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Never knew that. I guess this is one of the challenges of arbitraging index vol against the vols of the underlying stocks. From the perspective of the retail investor selling index options to generate cash and limit risk, the vol-convexity could be traded off for the benefits of...

Why only index options?

He might as well say the same thing about the whole BS model, not just vega...BS relies on a Gaussian assumption which Mandelbrot and others have long nailed as wrong and dangerous. So your Prof's comments are a blinding glimpse of the obvious. On the other hand, BS is just a model and as...

Me too

This is a blinding glimpse of the obvious. Because of the "insurance" nature of options there will be many cases where both the buyer and the seller are better off with the option expiring OTM. Hence the bias towards that direction. Thanks for the post, Mav.

I sell straddles and strangles on MNX and SPX and had positions on going into last week. My risk management depends and setting stops and rigorously honoring them. They fired last week and I rolled down and then they fired again and I went to cash where I will stay until things quiet down a...

Or EPP the ETF for Asia ex-Japan. I've owned some for a while but am selling it this week.

I use the options price because that incorporates the level of the underlying and its IV (covering short gamma and vega).

I wasn't trading either back then but if I remember right there were opportunities to get out because the market fell during the day driven by "portfolio insurance" selling volume.

Mav: Good question and I too await Waggie's response. In the meantime let me just note that the difference between Clinton and Bush economically is really the difference between Rubin and the numnuts that Bush has had running Treasury. Rubin created an expectation of fiscal responsibility...

Dynamically hedging short gamma would be an arbitrage-like money machine...not possible (legally) in an efficient market. The schemes that I have seen that claim to do this actually have you buying high and selling low, which doesn't sound too attractive to me. One takes gamma risk in...

Bingo. Check out the put/call ratios from yesterday: Total Put/Call Ratio 1.31 Index Put/Call Ratio 2.27 Equity Put/Call Ratio 1.10 To have the index ratio over 2 or the equity ratio over 1 is high indeed. So why is VIX up while SPX is up? Simple supply and demand. I'd...

Very interesting post: thanks. I only wish that what Bernstein is forecasting would come true sooner. My fear and expectation is that inertia is a powerful force and the trend will take the rest of this decade at least to play out.

Not only do you get company-specific risk with individual equity options, you also get the short-term capital gains tax rate (in the USA). In contrast, index options, e.g., SPX or MNX options, qualify for so-called section 1256 treatment which means that 60% of your net gets the long-term...

Check out Max Ansbacher: http://www.usafutures.com/aimartofoptions.pdf

You are right. NEVER sell naked options. Only buy options. Please buy lots of options. If it is not inconvenient, could everyone buy some on the NASDAQ 100 and drive the premiums up? My children need new shoes and they thank you in advance. PS: doesn't matter if you buy puts or...

I think you're setting up a straw man to knock down...in my reading he never said that he wants to sell as many as possible; he just wants to understand what is possible.

How can you call a guy a homophobe when he was talking about NAKED PUTS??:p :p :p

Actually you can do more, assuming your broker has given you full trading privileges. At thinkorswim the margin requirement for naked puts reads: The current marked-to-market value of the option plus 20% of the underlying stock less any amount the option is out-of-the-money. So you can...

You go Waggie; keep the posts coming. I don't always agree, but I do appreciate your fact-based analyses.