Very simple: Let's say you make $2K on each vertical spread that you sell. You have sold 5 vertical spreads and have made $10K, very good. A "rogue wave" hits, you get assigned, the spread between the short and the long leg is exactly 5, multiply that by 20 contracts that you did, $10K gone!! Boom!!! There you go. Profit back to $0!!! If you only 0.5% risk per trade, you are not going to make much money, only 0.5% return. And when the gamma starts accelerating, you are not going to be facing just 1% slippage, the bid/ask spread will widen as well as the spread between the strikes between the short and the long legs so you end up not able to sell the long legs as much as to compensate the losses from buying back the short leg. That is if you are hedged in the form of a spread. If you sold naked, then you just die like James Cordier.
How legit is options selling?
- Thread starter nooby_mcnoob
- Start date
Very simple: Let's say you make $2K on each vertical spread that you sell. You have sold 5 vertical spreads and have made $10K, very good. A "rogue wave" hits, you get assigned, the spread between the short and the long leg is exactly 5, multiply that by 20 contracts that you did, $10K gone!! Boom!!! There you go. Profit back to $0!!! If you only 0.5% risk per trade, you are not going to make much money, only 0.5% return. And when the gamma starts accelerating, you are not going to be facing just 1% slippage, the bid/ask spread will widen as well as the spread between the strikes between the short and the long legs so you end up not able to sell the long legs as much as to compensate the losses from buying back the short leg. That is if you are hedged in the form of a spread. If you sold naked, then you just die like James Cordier.
In my experience as a professional market maker, I would be extremely confident in assuming 90%> of market making firms are net short vega. If options selling was not profitable firms/traders/myself would cease to exist and liquidity would vanish leaving all of you the inability to purchase options. Being short vega takes an esoteric approach to the market, not directional. If you have convinced yourself selling options is an unprofitable strategy, I will be here to tell you flat out, that you are wrong.
"But what about optionsellers.com?" Those are fucking amateurs, plain and simple. They; have no understanding of risk, had no skin in the game, employed the cheapest, most amateur, laughable strategy known to junior/experienced option traders, also greedy.
"But what about optionsellers.com?" Those are fucking amateurs, plain and simple. They; have no understanding of risk, had no skin in the game, employed the cheapest, most amateur, laughable strategy known to junior/experienced option traders, also greedy.
Perhaps not, but it is just a general caution to anybody that takes option touts and "experts" advice leading to over-leaverage. Not respecting risk and selling too many spreads has crashed many accounts. Not suggesting you are doing this. Good trading to all.
7 trades is so small. I ran a simple simulation which shows that it is possible that in a world where 10,000 of you try 7 trades, one of them will end up with 6 losses initially. Now, do you think over the last year, 10,000 people tried 7 option trades? Probably. So you were possibly unlucky. This obviously assumes that your 80% probability was correct and it wasn't worse.
I'm a slow-but-steady kind of guy. I like to build income streams, not homeruns. So 0.5% returns on a monthly basis that I can reasonably scale is fine for me.
Still won't negate the fact that one day all of those 0.5% returns will be wiped out in one big move. You make 0.5% return each time for 5 times, so you have accumulated 0.5% X 5 = 2.5% return. One day a 5% move will wipe out all of the 2.5% return that you have made and then some. Same thing just on a smaller scale. You are back to square one and with potentially more losses than when you started. This is the problem with options. There is not one option out there that overcompensates for either the assignment risk or movement risk in its premiums unless you arbitrage.
How do you reckon? Using your own example, I only lose the profit on a single trade. But I'm talking about making many many many trades per month, each risking very little. So if any one of them goes bad, I'm OK. I still don't hear how ONE trade can wipe out profits from ANOTHER trade ASIDE from the defined risk I'm already taking.
You risk little but you also make little and that little profit and all the little profits that you made can get wiped out by ONE big loss simply because the speed of acceleration/de-acceleration of option prices not just the speed but acceleration of it does not stay constant but you are not being compensated for the change in the acceleration when it's in your favour but pay dearly when it's not. I suggest you finish reading my first post responding to you. I apologize for it being bit too long but I explained the risk clearly why selling options is not that worth it regardless on which scale and how small or slow or steady you make the returns to be.
Good luck!
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That is the thing. If I were just outright buying puts and calls, I probably, will lose 4 times out of 7 and still end up profitable with the 3 winning trades. It is a poor use of capital to risk too much to earn a little. I would rather risk a fixed limited amount on a worst case scenario at that with the chance to make multiples of the amount in profit. Way better in terms of risk versus reward. With rewards for buying calls and puts way, way larger. Sometimes 5-10 times your risked capital. More often 2-4 times your capital.