Buy or Sell Options?

[IluvVol]

Quote from Sunshine4ever:

As you've probably heard, more than 90% of the options expire worthless. Why would you want to be part of the crowd who "safely" looses month after month ?

Since you're a beginner I'd recommend you take some courses or follow somebody else's trades for a while to understand the process. Yes, it may cost you some $$$ but believe it's worthed ( try Ryan Jones -- options for profits).

Good luck!

Well you seem to be the beginner here,
As MTE rightly pointed out, the risk/reward in writing is worse. Writing options exposes you to huge risk. if you fully insure against such risk you end up with EXACTLY the same expected payoff than with the long version. This is not just theory but fact.
Anything less than full insurance is speculation, meaning you take more risk with high potential payoffs. Period. no more no less.

Let me ask you a simple question, maybe it makes it clearer then: THink about a standard European Call and Put. Lets assume right now for simplicity sake that interest rates are zero. Put call parity says that the call should be of equal value than the put. However, the put has limited upside potential but the call unlimited upward potential. This suggests the call should be worth more than the put. How do you reconcile this seemingly disparate potential payoff?

It does not look at first sight it is related to writing options but if you really think about it then it is and it makes the pointless discussisions about what is better, writing or longing options, totally obsolete. Tip: What really matters is the underlying lognormal risk-neutral distribution (in facts its not even log-normal, but certainly not normal). Another hint: Fat tails....;-)

 

[yip1997]

Quote from Sunshine4ever:

As you've probably heard, more than 90% of the options expire worthless. Why would you want to be part of the crowd who "safely" looses month after month ?

Even 100% of options expire worthless, it means nothing. You might not make money selling options. Why? Most option sellers take a loss and cover their risky positions before expiration.

For example, I sold SPX 1550 call early this month, now SPX is 1556. If I hold the contract, it will be exercised at expiration. But I am not so stupid to hold the contract, I have covered it at a loss long ago. So CBOE will report that 100% open contracts expire worthless.

Don't use any newsletters or follow any traders who use "90% of the options expire worthless" to support their strategies.

 

[yip1997]

Quote from commiebat:

EDIT: To yip1997, there is an option play for every outlook on a particular stock. For example, if I know direction but not timing, I can make a bundle on writing against that direction. If the stock will move up, but you don't know when, you can write puts against it till it finally moves.

That is true. If you are not good at timing. Selling options might work for you as I mentioned in my last paragraph. Buying stocks will work for you too.

I have nothing against selling options. I am mainly a premium seller.

 

[IluvVol]

Quote from yip1997:

Even 100% of options expire worthless, it means nothing. You might not make money selling options. Why? Most option sellers take a loss and cover their risky positions before expiration.

For example, I sold SPX 1550 call early this month, now SPX is 1556. If I hold the contract, it will be exercised at expiration. But I am not so stupid to hold the contract, I have covered it at a loss long ago. So CBOE will report that 100% open contracts expire worthless.

Don't use any newsletters or follow any traders who use "90% of the options expire worthless" to support their strategies.

I am not positive what you say is true. I dont trade US markets so I dont know how CBOE handles open contracts. But if you cover your short and some long covers their long by selling it to you then the open contract should be reduced and should not be reported as having ever expired. That sounds the most logical to me but please correct if I am wrong. Isnt it the same as with futures?

 

[atticus]

The 90% statistic [more than?] is simply absurd. For every OTM call [put] there is an ITM put [call]. The stat is only relevant w.r.t. the ATM strike, if pinned.

 

[yip1997]

Quote from IluvVol:

But if you cover your short and some long covers their long by selling it to you then the open contract should be reduced and should not be reported as having ever expired.

That is right.

Let me make up a story.
Suppose two weeks ago, I sold 10 open contracts of SPX 1550 for a credit of $3.0 and sold 10 contracts of SPX 1500 put for a credit of $2.00. Two days ago, I covered my SPX 1550 call at $10.00.

CBOE will find 10 contracts of SPX 1500 Put at expiration, and it will expire worthless, and have 0 contracts of SPX 1550 call. So it will report that all options expire worthless.

Does it mean I make money? No! When I covered my call options, I took a loss of $700 for SPX 1550 call.

 

[yip1997]

There are many newsletters and many CTAs selling the idea of premium selling. It doesn't mean that the strategy gives you a better expectancy. In the long run, they are pretty much the same.

 

[crgarcia]

Buy calls

With at least 60 days left until expiration, so time decay won't hurt you much.

About 10:1 leverage!

 

[lindq]

Quote from rebilly7:

New to trading, what is the best strategy with Options- to buy or to sell

Neither. If you are new to trading, you shouldn't be looking at options at all.

 

[panzerman]

Quote from MTE:

Not true! The probabilities may be better, but the risk/reward is worse.

Of course Payoff = Probability*(Reward/Risk)

Therefore, seek to maximize the payoff, and not just a high probability trade, or a favorable reward/risk ratio.