Any studies on who normally wins - option writer versus purchaser?

[Saltynuts]

Are there any long term historic studies of this?

On the one hand, you hear that some large percentage of options expire worthless. Plus, it seems the option writer should be paid for letting the purchaser use leverage. Maybe there is a "cost to carry" that should be compensated.

on the other hand you have mutual funds that sell covered calls, and their performance is usually a goid bit sub par.

I know the above are not mutually exclusive. Just wondering if there is any long term analysis on this. Maybe on average writing versus buying is pretty much a push, which one might expect given I believe options are a zero sum game and assuming the market is efficient.

Thanks!

 

[Sweet Bobby]

Are there any long term historic studies of this?

On the one hand, you hear that some large percentage of options expire worthless. Plus, it seems the option writer should be paid for letting the purchaser use leverage. Maybe there is a "cost to carry" that should be compensated.

on the other hand you have mutual funds that sell covered calls, and their performance is usually a goid bit sub par.

I know the above are not mutually exclusive. Just wondering if there is any long term analysis on this. Maybe on average writing versus buying is pretty much a push, which one might expect given I believe options are a zero sum game and assuming the market is efficient.

Thanks!

I am grateful for those who purchase options. They help put my kids through school!

 

[Mugono]

There's been a lot of discussions on this board about buying vs selling options, zero sum etc.

Buying vs selling: The markets are fairly efficient. Without some form of 'edge', ie in predicting implied or realised vol, either endeavour would likely lose money, once including commissions (negative expectancy). To do well you'd need to combine options (buy / sell) and or trade the underlying. But I recognise this is outside the intent of the post.

Zero sum: Options are used primarily as hedging instruments to manage the downside risk (ie long puts to hedge long stock position).

 

[Pekelo]

Without taking stocks into account, the picture of using options is not full. If you keep buying puts for insurance on your stock holdings but the gain on your stocks is more than the cost of the insurance, you are ahead in the game although negative in buying options.

It is like asking: in the insurance business, who is ahead, people who buy insurance or the companies who sell them? But without putting the ability to sleep well at night into the picture the math isn't complete.

 

[spindr0]

I have no source info to prove anything so here's a potpourri of info that supports my opinion.

Options are a zero sum game, actually a negative one when you factor in the B/A spread and frictional costs.

Selling options offers a higher probability of making a limited reward and lower probability of a large loss. Buying options offers the reverse.

As with all option strategies, it's one's timing and selection that determines success (stock direction, selling volatility, etc.), not simply uninformed buying versus selling.

The CBOE has several option seeling indexes:

BXM (1 month ATM CC-s)
BXY (1month 2% OTM CC-s)
PUT (1month ATM naked puts)

Over the past 20+ years they have all returned within 1% of the S&P 500.

I would imagine that if there was an edge to buying over selling (or vice versa), traders would be arbing that edge. I don't believe that it exists across the board.

 

[zdreg]

Without taking stocks into account, the picture of using options is not full. If you keep buying puts for insurance on your stock holdings but the gain on your stocks is more than the cost of the insurance, you are ahead in the game although negative in buying options.

It is like asking: in the insurance business, who is ahead, people who buy insurance or the companies who sell them? But without putting the ability to sleep well at night into the picture the math isn't complete.

when you sell options to open you are in the insurance business. professional insurers buy re-insurance. that excludes most posters on ET who think they have discovered the holy grail of selling naked options.

 

[Mugono]

when you sell options to open you are in the insurance business. professional insurers buy re-insurance. that excludes most posters on ET who think they have discovered the holy grail of selling naked options.

Are the reinsurers the real bag holders

 

[ironchef]

Without taking stocks into account, the picture of using options is not full. If you keep buying puts for insurance on your stock holdings but the gain on your stocks is more than the cost of the insurance, you are ahead in the game although negative in buying options.

It is like asking: in the insurance business, who is ahead, people who buy insurance or the companies who sell them? But without putting the ability to sleep well at night into the picture the math isn't complete.

Buy/sell options is negative sum (zero sum - cost of slippages and commissions), but insurance is not zero sum, the insurance companies make money selling insurance so how can we duplicate the insurance companies' approaches in selling options?

 

[ironchef]

The CBOE has several option seeling indexes:

BXM (1 month ATM CC-s)
BXY (1month 2% OTM CC-s)
PUT (1month ATM naked puts)

Over the past 20+ years they have all returned within 1% of the S&P 500.

I would imagine that if there was an edge to buying over selling (or vice versa), traders would be arbing that edge. I don't believe that it exists across the board.

But the risk adjusted returns are higher than buy and hold SPY. My non professional question to you all is: Is risk adjusted return meaningful?

 

[spindr0]

Yes, the CBOE option strategies had a lower standard deviation the B&H SPY but that's a separate consideration from whether buying is more profitable than selling, or vice versa.