Thanks. Did you only take 7 trades before you decided to stop? The whole thing with probabilities is that you have to have a large number of events before you get the expected distribution. I would probably have to have at least 50 trades under my belt before I would look at the % and whether they matched my expectations.
How legit is options selling?
- Thread starter nooby_mcnoob
- Start date
lol the vol in the Euro is like 5%. You'll be looking for a job if you short vol in the FX Majors.
Yep. 7 trades is enough for me. I lost a couple of thousand in the process. If I cannot show a profit or breakeven, I figure that it is a waste of monies to keep going down that route. I was already buying calls and puts at the time. Figured I would sell calls for premium. Seemed easy enough to do aside from the probabilities of 80% in my favor. Buying calls and puts, I probably, would have 40% winners per my stats of hundreds of trades so, maybe, 3 winners and 4 losers. Difference is the winners will be way larger than the losers and so, show a profit.
Wait you do know that the .8 probability shown to you doesn't give you positive expected returns right? The payoff has been chopped so that your expected is 0, not incl commissions and spreads. You need some sort of prediction to generate +ve alpha.
Loss could be more than everything that you have made. The problem with option selling is not just the information asymmetry or the tail risk, it's the inability of cutting losses when you are wrong, aka caught in a "rogue wave" due to not just an increasing gamma but an acceleratingly increasing gamma (gamma doesn't just increase it increases faster) but when you are right, you are only getting compensated by the previous gamma and totally cut off by the potential increase in profit by the accelerating gamma. When you are selling options, the premium is only compensating for the CURRENT gamma at the time when you sell the option but when a "rogue wave hits, if you are on the right side of the market, the market just takes off from you and you are totally cut off from the additional profit that is available from the market because all of the option prices are higher now adjusted by the accelerating gamma and you run the risk of buying at the top because if the underlying goes the other way, the gamma accelerates in the opposite direction then you will lose money on the long option now potentially turning your originally winning shorts into a potential loss but when you are on the wrong side of the market, then you either have to pay double or triple to buy back the short leg to cut your losses because the short leg option price has now been quickly adjusted for the new gamma which is 2X or 3X higher than the gamma that the premiums compensated you for or face assignment which may or may not be offset by the hedging long leg if the underlying price just happens to be ATM with the hedging long leg. Either way, you lose more than what you've earned.
Selling options may look to be a way to earn income but you ALWAYS earn less than what you can potentially lose, ALWAYS because of this increasing and forever adjusting gamma and the more that you sell, the more chance that you will lose. If you sell OTM, then you earn peanuts and when the "rogue wave" hits, if you are hedged, you get creamed by the assignment and when you are not hedged, you become bankrupt like James Cordier because the peanuts you earn is never enough to compensate the losses. When you sell ATM, you earn more peanuts so you can offset the losses from assignment better but you lose more often if you are hedged and if you are not hedged, you become bankrupt like James Cordier again and you become James Cordier faster and more often. If you sell ITM, your loss would be much smaller because now you are actually on the tail risk now riding on the "rogue wave" itself but you will now ALWAYS lose with only a small chance of you making a profit because as strong as the "rogue wave" hits, it actually doesn't happen often, that's why it's called a tail risk. It's like life. When you are doing the right thing, you are rewarded with peanuts, earning a measly income but when you do something wrong, you get sent to the electric chair. And the longer that you live, the more chances that you will do something wrong. You don't do wrong things all the time but this ONE time that you did something wrong inadvertently or being at the wrong place at the wrong time, or whatever you get sent to the electric chair. But if you always do wrong things aka selling ITM, then you are always in jail not really dying but always locked up and you only get this one small chance that you might be able to escape and live forever on a paradise island that has no extradition treaty with any country.
I do not understand how you can possibly lose more than everything you have ever made in a structure like below, if you can find high probability setups. OK I understand, assignment is a risk here but even then, if you only have 0.5% at risk per trade, maybe with slippage you lose 1%. Is that really so scary? The only circumstance I can see this being a real problem is:
1) Your entire portfolio is full of put/call spreads
2) The entire market takes a nosedive/rips higher such that every single short put is now being assigned when the option expires (and all of them are expiring on the same day)
3) The market is nosediving/ripping so hard that your broker auto liquidates every single position and then charges you a fee for their inconvenience
OR, same thing, but now every single equity you have is now declaring a dividend and every single ITM put/call you sold is being exercised to catch the extra dividend.
Could it happen? Yes. I don't see how that is a normal course of business though. This means to me that I'm 100% missing something, so please tell me how being assigned on a contract or a series of contracts can lead to the loss of everything you have made in every trade to that point.
I followed this guy when he first started: http://www.terrystips.com/
Always seemed like he greatly understated the risks. Then this happened:
https://www.leagle.com/decision/2006935409fsupp2d5261887
Somehow he is still in business. Will his followers be "Cordier-ed" again? Who knows...
Always seemed like he greatly understated the risks. Then this happened:
https://www.leagle.com/decision/2006935409fsupp2d5261887
Somehow he is still in business. Will his followers be "Cordier-ed" again? Who knows...
Nothing is guaranteed in the stockmarket but, considering the 80% probability, I was expecting more winning trades out of those 7 trades. Instead, most of them, 6 trades turned out to be losers. These are short term options too like the current month. However, once the stock blows thru both calls including your hedge, you know you are staring at huge losses. Way more than the premiums you collected! You use the trend of the stock to forecast where you expect the stock to trade during the time period you sold. At the time I placed the trade, I believed I had an edge in the trade. Of course, I did not count the commissions and the slippage which further reduced the actual premiums collected if you deduct those!
Terry's Tips' website claims that its "10K" auto-trading strategy will yield substantial profits in most trading markets; will produce more than 100% (annualized) every month if the stock stays flat, goes up by any amount, or falls by less than 5%; and that this strategy works best with the Nasdaq 100 tracking stock for a variety of reasons
That's not even close to what I'm talking about.