The company that makes whatever it is that's being insured?
Any studies on who normally wins - option writer versus purchaser?
- Thread starter Saltynuts
- Start date
the re- insurer can hedge his book. it is is like a bookie who lays of bets received if he has too much on one side. you are playing with words, spreading your risk is a tool of hedging.
We could argue on the meaning/difference between hedging and spreading the risk (to me hedging is not diversification). But in the end it all comes back to what you claimed earlier, that reinsurer's "don't hold the bag because they hedge".
If you spread your risk, it doesn't mean that you are "not holding the bag", does it? As I said before, it just softens the blow. The reinsurer will still have to pay out the claims (the "bag"), it doesn't matter if it is from premiums collected or reserves or whatever. It comes out of his pocket, doesn't it?
In fairness to @punisher, I suspect it is you who are playing with words. There is a difference between (1) the pooling of risks (a fundamental principle of insurance) and (2) offloading risk. The two are clearly not the same.
Under (1), the (re)insurer retains the risk and holds reserves and (additional) capital against the risk of 's' hitting the fan. In Europe, the Solvency II regime requires (re)insurers to hold capital equal to a 99.5% VaR over a year and will cover a range of risks (e.g. market, insurance etc).
This is akin to a naked option writer holding sufficient collateral to be able to withstand margin calls / assignment.
Under (2) the (re)insurer decides to offload the risk by engaging a reinsurer, which reduces the amount of capital they need to hold: the bag has been passed
. Now, reinsurers can also offload the risk to another reinsurer (called retrocession). However, the point is the buck stops somewhere (another reinsurer?). The opacity of who 'holds the bag' and the extent, if any, that we should be concerned from a financial stability perspective is actually quite a topical issue at the moment.I don't know what win rate is, but just like in trading, %win rate is just a number, meaningless by itself. You can have 99% win rate and still be a loser. All you have to do is puke out one huge loss. And that is what happens to majority of option sellers. It goes well until it doesn't, and that means disaster. It could be a profitable business if it's run like a true insurance company, like discussed earlier, but even then black swan events could take it out.
Yes yes. Very true. And I do not believe you can have a stop strategy like a stock, etf or futures.
But if I’m selling calls, a black Swan would be a monster move up. Sure it happens, but not like the big down days. That’s why I don’t sell puts.
Any advice on stops
First of all, Do 80% Of Options Expire Worthless?
No, it's a myth.
According to The Chicago Board Options Exchange (CBOE) here are the facts:
- Approximately 10% of options are exercised (The trader takes advantage of their right to buy or sell the stock).
- Around 55%-60% of option positions are closed prior to expiration.
- Approximately 30%-35% of options expire worthless.
Percentage of options expiring worthless is completely useless to options traders. This is NOT what should impact your decision to become an options buyer or options seller. The only way to determine which options strategy suits you is by really learning about them, their reward risk ratios, practicing them and understanding which approach best conforms to your investment objectives, trading style and risk appetite. Options is risky no matter if you are an options buyer or seller, don't let anyone tell you otherwise. There is no such thing as becoming "banker" in the options market. Understand the risks of options trading and you will be profitable.
Some people like Tom Sosnoff claim that the only way to make money in options is by selling premium. Nothing could be further from the truth. It's not the strategy, it's how you use it.
Is buying straddles good or bad? Depends. Buying straddles on indexes is usually bad. Buying straddles on random stocks at random times is also a losing proposition in the long term. But buying straddles before earnings and keeping them till earnings is a winning strategy if done properly. In fact it is so good that it produced around 80%+ winning ratio for use, with very low risk (losses rarely exceed 10-15%).
There are many ways to make money with options. It's not about selling or buying. It's about using the right strategy at the right time on the right stocks at the right prices.
Getting similar performance with less volatility and almost double sharpe ratio? I will take it every day.I posted this in a different thread:
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I don't know, it seems like no matter what you sell your absolute performance is about the same as buy and hold? If that is the case, why go through the trouble, why not just buy and hold??