Short Premium Research Dissection (Part 26)

Today I want to wrap up the last six blog posts.

Curve fitting and all, the current version of the limited-risk strategy is described in the second paragraph here. Just below that, our author gives us the graph and table of the strategy.

In Part 21, we get:

     > You’ve likely noticed that the returns of the strategy
     > above are less substantial than the returns of the
     > high-risk strategy discussed in the previous section…

I have been studying this comparison intensely over the last five posts. Contrary to her suggestion, I had not noticed the difference. The only reason I even realized such a comparison was to be made is because one section is entitled “high-risk options strategy” and the next section “limited-risk options strategy.” Aside from that, she could hardly have been less clear.

Being spared the need to trade intraday is, as discussed in her third point (Part 21), a huge potential benefit that does have consequences for execution. Without being around the computer intraday, I may not be able to close trades at EOD when exit criteria are met. Contingent orders have benefits but can be rough on slippage necessary to maintain a high probability of fills. More likely is the possibility that I review trades at night and enter closing orders for the next day: a logistical difference.

After further review, I have no reason to suspect a meaningful impact between trading EOD or next morning. I certainly may see gap moves up/down that take the market NTM/OTM and affect trade profitability. Over a large sample size of trades, I would expect no net effect, though.* I may actually get a slight bump in theta between market close and next morning’s open especially closer to expiration. Since I like to be conservative in drawing conclusions, I am fine with her use of the EOD trades (although less fine with omission of transaction fees as mentioned in this third paragraph).

My last paragraph includes suggestions about improving total return that would probably apply to both limited- and high-risk strategies. Trading that way may come at the cost of having to be home or capable of logging in to make intraday trades.

* If 1-2 trades experience a huge gap sufficient to skew the overall average, then they should
   probably be excluded from the data set since this is nothing meaningful about the strategy
   itself (with equal likelihood in the future of seeing a gap that offsets the difference).