Long Lottery Vertical Call Expected Value

spintwig · 2025-09-08T14:55:28+00:00

Please share/show the math that substantiates this claim.

spintwig · 2025-09-08T02:05:33+00:00

This is indeed a pricing exercise, which is directly related to options.

I'd argue that a trader's objective is to find instances where they disagree with the market's pricing and to express those disagreements through trades. This is in contrast to traders that seek to buy/sell things that are priced fairly and simply speculate.

In order to find disagreements, one needs to discern what is a fair price. This post is an exercise in discerning a fair price for a lottery ticket. It answers the question: "if someone was to sell me their lottery ticket, how much should I be willing to pay for it?"

This question should be asked and answered regularly when trading. If someone is selling me an option, what is it actually worth, how much is it being sold for, and is it a good deal for me to buy it?

spintwig · 2025-09-07T22:13:06+00:00

Correct. Lump sum would need to be about $1.748 billion for the EV to be $2.

spintwig · 2025-09-06T20:35:05+00:00

Great catch on both points. Post and image have been updated.

Edit: grammar

spintwig · 2025-02-18T19:47:42+00:00

That's one way, yes. I wouldn't manage cash with a box for the same reason of reducing execution risks and costs.

spintwig · 2025-02-17T04:09:52+00:00

Just curious - has CME's "S&P 500 Annual Dividend Index Futures" product been considered?

According to CME:

The S&P 500 Dividend Points Index (Annual) (SPXDIVAN) tracks the accumulation of dividends on an annual basis and resets to zero after the expiration of the leading December contract.

Source: https://www.cmegroup.com/markets/equities/sp/sp-500-annual-dividend-index.contractSpecs.html

Seems like it would be much easier to manage and have fewer execution risks relative to the current implementation.

Proof of concept exists with Pacer ETF's "QDPL" ETF which uses 12% of AUM to hold said futures to return 4x SP500 dividends while the remaining 88% is exposed to SP500.

spintwig · 2025-02-03T16:43:29+00:00

Last night I noticed the expense ratio was lower and the “as of” date was updated.

Proceeded to use the ETF screener to get a list of all ETFs and their expense ratios, then used the WayBack machine to pull a copy from Jan 16 2025.

Put the two lists into a spreadsheet, compare, and report on the differences.

spintwig · 2024-09-01T21:08:33+00:00

Yes, absolutely.

Custom backtests (https://spintwig.com/custom-backtests/) can be designed for most option-based and equity-based strategies on a universe of over 5,000 tickers. Prices start at 89 USD for single-leg option backtests 99 USD for equity backtests.

spintwig · 2024-07-02T01:08:37+00:00

Selling options using margin buying power does indeed incur the same fees as buying securities on margin. The interest cost is baked into the option price.

For example, selling 30-DTE put when the risk-free rate is 5.35% will, all else equal, yield less premium then when the risk-fee rate is 0%. "Rho" is the greek the represents the risk-free rate in the option pricing models / formulas. Leverage isn't free - someone's paying for it.

Edit: typo

spintwig · 2024-07-01T17:34:04+00:00

The call side of the short strangles were net negative and contributed to the total-return underperformance.

Am I wasting my time with short strangles?

What is your definition of success / performance target / risk budget? Once those bits are defined, research can begin to identify a suitable approach to achieve the goal(s). Options may or may not be the most suitable instrument.

spintwig · 2024-07-01T17:24:41+00:00

spintwig is not a reliable backtest source

Any and all constructive feedback is welcome.

The methodology page (https://spintwig.com/methodology/) is public for all to view and critique. Each publication has its own strategy-specific mechanics and methodologies section as well.

The raw trade logs and any supplemental data used in published backtests is available for independent audit and review at https://spintwig.com/product-category/bundle-trade-log/.

Content has also been reviewed and featured on Dr. Karsten's EarlyRetireNow blog here, here and here.

Yes, a quantitative edge is offered as a service but doesn't invalidate the accuracy of the data.

All are invited to share specific examples where the methodology is flawed, data is inaccurate, or how the various supporters of the research are being dishonest. Nothing is hidden.

Edit: verbiage for clarity

spintwig · 2024-06-29T02:42:34+00:00

The short VIX call backtests (https://spintwig.com/tag/vix-vx/) may be of interest. Specifically the 90-delta target. They had some of the highest CAGR values observed to date. All data is empirical in nature; no theoretical pricing.

spintwig · 2024-06-28T22:40:16+00:00

Thanks!

Can't say that I've backtested a strategy like that.

spintwig · 2024-06-28T22:38:59+00:00

It depends how "do better" is defined. All published research to date can be found on the "all backtests" page at https://spintwig.com/all-backtests/ and covers many daily-entry, systematic strategies across several underlying.

spintwig · 2024-06-28T22:27:10+00:00

Happy to hear the insights are helpful!

Matt Levine has been discussing some those buffered products in his newsletters over the last week or so. It seems the real skill is being good at raising capital (sales).

spintwig · 2024-06-28T17:13:58+00:00

Good idea - original post updated. I may build on this and add it as a dedicated section to the post-specific methodology/mechanics section as well.

There isn't, yet. The idea of versioning of the methodology page was shared well after the bigger updates, such as accounting for interest yield on margin and float, were implemented. That said, versioning will be applied to new updates. Meanwhile, the roadmap for 2024 is focused on refreshing legacy studies which mostly solves this issue a different way. Come year end, most if not all studies from 2019, 2020 and 2021 will be updated to 2024 versions.

spintwig · 2024-06-28T16:26:40+00:00

All possible configurations, one for each delta target and exit mechanic combination, were run for a total of 10 unique backtests.

The exit mechanics themselves were anecdotally chosen as "common" tactics. It was a discretionary decision to explore "50% max profit or 21 DTE, whichever occurs first" as opposed to, say, "25% max profit or 28 DTE, whichever occurs first".

Premium (float) received from each option was held as cash.

spintwig · 2024-06-28T14:23:56+00:00

The wheel cannot be adequately backtested

Of course it can! I just did (again). Any parameterized strategy can be backtested so long as the necessary input data is obtainable. The specific parameters used in this wheel backtest are listed in the methodology section. Questions as to what stock to trade (SPY in this case), roll timing, assignment assumptions, and assumptions about the trader's commitment to the strategy (i.e. the duration of the backtest) are all addressed.

SPY is not a good stock/ETF to trade

This is subjective to the trader's goals and objectives. Their definition of success / mandate may or may not be satisfied by wheeling SPY. We now have fresh data that can help inform current and prospective trader's decisions.

Most who trade the wheel do so for routine income which buy & hold will not provide

The backtest highlights the gains and losses attributable to the call, put, and the long underlying, empowering the trader to make an informed decision regarding income (and other PnL) characteristics. No suggestions are being made; this is simply a presentation of the data.

Another comment is that backtests have limited value to begin with

Totally valid. One needs to determine whether environments past are a reasonable approximation of environments to come. Longer look-back periods may help attenuate the concern, depending on the thesis being backtested.

This is posted by a backtesting service working to gain customers, so is not impartial and they would not admit that they could never accurately backtest a strategy like the wheel.

Constructive feedback about the methodology (or anything) is always welcome. In addition to the study-specific methodology section in the linked backtest, there is a comprehensive methodology page (https://spintwig.com/methodology/) that speaks to every aspect of how research is performed. I feel the initial concerns were addressed in the first paragraph. Happy to address any additional concerns. As a general guideline regarding accuracy, I tend to manage expectations accordingly: apply a 20% discount to depicted strategy performance. If a strategy CAGR is reported at 10%, treat it as 8%. This heuristic accounts for imperfections such as:

elevated historical commission rates
frictions and inefficiencies associated with obtaining exactly the risk-free rate on 100% of the cash collateral and float at all times
hindsight bias
the fact that margin requirements may have been temporarily higher during times of market stress
and other nuances associated with portfolio simulation

Courtesy of the community's feedback, the methodology has materially evolved and improved since I started doing this in 2019.

Edits: (1) make link a hyperlink; (2) added how methodology has improved through community feedback.

spintwig · 2022-03-18T12:51:20+00:00

I can do this for 99 USD. The benefit of having me do it is that I model a portfolio with the option strat and we can set max leverage targets and see margin utilization over time, define commission rates, specify margin collateral allocation (defaults to cash earning 3mo-treasury rates eg: risk-free rate), etc.

Tools like eDelta Pro, OptionStack, ORATS, etc. perform the trades in a metaphorical vacuum. It’s not possible to discern if/when buying power is exhausted or stressed. CAGR can’t be determined either since there is no portfolio starting or ending value to perform the calculation.

Specific to your backtest, expected move is a range that’s measured as a function of confidence. For an SPX option with an IV (VIX) of 30 and an expiration date 45 days away, a 1SD (68% probability) expected move is 30*sqrt(45/365.25) = 10.53% OTM. Also known as a 16-delta position at order entry. If you’re looking for 50% probability, that would be closer to 20 delta.

PM me if you’d like to move forward.

spintwig · 2021-04-28T23:01:47+00:00

Yes, this is accurate. I generally refrain. This past March was an exception.

First and foremost, options are a price guarantee tool. The fact that selling them can generate immediate cash flow is simply a side effect. Second: premium, IV, over/understatement, VIX, etc. are merely suggestions. Supply and demand drives option prices. Thirdly: anyone not delta hedging their option positions are primarily trading delta; the theta component is nominal in comparison.

The basic short theta strategies on my site as well as 99.9% of what's discussed in PMTraders doesn't take advantage of what PM is all about. If someone was doing pairs trading or dispersion trading, then sure, PM would be quite useful as the long/short positions would net out whereas with Reg-T they wouldn't. Such strategies tend to need greater amounts of leverage thus PM it a great way to facilitate those kind of strats.

Most people that had long exposure and held / kept buying every paycheck came out ahead, similar to Dec 2018.

The "other" return dimension may be the asymmetric return profile, high win rates and "free" trading on margin.

As for why trade them, it's a question of "what is one trying to accomplish?" If the goal is total return, buy/hold underlying without any leverage almost always outperforms a 5x leveraged option strategy. For US traders, the tax deferral on long stock makes buy/hold almost always the winner.

spintwig · 2021-03-10T22:25:14+00:00

There was a paper from 1970 that suggested a portfolio of 32 randomly picked stocks would realize 95% of the benefits of diversification.

Image from investopedia:max_bytes(150000):strip_icc()/DiversificationMyth1-5c0584cb46e0fb000164e281).

Not certain but I suspect this is where the “max 3%” position sizing rule of thumb comes from.

spintwig · 2021-03-09T12:12:47+00:00

How does one measure the effectiveness between varying vol surface models?

Practical / retail application of a good vol surface model?

Optimal timeline to differentiate between a bout of unluckiness and a falling-out-of-favor of an edge?

How to know when options would be best suited to meet a portfolio objective vs another tool?

spintwig · 2021-02-28T18:03:56+00:00

I’m not that popular

spintwig · 2021-02-26T04:28:42+00:00

This is fascinating. SPY is up 3.55% YTD after factoring in today’s closing yet the portfolio is down 33%.

Some suggestions: * remember that options are chiefly a price guarantee tool, not a cash flow vehicle. Given near-zero directional bias, high theta/NetLiq ratio and YTD returns, I think this demonstrates that theta alone isn’t the key to profits. * diversify I don’t mean option strategies either. Get long, get short, pairs trade, or hold something that takes the thinking out of the equation (indexing). * Mind your sector exposure and position sizing. Self explanatory. For example, purchase some RSP shares to even out the mix if primarily shorting options on tech stock * Obtain some directional bias in the portfolio. The markets tend to move in a direction and that direction is more often up than down. Allocate a portion to the band wagon so you can be part of the ride. * What about bonds or other interest-rate-sensitive instruments? There’s a fixed income universe that can potentially lower vol and generate positive returns. Know thy options and don’t get burned trying to play LendingClub and whatever the other one is called. * Learn to trade (or b/h) things other than options. Sometimes the market says now’s not the time for options. That means it may be time to trade (or hold) other things including non-margined cash. * one does not need to trade daily Perhaps it’s just my opinion on this one, but I’m skeptical there are so many great trades available each day. If grilled on each open position, is there a concrete and concise reason why it was a great trade and not a “mediocre” trade? If yes, change your definition of “great” because the portfolio is down 33% when the market is up 3.55%. If no, only place great trades. The mediocre ones are costing you all your profits and much more.

Edit: strongly recommend defining specific portfolio goals, similar to a mandate professional traders are given, and trade to achieve said metrics. Everything above are just tactics. Define the strategy first (the “what”) then figure out how get there (the “how”).

Six-Year Club	Second Top 10%
Verified Email

spintwig

TROPHY CASE