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I just sold my first very first put! 3830 strike for $0.95. Delta 2.6. VIX at 19. I'll continue to sell low Deltas for now until I get more comfortable.
Congrats! I sold puts today between 3775 and 3830! Good luck everyone!
3845 strike for $1.20. Delta 4.9. VIX at 19. I'll continue to sell at around VIX*Delta = 90
@fi4wanderlust Like the idea of low delta to start and learn. The secret sauce is knowing when to raise and lower your delta...I've not got that perfected yet.
I am always riskier than Big ERN, but part of that is that I'm still working.
I like your idea of setting your strike based on a target VIX*Delta. How has this strategy been working out for you during big down days?
@fi4wanderlust Big ERN mentions the different options on Strike price selection in one of the articles, so not my idea.
I'm still only at about 9 months into this, so I have limited data. I was caught on 9/4/2020 close because got greedy and sold a put for $195 on 9/2, which was too much (higher Delta). Ended up about 44 points in the money, so I lost $4,400.
You have to mentally expect to loose ~50% of your premiums, or you'll go crazy. So far, I've retained 75%, so preparing for another loss at some point.
This will be so much more powerful post FIRE, since LTCG might be 0% and STCG might be 12%.
Thanks, yea I'm planning to log all of my trades to get an idea of a good strike between the delta, VIX, and % drop data. I started logging in data since 2000 (dotcom bubble) with VIX and % drop data info to test out safe strike prices. Your formula made me look at the data for 10/9/18 where VIX was at 16 and had a 5.3% drop (2880>2728). I wonder what the proper delta was to stay OTM? 8/19/15 was another date where VIX was only 15 and had a 5.2% drop.
Just looked at 9/4/20 and the VIX was 31 and expired with a 2.8% drop. Based on your formula, a 2.9 Delta would have been a safer strike.
I'm definitely excited to get started on this and hoping to pick everyone's brain more! I FIREed last year at 37 so the additional income and the Section 1256 tax treatment is perfect for my situation!
Sorry, 9/2-9/4 was actually a 27 VIX and closed at a 4.3% drop. Your formula would have called for a 3.3 Delta. 44 points in the money meant you set the strike around 3470 when 9/2 closed at 3581 and 9/4 closed at 3427.
@fi4wanderlust I'm selling mostly 2 DTE puts, and the put that I lost money on (3470 Strike) was likely sold late in day on 9/2 (VIX around 26.5) for expiration on 9/4 with SPX around 3580. Then by Friday (9/4) SPX closed SPX around 3427.
You will get caught and lose at some point, and I mentally plan to give back half the premiums. We are selling insurance.
I'm scared for the days of VIX near 12 with 5 delta Puts 40 points below the market!
In case you're curious, from the data I painstakingly entered from 2000 and up: There has been 15 instances of 2DTE puts with more than 3% drop where the VIX was 19 or lower.
@fi4wanderlust Wow that's a really interesting stat. Care to share what dates they were/what was the biggest loss?
One thing to note is that sometimes the VIX might be low which tracks 30 day implied vol but the 2 day implied vol might be high such as before a Fed meeting when the market is expecting a potential big move so you could have sold a further out put on those days even with a low VIX. However, the opposite can happen as well such as a surprise move over Christmas or something.
I ended up looking it up myself, I counted 13 times (just looking at MWF close-to-close changes not factoring holidays). Biggest 2 day drop was 5.6% with a VIX of 16.4 on 12/3/18. I also went back to when the VIX was started in 1990 and found 5 more instances of >3% drops in the 90's.
@figuy1 I looked at TTH as well for additional data points. Two biggest drops with low VIX were what I mentioned above:
"Your formula made me look at the data for 10/9/18 where VIX was at 16 and had a 5.3% drop (2880>2728). I wonder what the proper delta was to stay OTM? 8/19/15 was another date where VIX was only 15 and had a 5.2% drop."
@fi4wanderlust I used VXO (VIX predecessor) data to go back even further, the worst <20 VXO was 10/11/89 had a 6.5% drop with VXO of 16.73. Another notable one was the Wed-Friday before "Black Monday", had a drop of 7.4% on 26.3 VXO.
Interestingly 2018 seemed to have the most <19 VIX >2.4% drop days with 3 and the strategy did alright that year.
While its not a perfect comparison, you could look at next time VIX gets to 16 to look at how much premium you can get for the 5.3% out of the money put. I'm guessing it would be <1 delta. There's always a trade off between avoiding losing money and collecting premium.
@earlyretirementnowcom One would have been "safe" selling puts just before 9/11/01 which dropped 7.4% when it reopened a week later since the VIX happened to be >30 just before it happened. However, I suspect there would have been that big of drop even if VIX was <10 and put selling would've been painful.
I'm not sure how the exchange would handle 2 day options expirations in that situation where the exchange was closed for a week. They didn't even have weekly options expiration back then.
There are so many levers one can tune in this strategy. The ones I’m most focused on are when to adjust delta, DTE (just morning vs close), investments with the margin collateral, when to sell a second put with the same expiration, how to scale the strategy when adding another put requires 6 figures...It’s taking some experimenting for me to figure out where I want to sit on all of that, but I’ve settled over 2020/21 on something that works for me. However since the last year was such a success for this strategy I don’t think I’ve learned enough to say that with certainty!
I am glad that before I started I sold some smaller puts on XSP with higher delta to learn how I react to winning and losing trades in this strategy - still made some profit but it was good to experience that before scaling. Unlike passive investing you can’t set and forget this!
Sold 3780 at 1315 EST for 1.25 ~ 4 delta
Sold 3725 at close for for 0.80 ~ 2.5 delta
As long as drops are slow and steady vice really big days, I'm happy!!