How legit is options selling?

[sle]

What if we consult AQR

It's marketing material so it requires some amount of NaCl

 

[sle]

Don't insurance companies also use re-insurance companies to reduce risk even further?

Well, somebody is left holding the risk, eventually. For this discussion it's not important if that is going to be the insurance company itself or a re-insurance entity.

 

[qlai]

For this discussion it's not important if that is going to be the insurance company itself or a re-insurance entity.

Well my point is that while it's a stretch to compare retail account with insurance company, it's ridiculous to compare it to re-insurance company.

 

[nooby_mcnoob]

So here is an example where it would have been profitable over the last year to sell vol (darker colour is implied vol + 30 days, lighter is realized vol (20 day MA):

I'm sure at some point that will change to be somewhere else but it seems like these opportunities continue to exist, perhaps in non-mainstream equities.

In any case, I absolutely hate stocks. Anyone trade FX options?

 

[guru]

This looks like what High Volatility Put Write ETF (HVPW) was trying to accomplish, but it closed down. They were selling puts (also equivalent to selling covered calls) at highest IV, on 20 or more underlinings I think.

Also, since you’re not discussing a riskless strategy, but using some arbitrary entry and exit criteria then you’re really getting into regular trading. And in such case I’d first come up with a mildly profitable or at least safe strategy/algo on the underlining, then try to enhance results through options. And without putting constraint on what options strategy may come up as optimal.

 

[nooby_mcnoob]

What would be a risk less strategy?

 

[guru]

What would be a risk less strategy?

Riskless arbitrage (vs non-riskless arbitrage and trading strategies). I wrote a bot for riskless arbitrage but really it wasn’t doing more than market making - profiting off of bid/ask spreads across somewhat related options. This rarely works now but market makers like Citadel, Virtu and possibly Renaissance are masters of many riskless strategies.

Although maybe I should’ve say “since you’re not discussing an arbitrage but a trading strategy”.

 

[smallfil]

This is a common thing people think about options selling. There are a lot of problems however here.

First, a 1 SD movement is great if the tails of your distribution are small enough. This typically is not true in general. The probability of experiencing a large movement in price is much larger.

It is true IV is generally overstated in the price of the options leading up to binary events. However, this doesnt mean you can safely straddle into earnings. There are other risks involved.

Finally, the insurance analogy is flawed. It comes from the realization that selling options (tail risk) is basically what insurance companies are doing. If you sell enough insurance to enough healthy people your overall risk is small. Its that one guy who has a quadruple bypass and brain surgery two-for-one special at the hospital after buying his new car that bankrupts you.

In the stock market the amount of "people" having quadruple bypass and brain surgery two for one specials is significantly higher than the human case. More to the point (and most importantly imo) is that as an insurance company you can reinvest your premiums in order to mitigate some of your tail risk. The money you make on premiums sitting there is basically the "free" capital you are thinking of when insurance companies make money. You can't do that in options.

I like trading options. It's fun. Not as much fun as futures, but it's a mathematically satisfying problem. Don't be swooned by the optionsalpha/tastytrade/etc "sell options for easy profit" trash. It can be done, but it is not nearly as easy as it looks. If it was, Tom Sosnoff's entire staff wouldn't be tits up on shorting puts.

What I really want to know is of all the people who actually trade the stockmarket and are retail traders, how many sell options for premium and make monies doing so? Now, the flip side, how many other retail traders who sell options for premium lose monies? I would guess you would need an algorithm to consistently, make monies selling option premium. And the possibility of huge number of adverse moves causing you huge losses is there as well! I will place myself on the ones who lost monies trying to sell options premium. My positions was hedged too since, I used options spreads.

 

[nooby_mcnoob]

What I really want to know is of all the people who actually trade the stockmarket and are retail traders, how many sell options for premium and make monies doing so? Now, the flip side, how many other retail traders who sell options for premium lose monies? I would guess you would need an algorithm to consistently, make monies selling option premium. And the possibility of huge number of adverse moves causing you huge losses is there as well! I will place myself on the ones who lost monies trying to sell options premium. My positions was hedged too since, I used options spreads.

Why do you think you lost money overall?

 

[smallfil]

Why do you think you lost money overall?

The trades did not work out? When I got into those trades, I was using ThinkorSwim with their probabilities. Those options I sold were way out of the monies and were supposedly 80% chance to end up out of the monies with me pocketing the small premiums of $200-$300 for 5 contracts. Instead, they ran up and cost me multiples of the premium collected. Out of 7 trades, only 1 ended up profitable. Take note too after paying commissions and the cost of hedging buying call options, that profit is even less! I am an options buyer nowadays and that is way better in terms of risk versus reward!