Is it possible that this member found the Holy Grail?
After running some backtests, it turns out that this setup can suffer losses if the implied volatility drops significantly.
However, with a holding period of 3-10 days, the likelihood of a dramatic volatility drop is relatively small. In backtesting, the maximum loss was around 15%.
Here are some frequently asked questions about this strategy.
Q: Which subscriptions does this trading strategy apply to?
A: It is part of the SteadyOptions service and complements other strategies (straddles, calendars, etc.) you use in your model portfolio.
Q: How often do they trade?
A: The goal is to trade both (SPY and QQQ) every week, assuming the setup is right. Aim to open on Friday or Monday and close by the end of the week (within a week).
Q: How was the performance in your backtests when the VIX was very low?
A: So far, we have backtested this trade setup using weekly trades for everything in 2022. Only a handful of cases had losses below 10% (and most of them would win trades with a short expiry), so the downside risk of this setup tends to be small. The main risk in this trade is a sudden IV collapse, and with VIX between 15 and 17, this scenario is much less likely.
Q: Is the risk graph trustworthy? It’s like risk free trading.
A: As mentioned above, trading is risk-free only if the volatility does not change during the trading period. Even if the implied volatility drops significantly, you may incur losses. We aim to structure our trades to allow for a 20% drop in volatility.
Q: Is the following a risk free trade after some adjustments have been made? It seems to me that the original setup had some (possibly significant) risks. I mean, did you sell the following for credit in your original setup?
A: Default setting. This transaction does not adjust. As mentioned before, it is not without risks and there are Vega risks.
Q: Do you open all legs at the same time?
Q: What if the market crashes?
A: Since you start trading credits, you can make a profit of 4-7% no matter how much the market goes down. In fact, this is the case when trading becomes truly risk-free.
So far, we have closed 10 trades using this strategy, all with winners with an average return of 7.2% and an average holding period of 6 days. Only one trade was down 11% at any point in time, the rest never dropped more than 3-4%. For a high probability strategy with an average holding period of less than a week, these are good results and good risk/reward. covers SteadyOptions subscription for 1 year.
If you want to check it out, we recommend subscribing.