1. Is it possible to make at least 20% expected geometric mean returns per year? With expected returns I mean that you have studied that your strategy in average gives you those returns, considering the expected value of your “play” and the optimal capital management for that strategy. Don't tell me that your strategy can make X% per year, I don't care about that. You also can turn $1 into $1M playing the lottery. I care only about expected value.
It seems to me that this forum is full of people fooled by randomness (people that have no idea of the expected value of what they are doing, and have just been lucky while doing something that is less profitable than they think), and then there are some charlatans and some people that seem to know what they are talking about. Some of the latter even have posted incredible screenshots with their annual returns (like rallymode and sellindexvol66). It's because of this group that I have been motivated to keep reading the forum, looking for information in more places and thinking and backtesting different strategies. It seems like there's people capable of consistently getting very high returns per year. Or maybe they are also lying or fooled by randomness, but I “feel” that's not their case.
2. I have been a professional online poker player for several years. I played in many tables simultaneously, playing an enormous amount of hands per year (more than 1 million per year), making a living by exploiting very small edges. To make a living playing poker, you have to make decisions with positive expected value, and manage your bankroll properly so your risk of ruin is as small as possible. You also need to be disciplined enough to play well every hand, don't tilt and just keep working no matter what happens.
So I know very well the power of variance fooling people, specially with strategies that have lots of variance (like multitudinous tournaments in the case of poker or OTM options here). You need an enormous sample size before knowing what's the expected return of your strategy by just looking at your realized returns. You can very easily believe that you are “playing” much better or much worse than you really are, just because of luck.
I constantly read people here extrapolating from ridiculously small sample sizes. You can't say you "make" 2%-3% per month selling options just because those have been your returns from the last 5 years. You either need to be able to estimate accurately beforehand the expected value of your strategy (and what's the optimal money management to be used) or you need to keep trying it for decades before knowing what's the true expected value of what your are doing.
In poker, even after playing 1 million cash game hands your realized return can be different than your expected return. In the case of multitable tournament players (which is a much more volatile modality), you'd need an even bigger sample size. So don't pay attention to minuscule sample sizes.
3. If trading is profitable (understanding “profitable” as more profitable than just buying and holding the underlying), why does that happen? Is it because the behavior of your competitors can be exploited?
I'm a quantitative value investor, so I know it's possible to have higher expected returns than just buying the whole market. You profit from being a contrarian, from buying “boring” stocks, or stocks that have recently had a bad perfomance, while you ignore “cool” stocks and stocks with high recent returns. You buy low P/E, P/B, EBITDA/EV stocks and ignore those with high ratios. This works, there are several papers and books that prove it and explain why it happens (behavioural economics).
So I wonder if there's also something exploitable when dealing with options. Are there also overvalued and undervalued options? Does the market, in aggregate, overvalue some options? All the time or just sometimes? Why does that happen? Or is the options market efficient?
4. How can you calculate whether an option is over or under valued? Do you compare the current implied volatility with the historical average realized volatility? Do you compare it with the historical average realized volatility of situations like the current one (for example, same month)? How do you calculate the expected value of buying or selling an option?
It seems to me that this forum is full of people fooled by randomness (people that have no idea of the expected value of what they are doing, and have just been lucky while doing something that is less profitable than they think), and then there are some charlatans and some people that seem to know what they are talking about. Some of the latter even have posted incredible screenshots with their annual returns (like rallymode and sellindexvol66). It's because of this group that I have been motivated to keep reading the forum, looking for information in more places and thinking and backtesting different strategies. It seems like there's people capable of consistently getting very high returns per year. Or maybe they are also lying or fooled by randomness, but I “feel” that's not their case.
2. I have been a professional online poker player for several years. I played in many tables simultaneously, playing an enormous amount of hands per year (more than 1 million per year), making a living by exploiting very small edges. To make a living playing poker, you have to make decisions with positive expected value, and manage your bankroll properly so your risk of ruin is as small as possible. You also need to be disciplined enough to play well every hand, don't tilt and just keep working no matter what happens.
So I know very well the power of variance fooling people, specially with strategies that have lots of variance (like multitudinous tournaments in the case of poker or OTM options here). You need an enormous sample size before knowing what's the expected return of your strategy by just looking at your realized returns. You can very easily believe that you are “playing” much better or much worse than you really are, just because of luck.
I constantly read people here extrapolating from ridiculously small sample sizes. You can't say you "make" 2%-3% per month selling options just because those have been your returns from the last 5 years. You either need to be able to estimate accurately beforehand the expected value of your strategy (and what's the optimal money management to be used) or you need to keep trying it for decades before knowing what's the true expected value of what your are doing.
In poker, even after playing 1 million cash game hands your realized return can be different than your expected return. In the case of multitable tournament players (which is a much more volatile modality), you'd need an even bigger sample size. So don't pay attention to minuscule sample sizes.
3. If trading is profitable (understanding “profitable” as more profitable than just buying and holding the underlying), why does that happen? Is it because the behavior of your competitors can be exploited?
I'm a quantitative value investor, so I know it's possible to have higher expected returns than just buying the whole market. You profit from being a contrarian, from buying “boring” stocks, or stocks that have recently had a bad perfomance, while you ignore “cool” stocks and stocks with high recent returns. You buy low P/E, P/B, EBITDA/EV stocks and ignore those with high ratios. This works, there are several papers and books that prove it and explain why it happens (behavioural economics).
So I wonder if there's also something exploitable when dealing with options. Are there also overvalued and undervalued options? Does the market, in aggregate, overvalue some options? All the time or just sometimes? Why does that happen? Or is the options market efficient?
4. How can you calculate whether an option is over or under valued? Do you compare the current implied volatility with the historical average realized volatility? Do you compare it with the historical average realized volatility of situations like the current one (for example, same month)? How do you calculate the expected value of buying or selling an option?
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