Yeah you sound like real pro...
good luck selling your options , you may want to sell the house to cover your margin first ( based on your understanding of the 85% worthless).
Do most option writers hedge thier writes, or do you just take a chance?
- Thread starter rabmanducky
- Start date
Yeah you sound like real pro...
good luck selling your options , you may want to sell the house to cover your margin first ( based on your understanding of the 85% worthless).
Where is the evidence for the claim that "85% of options expire worthless"?
I for one do not believe that to be true at all.
One study in TASC by options guru Lawrence Macmillan pegged it at around 50%.
85% of options that are held to expiry may expire worthless, but that's not the same as 85% of all options that exist during the life of the contract.
Here's a simple example. Suppose, during the life of an option 100,000 contracts are open, and subsequently 60,000 are offset (i.e. closed out prior to expiry). That leaves 40,000. Out of those 40,000, 35,000 contracts may expire worthless, which means that 87.5% (35,000/40,000) of options that were held to expiry have expired worthless. However, those same 35,000 are only 35% (35,000/100,000) of the total number of contracts that have existed throughout the life of the option.
In other words, it is completely misleading to state that 85% or whatever of options expire worthless so you should write options rather than buy them. Taken at face value writing is neither better nor worse than buying. Options are priced at zero expectancy, which translates into negative expectancy for retail traders because of bid-ask spread and commissions.
Here's a simple example. Suppose, during the life of an option 100,000 contracts are open, and subsequently 60,000 are offset (i.e. closed out prior to expiry). That leaves 40,000. Out of those 40,000, 35,000 contracts may expire worthless, which means that 87.5% (35,000/40,000) of options that were held to expiry have expired worthless. However, those same 35,000 are only 35% (35,000/100,000) of the total number of contracts that have existed throughout the life of the option.
In other words, it is completely misleading to state that 85% or whatever of options expire worthless so you should write options rather than buy them. Taken at face value writing is neither better nor worse than buying. Options are priced at zero expectancy, which translates into negative expectancy for retail traders because of bid-ask spread and commissions.
FaderTrader you have asked the "holy grail" question. The problem of selling the option in a high vol environment is directional risk...I assume you have read both McMillian and Natenberg to get an understanding of volatility. However there is no substitute to trading in different volatility environments. I haven't heard of a book with a step by step approach on how to trade in high vs low. Probably because there are other greeks that come into play which need to be managed. I know what has worked for me was doing calendars in lower vol environments (Jan-Mar) and selling straddles (short term) in high vol (late Apr/May/Jun). The truth is we haven't seen vol's this high for a number of years. Other strategies that haven't worked in low vols might be good now such as backspreading. I think in McMillian's book "Options as a strategic Inv" he does have a list of strategies and the complementary environments you use them in. YOUR (and MY) task is to identify the stock/index which we think will match up
Good Luck!Thank you for the explanation.
I was under the assumption that no matter how OTM I am, the same margin requirements would apply. But obviously that's not the case and I see it now.
Still a bit confused though, but will have to clear it up in my head before I ask the question...
I was under the assumption that no matter how OTM I am, the same margin requirements would apply. But obviously that's not the case and I see it now.
Still a bit confused though, but will have to clear it up in my head before I ask the question...
While I cannot speak with any authority about stock option or retail traders, I can say that most futures option market makers will experience something similar to the following:
1) If a MM is long calls or put - as soon as the same strike put or call is trading cab for a couple days, the long is exercised. This is usually not for margin reasons but because interest is collected after your net short premium exceeds $100k. (Some houses pay interest when you simply have a positive value).
2) Only about 20% of a MM's equivalent short positions are exercised.
3) Slightly more than 60% of a MM's shorts will expire with some value. Note: this is not to say the trades were profitable, only that the options do not expire worthless.
I am consistently surprised to see that 80% (90%, 95%) of all options expire worthless statement. If the percentage of worthless options even approached 80% it would necessarily mean the vast majority of the trade occurred in deep OTM strikes. I think most people would agree this is not the case.