Is buying options a mugs game?

[Wheezooo]

Epicurious,
The funny thing is that is backwards. It is almost impossible to effectively price volatility in the short term (instantaneous volatility), but pricing long-term is easy. It always amazed me how an issue that has a historical volatility tends to adhere rather tightly to that volatility for the future. A fact that is useful to help build long term volatility structures.(which doesn't mean it will adhere, but I'm just saying it has a strong tendency to). Moreover, options models do not care about trends nor should they. It is about average daily price movement and hedging the gamma/theta relationship. Trends are meaningless to a professional options market maker.
And as an FYI. Once I retired as an options trader I never traded another option.
-Wheezooo

 

[ironchef]

Epicurious,
The funny thing is that is backwards. It is almost impossible to effectively price volatility in the short term (instantaneous volatility), but pricing long-term is easy. It always amazed me how an issue that has a historical volatility tends to adhere rather tightly to that volatility for the future. A fact that is useful to help build long term volatility structures.(which doesn't mean it will adhere, but I'm just saying it has a strong tendency to). Moreover, options models do not care about trends nor should they. It is about average daily price movement and hedging the gamma/theta relationship. Trends are meaningless to a professional options market maker.
And as an FYI. Once I retired as an options trader I never traded another option.
-Wheezooo

And as an FYI, I retired from my day job, I now only trade options.

 

[qlai]

Once I retired as an options trader I never traded another option.

Is that because you were a market maker and you no longer have the same access as you used to as professional?

Speaking as a professional options trader, my advice is to keep away from them like the plague (for speculation purposes).

Funny, a friend of mine, whose opinion I respect a lot and who is also in the industry, gave me the same advice. Said that I could not even imagine how efficient options are. What is your reason? Thank you for sharing your experience with us.

 

[Epicurus]

Go back to basics.

Calculate the trend of the security that you're analysing, and let that drive your timeframe to get optimum exposure with a single option.

Check my journal on here to see exactly this process repeated over the last few months for several securities. P&L is shown for each trade, too.

Hi Global. I don't think your response addresses my question, but I find your trading approach quite interesting.

I'm fairly accomplished at TA and can certainly idenify a trend and form a view as to possible extent and duration. Given that, I was contemplating whether any advantage exists with simple long options for trading longer duration trends than shorter ones.

Nevertheless, what you're highlighting is the success you are having with the type of analysis you are doing in selecting trades. It's a basic form of time or rather cycle analysis, combined with the range or effectively typical volitilty of the underlying.

I tend to combine multipleTA approaches which can generally be grouped under price and pattern. I use time analysis in certain select situations but haven't found a generally reliable suite of tools to enable use of time and cycles as a core approach. Very powerful if you can though so interesting to hear you're finding some success with that.

 

[Epicurus]

Epicurious,
The funny thing is that is backwards. It is almost impossible to effectively price volatility in the short term (instantaneous volatility), but pricing long-term is easy. It always amazed me how an issue that has a historical volatility tends to adhere rather tightly to that volatility for the future. A fact that is useful to help build long term volatility structures.(which doesn't mean it will adhere, but I'm just saying it has a strong tendency to). Moreover, options models do not care about trends nor should they. It is about average daily price movement and hedging the gamma/theta relationship. Trends are meaningless to a professional options market maker.
And as an FYI. Once I retired as an options trader I never traded another option.
-Wheezooo

Good comment Wheezoo re volatility, I learnt something there which is actually quite obvious.

But re your "Trends are meaningless to a professional options trader", in that comment seems to lie the secrets of success for a retailer. I care very much about trends and wish to use options to trade them. I think I need to understand what MMs are doing much better but if they're not betting against my view there must be opportunity in the trend.

 

[Wheezooo]

Is that because you were a market maker and you no longer have the same access as you used to as professional?

Funny, a friend of mine, whose opinion I respect a lot and who is also in the industry, gave me the same advice. Said that I could not even imagine how efficient options are. What is your reason? Thank you for sharing your experience with us.

The answer is inline with what your friend is telling you. They are so efficiently priced that it would be like spending time betting on a coin flip. I once dedicated 20 hours a day to only options and had unlimited resources to dedicate to it. Whereas I would never argue I have any advantage over anyone betting long or short. Trading options against me would have been a very very very bad idea. Beware of the people that say look at this performance over 5,10,20 trades. Statistics is about the law of large numbers, and with options the law of large numbers says over the long haul you will sacrifice what you must to cross the bid/offer spread. Reality is, if that were the final outcome you would be lucky.

I can't repeat more firmly. With options every benefit must have an equal cost. Thatis how they are priced. That is why I made two sided markets and didn't give a rats ass whether you hit my bid or lifted my offer. They are wonderful for changing the outcome surface of a possible payout, particularly for physical producers and end users, but as a speculator it is a game you will not win long-term. If you like up, buy the damn underlying. The moment you buy a 20 delta call. At that instantaneous moment your position is exactly the same as buying .20 units. Anything that happens after that, any benefit you might receive you will be paying for somehow/somewhere.

and you are welcome... my pleasure.

 

[Wheezooo]

Good comment Wheezoo re volatility, I learnt something there which is actually quite obvious.

But re your "Trends are meaningless to a professional options trader", in that comment seems to lie the secrets of success for a retailer. I care very much about trends and wish to use options to trade them. I think I need to understand what MMs are doing much better but if they're not betting against my view there must be opportunity in the trend.

If there is opportunity in the trend it is in the trend, not the option. If you think you can see the trend AND time it, well as they say on Wall St. Mazel Tov!

 

[ironchef]

The answer is inline with what your friend is telling you. They are so efficiently priced that it would be like spending time betting on a coin flip. I once dedicated 20 hours a day to only options and had unlimited resources to dedicate to it. Whereas I would never argue I have any advantage over anyone betting long or short. Trading options against me would have been a very very very bad idea. Beware of the people that say look at this performance over 5,10,20 trades. Statistics is about the law of large numbers, and with options the law of large numbers says over the long haul you will sacrifice what you must to cross the bid/offer spread. Reality is, if that were the final outcome you would be lucky.

I can't repeat more firmly. With options every benefit must have an equal cost. Thatis how they are priced. That is why I made two sided markets and didn't give a rats ass whether you hit my bid or lifted my offer. They are wonderful for changing the outcome surface of a possible payout, particularly for physical producers and end users, but as a speculator it is a game you will not win long-term. If you like up, buy the damn underlying. The moment you buy a 20 delta call. At that instantaneous moment your position is exactly the same as buying .20 units. Anything that happens after that, any benefit you might receive you will be paying for somehow/somewhere.

and you are welcome... my pleasure.

This is one of the best posts I have read.

Have a good day and please do hang around.

 

[ironchef]

If there is opportunity in the trend it is in the trend, not the option. If you think you can see the trend AND time it, well as they say on Wall St. Mazel Tov!

Based on my 6 years of personal experience trading, trying out many combinations, modeling and backtesting, you are absolutely correct.

We amateurs are all just hitching a ride betting with the raging bull market and think we are geniuses. Most likely I will retire from this second "career" when the bull stops.

 

[Pkay]

The answer is inline with what your friend is telling you. They are so efficiently priced that it would be like spending time betting on a coin flip. I once dedicated 20 hours a day to only options and had unlimited resources to dedicate to it. Whereas I would never argue I have any advantage over anyone betting long or short. Trading options against me would have been a very very very bad idea. Beware of the people that say look at this performance over 5,10,20 trades. Statistics is about the law of large numbers, and with options the law of large numbers says over the long haul you will sacrifice what you must to cross the bid/offer spread. Reality is, if that were the final outcome you would be lucky.

I can't repeat more firmly. With options every benefit must have an equal cost. Thatis how they are priced. That is why I made two sided markets and didn't give a rats ass whether you hit my bid or lifted my offer. They are wonderful for changing the outcome surface of a possible payout, particularly for physical producers and end users, but as a speculator it is a game you will not win long-term. If you like up, buy the damn underlying. The moment you buy a 20 delta call. At that instantaneous moment your position is exactly the same as buying .20 units. Anything that happens after that, any benefit you might receive you will be paying for somehow/somewhere.

and you are welcome... my pleasure.

Ok but what if you buy an itm call on an option with a .7 delta and the underlying is rising? Is there not a good chance your call option will increase in value?