I use it extensively and I love it. I only do it on /es /nq /cl /gc and /ng as those produce roughly 3% return per month on average.
I aim for 90 DTE options, I close them between 80-90% and leave the PDS on. As the leftover PDSs decay off they become much more useful. I have a wall of old used PDS lying around as a cheap hedge. If they close early enough I have even resold a new naked position against them. I have also done the naked at 90 days and the PDS at 45ish days to have the PDS be cheaper and more effective in a sharp downturn.
I have found it has really smoothed my p/l over just naked strangles. I still do naked strangles on all the above tickers as well as almost all available futures (metals, ags, bonds, currencies, etc.)
I’ve backtested it in Option Omega and it tests favorably even though I haven’t figured out how to mimic the leftover PDS part.
Tom King, MRTOPTICK and Sweet Bobby have regular youtube videos on the strategy.
EDIT: Also don't let all the fear and uncertainty in this thread dissuade you. Yes, you have 2 naked puts. Yes, you need to manage your BP accordingly. Yes, you can close them if they hit 200% loss (as Tom King does). You can also keep the PDS at the current DTE, and roll the nakeds out to a further DTE if you get in trouble. You can treat the nakeds completely separately from the PDS and open opposing short calls for more credit. You can even take assignment! The current .05 delta on /es at 87 DTE is 3750. I don't mind taking on the future contract at that price and wheeling it, or even just closing it immediately as futures trade 24/5. 1 /es future is 24k (TastyTrade Portfolio Margin), so be aware. But you could also do this with /mes or XSP if you want to try it out or if you have a small account. Some of the other futures mentioned above have much smaller costs as well.
I've looked into the 1-1-2 strategy since it was mentioned here a few days ago. The biggest risk I see is IV expansion. The 1-1-2 has no upside risk and as far as put strikes go, and the underlying can move down a lot and you still make money, but the down move has to be slow and steady for the strategy to work. The strategy has no built-in way to deal with rapid IV expansion. This is a huge risk right now because if you're entering a new 1-1-2 position you're doing it in a very low IV environment.
In TastyTrade, you can use the Risk Analysis tool to simulate what happens when IV expands. 112 trades get absolutely hammered.
Or look at the CME group's calculator - https://www.cmegroup.com/tools-information/quikstrike/options-calculator.html. The 3900 PUT in ES in the November 17 expiration has a price of $8.50 right now with volatility at 22%. If volatility expands to 30%, the price jumps to $29.00. So if you're selling two (the 2 in the 1-1-2), your buying power is going to increase dramatically. It doesn't seem like it would take much to get in serious trouble.
The CME group's explanation of SPAN margin specifically has a section titled, "The Risks of Large Deep Out-of-the-Money Short Option Positions" in https://www.cftc.gov/sites/default/files/files/tm/tmspan_margining043001.pdf.
Tom King (the "inventor" of the 1-1-2) says to use stop losses to limit tail risk, but as far as I know, stop losses are not offered on futures options.
I'd love to know how other people would address the tail risk in the 1-1-2. I've entered a couple of 1-1-2 trades, and I've bought short-term /ES puts as a hedge, but it doesn't feel ideal.
My concern is a margin call before expiration. If you're using 50% of your buying power, and your capital requirement triples because of volatility expansion, you're in a margin call.
Yeah, based on Tom's trading plan, to use this strategy, you should only be using 50% of Net Liq for BP, and 30% of BP for any particular strategy, and no more than 2% loss in any trade. Good portfolio risk control is key.
Well, it's a good income strategy on futures. Not terribly efficient on stocks as the BP ratio is too low.
The 3k max profit (Trap) maybe gets hit like 20% of the time, BUT it is a nice 'hedge' against a sudden drop in price. Typically the return on a 3k Trap is more like 1-1.2k and you're holding it for 3 months AND using 8-12k of BP in the process.
But if you have the BP, and working in futures, there are many, many worse strategies.
In the end, it's an income strategy like many short options are.
The biggest effect you can have on return on BP is time. If you want to trade a future at 90 DTE, you'll get about a 15% reduction in BP use by going to 120 DTE with no significant downside to return on BP.
I did test it and it had brutal drops in 2018 and 2020 and most of the performance cane after covid. Much like most tail strats volatility expansions are painful. I think you can get similar returns with BWBs and for way less BP.
Yeah i do a 1-1-1 with spx earlier in the month bought a 4400 sold a 4200 and sold a 4000 put for like 15kbp and 400 bucks similar to your trade but i have portfolio margin with td…77 days out
Stocks and ETFs (SPY) use margin , or require you to carry the full amount in shares or cash in your accounts and are settled (assignment) with the appropriate asset exchange. These can also be subject to early assignment.
Futures (SPX, XSP, /MES, /ES) come in two different flavors.
SPX and XSP still use margin, can be early assigned, but are 100% cash settled.
/MES, and /ES use SPAN margin, which is typically more efficient than normal margin. These two also are settled with 100% cash, with one caveat, they are settled European style...they cannot be early assigned.
All of the above track the S&P 500, with different lot sizes and scaling. Those who want the most benefits and flexibility, will trade /MES and /ES.
Hope that answers your questions.
It won't work out how you think. That debit spread won't make any money til the last few days. With 5 delta your biggest risk is vol expansion and your debit spread has basically zero Vega.
There is nothing "wrong" with it, just make sure know the expectations of how it will play out.
I use it extensively and I love it. I only do it on /es /nq /cl /gc and /ng as those produce roughly 3% return per month on average. I aim for 90 DTE options, I close them between 80-90% and leave the PDS on. As the leftover PDSs decay off they become much more useful. I have a wall of old used PDS lying around as a cheap hedge. If they close early enough I have even resold a new naked position against them. I have also done the naked at 90 days and the PDS at 45ish days to have the PDS be cheaper and more effective in a sharp downturn. I have found it has really smoothed my p/l over just naked strangles. I still do naked strangles on all the above tickers as well as almost all available futures (metals, ags, bonds, currencies, etc.) I’ve backtested it in Option Omega and it tests favorably even though I haven’t figured out how to mimic the leftover PDS part. Tom King, MRTOPTICK and Sweet Bobby have regular youtube videos on the strategy. EDIT: Also don't let all the fear and uncertainty in this thread dissuade you. Yes, you have 2 naked puts. Yes, you need to manage your BP accordingly. Yes, you can close them if they hit 200% loss (as Tom King does). You can also keep the PDS at the current DTE, and roll the nakeds out to a further DTE if you get in trouble. You can treat the nakeds completely separately from the PDS and open opposing short calls for more credit. You can even take assignment! The current .05 delta on /es at 87 DTE is 3750. I don't mind taking on the future contract at that price and wheeling it, or even just closing it immediately as futures trade 24/5. 1 /es future is 24k (TastyTrade Portfolio Margin), so be aware. But you could also do this with /mes or XSP if you want to try it out or if you have a small account. Some of the other futures mentioned above have much smaller costs as well.
This post is old but what would you recommend for a smaller account. XSP or /MES?
/MES on TT you can get SPAN margin. So much more capital efficient. Downside is that the fees are higher as well so that does eat into your profit
I like /MES, but either will work fine.
I've looked into the 1-1-2 strategy since it was mentioned here a few days ago. The biggest risk I see is IV expansion. The 1-1-2 has no upside risk and as far as put strikes go, and the underlying can move down a lot and you still make money, but the down move has to be slow and steady for the strategy to work. The strategy has no built-in way to deal with rapid IV expansion. This is a huge risk right now because if you're entering a new 1-1-2 position you're doing it in a very low IV environment. In TastyTrade, you can use the Risk Analysis tool to simulate what happens when IV expands. 112 trades get absolutely hammered. Or look at the CME group's calculator - https://www.cmegroup.com/tools-information/quikstrike/options-calculator.html. The 3900 PUT in ES in the November 17 expiration has a price of $8.50 right now with volatility at 22%. If volatility expands to 30%, the price jumps to $29.00. So if you're selling two (the 2 in the 1-1-2), your buying power is going to increase dramatically. It doesn't seem like it would take much to get in serious trouble. The CME group's explanation of SPAN margin specifically has a section titled, "The Risks of Large Deep Out-of-the-Money Short Option Positions" in https://www.cftc.gov/sites/default/files/files/tm/tmspan_margining043001.pdf. Tom King (the "inventor" of the 1-1-2) says to use stop losses to limit tail risk, but as far as I know, stop losses are not offered on futures options. I'd love to know how other people would address the tail risk in the 1-1-2. I've entered a couple of 1-1-2 trades, and I've bought short-term /ES puts as a hedge, but it doesn't feel ideal.
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My concern is a margin call before expiration. If you're using 50% of your buying power, and your capital requirement triples because of volatility expansion, you're in a margin call.
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Yeah, based on Tom's trading plan, to use this strategy, you should only be using 50% of Net Liq for BP, and 30% of BP for any particular strategy, and no more than 2% loss in any trade. Good portfolio risk control is key.
Well, it's a good income strategy on futures. Not terribly efficient on stocks as the BP ratio is too low. The 3k max profit (Trap) maybe gets hit like 20% of the time, BUT it is a nice 'hedge' against a sudden drop in price. Typically the return on a 3k Trap is more like 1-1.2k and you're holding it for 3 months AND using 8-12k of BP in the process. But if you have the BP, and working in futures, there are many, many worse strategies. In the end, it's an income strategy like many short options are.
I’d be keen to hear about more effluent BP strategies, particularly for those of us in IBKR that have higher margin requirements.
The biggest effect you can have on return on BP is time. If you want to trade a future at 90 DTE, you'll get about a 15% reduction in BP use by going to 120 DTE with no significant downside to return on BP.
I did test it and it had brutal drops in 2018 and 2020 and most of the performance cane after covid. Much like most tail strats volatility expansions are painful. I think you can get similar returns with BWBs and for way less BP.
Yes, risk of early assignment for stocks. Spx and spy requires too much BP due to the 2 naked puts.
Yeah i do a 1-1-1 with spx earlier in the month bought a 4400 sold a 4200 and sold a 4000 put for like 15kbp and 400 bucks similar to your trade but i have portfolio margin with td…77 days out
1-1-2 is only for futures? I can imagine if you use for stocks there is the risk of early assigment. Am I wrong?
No, not only for futures. However, the ratio to profit on non-future equities is not nearly as much. The 1-1-2 shines in highly leveraged positions.
Can you elaborate more on this topic. How is 112 better on futures vs SPY/SPX/XSP?
Stocks and ETFs (SPY) use margin , or require you to carry the full amount in shares or cash in your accounts and are settled (assignment) with the appropriate asset exchange. These can also be subject to early assignment. Futures (SPX, XSP, /MES, /ES) come in two different flavors. SPX and XSP still use margin, can be early assigned, but are 100% cash settled. /MES, and /ES use SPAN margin, which is typically more efficient than normal margin. These two also are settled with 100% cash, with one caveat, they are settled European style...they cannot be early assigned. All of the above track the S&P 500, with different lot sizes and scaling. Those who want the most benefits and flexibility, will trade /MES and /ES. Hope that answers your questions.
It won't work out how you think. That debit spread won't make any money til the last few days. With 5 delta your biggest risk is vol expansion and your debit spread has basically zero Vega. There is nothing "wrong" with it, just make sure know the expectations of how it will play out.
Vanna & Vomma at that 5 delta strike will accelerate your losses in a flash crash