Quote from JohnGreen:
Absolutely fascinating discussion!
Here's my take. The famous poet John Donne once wrote a masterful poem that says, among other memorable phrases, "No man is an island, unto himself, alone..."
Human actions are amazing interdependent. Your actions influence everyone around you, and then their actions influence others, so that everything flows outward in concentric circles. What this means for the markets, is that people often seem to act in herds, and things that everyone assumes are independent aren't completely independent. When you discover where the correlations are, you can use them as indicators and predictors that sometimes take a little time to work their way through the markets. Hence, an edge in information flow can be used to advantage.
Secondly, since groups often operate as if they are dumb as posts, someone who thinks a little more clearly, or possibly in a contrarian manner at times can be wiser than the average guy. This does not mean that you have to be smarter. In fact, being smarter can have delusional effects at times (LTCM comes to mind here). Being humbler is always an advantage in the market!
Third, I have traded hundreds of index options. What may come as a surprise to rookie traders is that the price differentials between option series vary quite a lot, and often the skews are fairly substantial which lets you know the directional sentiment of the market in quantitative ways. It also means that just adopting one particular strategy designed for that particular skew may work very effectively if the market is conducive. In fact, many strategies can be implemented with minimal risk if the timing is right for them.
That said, no option strategy is completely risk free when originally implemented, and no one can predict individual stock or index behaviour with 100% accuracy. On the other hand, some may be able to exceed 50% (random)with regularity using some basic notions that apply to all time frames!
