Buying options for a living

[ironchef]

Well, you might have a positive expectation on a rare event but you need to keep the investors money for that event to arrive.

For a private trader, where your risk horizon and tolerances are not dictated by the management, there is no reason to restrict yourself to that modus operandi. You should think in relative value terms most of the time anyways.

As a retail, I don't have to worry about OPM and my risk horizon is flexible.

A different point: I find relative value so hard to determine when I tried to trade combinations instead of single/directional. A lot easier for me to "guess" if the underlying is going up or down. The odds are 50/50 with perhaps a slight up bias these days in a bull market.

 

[ironchef]

Today, option dealers efficiently price their options in accordance with their models, so there will not be any option price inefficiency in the market place if you take this view.

BUT, the inefficiency is in the fact that the entire model doesn't properly take into account tail risk, and can be argued that it underprices large deviations(which do occur; rarely). They tried to take better account of tail option pricing with the volatility smile and other methods which came about after the 1987 Black Monday crash; this is when volatility was assumed to be constant.
Amahrix

Since the professionals, MMs and fund managers all know that B-S and normal distribution underprice tail risks, they can always price it in with enough "smiles" and "Skews". Why do you think they still "underpriced the tails"?

I am not arguing with you, I am retail. Also, why the no arbitrage principle not priced in this tail risk?

 

[smallfil]

No, I NEVER let an option position expire worthless. If the set up does not work the next day I am out. That said anyone who invests in options has to understand that it is possible to lose the entire amount invested in the event of something catastrophic that might happen overnight. I have never experienced that but that is why it is necessary to keep 80% safe at all times. A 20% loss can be recovered easily but a 100% loss not so much.

The diversification is important as well. A catastrophic event might mean a total loss in SPY but a windfall in USO should the setups have you with a position in both.

I do not usually have the full 20% committed to options at any one time but my rules do permit it. The other 80% sits in the brokerage account as available funds.

You should save any residual value. Do not really believe the BS that most options expire worthless. Most options traders buying calls or put options close out trades that do not work and save the residual option values! They do not wait till all the premium is gone! Small losses are fine because once, you get a winning trade, you can make a lot more monies to wipe out those small losses all at once!

 

[Illini Trader]

so you ignore all overnight data?

i would think fills wold be awful near the close?

I use daily candlestick charts that end the 24 hour day at the NY Close so all overnight price action is included in that daily bar. Yes, I do want to purchase my option very close to the end of the trading session. If I entered at noon, the daily signal bar could look very different than it does at the close.

 

[rwnomad]

I tend to like long options as a short term rental. A few days to ride a trend. I view them like staying in a hotel as opposed to renting an apartment. Common wisdom says most options expire worthless, so I almost never hold to expiration. I take what I can get and get out. I also sell losers before they approach zero value.