A performance edge is helpful along with low coms and such. Consider, however, if you place a position and adjust in a way which has a cost similar or less than that of replication - you'll have your edge. Also, having and/or not having an edge is priced in with market expectations between your entry and expiration. Consequently edge must exist otherwise option traders would enter positions and just go away until the end of the month. You're not getting an edge on any one trade, but you're keeping a series of trades 'in play' long enough to realize two major features of the market: asset decay and volatility's revision to mean.
Are writing options profitable?
- Thread starter TraderTactics
- Start date
A performance edge is helpful along with low coms and such. Consider, however, if you place a position and adjust in a way which has a cost similar or less than that of replication - you'll have your edge. Also, having and/or not having an edge is priced in with market expectations between your entry and expiration. Consequently edge must exist otherwise option traders would enter positions and just go away until the end of the month. You're not getting an edge on any one trade, but you're keeping a series of trades 'in play' long enough to realize two major features of the market: asset decay and volatility's revision to mean.
I don't agree with this. First why were you selling puts? Even if you calculate the risk you should have known that puts are deadly as the equity skew is to the downside.
Next, I always have little losses when selling premium. I sell premium as a day job. This means I am ALWAYS watching the market and watching the minor ticks. And if things don't go my way I don't hesitate to adjust.
I find with selling premium 11 times out of 12 your adjustments and risk calculations will get you to do things that you did not need to do. However, that 12'th time you praise the Lord that you did adjust. I know I was trading with somebody where they played similar positions to what I did, lost 68% of the account, and I lost 3.5%.
Difference? I did not hesitate to adjust and get out of positions. Additionally I was diversified.
For example this cycle, I am not selling any index options. Too risky for what you get. It appears that the market is not going anywhere, but I know that there are hidden coils. So I would rather not make any money and focus my efforts elsewhere than try to make money and loose it.
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Managing naked puts is no different than managing long stock that is tanking. And the risk of unleveraged naked puts is less than owning the underlying outright since the acquisition price will always be lower due to the premium received.
The two big problems with naked options are leverage and that their risk/reward ratio is lousy.
This is true, the RR PL stinks on anything naked because you're only dealing with one side of a (simplistically speaking) binomial equation which remains open ended throughout the duration of the trade. Therefore, you are including your own personal probability into the your valuation of the option even though the rest of the market is not. Consequently, you must be ready to place a directional probability as well as a volatility component into your pricing towards the 'fairness' of the trade, see below.
Even if you had no capital restraints (per individual cycle of the trade... no doubling down here), you still wouldn't sell puts because what you're really betting for is a 1) a bullish play 2) a non-event/non-bearishANDnon-bullish play.
If the trader was really after the speculation it's more efficient to just trade the underlying, or to own the ATM vertical (which can often be entered at a slight advantage.) Clearly put selling is not a bullish trade (why would you take unlimited risk for limited upside), it's a non-non-bullish-but-neutral-will-also-do-trade which is about as brilliant as saying one is opposed to shorting stock so therefore they will buy a call (hear me out on this)... this is because every trade involving unhedged puts must be made in consideration to the potentially massive vol changes should the market decide to sell asset value quickly.
Here's the real PUT seller's dilemma. What's their portfolio look like? Do they go find a bunch of individuals to sell puts on. OK fine, but nearly every equity involved instrument is highly correlated today. So one month you make money, the next you'll end up taking on tons of shares (capital you'll need to set aside). That's just about as random as buying stocks outright. Consider, should the trader sell a OTM call to 'smooth' the average out? Maybe, but then he's trading a strangle, and that's like a college age spring breaker sending Mom a photo of themselves at Disney land Hong Kong and writing on the post card about how great the beaches are in southern Florida - same planet.... different world.