Do Option Sellers Have a Trading Edge?

[xelite777]

...it really is giving them your money and saying you understand the risks.

Yeah, sure

And speaking of Ameritrade and options trading, take a look at this post...
https://answers.yahoo.com/question/index?qid=20110819153346AA3pFx1

From the webpage:
" The naked stuff you have to have the net worth and the experience to prove that you know what you are doing."

"The nitty-gritty is that you have to be "wealthy" and experienced enough to qualify for margin exposure to be cleared for naked options."


Still thinking I am making this stuff up?

 

[jerry2dt]

yeah the IV ranking is bullcrap.

For example, last year was a fantastic year to be short vol despite VIX being super-low. That's the nature of contango. I'd rather be shorting vol when it's low than when it's high, because if it's high; it's often so for a reason. If it's low, markets are calm and one can steadily collect the premium. When vol is high it tends to be erratic and often go even higher. There's something called vol clustering or whatever that backs this up...(high vol is usually followed by high vol, whilst low is followed by low vol)

The time NOT to be short Vol is the day just before earnings when it is usually at it's high for the quarter. What happens then is called a "Vol Crush" which not only drops the Vol in half very often but sometimes send prices either way by 2 SD's. Some folks who really know what they're doing can make a killing in a few hours, but I'm not one of them... If the vol gets crushed but price doesn't move much the shorts make out, but to me it's too much like gambling. Vol always reverts to the mean so I like IV above the 60% percentile to sell options, and you also have our friend Theta in cahoots. To me, Theta is simply the risk premium for taking the risk, and it is a wonderful thing. Usually. The higher the IV the higher Theta. Most of the time.

BTW, pls be aware VIX is just a measure of SPX but stocks/options may not agree and have their very own IV... This confused the crap out of me a few years ago. No more.

Happy Trading,

Jerry

 

[paladinhgwt]

Well good for you, but how many applications were rejected during that same time, care to tell us about it?

I was approved the first time. Here it is by the way. https://www.google.com/url?sa=t&sou...l5cw1os-trkWmsemQ&sig2=O4KGgNjoU3ULHG2d8Aq6Jw

 

[xelite777]

I was approved the first time. Here it is by the way. https://www.google.com/url?sa=t&sou...l5cw1os-trkWmsemQ&sig2=O4KGgNjoU3ULHG2d8Aq6Jw

You were upgrading your options privileges, that means you already had an (apparently good) trading history with them.

 

[butterfacetrader]

You don't need to be very sophisticated to be selling naked puts. This is pretty basic. Just leave some margin room in case IV goes up for whatever reason. You know your max loss at expiration.

Selling naked calls is no more risky than shorting stock. So, if a client is sophisticated enough to short stocks (i.e. know they can theoretically be exposed to unlimited loss), then they should be allowed to sell calls naked also (+ having some understanding of basics about options pricing).

 

[TskTsk]

The time NOT to be short Vol is the day just before earnings when it is usually at it's high for the quarter. What happens then is called a "Vol Crush" which not only drops the Vol in half very often but sometimes send prices either way by 2 SD's. Some folks who really know what they're doing can make a killing in a few hours, but I'm not one of them... If the vol gets crushed but price doesn't move much the shorts make out, but to me it's too much like gambling. Vol always reverts to the mean so I like IV above the 60% percentile to sell options, and you also have our friend Theta in cahoots. To me, Theta is simply the risk premium for taking the risk, and it is a wonderful thing. Usually. The higher the IV the higher Theta. Most of the time.

BTW, pls be aware VIX is just a measure of SPX but stocks/options may not agree and have their very own IV... This confused the crap out of me a few years ago. No more.

Happy Trading,

Jerry

Vol tends to cluster. There's a paper somewhere showing the market outperforms when vol is low, as do premium selling strategies. When it's high (VIX is in backwardation) it's usually a terrible time to sell vol because spikes and instability tend to be followed by more spikes and instability.

For single stocks as well, those with a flatter smile tend to outperform. If not, short vol on biotech would be a bargain. We all know it's not.

 

[scr12]

http://i58.tinypic.com/fmrre9.png

This is from GMO white paper "Rethinking risk: what the beta puzzle tells us about investing"

One can also read exceptional book by Antti Ilmanen of AQR management "Expected Returns". He has good section about Vola selling in that book.

http://www.amazon.com/Expected-Retu...d=1400073778&sr=8-1&keywords=expected+returns

 

[Martinghoul]

Vol tends to cluster. There's a paper somewhere showing the market outperforms when vol is low, as do premium selling strategies. When it's high (VIX is in backwardation) it's usually a terrible time to sell vol because spikes and instability tend to be followed by more spikes and instability.

For single stocks as well, those with a flatter smile tend to outperform. If not, short vol on biotech would be a bargain. We all know it's not.

This is generally correct and is a feature of many mkts...

 

[luisHK]

Unfortunately it's not that easy.

You cannot simply sign a document that says you understand the risk of trading options and start selling naked calls (or other similar unlimited-risk positions) by tomorrow morning, not going to happen.

It is that simple. Have heard ( more like seen actually, but I don't want to embarass anyone ) brokerage salespeople who show their customers how to reply saying basically "it doesn't matter if it's not true, just answer like this and your account wil be aproved for most products"

 

[sle]

...

What you are saying is a general "feature" of risk premium - the cheaper the convexity in absolute sense, the more relatively rich it is. Something to keep in mind.