Previously, in "Analysis of Dual-Currency Financial Management Investment Products" [Link: https://www.craft.do/s/D1ykug8fYnhrpM], I talked about self-made dual-currency financial management, which is the related operations of selling Call and Put. This article is prefaced. Below I will focus on some of my thoughts on how to be an option seller and specific strategy choices:
1. Important features of options
1. Diversity and flexibility
① Diversity of option strategies: According to incomplete statistics, there are more than 70 options strategies, and there are more than 20 common ones; the main ones are single option strategies, option combination strategies, and option + underlying combination strategies.
② Diversity of option targets: specific stocks, indices, index funds, futures, mainstream crypto currencies, etc.
③ Diversity of maturity periods and execution prices: The more liquid the underlying, the richer the maturity periods and execution prices.
2. Easy to mathematically model
Constructing an options strategy requires statistical knowledge and probabilistic thinking. After completing the overall strategy and position allocation, you do not need to do futures or spot tracking. You only need to respond accordingly based on changes at a certain point in time.
2. Why do you want to be an option seller?
1. 100% certainty
The price of an option = intrinsic value + time value. Whether it is at-the-money, in-the-money, or out-of-the-money options, the time value will return to 0 when it expires. This is deterministic. The gradual disappearance of time value is the core source of profits for option sellers. For example: the current price of ETH is 1200U, and you sell an out-of-the-money option with an exercise price of 1000U that expires in 20 days, and the premium is 50U, then this 50U is the time value. No matter what fluctuations in the option price are experienced in the middle, the option price will eventually expire in 20 days. It will all return to 0 when it expires.
2. High winning rate
According to statistics from the Chicago Board Options Exchange, about 55-60% of option contracts are closed in advance before the expiration date; 10% are exercised at expiration; and 30-35% are voided at expiration. It is difficult to judge the possible profit and loss of a contract that is closed in advance, but it is beneficial to the seller if it is voided upon expiration. (Note: According to P400 of Victor Sporandi’s book "Principles of Professional Speculation", "A study by the Securities and Exchange Commission shows that the rate of losses among option buyers exceeds 85%", which also supports the winning rate of selling options from another aspect. high)
3. Gathering sand into a tower
The strategy of option sellers has a relatively good investment compound interest effect. If you control the risk of big losses, you can gather sand into a tower. In practical option operations, you will encounter the following three situations and explain how to deal with them, as follows:
To make money: you need to improve your success rate and accumulate small wins into big wins;
Small losses: Investment is an assessment of risks and returns, and small losses are inevitable.
Big losses: Big losses can easily cause permanent wealth losses, and a complete set of risk prevention and control systems are needed to avoid their occurrence.
3. How to control tail risk in options trading (avoid big losses)?
Options are also complex investment types among derivatives, so how to avoid big losses and control risks is a top priority. The most common criticism of the strategy of option sellers is that "limited profits, unlimited losses" is often said in textbooks. Frankly speaking, this one-sided statement is difficult to convince. For example, I gave an example of the Chicago Board of Trade before. Or "Principles of Professional Speculation" describes that finding some data sources can better explain the problem. Therefore, I won’t give too many text explanations here. Those who are interested can collect some first-hand data sources for verification. The following is a summary of some methods based on my recent experience in trading options.
1. Before opening a position:
① Position dividing method: that is, divide reasonable positions into each target, each execution price, and each expiration time, and do not place too large a bet.
② Set the execution price reasonably: For example, when we do a false-value sell operation of ETH, we choose the larger the difference from the current price, the smaller the risk.
③ Set the contract period reasonably: The longer the period, the greater the risk and the greater the uncertainty of the underlying trend; the shorter the period, the lower the return, so a reasonable period needs to be set.
2. After opening a position:
④ Position hedging: keep the original position unchanged and open a new position for risk hedging
⑤Position adjustment: Adjust the execution price or execution period based on the original position
The above strategies and methods are relatively general and contain many practical details. As the article is updated, we will discuss them in detail with practical cases.
4. Strategy screening and three trading techniques
The complexity of options as an investment tool is also reflected in the diversification of trading strategies. In practice, each investor needs to choose an option trading strategy that suits him based on his own investment goals, investment style, and investment strategy. My personal feeling is that there are so many strategies that it is difficult to master them. I am a conservative and stable investor. So the core elements of my screening are:
Mainly doing out-of-the-money options (Butterfly and Straddle are not eligible)
Possess follow-up transaction methods (Sell call and Strangle are not applicable)
Easy to operate and strong in certainty (calendar spread and diagonal spread are not applicable)
The following four core trading strategies have been filtered out: Sell put, Covered call, Vertical spread, and Iron condor. Combine them to form three combination strategies that I commonly use. Below, I will open and hold these three combination strategies respectively. , closing positions, risks, etc. are explained one by one:
1、 Sell put + covered call
When opening a position: Option target: Highly volatile target (individual stock or ETH); Execution price: Determined by different positions. For example: ETH current price is 1200U, 1100U buys 10% of the position; 1000 buys 20%; 900 buys 20%. Contract period: within 4 weeks; the number of contracts is small (more margin is occupied);
Unexercised: If more than 75% of the premium is obtained, the position will be closed depending on the situation;
After exercising the option: Sell the covered call and sell the put at a lower price to continuously reduce the cost of the stock;
Hold: manage the underlying and 2 options as a trading portfolio;
Closing a position: Choose an opportunity to close a position based on the profitability of the trading portfolio (not necessarily each specific situation needs to be profitable)
[Risk Assessment]: Diversified positions and the Wheel strategy effectively reduce risks. If the target is selected correctly, the holding cost can be reduced to resist a sharp drop in the price of the target. The overall assessment is low risk and suitable for large positions.
2. Short-term vertical spread (specifically: sell put spread and sell call spread) /iron condor
When opening a position: choose stocks with high volatility or BTC or ETH as the option subject; choose deeply out-of-value (my personal definition is more than 20%) as the execution price; contract period: expires within 2 weeks; large number of contracts (less margin required) ); There is basically no need to adjust the position during the holding period;
When closing a position: Choose an opportunity to close the position 2-4 trading days before the expiration date, and try to avoid holding it until expiration.
【Risk Assessment】: This is also a mature wheel strategy. The two factors of deep out-of-value and imminent expiry improve the certainty, the overall risk is low, and it is suitable for large position allocation.
3. Long-term vertical spread/ iron condor
Open position: target with moderate volatility (BTC, individual stocks, index funds); execution price: deep out-of-value; contract period within 6 weeks; large number of contracts (less margin usage)
Hold: If the underlying price fluctuates significantly, hedging, adjustment or rollover is required (important and difficult points)
Position closing: You can choose an opportunity to close a position when you reach a profit of more than 50%. In order to improve the efficiency of fund use, you can close the position one week before the last time.
[Risk Assessment]: Although risks can be reduced through methods such as hedging, position adjustment, or rollover, factors such as a large number of contracts and long expiration times increase uncertainty and are high-risk, so lower positions are suitable.
5. How to choose the target
The choice of options trading targets is a matter of opinion. Based on my personal practical experience, I summarize the following 4 points:
1. You can get higher royalties and have higher IVs; (Note: High IVs generally need to be higher than 80 in the crypto circle; generally choose deep out-of-value royalties with an annualized rate of not less than 25%, and the margin ratio is generally small. at 20%)
2. The target has a good prospect. For stocks, choose gorilla stocks (note: for details, see "High-tech Stocks Make Big Money - Gorilla Games"), indices, etc., and the crypto circle only chooses BTC and ETH;
3. High capital attention, high options trading volume, and good liquidity (lowering spreads);
4. Options have a wide range of terms and execution prices, which is conducive to operation.
【Conclusion】
Through a period of theoretical knowledge and practical operation of options, I found that I have quantitative and clear goals in terms of trading strategies, position allocation, risk control, expected profit rate targets, etc., and then formed my own options trading system, and constantly reviewed the role of option seller in actual combat. It is a method that is relatively easy to get started and the strategy is not very complex. If you apply it skillfully, you will have the opportunity to achieve long-term and stable compound interest.
In the future, we will update this article or publish a series of articles based on some practical cases and trading experience. Finally, I would like to give the end of "Analysis of Dual-Currency Financial Management Investment Products" to everyone and encourage myself, "Everyone is an underlying asset, and every day is in the state of ATM (at the money). Failure is like dual-currency financial management, a The currency is money, and the other currency is experience. Your risk can be great, but you must have the Risk Management Skill to match it. I hope each of us can gain Money & Experience on this uneven road of investment. .”