A New Options Trader's Worry

[ironchef]

I do have other questions for all of you:

I read a lot of articles that said selling options should be more profitable than buying them (Puts are greatly mispriced, said Bondarenko, Professor of Finance, U of Illinois, in http://papers.ssrn.com/sol3/papers.cfm?abstract_id=375784) selling premium you act like the insurance company and the "house". The "house" always wins they say.

And then I watched tastytrade on YouTube, they came out with studies after studies that short calls, puts, straddles, strangles you name it were always profitable and Super-trader Karen made millions shorting OTM options.

So, in real life, who are the sellers and buyers of options? Are professionals mostly buy and retails mostly sell? Are you folks more on the long side or the short side? Or you hedge, both long or short depending on what your analysis point you?

Thanks.

 

[Gimpyron]

I like your thread, it makes alot of sense and to be honest this is a subject which i continuously deny over and over in my head - simply prefer to ignore this questions, and they come alot.
sum zero game? - ofc.. but i believe there are many reasons for individual to take positions in the market (speculation, hedging, and most of all - boxes and arbitrage for the monsters - the only "house" players you will ever see. - there is the bright side here aswell- super liquied market thanks to those arbitrage players.).
so the whole saga around sum zero game is complicated in my opinion..
I keep looking for my own path to generate steady track record.

 

[ironchef]

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?

You have been very kind, patient and helpful, so, let me comment on this further.

I hold stocks long term and this was how I added to my positions: After I collected dividends paid or additional funds, I just put them in stocks that I owned that were at a relative low. With options I now tried to do the same with covered calls/puts but more recently with longs.

At first I tried using screening s/w from the brokerage to find targets but with bad outcome. Now I want to stay with the stocks I own, so the challenge is whether to go long or short, which one, strike, duration, pricing? Are the options expensive? cheap? That is why I am interested in BSM or higher order models to give me guidance.

Regards,

 

[lawrence-lugar]

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

What specific strategy should I try?

Try them all -- and see what sticks to you, or what you're good at
But the bottom line to it all...is your ability to read, or predict, the underlying's movement

 

[Martinghoul]

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.

Leaving aside my first question for now, here's one way for you to get into options properly. Imagine you're doing due diligence on a trade that you like that doesn't involve options. Examining scenarios, considering the risks and rewards, etc. To get yourself into the right frame of mind, even if it's not a natural fit, try to imagine expressing your idea using options. Consider pros and cons of doing so, think about what the choice of the expression does to your risk/reward, etc. It will be uncomfortable at first and you'll struggle, but, with time, you'll evolve a set of tricks.

Basically, you need patience and things will slowly coalesce and will begin to make sense...

You have been very kind, patient and helpful, so, let me comment on this further.

I hold stocks long term and this was how I added to my positions: After I collected dividends paid or additional funds, I just put them in stocks that I owned that were at a relative low. With options I now tried to do the same with covered calls/puts but more recently with longs.

At first I tried using screening s/w from the brokerage to find targets but with bad outcome. Now I want to stay with the stocks I own, so the challenge is whether to go long or short, which one, strike, duration, pricing? Are the options expensive? cheap? That is why I am interested in BSM or higher order models to give me guidance.

Regards,

Models will not tell you anything about the expensiveness/cheapness of options most of the time. Models, such as BSM, are primarily designed to serve a different purpose.

Like I suggested above, just try to think about your existing trades, but with an additional option dimension added. For instance, for a very basic framework, imagine you wanted to reinvest dividends or new funds into a stock, which is at a relative low. Before buying that stock, examine the possibilities that options offer you. Is implied vol historically high or low? Is implied higher or lower than recent delivered vol? Is there any lead/lag pattern to the relationship between implied and delivered vol that you can observe? What happens if you were to buy calls, instead of the stock outright?

 

[Martinghoul]

I do have other questions for all of you:

I read a lot of articles that said selling options should be more profitable than buying them (Puts are greatly mispriced, said Bondarenko, Professor of Finance, U of Illinois, in http://papers.ssrn.com/sol3/papers.cfm?abstract_id=375784) selling premium you act like the insurance company and the "house". The "house" always wins they say.

And then I watched tastytrade on YouTube, they came out with studies after studies that short calls, puts, straddles, strangles you name it were always profitable and Super-trader Karen made millions shorting OTM options.

So, in real life, who are the sellers and buyers of options? Are professionals mostly buy and retails mostly sell? Are you folks more on the long side or the short side? Or you hedge, both long or short depending on what your analysis point you?

Thanks.

Like I mentioned before, there is no clear division between who the natural sellers and buyers of options are. Most professionals would buy and/or sell, depending on circumstances and their strategy. For instance, I never sell options, because my core strategy is implicitly short vol. Retail guys probably sell options more, simply because it's deceptively attractive to a novice.

As to option selling, yes, there is all this theoretical evidence to suggest that you can collect risk premium by selling insurance. However, this, like I have said many times, isn't telling you the whole story. Before engaging in a strategy of this nature, you need to think long and hard about all its other aspects, such as how much unencumbered capital you need to put aside (insurance companies have to reserve arnd 10-15% if memory serves), the magnitude of your likely maximum drawdown, the liquidity issues, etc. Leaving Karen out of it, I often point people to the PNL profile here (for the aggressive strategy):
http://www.ljmpartners.com/performance-history

Point is that, if you have the appetite for that sort of thing and can do it properly, go ahead. Lots of people, especially the professionals, don't have the appetite. Also, lots and lots of people do it wrong and blow up.

 

[Gimpyron]

Like I mentioned before, there is no clear division between who the natural sellers and buyers of options are. Most professionals would buy and/or sell, depending on circumstances and their strategy. For instance, I never sell options, because my core strategy is implicitly short vol. Retail guys probably sell options more, simply because it's deceptively attractive to a novice.

As to option selling, yes, there is all this theoretical evidence to suggest that you can collect risk premium by selling insurance. However, this, like I have said many times, isn't telling you the whole story. Before engaging in a strategy of this nature, you need to think long and hard about all its other aspects, such as how much unencumbered capital you need to put aside (insurance companies have to reserve arnd 10-15% if memory serves), the magnitude of your likely maximum drawdown, the liquidity issues, etc. Leaving Karen out of it, I often point people to the PNL profile here (for the aggressive strategy):
http://www.ljmpartners.com/performance-history

Point is that, if you have the appetite for that sort of thing and can do it properly, go ahead. Lots of people, especially the professionals, don't have the appetite. Also, lots and lots of people do it wrong and blow up.

Hey
that ljmp fund, specialize selling options? or i got you all wrong?
you said you dont like selling options, but how you short volatility? by which kind of structure?

 

[Martinghoul]

Hey
that ljmp fund, specialize selling options? or i got you all wrong?
you said you dont like selling options, but how you short volatility? by which kind of structure?

Yes, as I understand it, LJM's specialty is, basically, systematically selling vol. They have several different strategies with different tolerances.

As to myself, I obviously don't work for LJM and the stuff I do is very different. Since my core methodologies are inherently short vol, I am never short vol explicitly. If you're asking how my core strategies are short vol implicitly, it's because a lot of the stuff I do is leveraged relative value/mean reversion. Short vol/liquidity bias is sort of baked in the cake.

 

[tickmagnet]

I'ts getting tough to trade options , no volatility , only instruments that are worth to trade are stocks under 10 ,
where you still have manual traders driving up the volume,

 

[Windlesham1]

the market is owned by the FED, central bankers globally are manipulating all markets,and trying to crush vol. Thursday's comedic efforts to get the US indexes back up 'buy levels' was a clear indication-nobody wants to hold on to risk over a holiday, real traders flatten,central banks don't know and don't care-hence the insane P/Es-but hey it's only the future they have set fire to