advantage to selling options?

[Tradex]

So, most options expire worthless so, they say. I have my doubts of course on that figure ...

It's true, as most long options are used for downside protection, not directional moves.

It's like home insurance, we lose the premium every year when our house does not burn down.

 

[newwurldmn]

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.

I think the risk premium is closer to 6percent. Anything above that is you being smart or over leveraged.

 

[Tradex]

I think the risk premium is closer to 6 percent. Anything above that is you being smart or over leveraged.

You truly believe that option writers would settle for less than the average return of the S&P 500 (around 10% a year)?

 

[Pekelo]

Tradex pretty much has answered all your questions.

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.

Not everybody is selling naked options. If the writer has stocks too aka covered calls, it is not a loss for him, just a predetermined gain. Sure he is missing out on the stock's rally, but probably he is still happy with the profits.

Options can be used in such complicated set ups that just simply think that the writer lost money is a mistake. We just don't know if stocks were involved or not. Or in case of verticals, the loss can be also maximized and predetermined.

But in short, the writer also makes money if the stock doesn't really move, so 2/3rd of the time is in his favor.

 

[newwurldmn]

You truly believe that option writers would settle for less than the average return of the S&P 500 (around 10% a year)?

I do.

 

[newwurldmn]

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).

Hedging doesn’t change the expected value. It only changes the variance of the expected value.

Hedging means that the strike price doesn’t have much bearing on the decision to “dump the option”

 

[Tradex]

Hedging doesn’t change the expected value. It only changes the variance of the expected value.

What?

Hedging changes everything, you have 3 scenarios working for you PLUS a downside protection, what more do you want?

Do that everyday and you will earn a nice steady income, just like a casino owner.

 

[TheBigShort]

What?

Hedging changes everything, you have 3 scenarios working for you PLUS a downside protection, what more do you want?

Do that everyday and you will earn a nice steady income, just like a casino owner.

Sounds like a game of Russian roulette. 9 empty chambers and 1 that kills you. You must love playing that game long run expected value for sure!

 

[Tradex]

Sounds like a game of Russian roulette. 9 empty chambers and 1 that kills you.

Nonsense, true options sellers hedge their bets, they are not crazy.

Funny, when someone talks about selling options he is automatically discouraged from doing so.

It's normal after all, options writers simply want to protect their turf...

 

[mt2rules]

Nonsense, true options sellers hedge their bets, they are not crazy.

Funny, when someone talks about selling options he is automatically discouraged from doing so.

It's normal after all, options writers simply want to protect their turf...

People automatically discourage others from selling options, especially naked, because the streets of trading are lined with the bodies of traders who have blown out their account after being on the wrong side of a big move.