Any studies on who normally wins - option writer versus purchaser?
- Thread starter Saltynuts
- Start date
Having traded options being the buyer most times, I would guess some sellers have lost their shirts a number of times. Sure, the trade win rate for me varies from around 40%-60% most times over hundreds of trades but, the returns are much, much higher like 40%, 70%, 150% of capital. They claim that options sellers win 80% of the time. However, selling options nets you how much in gains, 10% or maybe, even lower, each time you sell? All it takes is one big loser to wipe out an options seller profits. As an options buyer, my focus is on cutting my losses and trading with the trend. Will I have losses? Sure. However, I do not hold it till the very end till expiration. So, any losses incurred will be only a part to the premium traded. Not the whole, amount! Any leftover residual value of any trade goes back to my trading capital. One huge winner wipes out the smaller losses so, that statistic is utterly, useless!
The problem with this question is the definition of the last in line insurer. Farmers and airlines share the fact that they hedge the price of their produce/kerosine or currency exposure. A really interesting case study is KLM (nor merged with Air France) who at one time was making consistently more money from trading and hedging than from transporting people.
If you have the ability to take delivery and you have discounted the price you get delivered at in your own consumer prices this is a huge market edge. If the price went up you can sell and if it fell, you take delivery. So the re-insurance market and hedging sometimes simply bring together people that want to trade away their respective risks against each other. A supermarket wants to be sure of the price of carrots and will accept the risk the price will drop, the farmer has capital investments to cover and needs to be sure the price doesnt tank.
Not a few lotteries afford their big pay-outs by simply hedging them. The chances are so small that a re-insurer can take the statistical risk on the other side. They get a return on their money and the lottery is able to advertise a huge pay-out presumably making it more successful in its market.
You are saying there is an edge of selling cash secured puts ,if put, then selling covered calls. Next, if call, selling cash secured puts....?
His comment is in the context of farmers, airlines etc. The derivatives are an overlay to their underlying business of selling produce or transporting people between countries.
More generally @ironchef , I've read a number of your posts and saw somewhere that you've been trading full time for the last 5 years...
I think you will benefit from further reading on options. It will help answer a lot of the questions you post.
JMHO, as I'm no expert on options math, just what I feel is good risk/reward, but it seems ludicrous to me to sell a cash covered put on the SPY if my only protection is a 5% premium for a 1 year expiry. And a lot of others are like that. You will get your A handed to you on a decent move against you.
It's been my experience that I should accept no less than a 13-20% premium for a 5-6 month expiry, desiring to buy the stock yet at a decent final cost average for assuming the downside risk.
[For example, the next time the VIX rises to 70+, they'll have 20% premiums on ATM puts on the SPY for less than a year expiry. now That's something you can work with to get an avg cost far below what the low of the SPY may happen to go].
You have to play the game that works for you. When you're given enough downside protection to work with, you can arrive at good deals for partial to full stock ownership. Considered as part of that acquisition are the expirations where you kept the premium. If you treat the entire operation as a closed system then those premium profits go to lower the cost avgs ob the stock you do get assigned.
Doing this for the premium collection is not my game. I do this type of thing in my IRA b/c I get to apply the full profit of the 100% premium collections going forward.
How does this get funded? Futures trading. There's more volatility there than you'll ever need to generate a decent cash flow to fund these other types of operations.
[Forgive the grammar mistakes. The edit feature on this website doesn't work well with the tablet I'm using]
It's been my experience that I should accept no less than a 13-20% premium for a 5-6 month expiry, desiring to buy the stock yet at a decent final cost average for assuming the downside risk.
[For example, the next time the VIX rises to 70+, they'll have 20% premiums on ATM puts on the SPY for less than a year expiry. now That's something you can work with to get an avg cost far below what the low of the SPY may happen to go].
You have to play the game that works for you. When you're given enough downside protection to work with, you can arrive at good deals for partial to full stock ownership. Considered as part of that acquisition are the expirations where you kept the premium. If you treat the entire operation as a closed system then those premium profits go to lower the cost avgs ob the stock you do get assigned.
Doing this for the premium collection is not my game. I do this type of thing in my IRA b/c I get to apply the full profit of the 100% premium collections going forward.
How does this get funded? Futures trading. There's more volatility there than you'll ever need to generate a decent cash flow to fund these other types of operations.
[Forgive the grammar mistakes. The edit feature on this website doesn't work well with the tablet I'm using]
Well you're right about one thing!
An arbitrary premium target without regard to the volatility of the underlying doesn't make sense. The options math is definitely a more precise way to demonstrate this, but I'll give you a quick thought experiment. Imagine you were selling an option on Pfizer versus an option on a one drug biotech that's going to release their phase 3 trial results next week. Do you really think the premium is somehow better on the one drug biotech because it's invariably higher than Pfizers? It could be that Pfizer's options are mispriced and a 5% premium is really good for them, while the biotech's could be overpriced and 40% is a horrible risk adjusted return. The "right" premium is inextricably tied to the volatility of the underlying.
OK, so my "business" is buying and selling stocks, not soybeans, but how is that different from buying and selling soy beans? The derivatives are overlay to my underlying business of selling and buying stocks.
Options on commodities and on stocks are both derivatives. Fundamentally and mathematically I don't see any difference between options on commodities vs options on stocks, futures, currencies...?
Yes, I am a full time trader, trading options is my "job" for the last 5 years. And yes, I can benefit from your coaching as I am not a professional. Thank you sir.
professional options makers lose money when there are no interest in trading or some trader or option buyer has an 'advantage' either by insider information...and they can lose millions and not enough customers or options participants. they are same as bookies in las vegas taking bets from gamblers and/or speculators.
most of the or majority of insider information that the SEC charge or people with insider information and they go buy $500,000 worth of OTM options that will expire in a few days. and make 2 million in options position with no hedge or 1.5 million profit in a few days. these options makers know that you chance of wining is 1 in 500 chance of in the money or those OTM options are worthless. those odds are worse than casino slot machines.
And the market makers know it's 'insider information' and will not honor your win. and call the SEC have your brokerage account frozen.
normally the options market makers would rig the stock price if someone has that kind of position in OTM options that will expire worthless in a few days.
most of the or majority of insider information that the SEC charge or people with insider information and they go buy $500,000 worth of OTM options that will expire in a few days. and make 2 million in options position with no hedge or 1.5 million profit in a few days. these options makers know that you chance of wining is 1 in 500 chance of in the money or those OTM options are worthless. those odds are worse than casino slot machines.
And the market makers know it's 'insider information' and will not honor your win. and call the SEC have your brokerage account frozen.
normally the options market makers would rig the stock price if someone has that kind of position in OTM options that will expire worthless in a few days.
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