How Profitable Is Writing Options

[Trading Education Buyer]

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?

Sell calendar spreads below major supports.

Or those who know their major supports , which rarely get broken permanently.

 

[Martinghoul]

The bxm doesn't include dividends you would receive on your long stock.

Yeah, obviously, it goes w/o saying that you need to compare total returns...

 

[Robert Morse]

Here is my take on buy-writes. I don't like them for myself. It requires me to pick a stock that I like enough to buy, above all others, that I expect to outperform other stocks and the indexes, yet be willing to cap my potential gains with selling calls that provide very little protection if I'm wrong,and the stock falls.

bob

 

[Trading Education Buyer]

Here is my take on buy-writes. I don't like them for myself. It requires me to pick a stock that I like enough to buy, above all others, that I expect to outperform other stocks and the indexes, yet be willing to cap my potential gains with selling calls that provide very little protection if I'm wrong,and the stock falls.

bob

Ever thought of writing out of the money calls longer period and lower put?This will give you good profit on upside.

 

[Robert Morse]

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).

I would agree if you add direction. You should have an opinion on the direction of the stock or the index and have a view on volatility to profit over the long run.

 

[Robert Morse]

The entire options game is a zero sum game.

I disagree with this statement unless you're including opportunity costs on every trade.

 

[ironchef]

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

drcha,

After running my own numbers last night, you are correct on both unless the return is cum return or annualized return instead of average.

If there is a draw down, regular withdrawal, volatility in the outcome is very bad for my wealth. I just ran a calculation and with drawdown a highly volatile situation will do a lot of damage to the outcome.

In a way, it says trading as a profession such that one needs to withdraw for living expenses is very hard to do whereas trading as a means to grow one's asset is a lot easier.

Thanks for the insights.

Regards,

 

[Pekelo]

Are there any fundamental difference between selling naked calls vs covered calls?

Sure. With CC you don't have to sweat it, when the stock starts to move up.

 

[ironchef]

Ever thought of writing out of the money calls longer period and lower put?This will give you good profit on upside.

You should read Maverick74's posts on this. It is a very dangerous game: Shorting OTM calls/puts can go bad on you fast due to the non linearity of gamma. It was what caused my losses on writing OTM BAC calls.

 

[ironchef]

Sure. With CC you don't have to sweat it, when the stock starts to move up.

Should I manage a CC different than a naked when the trade goes against me?