Is buying options a mugs game?

[Magic]

How about of you had a stock that had broken out and is rising, would buying a slightly OTM option not be a good strategy. Say one that has 2 months to expiry and has a delta of 78? Thanks.

You keep asking iterations of the same question over and over again. A 78D call is not going to be OTM. I’ll assume you meant 22D. You’re buying fractional deltas and vol with some embedded leverage. Vol will have to come in with a continued rise in price pretty quickly for you to beat the decay and embedded costs. Again, why are you buying the option instead of the underlying? You need to be right on your vol forecast (and timing) almost even more so than your directional prediction to get good risk adj. returns. You didnt even think to include a vol forecast in your vague example. And two months is a long time to make a blanket forecast. Your exposures are going to be changing daily. Leaning too hard on terminal distributions is classic rookie mistake. +1 for the chorus of stay away from options or you’ll end up costing yourself.

However, I will say I don’t understand the extreme aversion to options from Weez. Since they’re efficiently priced, you aren’t losing anything nor gaining anything by trading them intelligently. And shifting the payoffs can be an optimization in and of itself. 150% long PUT outperforms SPY decently enough for the decade+ horizon. And it’s not that difficult to improve even further on that. Sizing improperly and poor understanding on risks and mechanics of options is a much bigger problem than the options themselves.

If you’ve got better things to do than passive investing or an edge in direction with SNs, sure it makes sense to stay away from options. But index vol is pretty rich sometimes and to do a blanket pass on that as a portfolio/strategy component is a little hasty imo.

 

[Wheezooo]

You keep asking iterations of the same question over and over again. A 78D call is not going to be OTM. I’ll assume you meant 22D. You’re buying fractional deltas and vol with some embedded leverage. Vol will have to come in with a continued rise in price pretty quickly for you to beat the decay and embedded costs. Again, why are you buying the option instead of the underlying? You need to be right on your vol forecast (and timing) almost even more so than your directional prediction to get good risk adj. returns. You didnt even think to include a vol forecast in your vague example. And two months is a long time to make a blanket forecast. Your exposures are going to be changing daily. Leaning too hard on terminal distributions is classic rookie mistake. +1 for the chorus of stay away from options or you’ll end up costing yourself.

However, I will say I don’t understand the extreme aversion to options from Weez. Since they’re efficiently priced, you aren’t losing anything nor gaining anything by trading them intelligently. And shifting the payoffs can be an optimization in and of itself. 150% long PUT outperforms SPY decently enough for the decade+ horizon. And it’s not that difficult to improve even further on that. Sizing improperly and poor understanding on risks and mechanics of options is a much bigger problem than the options themselves.

If you’ve got better things to do than passive investing or an edge in direction with SNs, sure it makes sense to stay away from options. But index vol is pretty rich sometimes and to do a blanket pass on that as a portfolio/strategy component is a little hasty imo.

Thank you. I was shaking my head in disbelief. Everything else you said I am in agreement with, and somewhere in one of the posts said. Efficiently priced, shouldn't win or lose (theoretically). Your last comment on the 150% puts is not how I see anyone wan to trade, it is always either spec/leverage or covered call nonsense. As for selling 'rich' premium. I do have a severe aversion to being a seller of options, rich or not, and it is for very well substantiated reasons. Selling those "free-money," wings to me is the absolute worst thing you can do as a trader. The ultimate of cardinal sins. I have been programmed.

 

[Magic]

Thank you. I was shaking my head in disbelief. Everything else you said I am in agreement with, and somewhere in one of the posts said. Efficiently priced, shouldn't win or lose (theoretically). Your last comment on the 150% puts is not how I see anyone wan to trade, it is always either spec/leverage or covered call nonsense. As for selling 'rich' premium. I do have a severe aversion to being a seller of options, rich or not, and it is for very well substantiated reasons. Selling those "free-money," wings to me is the absolute worst thing you can do as a trader. The ultimate of cardinal sins. I have been programmed.

Agree.. shorting wings is far from free money. I think people don’t realize that the danger isn’t in the initial risk profile, it’s that your risk will blow up exponentially in a tail event. Shadow gamma or whatever it’s called. And even backtesting won’t necessarily show the true risk of wide spreads if liquidity drops off and the effect of that on your margin req.

I’m short relatively close to the money when I have a forecast of realizing a decent amount less vol than is implied. The further you get from cash secured the more potential danger.

In general, I’m trying to get better at trading other stuff against my risk / getting cheap tail protection so I can size bigger where I’ve got the best expectancy. Returns can be measured against standard deviation or stress test risk budget. I think one of the best advantages retail traders have is that we can do the latter and tolerate more volatility as long as the earnings are good.

Hard to find good discussion around here though, there’s a lot of chatter to wade through. The new guys that think there’s some inherent expectancy in some instrument or strategy mean well but the repetition gets old. They’re just tools to express a specific forecast. And if there’s no basis for your trade hypothesis or you don’t even know what view you’re expressing.. it’s not going to end well in the long run.

 

[Overnight]

...+1 for the chorus of stay away from options or you’ll end up costing yourself...

This is why I stay the hell away from them. I simply cannot make heads nor tails out of it. As much as I might lose in outright futures, I'd prolly' lose much more than that trying the FOP poison.

You options guys are crazy.

 

[qlai]

You options guys are crazy.

That's what I say about you Futures guys ... Rolling, unpredictable margins, mark to market, Corzines ... Insanity!

 

[ironchef]

As for selling 'rich' premium. I do have a severe aversion to being a seller of options, rich or not, and it is for very well substantiated reasons. Selling those "free-money," wings to me is the absolute worst thing you can do as a trader. The ultimate of cardinal sins. I have been programmed.

As a market maker weren't you "forced" to sell them?

 

[Epicurus]

You keep asking iterations of the same question over and over again. A 78D call is not going to be OTM. I’ll assume you meant 22D. You’re buying fractional deltas and vol with some embedded leverage. Vol will have to come in with a continued rise in price pretty quickly for you to beat the decay and embedded costs. Again, why are you buying the option instead of the underlying? You need to be right on your vol forecast (and timing) almost even more so than your directional prediction to get good risk adj. returns. You didnt even think to include a vol forecast in your vague example. And two months is a long time to make a blanket forecast. Your exposures are going to be changing daily. Leaning too hard on terminal distributions is classic rookie mistake. +1 for the chorus of stay away from options or you’ll end up costing yourself.

However, I will say I don’t understand the extreme aversion to options from Weez. Since they’re efficiently priced, you aren’t losing anything nor gaining anything by trading them intelligently. And shifting the payoffs can be an optimization in and of itself. 150% long PUT outperforms SPY decently enough for the decade+ horizon. And it’s not that difficult to improve even further on that. Sizing improperly and poor understanding on risks and mechanics of options is a much bigger problem than the options themselves.

If you’ve got better things to do than passive investing or an edge in direction with SNs, sure it makes sense to stay away from options. But index vol is pretty rich sometimes and to do a blanket pass on that as a portfolio/strategy component is a little hasty imo.

Great discussion on this thread. Magic what do you mean re "150% Long Puts..."? I didnt think I was that new. Perhaps I'm confused on terminology.

 

[Magic]

Great discussion on this thread. Magic what do you mean re "150% Long Puts..."? I didnt think I was that new. Perhaps I'm confused on terminology.

I was referring to CBOE’s index called “PUT”—mechanically writes a cash secured ATM put and holds until expiry every month. They track performance stats on at least a handful of rigid option systems.

 

[Wheezooo]

As a market maker weren't you "forced" to sell them?

Sure, but I sold them where I knew I could spread into something else against them for cheaper. Wash, rinse, repeat.

 

[ironchef]

Sure, but I sold them where I knew I could spread into something else against them for cheaper. Wash, rinse, repeat.

Care to expand on that? By spread, did you buy a different call or you hedge with underlying or future?

Thanks.