Buying Options w/High Implied Volatility, Not Good. But What If...

[forex-forex]

Quote from chrismontez:


But let's think like pros here with big accounts. We know if we sell a call, we will make $
1. if the underlying stays flat,
2. goes up a little,
3. goes down a little
4. goes down alot.
We only lose $ if
5. the underlying goes up alot.
So the smart move for a long term trader is to avoid the one situation (#5 calls with high IV) ) that has the most chance of nailing us and put our $ into the situations that make us $ 4 out of 5 times.

Problem is that all the profits with 1 through 4 can get wiped out with 5. If the stock has low IV - and low option premiums - then one bad trade could wipe out the profits from 10+ good trades. Looking at the 1 year chart most stocks do have that big one day jump after months of trading flat.

So selling options with low or high IV carry the same risk.

 

[panzerman]

Quote from forex-forex:

Problem is that all the profits with 1 through 4 can get wiped out with 5. If the stock has low IV - and low option premiums - then one bad trade could wipe out the profits from 10+ good trades. Looking at the 1 year chart most stocks do have that big one day jump after months of trading flat.

So selling options with low or high IV carry the same risk.

Yep, haven't seen a Taleb post lately, but what you're saying is all about Black Swans.

 

[MajorUrsa]

Quote from wtfomdecay:

this nonsense of selling the meat, and all really will bite you more often than my way. those who lose in my style, trade too many contracts, and do not manage the trying times properly, just as any insurance company that survives does it.

This remark intrigues me. By 'meat' are you refering to the discussion that it is better/worse to short ATM straddles that OTM strangles? Could you explain your view somewhat? Is it just a feeling, how do you compare?

 

[wtfomdecay]

Quote from MajorUrsa:

This remark intrigues me. By 'meat' are you referring to the discussion that it is better/worse to short ATM straddles that OTM strangles? Could you explain your view somewhat? Is it just a feeling, how do you compare?

right on. yes, this question has been done so many times that i am sure no one wants to hear it again. my particular inclination is selling very otm index options. i have done straddles, ctm shorts, ctm spreads, etc. i can manage those positions well as i do have the aptitude , experience, and contacts to work these; but i avoid those trades. i simply prefer the 10% otm stuff. i can sell those, leg into ctm options long, and move those shorts lower
( to 16% or more from the original underlying price) before taking a loss. one of my sayings is,"if you do not want to get mugged, do not go into that neighborhood." i respect those who are adamant about their view over mine; but i ask them, if they could hold back from overleveraging, wouldn't they potentially enjoy nice returns?

 

[stupididiot]

Quote from chrismontez:

I really don't have enough historical info one way or another to make an intelligent comment.

http://finance.yahoo.com/q/hp?s=^VIX

http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=2&c=1990&d=10&e=11&f=2007&g=d

There you go. Now you have the data. Please report back to us after you test it.

 

[commiebat]

Quote from ig0r:

Retail traders shouldn't be trading options in the first place; I somehow doubt the majority are using them for their real purpose (hedging)

Wow, condescending.

How many people do you think are using common shares for their real purpose, which is having a management stake in a business?

Options are little insurance policies. The long side is hedging, and the short side is selling a risk he thinks is not likely to occur. Just like in real life, when you buy fire insurance on your house to hedge against a large loss, and the insurance company is trying to make money by playing the odds that your house doesn't burn down.

Anyway, so what if retail traders aren't delta-hedging enough for you? These things are a financial instrument like any other, and people will try to game them for profit, the same way people flip 30-year bonds on an interest rate play, when the original intent was probably for someone to sit on them till maturity.

 

[ig0r]

Quote from commiebat:

Wow, condescending.

How many people do you think are using common shares for their real purpose, which is having a management stake in a business?

Options are little insurance policies. The long side is hedging, and the short side is selling a risk he thinks is not likely to occur. Just like in real life, when you buy fire insurance on your house to hedge against a large loss, and the insurance company is trying to make money by playing the odds that your house doesn't burn down.

Anyway, so what if retail traders aren't delta-hedging enough for you? These things are a financial instrument like any other, and people will try to game them for profit, the same way people flip 30-year bonds on an interest rate play, when the original intent was probably for someone to sit on them till maturity.

I'm not trying to be condescending, it's the sad truth. Try is the key word in your last sentence. Retail investors have no edge in derivatives, and derivatives certainly don't have the same investment potential as equity (they are zero-sum). In addition to increased transaction costs, I see no reason why any rational retail investor would touch derivatives other than for hedging.

 

[timbo]

Quote from ig0r:

Retail investors have no edge in derivatives, and derivatives certainly don't have the same investment potential as equity (they are zero-sum). In addition to increased transaction costs, I see no reason why any rational retail investor would touch derivatives other than for hedging.

A theo. edge isn't necessary for retail; it's not their business. Your one-dimensional replies make me yawn.

 

[El OchoCinco]

Quote from ig0r:

I'm not trying to be condescending, it's the sad truth. Try is the key word in your last sentence. Retail investors have no edge in derivatives, and derivatives certainly don't have the same investment potential as equity (they are zero-sum). In addition to increased transaction costs, I see no reason why any rational retail investor would touch derivatives other than for hedging.

Then you do not understand options real well. Options can be used to manage risk if used correctly. Options are like any other security, you have to understand them and know how to use them correctly, otherwise you will lose your money. Stocks are easier to understand for newbies and retail traders but it does not mean options are off limits. Just takes more understanding and effort.

Options are not for everybody for sure, but if used properly they can be quite profitable. If you think options have higher transaction costs then you are with the wrong broker. Zero-sum has nothing to do with whether a retail investor can make money in options just like an apparent lack of zero-sum does not guarantee profit in stock investing.

It is ok if you do not understand how options work, many retail traders and even professionals have no clue.

 

[iloveoptions]

Quote from panzerman:

What no one has conceded yet is that the most important factor in an options price is the absolute level of the underlying, and not volatility. In other words, if buy low IV or sell high IV, if you get the direction of the underlying wrong, it will be extremely hard to make money with options.

Escpecially true if you are a retail options trader, and use options for pure speculation


I hope you're not suggesting that retail traders start dynamically delta hedging their positions. They will lose so much money to spreads, slippage, and commission. Also you have to consider the possible expense of buying options software to track the delta of your position, and the time investment involved to do all the monitoring and trading.

You've got to be kidding!! I trade precisely what you think is impossible(dynamically delta hedging my positions), and on a retail level. Extremely hard to make money with buying options?? Now that's quite funny.