This is How We Win

Selling premium is easy.

Being a premium seller is hard.

This chart perfectly encapsulates why this is true:

This is the one-year performance of our trading account dedicated to delta-neutral premium-selling strategies. We call it our “Paid-to-Play” or “P2P” account.

We’re making new highs, and the long-term trend is in our direction. But as you can see, the ride hasn’t always been smooth.

Selling premium is a winning strategy over the long run precisely because it’s hard. It’s hard because sitting through sudden drawdowns is hard – and many traders don’t have the stomach for it. Or they trade too big, making the PnL swings far too taxing on their emotions. Or worse, the big swings knock them out of the ring.

That big drawdown you see in March was courtesy of the regional banks blowup. Going into it, we were short a naked strangle in $KRE (regional banks) options, as well as some related positions that didn’t fare too well.

It was no fun defending those positions and staring at paper losses that eventually converted to realized losses. But the one thing that kept us in the game and continues to work for us is position sizing.

When trading strategies such as short strangles (naked short puts + naked short calls) which feature undefined risk, the best way to ensure our continued ability to participate in markets is to trade each individual position small. Being conservative is what keeps us in the game.

The reward for being conservative and sticking to our process speaks for itself.

Check out the P2P portfolio’s performance relative to two key benchmarks.

First up, the S&P 500:

While our returns have only slightly outpaced the S&P 500, we achieved this gain with significantly less volatility. Our max drawdown of -6.23% is dwarfed by the S&P’s -16.9% drawdown during the same period.

Amateurs are seduced by total returns. Professionals focus on the risk-adjusted returns and the volatility of the ride.

Compared to the S&P 500 Covered Call ETF, there’s no contest:

It’s important to point out that our P2P Portfolio represents only a portion of our total trading assets. We are not ALL-IN on this strategy. It is only one of many that I and JC each run.

This is not meant to be a strategy to house all of our investable or tradable assets.

The true aim for a strategy like this is to provide portfolio and strategy diversification. This trading account often zigs while other accounts we manage zag. That’s what we want it to do – to provide some ballast to weather the rolling waves of the market while offering a meaningful risk-adjusted total return.

This is how we win.

If you’d like to follow along with our Paid-to-Play portfolio, you can learn more about it here.

Trade 'em Well,

Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research