From the small sample size of the ongoing trade of short options on $VXX, I believe I can maintain a ~100% return on invested capital. To take a current trade as an example, $45k margin collateral is scheduled to net me $10k over 2.5-3.0 months, or between $40k and $48k per year. This is assuming constant margin collateral of $45k and no reinvestment of capital, which of course could boost this a amount significantly, but I’m focusing only on the per-trade return, not on the entire portfolio. If I can cycle through about four of these trades per year, it would be the ideal, ongoing, core focus of the options strategy.
Can I do better to get better return and with less risk?
I believe so. So additionally, I’m researching how to boost return even more by pursuing earnings trades in between these 4x core trades that last 2.5-3.0 month each. The basic idea behind earnings trades is that options become highly over-inflated in price leading up to earnings. Once earnings figures are announced, options may rapidly lose value in the collapse of implied volatility in a “single day” what it might take them 1-3 months to lose in non-earnings contexts.
Similar to $VXX, it’s possible to go long options (long implied volatility, aka: long IV). In this case it would be to go long IV leading up to earnings announcements. However, research I’ve done shows it’s very hard to time the increasing options IV, so my strategy instead is to short IV right before earnings, and exiting within one trading session.
To summarize, my plan for opportunistic earnings trades:
1. Research what underlying stock has historically the greatest drops in implied volatility at earnings announcements, preferably accompanied by the least movement in stock price
2. Commit 1%-5% of margin capital per earnings trade during earnings seasons, in between the core $VXX trades, to short straddles/flies and/or strangles/condors for 1-day trades
3. Automate this process via Python code connecting to the Interactive Brokers API to to hit 60 earnings trades per quarter for the most highly liquid options on the most highly liquid underlying stock
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