How legit is options selling?

[nooby_mcnoob]

Not saying that every option seller (retail or otherwise) is a loser or anything. It's the truth - less-sophisticated one-way flow like that is good for the sophisticated players, it creates opportunities that can be exploited. That sophistication can be in terms of time frames, cross-asset capabilities or ability to play more complex relative value games.

PS. As a more general note, in some markets this truth has been made pretty explicit. Why do you think market makers are willing to pay for the retail order flow?

I agree that there is obviously a "take money from the noobs" (no pun intended) strategy that is profitable. And I know it's good to think or feel that everyone else _is_ that way, but honestly, I would rather compete against good people. That's why I want to beat you

 

[taowave]

Here is my experience having been the head trader of equity derivatives at 2 major investment banks.If you run a short gamma book,it's not a question of if you blow up,it's simply when..

As I no longer trade OPM,I will only sell the notional that I am willing to own. Most of the time,I will do it on the indices,as I have learned that I get nauseous when a stock blows thru my short strikes,despite looking cheap on every financial metric known to man...

 

[ironchef]

Actually, a lot of one-way flow like this is a good thing. We need liquidity anyway we can find it

You are a buyer and not a seller?

 

[sle]

You are a buyer and not a seller?

I primarily think it terms of relative value (though I tend to have a longer vol bias). So if there are a lot of sellers of a particular type of risk (e.g. cheapening gamma or skew) it might create opportunities for me.

Here is my experience having been the head trader of equity derivatives at 2 major investment banks.If you run a short gamma book,it's not a question of if you blow up,it's simply when.

If you don't have juicy vig (coms/spread) coming in to pay for your theta (like a dealer desk does), running a perpetually-long gamma book is a recipe for bleeding out.

 

[ironchef]

Here is my experience having been the head trader of equity derivatives at 2 major investment banks.If you run a short gamma book,it's not a question of if you blow up,it's simply when..

As I no longer trade OPM,I will only sell the notional that I am willing to own. Most of the time,I will do it on the indices,as I have learned that I get nauseous when a stock blows thru my short strikes,despite looking cheap on every financial metric known to man...

So why do sophisticated professionals/hedge funds/investment banks keep doing it? And once "retired' and trade their own money do they still do it?

 

[sle]

I agree that there is obviously a "take money from the noobs" (no pun intended) strategy that is profitable.

It's not really that simple. Everyone is a "noob" in some sense - e.g. my futures trades are far less sophisticated that that of UHF players and probably from their perspective they "take money from the noobs" when trading with me. In part it's a matter of investment (technology, education etc) and in part it's a matter of what you are aiming for.

 

[taowave]

IB's do it because they accommodate their customers and they typically wind up short gamma/vega. The hedge funds I worked for did not appreciate tail risk,and the guys who are great directional traders rarely sell premium.They want to be paid when they are right.

One of my ex colleagues is probably the best option trader on the street,but he does not simply sell gamma/vega and delta hedge..I think that what we are talking about..

And like everything else,there are exceptions to the rule.

 

[taowave]

Agree 100%..... Its torture...

If you don't have juicy vig (coms/spread) coming in to pay for your theta (like a dealer desk does), running a perpetually-long gamma book is a recipe for bleeding out.

 

[ironchef]

IB's do it because they accommodate their customers and they typically wind up short gamma/vega. The hedge funds I worked for did not appreciate tail risk,and the guys who are great directional traders rarely sell premium.They want to be paid when they are right.

One of my ex colleagues is probably the best option trader on the street,but he does not simply sell gamma/vega and delta hedge..I think that what we are talking about..

And like everything else,there are exceptions to the rule.

Thank you for your response. Make sense to me.

 

[Option_Attack]

Present noob excepted, of course!

I agree that there is obviously a "take money from the noobs" (no pun intended) strategy that is profitable...