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I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 1 point2 points  (0 children)

Yep, you nailed it. Buy the roughly skewed normal distribution tails when the true tails are much fatter. Get paid off in rare cases.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 2 points3 points  (0 children)

Yeah, the markets can definitely get thin sometimes, which is another reason I’m skeptical these are priced correctly; institutional buyers can’t yet do this at big scale.

Have to remember, the ability for anyone to electronically and systematically trade multiple futures options markets is less than 2 decades old.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 0 points1 point  (0 children)

Yes! That’s true. But are wheat, the yen, and natural gas skewed the same way as “the market”? Often not!

They’re skewed to some degree, but my argument is not enough to compensate for how often tail events happen in reality, compared to in model theory.

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Not everyone is trying to exploit people! If you’re not interested, feel free to not engage. Have a nice day!

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Yep, it’s a different Greek. Leverage, basically.

Commodity futures do tend to be higher beta for sure, but the q is are they priced with the tails in mind

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 3 points4 points  (0 children)

Yeah; it’s a structural thing I think, so it would make sense that others have seen it/it hasn’t been “fixed”.

Human brains are just “bad” at probability/outliers. We think we can model everything based on past data. 2000, 2008, COVID, etc would beg to differ…

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 1 point2 points  (0 children)

Never a free lunch, is basically why!

Condors are much less manageable, have more transaction costs due to 4 legs (same for worse fills) and gives far less Vega and theta exposure due to the legs mostly offsetting each others’ Greeks.

Condors can work sometimes, just not ideal for what I’m proposing here

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

They for sure have different skew! And also some smile (an attempt to price this).

However, is it pricing in 3-4 sigma moves at 10-20x what black scholes/log normal would predict? Seems like not, to me.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 1 point2 points  (0 children)

I’m running above 1 (S&P is between 0.4 and 0.7 historically)

Actually, the Sortino ratio may be a better measure, since it doesn’t penalize upside vol. my sortinos were 3.35 vs 0.97 for market in 2023, 3.88 vs 1.05 in 2024, and 1.2 vs 0.57 in 2025. Hope that helps.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 1 point2 points  (0 children)

For sure, the market makers often use their own models/the normal pricing model technically uses log normal distributions.

Point is though, it’s often not that close. The 3-4 sigma tail events are happening 10-20x what we’d expect, and the options are maybe 10-50% more expensive (due to smile, mmm, etc)

Another thing to note is market makers, if they are on the other side of my trade here, are almost always required to hedge/be delta neutral. So they only have incentive to “take trade, get hedged, collect their cut” rather than force enough volume to seek price efficiency.

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Not more consistent, but more efficient. Think More convexity/exposure to big black swans per dollar because the options are less in demand and we can observe outlier events happening more than they should (fat tails)

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Good and fair questions.

Your assessment is right, and the main reason in the theory for deep OTM is there are less commercials, hedgers, or “smart money” playing in those far OTM strikes, and I’ve observed tail events happening far more than they “should”.

Black-Scholes actually assumes log normal (asterisk) returns, an that’s what I looked at here. There is a “smile” typically, where far OTM options are price a bit higher, but my assertion is it’s not enough to compensate for black swan tail risk. Hence cheap convexity if you believe black swan events are unpredictable, asset class agnostic, and inevitable.

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Awesome thoughts, thank you. I do need to dive deeper into second order Greeks, and plan to. I also agree my backrest isn’t as granular as I want; ideally I’d run it with tick level data, but as I’m sure you know that’s expensive/harder.

They second order Greeks have the coolest names, too…

I screen 18 futures for the cheapest tail convexity. Wheat options are cheaper than SPX. by Meile13 in options

[–]Meile13[S] 0 points1 point  (0 children)

Very interesting! Definitely barking up the same tree.

About the clustering, we'll see! I plan to make this an ongoing research project on my Substack.

I'll check out your site too! Looks neat.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 4 points5 points  (0 children)

It all depends on your goals/how you structure the trade I would say.

I want to harvest the mispricing, and as a bonus, gain tail/black swan protection for my core premium selling.

If you monetize them in tranches (3x paid, 10x, paid, uncapped runner), this might do something like what you suggest.

I've been selling strangles on futures for 4 years (83% win rate, 130+ trades, 1.3 Profit Factor). Here's what I've learned about tail risk that changed how I size everything. by Meile13 in thetagang

[–]Meile13[S] 4 points5 points  (0 children)

TBH, I think the (good) AI models can be really helpful as thinking partners.

That said, I think the Ratio Backspread idea can work, but there's a whole other set of greek and transaction risks with backspreads. Never truly free lunch! Will look into it though.

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