This poster needs to study the term "Rube Goldberg" machine.
Are writing options profitable?
- Thread starter TraderTactics
- Start date
This poster needs to study the term "Rube Goldberg" machine.
If you want to write options then the commodities market is the way to go.
You get the benefit of SPAN margining (margin only ~10% of equities market). This means you can get decent option premium from way-out-of-the-money options. Try selling options 100% out of the money in the equity market (you can't).
Also commodities such as coffee don't go bankrupt, miss earnings or suffer from corrupt accounting.
Yes it's like running an insurance company - and you make money by choosing your customers wisely.
The big issue is long-tail / black-swan risk. So make sure you have legal separation between your futures account and your personal assets.
You can manage risk that evolves over a period of weeks or days - but events like mad cow disease or regulatory changes can occur overnight with no possible exit to achieve a reasonable stop loss.
You get the benefit of SPAN margining (margin only ~10% of equities market). This means you can get decent option premium from way-out-of-the-money options. Try selling options 100% out of the money in the equity market (you can't).
Also commodities such as coffee don't go bankrupt, miss earnings or suffer from corrupt accounting.
Yes it's like running an insurance company - and you make money by choosing your customers wisely.
The big issue is long-tail / black-swan risk. So make sure you have legal separation between your futures account and your personal assets.
You can manage risk that evolves over a period of weeks or days - but events like mad cow disease or regulatory changes can occur overnight with no possible exit to achieve a reasonable stop loss.
Perhaps, but when it is all said and done, writing options without some kind of outperformance edge will likely wind up as breakeven to losing after commissions, slippage, bid/ask, risk, errors, fees, taxes, etc.
If it were ever this easy, the institutional trading houses with their billion dollar research budgets and their quant experts would already be doing this and would arb the life out of it. And their trading costs are much lower than Harvey Option Trader and his $6,000 account.
Your time will come. Sorry to say, but it will.
Because at some point in time, this market is going to get wacked, and all those nice little premiums you've been collecting will be going back to Momma.
I made very nice money selling puts for a few years. Friends kept warning me, but hell, I stood up nicely to 5%-10% corrections with no problem.
Then I pushed just a little too far, and the bottom dropped out of the market. The careful calculations I had made about risk just went out the window, along with ALL of those nice premiums I'd been collecting when the market was running.
You see, the really deadly thing about short options is how quickly and drastically a sharp increase in volatility can kill you before you can take a protective move. And you'll never appreciate that until it happens.
So, nothing wrong with selling for premium now and then. Just don't get yourself lulled into expecting that you're going to be able to rely on it for sustained income or growth. Because at some point you'll be giving back a lot of those dollars you've been collecting.
Collecting premium should be a VERY small part of your overall strategy.
of course it depends. some people are happy holding a portfolio of dividend stocks for sustained income from the dividends. is it any less risky holding those stocks for the dividend income or selling cash secured puts on the same stocks?
Absolutely it carries less risk, when you consider all possibilities and the management of the position.
The explosion in pricing of short puts can be dramatic and sudden, and spreads will often widen a lot. Anyone who has been short an option when the market and/or stock tanks will understand.
A long equity is much easier to manage in a crisis situation.
But I am simply offering a warning based on consirable experience. And checking out, as there are many other threads on the subject.
we will just have to agree to disagree. the risk on unleveraged short puts is the same as a portfolio of buy and hold stocks.
the reward can be different. in a flat market selling puts will outperform. in a strong bull market selling puts will underperform as will covered calls.
i also speak from experience. years of it including selling through 2008.
And not to mention, without seeing the trader's track rcord, trading statistics/metrics, risk profile, his claim has absolutely no meaning.
3 trades? 5 years? Tolerate 80% drawdown a few times? Profit factor of 1.05?
Does the trader have an edge or is it purely from "writing options"?
I dismiss when someone says "works for me" without proof, history, metrics, and other things.