Options Strategy Thoughts – Taking Advice from Taleb

So it’s been a while since I’ve made a blog post about any trading strategies. The pain from February’s market meltdown is still fresh in my mind and I’ve been trying to figure out new strategies to avoid that type of catastrophe again. From reading a lot of Nassim Taleb’s writings, I’m really trying to imitate his style of “anti-fragility” in the market. Essentially, this means that I am looking to put on trades (sometimes complex options positions) such that my downside is limited, my maximum risk is known, and I have unlimited upside potential. The best way I can think of with these positions is to have a net long vega position, while ideally, being net credit with positive theta.

These opportunities have been tough to find and, through my recent live testing, I’ve unfortunately not been doing well structuring these positions. I should also be addressing my sizing again as I’m not sure whether I want to size based on maximum risk as a percentage of my account size or size based on the delta as a percentage of my account size. So far how I’m going about finding these positions is by doing the following steps:

1. Pull the top 100 single name equities based on options volume (for options liquidity) that also have prices higher than $30, market caps higher than $5B, and they haven’t had an earnings in the past month. As well, pull the top 100 ETFs based on options volume with prices higher than $50.
2. Take these names and calculate their intraday (same day open to close), overnight (yesterday close to today open), and daily (close to close) historical volatility.
3. Pull the latest options chains for all the names (at least 20 days to expiry) and find the implied volatility for the options that are ATM.
4. I then calculate the difference between the IV and daily HV/intraday HV and select only the names that have absolute differences greater than 5%.
5. With these names, I sort them based on descending order of intraday HV and look at the volatility skew to see whether a position is worthwhile.

Things that have worked out so far:

• Flat IV skews for a certain expiry can be a good opportunity to put on back-ratios with same expirations.
• If the IV term is backwardated, putting on diagonal back-ratios where we short the front month and long the back month works well if the back month expires during earnings week. *Diagonal back-ratios have not worked out very well otherwise.
• Straddles and strangles should be placed in the morning if intraday HV is much higher than daily HV. If overnight HV is higher than daily HV, only put on straddles and strangles that have IV’s around or lower than 20% since theta will erode a lot of value.

Things that have not worked out for me so far:

• Structuring my trades such that I minimize theta; I have been getting hammered by theta lately. This may also be from my poor positions sizing.
• Longing the front month and shorting the back month options for a diagonal spread does not work well in low volatility environments so far.
• Determining how far the strikes should be from each other has been difficult and many times, I have been caught in the loss region of back-ratios or straddles. I should factor in the daily dollar HV as well when structuring these trades.