How Profitable Is Writing Options

[Trading Education Buyer]

All these discussions are useless , unless trading phsychology is included , in these discussions .

We all suffer from

1)Self sabotage
2)impatience
3)greed
4)emotions /emotional hijacking /amygdala hijackings
5)stress responses reactive trades
6)informations processing delusions
7)Need to be right
8)Trading phsychosis
9)other phsychological wiring flaws related to trading.
10)acceptance of losses /loss grieving etc
11)getting smart for own good
12)Dunning Kruger effect

 

[lawrence-lugar]

Writing/selling options for the relatively small instant premium collected is like betting on 95-99% of the numbers on the roulette wheel__/

Do you feel...Lucky...or you might step on a land mine `

 

[ironchef]

Writing/selling options for the relatively small instant premium collected is like betting on 95-99% of the numbers on the roulette wheel__/

Do you feel...Lucky...or you might step on a land mine `

Are there any fundamental difference between selling naked calls vs covered calls? I mean in terms of how you would manage the trade once it moves away from you, like the example I used when I sold BAC covered calls and naked calls and the stock popped $4 after Trump won the Presidency, went from $16 to $20 in a couple of weeks.

Why you should care about Sharpe (or whatever similar measure you want to use):

Volatility robs you of returns. I hope the below will print out legibly. Consider 2 methods, both with a mean return of 10%. The method that is more volatile has a lower cumulative return. You may not think $152 is that much less than $161, but multiply this out over more periods with more volatile returns, and it becomes real money.

If you are withdrawing from the portfolio, the situation becomes even more critical.


Year Return-Method A Cum. Return on $100 Return-Method B Cum. Return on $100
1 10 110 10 110
2 10 121 -10 99
3 10 133 20 119
4 10 146 -5 113
5 10 161 35 152

True, but they were looking at and comparing cum returns:

 

[Dolemite]

theta is not an edge

This is something every beginning option trader should read over and over.

 

[CBC]

I post that the MM post correct IV and that it all works out fairly in the end.

No advantage for buyers or sellers.

 

[drm7]

Euan Sinclair wrote an excellent book about trading options called Volatility Trading. The central premise of the book is - don't trade options unless you have a view on volatility. Otherwise you get the risk-free rate over time, minus transactions costs (and with a lot of volatility).

 

[thaitye]

The entire options game is a zero sum game. Actually I take that back, it is a negative sum game because of commissions and spread. The only true winner in the long run is the MM(casino). The question you should be asking is, how do you beat the dealer?

 

[Trading Education Buyer]

Zero-sum is a situation in game theory in which one person's gain is equivalent to another's loss, so the net change in wealth or benefit is zero. A zero-sum gamemay have as few as two players, or millions of participants.

Take a look at this support

No reason why you can not make money writing , with two months to expiry , below the support .

Dax

9900 put dec 29.5 to buy

Jan 9950 puts .... 89.2 to sell

Chances are it will go to <50 on expiry in or 3 weeks , probability trade.

potential profit 20.5 less costs to close


Your worst risk on this trade is , the price moves near the short option and option premium rises to 200.

Net potential risk is 130 , but probability is low.

You have to have some fundamental and technical bias to your trades.

 

[ironchef]

The entire options game is a zero sum game. Actually I take that back, it is a negative sum game because of commissions and spread. The only true winner in the long run is the MM(casino). The question you should be asking is, how do you beat the dealer?

It is not the MM I am trying to beat. It is someone else - the market. My point of reference is the SPX.

If the stock market is completely random like in a casino then I am doomed. However, there is an up bias trend, there are non random events (fat tails)... So, hope springs eternal.

In the casino, most games are random and you mostly play against the house and not one another. And even there, I bet you one can model a specific roulette table and determines its biases since it cannot be a perfect mechanical system.

In any case, I am intrigued by some of Trading Education Buyer's posts. I don't think he is crazy. He got me thinking....

Regards,

 

[ironchef]

Euan Sinclair wrote an excellent book about trading options called Volatility Trading. The central premise of the book is - don't trade options unless you have a view on volatility. Otherwise you get the risk-free rate over time, minus transactions costs (and with a lot of volatility).

For me it only works if I have a view of direction.