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May 4, 2021 - 6:51pm

I am assuming (potentially naively) that listening to the option alpha course is less about directional bets, and you want to actually trade vol. I'm also assuming you have a decent background in math. 

I would start with reading "when genius failed" and think through what happens when you have potential liabilities 10x - 100x your net worth. Then, if you still want to sell options, I would pick up Hull, like every other option trader in the world, and read it from start to finish at least twice. After that I would pick up some of the newer option pricing models-- I think Nuclear Phynance (a forum) talks about these a lot, but I'm not up to date, and try to understand vol forecasting, pricing, etc. 

Then I would buy some option data and start playing with it. I would go back in time and try thinking of any strategy you can that will actually make money. I've seen others use this site in their research, but have never personally tried it:


If you have access to Bloomberg you can also pull historical quotes for the last 6 months from there. Don't forget to include slippage costs -- the B/A spread kills >90% of strategies I've ever looked at. 

As for podcasts, there is no podcast I know of with a sophisticated vol trader discussing options. There are episodes here and there I've found, but generally they're so rudimentary you won't learn anything you can make money with.

As for traders-- every successful S&T platform has vol traders, generally multiple. Every large pod fund has vol traders, generally multiple (I know there are a couple on this forum). There are no hedge funds (that last very long) that only sell vol (because it is incredibly stupid), but many that do vol arb, generally tending to be long vol for very cheap. 

If it hasn't come through in the tone of this post yet, I think selling options is incredibly risky, and very very hard to do well. If you don't have S&T experience, or aren't serious about reading the technical texts, you might as well hire a bankruptcy lawyer now and just keep them on retainer-- it'll be way harder to pay them in a couple years.

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May 4, 2021 - 8:56pm

Thanks for the pointers. I am new to this but I'm willing to put in the work. You mention that it is potentially very risky selling options.

I'm thinking of selling risk defined options with a high probability of success (around 70%). Limiting my exposure to 1-3% per trade and aiming to keep my overall portfolio beta at 0 (a moving target not a goal). Choosing to sell in only high IV environments (above 50%). If I do this consistently over time, like a casino the probabilities will hopefully work out (at least that's what I learned from the course).

My question is, if I'm limiting my exposure to 1-3% per trade and not selling anything naked (only risk defined strategies) how would I put myself in a position to potentially go bankrupt?

May 6, 2021 - 11:18pm

Let's say you only like selling high vol puts. So you sell puts in some company with imp vol at ~50. Stock's at $100, you sell jan puts at $50 (one st dev away, or ~85% chance of success, though this is an awful metric that you really shouldn't use). You have a $100k portfolio, the options are ~$5 a piece, so you sell 6 contracts (approx 3%).

So let's say the stock goes to zero. You now owe $30k for that potential $3k you would have made. 

Okay bankruptcy is extreme. Let's pretend you have perfect foresight, and manage to know exactly which companies won't go bankrupt each year. So you sell one put for ~3k, are you happy with that? No, of course not, 3% is puny. So what you can do now is either invest in stocks, or sell more puts. So let's say you do some of both. You find ~20 different puts, each you sell puts ~80% out of the money (to be even "safer"), then you size them to all be ~1% of your portfolio. The other 50% of your portfolio you put into stocks. You also delta hedge your puts, which likely means shorting ~10% against them.

Well let's say something like COVID hits again and the market is down 30% in a couple weeks. Those puts you sold? Directionally you're probably flatish if you're delta hedging but the implied vol in the positions is also peaking, as it is inversely correlated with beta. But if they were selling for 20 - 30% imp vol, you've probably lost somewhere between 5x and 10x per contract. But also remember there is going to be a VERY wide bid ask spread, so when you get a margin call, the brokers will liquidate for whatever they can, likely actually making that 5x - 10x loss a 10-15x loss on each contract. Don't forget, these losses are all correlated with losses in your stock portfolio. So you had 1/5 of your portfolio in short vol, that's cost you a -200%, your stock positions adds an additional 15% loss, and your delta hedging is flat. 

None of that is super likely, but also none of it is unheard of strategies for vol desks that don't know what they're doing. The Canadian pension systems literally blew up within the past year, and while I was doing vol arb we had vol-maggedon which wiped out ~10 managers I knew well. On the other hand, if you're long vol you did just fine in both situations. I had a buddy who was only managing a few hundred thousand dollars trying to build a track record and he made 8 figures in a single year getting very lucky long vol. 

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