Policies – please read!
- Everyone can read posts, but to start a new topic or add a reply you’d need to register. To create an ID, please verify your email address. You will get a link at that email address and you can then pick a password.
- Be courteous to others. Treat others like you like to be treated. Discuss the issues. No ad-hominem attacks!
- It’s OK to include external links if they are relevant. But please avoid spamming! Please no affiliate links.
- Before starting a new topic, please check if that question/topic has been discussed before already and add to that discussion instead of starting a new topic.
- If you’ve written a cool blog post that you want to share with others please post this in the “Self-Promo” category only!
- The forum policies may be amended in the future!
Question about leverage
I am trying to figure something out here about leverage and selling 5D puts for 2-3DTE on either the SPY/SPX/XSP or some other index really.
If I sell a 5D on SPX (let's say 5D @ 3500), I think I understand the leverage calculations: 3,500*100/30,000 = 11.7 (if I were to be able to do it on a 30k portfolio, which can't be done due to margin, and which I wouldn't anyway...).
Now, I know stop losses are not optimal and have drawbacks but how can you look at leverage or "risk", if I use, let's say a 3x credit stop loss (i.e. for $2 credit received put a $6 stop loss). Would it be better to look at potential of the percent of account lost per trade as a "better" approach for risk? So here if I took $6 stop loss, a 2x slippage (for gap) the max loss would be $1,000 ($2x$6-$2) or 3.3% of the account.
Or with the overnight gaps are too unpredictable in black swan event and this would not really reflect the worst case scenario? A gap to zero is not realistic but Black Monday was a 20% drop or 700 points at current price, and now that I type this and do the math, with a 200 points buffer at the 5D, that would be a 500 point ITM so a possible loss of more than $50k loss if the stop is not exercised due to the gap. Complete blowout and some.
So would using SPY or XSP or some other instrument give more flexibility for a smaller account like this to bring the margin requirement lower, staying potentially without a stop loss but better sizing to let the probabilities play out, not allow a complete blowout even in case of massive gap?
With "only" 30k in equity, you might want to look into doing put spreads. Also called credit spread or vertical spreads. So, sell the 3500 strike and buy the 3400 strike. Maximum loss = 10k (=100 points times 100 multiplier)
Sorry but I think writing using SPX options with 30k in equity (ie: effectively 15k cash for margin requirements) is a bit insane.
If you write a spread you're looking at having to increase your short leg to offset the premium paid on the long leg which will negatively impact you even more. This actually will work against you if there is a noticeable drop.
You won't be able to get good buffers in your regular use.
If you're absolutely sure about doing this then you should only do this when VIX is very elevated and you can score 10% buffers on your positions. This way your put spreads would at least generate some decent PNL.
I see a 3450/3350 spread right now is going for $35 Feb 8th. That's about a 10% buffer spread out across almost a week. Even if your position remains strong but IV increases you won't be able to exit the position without a significant loss for it.
I personally don't think this is a good play with that account size. I considered this as well when my account was this size and I didn't find it worth it then either.
I started at 30k writing XSP weekly options for a while at 2x leverage (now would be 38k), but used a higher delta of 10-20 than I do now (2-8ish). The purpose was to understand the process because there’s only so much reading can prepare you for the experience.
Keep doing that until you lose at least one or two trades. The higher delta, small position was good to learn as my returns weren’t all eaten by t-cost and I experienced a couple of losses when the portfolio was insignificant before scaling into a larger portion of my assets. Usually with XSP I just sold at bid and got a $1 price improvement almost every time so the bid/ask wasn’t quite as bad as advertised.
Then as others say scale to futures and SPX. The simplest way to scale is to just buy a total stock ETF and sell it when you have enough to scale up, but elsewhere we had a discussion about a futures approach and some other ways to grow the portfolio.