Are There Any Successful Option Buyers ?

[Fundlord]

• Why was it denied?
• Fill out another application and fudge the questions to satisfy the broker. They do not confirm your answers.
• Keep in mind you can't trade options in a cash account - you will need a margin account.

Really ?

I thought you can buy calls and puts in a cash account ?, I'm pretty sure it said that on the OX website.

Could I have been declined because I said I'm a student ? even though I said I have an income and sizeable net worth which I do.

 

[Chubbly]

Really ?

I thought you can buy calls and puts in a cash account ?, I'm pretty sure it said that on the OX website.

Could I have been declined because I said I'm a student ? even though I said I have an income and sizeable net worth which I do.

Yes, it is most likely because you said student, they never check.
I opened several accounts and was never asked to verify my job/income.

 

[Fundlord]

Yes, it is most likely because you said student, they never check.
I opened several accounts and was never asked to verify my job/income.

So should I move on to TD ameritrade or something ?

I don't see how being a student can hurt, technically I have had a secure monthly income while being a student for over 3 years.

 

[ironchef]

I would be interested to see this evidence as there is lots of research out there that shows buywriting outperforms the index by about 1%/annually over a long period of time. The two claims are not consistent.

Look at this article on the Russell 2000 index buy-write:

http://www.optionseducation.org/content/dam/oic/documents/literature/files/umass-buywrite.pdf

On an absolute return basis, buy-write is inferior to buy and hold. But on a risk/return basis, it is superior.

Regards,

 

[VTS]

This is one of those situations where you are both right. If you calculate it out, technically you are correct in your assumptions. However you have to factor in that in the real world, markets are made, with compensations and middlemen and various aspects that make the strategy mathematically negative.

You're both correctly answering different questions. One is a question of math, the other is a question of the real world markets.

 

[Occam]

The black-scholes equation has nothing to do with CAP-M.

Of course the Black-Scholes equation has something to do with CAPM -- in fact, the second derivation in the Nobel-prize winning 1973 paper starts directly with CAPM -- it's right there in the first sentence.

That said, I'm not sure that thinking about the CAPM derivation is going to help a newbie option trader become profitable, particularly in light of the observation (at least in my opinion) that CAPM is only a very approximate view of reality. But then again, you never know -- any true edge someone can gain in trading options is worth a lot in today's hyper-competitive market.

The options market is pretty efficient these days, as the OP hints -- that's made clear by the fact that Knight just voluntarily gave up its entire retail options wholesaling business. You need a pretty strong edge to overcome the slippage, and the ever-increasing efficiency doesn't make that easy. Even with very efficient pricing, there's still a lot of slippage, as the wholesalers (the ones who are left, that is) have the ability to jump in front of everyone else for a big portion of total order flow. This not only makes it difficult to add liquidity, but increases spreads for those wishing to take liquidity, as market makers (or other liquidity adders) without the privilege of being a wholesaler have to widen their spreads to compensate for the risk of getting rolled over. (That's the risk of "picking up pennies in front of a steamroller"!)

 

[newwurldmn]

Yes you can derive Black Scholes from CAP-M. But the beta of a call option is not a meaningful measurement of anything. The beta of the call options delta has some meaning. One doesn't compare the risk of an option through the beta of it's delta. It is done through it's volatility. Beta doesn't account for the convexity (gamma) and cost of that convexity (theta) of that option.

Attached is the long term performance of the BXM (buy-write), Put-write, and SP TR. The believe that the BXM doesn't include the dividends you would receive being long the SPX index so the Put-write would be more applicable to the SPX total return. You can see that it tends to outperform even with the rampant rally in the last several years.

The idea that a long call option will outperform the market would mean that the volatility of the index is consistently higher than that of the option.

For example:
A 1Y call option costs 6%. If the market rallies 10% then you will underperform by 6%. If after that the stock market selloff 10% then the option will outperform the market by 4% netting an underperformance of 2% with the index returning zero.
However, if the market rallies 20% and then sells off 20%, the option will return a net of 8% (14% and then -6%) while the market returns 0%.

There is a lot of evidence that volatilities of options are consistently higher than that of the underlyings and this makes phenomenon makes intuitive sense.

 

[Windlesham1]

buying options makes sense when you sell other options to pay for them. I used to love combo's- sell a call/call spread to buy a put/put spread when you think the market is too high-which it would be even if it dropped 30% tomorrow. Unfortunately we don't have markets,we just have the whims of central banksters and the sheeple in Wall Street -not sure which is the dog and which is the tail,but there's a whole lot of wagging going on.

 

[newwurldmn]

This is one of those situations where you are both right. If you calculate it out, technically you are correct in your assumptions. However you have to factor in that in the real world, markets are made, with compensations and middlemen and various aspects that make the strategy mathematically negative.

You're both correctly answering different questions. One is a question of math, the other is a question of the real world markets.

Want to expound on this?

 

[Mario Cesolini]

Buying options is interesting if you keep in mind what are the vantages and disavantages of it.

Imagine to have had a strong buying signal on a market as Gold, but for its volatility you aren't available to buy the future. Buying a call, one or two strikes otm, could be the solution: you'll risk less (no more than you payed) and you'll have to possibility to take part of the rising (not how much who bought the futures, but you will).

Another example. You have a daily trading system working on shares that you backtested and that have more than the 75% of winning trades, but the stop loss is quite big and you don't feel confortable to trade it. Well, if it remains in the markets for few days (as buyer time works against you), buying atm options could be a good solutions. The resting 25% of times you'll lose less than buying the underwriting.