2014. I am sure 2007/08 scenario will be tough. Biggest risk I see with the strategy is gap up and down . How will the output look if someone does this strategy for the last 2 expiry days only. and buy some OTM strangle overnight close them in the morning Rationale is to negate any sharp gap up/down and then sell implied volatility on expiry day.Backtest looks good but not sure how the results would be on a large portfolio
but if i consistently do every week I will have more winners than losers .Even though some weeks are bad.They generally wipe out 2 weeks of gain.The week after losing they generally make more profit because of spiked IVs .Also right at the expiry i see lot of overpriced options
All it takes is one big gap (down or up, more likely down) to wipe out not 2 weeks of gains, but possibly few months. You need to identify an edge, not just blindly do. And my advice: NEVER naked. Not only it exposes you to unlimited risk, but it is also very margin inefficient.
The low odds of something bad happening are 100% irrelevant until you're the one it happens to. Only risk what you can afford to lose on short strategies and that may be impossible with naked strategies. If your strategy yields close to 100% yield, waste some money on OTM long legs ( butterflies) and accept a 'mediocre' 60% or so, without the tail risk.