How Profitable Is Writing Options

I

ironchef

I am posting this thread not to argue a position but to seek help.

I used to mechanically wrote call options to capture time decay and collect "insurance" premium (after watching videos online and reading books). Then I thought I could profit from selling call options when volatility was high compared to HV. Neither worked for me.

This chart captured some fallacies of my thinking then that selling options had an edge. If I sold options when IV was at 26.7%, much higher than HV, on Nov 7, I would have lost a ton, especially if I sold OTM and used margins.

I think the market is quite efficient so neither buying nor selling blindly has advantage. One needs knowledge and judgement to make money in trading options. I am still looking for my knowledge and judgement for writing winning options.

Comments are welcome especially if you think I am wrong or can point me to a better understanding. By the way for the period of the chart HV and IV averaged out to be about equal.

Cheers and happy Thanksgiving.

upload_2016-11-23_6-22-21.png
 
Take the premium received multilpy by number of expiries and then calculate an annual percentage of the stock price.
 
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Pekelo said:
You write calls after a rally, you write puts after a sell off. On the index, you would be writing calls right now...

Maybe your approach was too mechanic.
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Thanks. So I found out that selling mechanically generally did not work for me and selling when IV was high did not work for me either.

I tried that too but the issue there is timing: When to do it after a rally? About now or should I wait and if I wait, what trigger/signal should I use? By the way, I think I still lose money if I sell the week after Nov 9.....

Regards,
 
You could examine the returns of the various funds/indices which sell vol and see what return/Sharpe/drawdown/etc they've produced in the past. That may offer you some useful insights.
 
Martinghoul said:
You could examine the returns of the various funds/indices which sell vol and see what return/Sharpe/drawdown/etc they've produced in the past. That may offer you some useful insights.
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You raised another question for me: I read articles on the CBOE site about their funds/indices on writing calls/puts comparing results, Sharpe, Std Dev.... Here is one of their articles: https://www.cboe.com/micro/put/putwrite.pdf

What I don't quite understand regarding Sharpe, risks, etc. is if I were a long term investor, my buy and hold SPY returned slightly better than writing calls and slightly worst than put-write even though the Sharpe ratios for put and call writes were better and standard deviations lower. So why do I care about Sharpe Std Dev... and why go through the troubles of writing calls and puts for a fraction of a percentage in absolute returns if my time horizon is 20+ years?

Thanks for taking the trouble to educate me.
 
I think you've answered your own question here... Looking at the paper, it would seem that there's very little additional "juice" to be had from their systematic vol selling strategy.
 
ironchef said:
You raised another question for me: I read articles on the CBOE site about their funds/indices on writing calls/puts comparing results, Sharpe, Std Dev.... Here is one of their articles: https://www.cboe.com/micro/put/putwrite.pdf

What I don't quite understand regarding Sharpe, risks, etc. is if I were a long term investor, my buy and hold SPY returned slightly better than writing calls and slightly worst than put-write even though the Sharpe ratios for put and call writes were better and standard deviations lower. So why do I care about Sharpe Std Dev... and why go through the troubles of writing calls and puts for a fraction of a percentage in absolute returns if my time horizon is 20+ years?

Thanks for taking the trouble to educate me.
More...

The bxm doesn't include dividends you would receive on your long stock.
 
As an example, I would sell NVDA calls right now. The stock has just rallied from low 70s to mid 90s... It might still kick up to 100, but I don't expect to stay above that...
 
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