advantage to selling options?

[MK020]

I read on many blogs/websites that there's a "house advantage" to writing options, because most options expire worthless, etc.

I don't see how there could be an inherent advantage to selling options, since you can only sell what someone is willing to buy, and unless the seller had more information than the buyer, it should be even. It's also pointless to me when someone says 80% of options expire worthless, since it's not win-loss percents that matter, but rather profits (1 big win can offset 20 small loses).

Am I missing something? Is there another reason why there's an advantage to selling?

 

[Turveyd]

Time decay is on your side, so even if the stock doesn't move your still making money.

Unless it's a trend market strong 1 at that then OTM Options are 90% lose, never Sold Options, but once had a Stock on SEC News go from $20 to $7 over night, I had 17.5 Puts made loads from a worthless loser, wouldn't like to be on the wrong side of that.

 

[BAT31]

Hmm... one advantage-- Theta works in your favor when you sell options, as opposed to against you when you buy an option.

Another advantage, if you plan to hold a stock long term, why not write options for income? It sure beats writing a naked option.

Take the above with a grain of salt, I only wrote option very briefly and learned it's not my forte.

 

[Tradex]

Am I missing something? Is there another reason why there's an advantage to selling?

When you buy a call (especially out-of-the-money calls) the stock has to make a significant move and fast (otherwise the time decay will eat you alive). That's the ONLY way to make money.

When you sell a call option (especially out-of-the-money options) you now put the odds in your favor, because now the market can go down, sideways or even higher (as long as it does not hit the strike price) and it won't matter, you will still make money.

In other words you have 3 possible scenarios working for you, but only 1 (one) with the long call option.

But keep in mind that getting approval for option selling privileges is not easy, you have to show your broker that you are an experienced trader, are fully aware of the risks, and have more than adequate trading capital.

 

[MK020]

When you buy a call (especially out-of-the-money calls) the stock has to make a significant move and fast (otherwise the time decay will eat you alive). That's the ONLY way to make money.

When you sell a call option (especially out-of-the-money options) you now put the odds in your favor, because now the market can go down, sideways or even higher (as long as it does not hit the strike price) and it won't matter, you will still make money.

In other words you have 3 possible scenarios working for you, but only 1 (one) with the long call option.

All true, and why most options expire worthless. But when the stock moves fast, the loss for an option writer will be much more than the win from a premium collected on a worthless option. I figure this must all even out over time.

I just can't wrap my head around the possibility that there is a true advantage in anything so simple. My logic is that if there was an advantage to selling options, then there would be a rush of people wanting to sell options, and with more sellers the price would drop until it reaches an equilibrium so that there's no inherent advantage between buying and selling.

 

[ET180]

Why do people buy options? For insurance or leverage. When you sell options, you are paid for providing that service. You are being paid to assume risk. If it was a losing proposition, on average, then people would not do it. Same with car insurance. Most people don't buy car insurance expecting to use it. But if insurers on average only broke-even, they simply would not do it. So averaged over a large number of occurrences, there should be an advantage to providing that service, otherwise it would not be offered.

 

[Tradex]

But when the stock moves fast, the loss for an option writer will be much more than the win from a premium collected on a worthless option. I figure this must all even out over time.

No, because option writers usually hedge their bets with the underlying financial instrument.

Plus they can always dump the option if the price threatens to rise above the strike price (they will make less money or breakeven in that case).

 

[TheBigShort]

Congratulations! You are already thinking smarter than a majority of option traders. There is a risk premium associated with selling options which is very similar to the risk premium for buying equity.

In the long run the seller of the options should make more than the buyer. However, it's not an advantage, it's a transfer of risk. Someone who does not want to lose in bad times will be willing to pay up to remove some uncertainty.

Also the risk premium is not gigantic like some of the gurus mention. It's small and can make you 15%/yr if done correctly.

 

[Tradex]

Also the risk premium is not gigantic like some of the gurus mention

Savvy options writers can still collect fat premiums with volatile stocks that go nowhere after the initial up or down move.

It's all about the volatility.

Options writers also make money because the Black-Scholes model is flawed. In fact, I strongly suspect that it has been designed to profit the option sellers...

That said a trader can still make good money buying put or call options, if he knows what he is doing.

After all, Gordon Gekko did make a killing buying 1500 call options on Anacott Steel.

 

[smallfil]

I read on many blogs/websites that there's a "house advantage" to writing options, because most options expire worthless, etc.

I don't see how there could be an inherent advantage to selling options, since you can only sell what someone is willing to buy, and unless the seller had more information than the buyer, it should be even. It's also pointless to me when someone says 80% of options expire worthless, since it's not win-loss percents that matter, but rather profits (1 big win can offset 20 small loses).

Am I missing something? Is there another reason why there's an advantage to selling?

The quoted win rate of those selling options is 80% or higher. So, most options expire worthless so, they say. I have my doubts of course on that figure since, I am an options buyer. My win rate is around 40% and lose 60% of the time. Most times, I close positions at a loss but, the losses are not 100%. There are times I lose more than 50% of the premiums and other times lose about 20% of the premiums. So, the options I lost on, did not expire worthless. There might be 1 or 2 in a blue moon that I lose the entire option premium but, it is more on me being stubborn and refusing to sell, thinking the stock will go back up. On the times I win, it is multiples of the trading losses so, 40% wins is pretty good. The advantage for option sellers is the higher win rate which would make you feel good but, the premium is quite low. One big loss is all that it takes to wipe out those tiny gains. So, I am an options buyer and not a seller. Tried that route and ended up losing thousands.