A New Options Trader's Worry

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ironchef

Every time I entered a trade, I always wondered why someone wanted to be my counter party? What did he/she know that I don't? Why was he willing to offer/accept the price? Did he know something I didn't? This was especially true when I traded high volume indices. If it is MMs keeping the contracts and hedging all the risks away, by hedging, the MM essentially passed the risks to someone. That someone, if a professional then passed the risks to someone else...... Someone will be holding the bag eventually. Could that be me?

Options are derivatives, must be a zero sum (or negative sum since the MM and my broker take a cut in any transaction) game? At the end of the day the net sum of all of us making any money is zero (negative). So, professionals (some here?) need people like me to join in with fresh capitals in order to net positive? Maybe that is why every now and then Wall Street holds seminars or publishes papers (like what Goldman did a few years ago) saying one could get excess returns (free lunch) investing in options?

I am a novice, so I, most likely take the wrong side or paying too much every time I trade! But it is fun while I still have my capitals to trade!:D
 
Everyone trader is in the market for a different reason... Everyone has a different utility function describing the value associated with their trades... That being said the market can be a loser 99 percent of the time and still provide value to trader.. Hell some people get value from the thrill of losing money as well
 
Martinghoul said:
You're thinking about it wrong...
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What is the right way to approach this? I posted in a separate post that I looked at short term trends and could not make any sense out of that. So, my day trading venture failed.

I know how to manipulate equations and had fun playing with BSM. I can also do some simple statistical analysis and can even calculate the probability function and probability of a strike price being reached (using BSM again). I think attending classes at Google U is not sufficient.
 
Well, firstly, stop worrying about it... As cdc stated, there are all sorts of mkt participants doing things for all sorts of reasons, with vastly different time horizons.

The reason why there's a counterparty to your trade is that there is a particular group who has a very specific mandate to show a mkt at all times. These people are remunerated differently and have very different objectives.

Professionals don't need you to provide fresh capital to the game. Your capital, even if they could somehow extract it, would be irrelevant to them.

Now, what is your specific question?
 
ironchef said:
What is the right way to approach this? I posted in a separate post that I looked at short term trends and could not make any sense out of that. So, my day trading venture failed.
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It took me 10 years to make sense of intraday movements ... I took a lot of wrong turns into dead end roads ...
 
All these discussions are very helpful. I am beginning to formulate my own approach. In trying to make sense why some trades were good and some bad. I am beginning to find what fits my situation:

1. I should not try to "scalp" any mispriced options, no matter delta, gamma, vega, theta... It is too hard for a novice.

2. My instinct for longer term directions of my underlying is not great but generally correct, so, I should not do day trade but go longer terms, months perhaps. With that, general rules of thumb can be helpful.

3. So what if Google told me BSM should return me 100% but in reality it was 20% off. I can live with that if the general direction is right.

4. All the fancy mathematics, partial differential equations, statistics, you name it is just noise for me for now. Even if I can analyze them, my lack of finance training means I cannot generate an edge.

5. It begs the question why don't I just stay with equities and not bother with options? Because it is fascinating, fun to do and keeps me busy.:D

Best wishes.
 
ironchef said:
I kind of tried to answer that with the prior post:

How should I approach options trading if I want to stay in the game?

What specific strategy should I try?
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I dunno, try anything and everything, be patient and you'll find something that works?

Think of it this way... There is no free lunch, there is no magical strategy that is better than all others. There's just hard work that, with time and effort, will hopefully allow you to slowly raise your odds of finding cheap lunches. I appreciate that you're trying to identify the broad direction that would allow you to make your journey more efficient. While I can offer you some advice, ultimately, it's something where you need to experiment, first and foremost.

So let me ask you a couple of questions... Firstly, given that, broadly, only two ways of making money in the mkt exist, do you know what they are? Secondly, you trade other stuff in the mkt, right? How do you do it? What is the strategy and the rationale for it to work?
 
I can answer the second question easily:

In the past I invested more like a collector and farmer than a trader, mostly I bought something I like and sat on it usually for years. Occasionally, every now and then I pruned my holdings to get rid of investments that seemed not to do that well. Why I did it that way? I was working full time and did not have time to do anything fancy.

As for the first, I don't know, maybe buy low sell high. Easier said than done?

Regards and thank you for taking the time to answer my questions.
 
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