Since there's no mathematical advantage to selling premium vs. buying premium, I've been thinking a lot about what exactly the advantage is, and I think I came up with an answer. Being short options works most of the time, and when it doesn't work, it's easier to adjust the position if you're short OTM options. In most cases, the time decay (thea) will happen slowly, and this is what gives you time to adjust the position. Also, since it works most of the time and time decay is slow, the writer of options can take profits at any time along the way, where as the buyer of premium will only be able to take profits if there's a big move in the underlying. It makes sense to me why selling premium tends to be a more common option strategy, although I'm not sure that I've articulated it correctly.
Advantage selling premium vs. buying premium
- Thread starter Eric1977
- Start date
I suggest you read Taleb. If you only get a superficial understanding of his thoughts then read it again.
This has been beaten to death. but when it comes right down to it - no advantage, means no advantage.
Yeah some traders will take the higher probability of profit with the associated much larger potential risk (for OTM trades). And the instant account cash infusion and theta-drip payoff, but I wouldn't call it an advantage...
I trade strictly long options and do fine. And I know my ultimate risk, no matter what crazy stuff the market does. It works for me, but if you are careful and you KNOW what the risks are, hell, sell to open if ya want (I need someone on the other side!)!
Yeah some traders will take the higher probability of profit with the associated much larger potential risk (for OTM trades). And the instant account cash infusion and theta-drip payoff, but I wouldn't call it an advantage...
I trade strictly long options and do fine. And I know my ultimate risk, no matter what crazy stuff the market does. It works for me, but if you are careful and you KNOW what the risks are, hell, sell to open if ya want (I need someone on the other side!)!
It's possible there is some very slight advantage to selling prem (Gallacher, if I remember correctly, suggests there may be a small advantage), but I suspect that when slippage and other costs are figured in, you are talking risk free rate or the average stock market upward drift. And of course no option trade can have a huge "automatic" advantage. Options and markets just don't work that way.
Just don't see much advantage. If you are so good picking direction that you can avoid the big losers from short ops, then I'd rather buy options or futures, anyway.
Could be wrong. I often am.
Just don't see much advantage. If you are so good picking direction that you can avoid the big losers from short ops, then I'd rather buy options or futures, anyway.
Could be wrong. I often am.
I don't know why there must be this pitched battle between longs and shorts.
Why not do both and/or spread? As someone has often stated.
The obvious problem with shorts is that despite positive theta, when the position moves against you it is with increasing delta and gamma... not comfortable!!!!
The disadvantage with longs is obviously theta and a time limit.
I'll have a view of the underlying and construct a strategy to suit, adjusting as that view develops/changes. I doesn't HAVE to be one side all the time.
Cheers
Why not do both and/or spread? As someone has often stated.
The obvious problem with shorts is that despite positive theta, when the position moves against you it is with increasing delta and gamma... not comfortable!!!!
The disadvantage with longs is obviously theta and a time limit.
I'll have a view of the underlying and construct a strategy to suit, adjusting as that view develops/changes. I doesn't HAVE to be one side all the time.
Cheers
There is no advantage to selling premium in the Black-Scholes world. The Black-Sholes world does not exist. You might be right, but you would be right for the wrong reason. There is no advantage to hedging a short versus long gamma position. People who insist on equilibrium of long versus short equity gamma do not understand the problem.
Remember ol' Victor Niederhoffer?
He's the guy that's selling the OTM puts etc.
Taleb is the one buying them
Options are a zero sum game. One's returns are merely the exchange for undertaking multiple factors of risk. One thing that makes them unique is the asymmetric payoff. However, because of the more-or-less rigid structure of their pricing models, they can be traded in an arbitrage-like manner when inconsistencies arise. The same structure allows for leveraged speculation, as well as hedging.
For example, in the massive selloff two weeks ago, implied volatility was unusually high (and remains somewhat so), pushing many out of the money options into a prime valuation (for selling
As IV settled down somewhat as the market consolidated, it became a nice time to buy more-in-the-money options at a lower premium to hedge the ones sold, or to buy them back. Quite often after a large sudden move, the market will take a few days to pull back or consolidate, causing IV to collapse a little, relative to how it was when the market was in freefall. I employed a strategy along these ideas and ended up with a cost basis for short options farther out of the money that was higher than those long closer to the money. Of course it was pure speculation, but it's an example of how combining TA and pricing analysis can work in this area.McMillan's book <a href="http://www.amazon.com/gp/product/0735201978?ie=UTF8&tag=advayourfina-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0735201978">Options as a Strategic Investment</a><img src="http://www.assoc-amazon.com/e/ir?t=advayourfina-20&l=as2&o=1&a=0735201978" width="1" height="1" border="0" alt="" style="border:none !important; margin:0px !important;" /> is a pretty solid resource on the basics...