Which is why there are so many wonderful edges in options trading. In general, the more understood and the better the models, the less "play" for market inefficiency (AKA trading).
What do you mean by "arbitrary nature"?
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Do Option Sellers Have a Trading Edge?
- Thread starter xelite777
- Start date
Which is why there are so many wonderful edges in options trading. In general, the more understood and the better the models, the less "play" for market inefficiency (AKA trading).
What do you mean by "arbitrary nature"?
Which is why there are so many wonderful edges in options trading. In general, the more understood and the better the models, the less "play" for market inefficiency (AKA trading).
What do you mean by "arbitrary nature"?
Reminiscent of the TA propagators.
As others have said, selling OTM options naked is like picking up pennies in front of a freight train.
You can win 99% of the time and make pennys for every dollar people may take home betting directly on the underyling instead, but once in a while, one bad trade can take back all those and more.
Selling options naked OTM limits your gains, but you potentially have significant losses. So it is asymmetric P&L profile.
That said, selling naked options has its advantages too. You can pick price levels that are further out, allowing a margin of error and still make money.
E.g. you are originally bullish on AAPL anyway. You can either buy 100 shares outright, or you can sell a put naked 3% away from underlying at the time. If AAPL stays flat or goes up your gains are limited, no harm no foul. But, if AAPL tanks 20%, you will be down massively. However, had you purchased the 100 shares instead, you would also have been down massively like everyone else, and you wouldn't have collected a premium or be at a lower price of entry. So selling that OTM put was still beneficial, so long as it fits with your original thesis of that investment. In this case, it means you lost less overall than had you just purchased 100 shares.
While the statistics of options sellers winning percentage wise may be correct, it does not address the payout. If you factor in payout, its possible primarily options sellers don't actually gain that much over the long term, if at all, because it only takes one or two bad trades for the market to take back everything.
That said, its basically insurance. The insurance industry makes a lot of money every day of every year selling insurance premiums to everyone else who buys it. Rarely do people do claims so overall its been profitable for them.
Very well said. (but I am unclear .... does that freight train have a bulldozer on it or not????)
There is a huge difference between a big loss and a losing system (as I am sure you know). Who here says insurance is not viable, yet most say selling puts is not a viable strategy? However the TBTF banks have the government backing them up, and the governments have other governments backing them up, and they have the monetary system backing them up, and so on and so on .....
Yes folks .... it'sTurtles all the way down .... go back to sleep!
Reminiscent of the TA propagators.
I see, the models are arbitrary but the only 100% true model of the world, is that world itself. Yes.
Depends. There could be a bull dozer attached to it with spines too. For naked call selling, this is the case for sure. For put selling, its more conservative. The max loss you know ahead of time.Very well said. (but I am unclear .... does that freight train have a bulldozer on it or not????)
There is a huge difference between a big loss and a losing system (as I am sure you know). Who here says insurance is not viable, yet most say selling puts is not a viable strategy? However the TBTF banks have the government backing them up, and the governments have other governments backing them up, and they have the monetary system backing them up, and so on and so on .....
Yes folks .... it'sTurtles all the way down .... go back to sleep!
Selling options can be profitable. I think it is more conservative than straight up betting on underlying because of that margin of error where you pick and choose your strike price that is OTM. It also doesn't tie up capital right away. As long as it fits with your original bull/bear thesis.
So after your fancy analytical research, and you are bullish on XYZ, then one could just sell a put. Stock goes up stays flat or falls just a little, you win. If it drops hard and you get assigned shares, well, you were so dam bullish on it originally so time to sleep it off.
Selling naked calls is something else though since it carries unlimited risks. But if you were so certain about shorting TWTR anyway, selling those naked calls a few % higher than underlying price would have been profitable. And if TWTR gaps 20% higher instead, and then proceeds to go up another 50% on a short squeeze ... well you know what they say about shorting stock right....
Selling naked strangles made 30% on my account minus taxes last year even after getting steamrolled twice both for 10% on the acct. I believe writing (selling) contracts is no more or less than being an insurance agent, at least that's how I explain it to my friends. I think that over time, the premiums outweigh the bulldozer effect and directional risk.
One guy is all in on GLD and has been for a few years. I have begged and pleaded with him to buy insurance like a jan 15 put because the theta is cheap this far out, then roll it every couple months to keep theta cheap and allow for moves. He says he doesn't understand options and broker says stay away. Pathetic.
Laws of economics would seem to dictate that, like insurance cos., if it weren't long term profitable it would not exist in the marketplace.
Fire away, Nomex installed...
Best to all and happy trading.
Jerry
One guy is all in on GLD and has been for a few years. I have begged and pleaded with him to buy insurance like a jan 15 put because the theta is cheap this far out, then roll it every couple months to keep theta cheap and allow for moves. He says he doesn't understand options and broker says stay away. Pathetic.
Laws of economics would seem to dictate that, like insurance cos., if it weren't long term profitable it would not exist in the marketplace.
Fire away, Nomex installed...
Best to all and happy trading.
Jerry
I guess another facet between naked call or put selling.
More often than not, big cap stocks tend to fall faster than they rise, in general. So even though put selling carries limited liability and naked call selling carries unlimited risks, the likelihood of getting hit with a steam roller may actually be higher for put selling (just an observation and no stats to back this up).
This is different for small caps or growth stocks of course, where stocks can go up 100s of percentages in a short amount of time. So selling calls naked on those you can get steam rolled because they tend to gap UP instead.
More often than not, big cap stocks tend to fall faster than they rise, in general. So even though put selling carries limited liability and naked call selling carries unlimited risks, the likelihood of getting hit with a steam roller may actually be higher for put selling (just an observation and no stats to back this up).
This is different for small caps or growth stocks of course, where stocks can go up 100s of percentages in a short amount of time. So selling calls naked on those you can get steam rolled because they tend to gap UP instead.
I see, the models are arbitrary but the only 100% true model of the world, is that world itself. Yes.
Thank you. I think it's safe to assume we have a similar point of reference and countenance.
I think doing iron condors or selling put or call credit spreads are more on the conservative side because it limits losses on the steam rollers to a degree. But nobody likes to give back premium.Selling naked strangles made 30% on my account minus taxes last year even after getting steamrolled twice both for 10% on the acct. I believe writing (selling) contracts is no more or less than being an insurance agent, at least that's how I explain it to my friends. I think that over time, the premiums outweigh the bulldozer effect and directional risk.
One guy is all in on GLD and has been for a few years. I have begged and pleaded with him to buy insurance like a jan 15 put because the theta is cheap this far out, then roll it every couple months to keep theta cheap and allow for moves. He says he doesn't understand options and broker says stay away. Pathetic.
Laws of economics would seem to dictate that, like insurance cos., if it weren't long term profitable it would not exist in the marketplace.
Fire away, Nomex installed...
Best to all and happy trading.
Jerry
Its basically the karen supertrader strategy. Shes apparently been winning for a long time doing short strangles on the indexes. But if the steam roller kicks in, then who knows.
Selling naked strangles made 30% on my account minus taxes last year even after getting steamrolled twice both for 10% on the acct. I believe writing (selling) contracts is no more or less than being an insurance agent, at least that's how I explain it to my friends. I think that over time, the premiums outweigh the bulldozer effect and directional risk.
One guy is all in on GLD and has been for a few years. I have begged and pleaded with him to buy insurance like a jan 15 put because the theta is cheap this far out, then roll it every couple months to keep theta cheap and allow for moves. He says he doesn't understand options and broker says stay away. Pathetic.
Laws of economics would seem to dictate that, like insurance cos., if it weren't long term profitable it would not exist in the marketplace.
Fire away, Nomex installed...
Best to all and happy trading.
Jerry
Re Nomex - if your methodology works, it helps you disregard some of the idiot posters in these forums. There are many good hearted smart ones as well. Remember to honor those who taught you what you know ( in my case, most are dead now) and pay back what you owe. That is progress in some sense.
Interestingly enough, one can learn a lot by suffering some disagreement heat by asking Am I Sure/ How do I know? What do I believe? etc. Whether I am wrong and you tell me why, or I am right and you tell me why: either way I want you to tell me why, since I can choose my future and not my past. Presentation can send a second message to learn from. As MG says, this is one of the few true choices in speculation or life.
Re GLD: I made a lot of money in uranium stocks when they trended. A group of 10 fellows invited me to talk at their regular investment club meetings to explain why a new recommendation from a guru gapped and dropped on the open. (They knew me and considered me an "expert" to explain their losses. LOL) Each quarterly meeting started with a vote of buy sell and hold from each participant as a warmup to discussion and waiting for the late ones to arrive. I attended regularly until I was thrown out of the group by the fellow who originally invited me in. He later told me that some of the group found my views too negative (some of the others in the group also told me that it was that same fellow that invited me in who found me too negative - he should have reduced his positions immediately).
Interestingly enough the "vote" in the meeting where I lost my "job" was the only one that was 9 to 1 for buying more uraniums with both hands. I said that I had sold my positions and was now swing trading but waiting for a pullback to buy positions again. Judging by the expressions on the faces in the circle while I was speaking, I had done a bad thing by telling the truth. However, I did a worse thing by profiting in cash while they all lost their asses buying more on the dips.
My advice is to always ask others how they are doing and reporting your portfolio the same way. If they are losing, say you are losing, if they are winning say you are winning in the same stocks as them. For the most part, your trades are secret, unless you are trying to send a warning message.
Leaving that meeting, I was excited when it was 9 against 1 for I had had many similar examples in my life. Intuitively, I knew the likelihood was that I was correct in my uranium assessment. I moved on to something else when it came along, and in time the "loosers" were gone and a new batch of trading recruits appeared. It gets lonely at times as hundreds of traders disappear (trader half life). There is a moral here. Trade long enough and it will happen to you again and again -DO NOT FALL IN LOVE WITH YOUR MODEL EVER! If your mother's last wish is for you to buy a stock, tell her you will, but do your own research and make your decision on your own. (Sorry mom!)
Brokers do not promote options because they are rarely licensed to sell them, and they get more losing lawsuit settlements on options than stocks. People do not understand the true nature of options and the courts have held, neither do those who sell them. There is more money for brokers dipping in the stock pools!