advantage to selling options?

[TheBigShort]

As the saying goes - "men lie, women lie, numbers dont". So lets take a look at some numbers .

Here is SPY ivol30 and the lagged rvol to line up with it. Ie. What did the market expect vs what actually happened. (Black is Ivol and red is rvol)

Here is the spread between them.

The mean of that spread is wait for it.. .45 vol points. The median is 1.7. What this tells us is that you can't just sell options and expect to make exceptional returns.

In regards to hedging your bet, isn't that why you are getting paid to sell options? To hedge someone's bet? If you are talking about buying a fly (selling high dollar vega and giving away some edge by buying the wings), that is a reasonable strategy but even then it wont do you wonders if you buy them systematically.

P.s. Just realized you were talking about hedging your deltas. As @newwurldmn said, hedging your deltas is only going to reduce your pnl variance. You are turning a terminal outcome into the implied/realized spread. That also comes with additional transaction costs and a potential for sloppy hedging. Not an easy game. There are much easier ways to make money

 

[newwurldmn]

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.

It doesn’t change anything except for the volatility of your returns. It does not change your expected value.

There is no steady income selling volatility. It’s inherently as speculative as buying volatility or picking stocks. Don’t be fooled by the positive cash flow and risk premium.

 

[Tradex]

What this tells us is that you can't just sell options and expect to make exceptional returns.

Did I say that? Where??

Options sellers are ONLY looking for a nice steady regular income, not spectacular returns.

Some of them earn a living just selling covered calls all day, for instance.

 

[newwurldmn]

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...

Not discouraging, but providing realistic assessment having traded equity derivatives professionally for 11 years and on my own for 9, with a short vol bias.

Anyhow, if you are intellectually honest, you’ll see my point eventually in your trading career.

 

[Tradex]

Anyhow, if you are intellectually honest, you’ll see my point eventually in your trading career.

Yes, I can see your point exactly, don't worry...
And by the way I do not sell options, I swing trade the Forex.

 

[TheBigShort]

Did I say that? Where??

Options sellers are ONLY looking for a nice steady regular income, not spectacular returns.

Some of them earn a living just selling covered calls all day, for instance.

I never understood the methodology of selling calls on single names...you do a lot of research to find a stock that has a lot of upside potential and then you cap it?

You are also forgetting about the scenario where:
You buy a stock at 100 and sell the 105 call.
The stock drops to 70 and then you sell the 75 call.
The stock rallies to 120 and you had to give the stock away for 75.

How is that steady income? That is a big loss

 

[7out]

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.

Almost any broker will easily grant you the right to write options on stock you own. Naked call options are tough to get granted, but rightfully so - it is inadvisable for anyone but very experienced traders. However, writing Put options is something most novice traders should start with. Win/win situation for selling puts on stocks that are currently priced out of your price range (for owning).

 

[destriero]

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.

How is BSM flawed?

 

[Tradex]

You buy a stock at 100 and sell the 105 call.
The stock drops to 70

The stock drops to 70 and you collect the premium ($$).

Then you find another stock with no upside potential and rinse and repeat.

Simple as that.

 

[Tradex]

How is BSM flawed?

What, you don't know that yet, Mister big shot millionaire who loves to brag and is afraid of losing his precious bitcoins?

Here, learn my friend:
https://www.moneyshow.com/articles/optionsidea-42955/