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Is it true
- Thread starter StockBagger
- Start date
Quote from chrismontez:
Of course I understand the efficiency of the pricing on the options. But the strategy of selling options can be oriented to the probability of movement and not the efficiency of the pricing.
Yes, you basically have to be a reasonably good stock picker, and trade options in such a way that they profit if your prediction is correct. While you may have a high probability of success writing options (selling black swan insurance?), you still have to watch out for very expensive low-probability events. We play for cash, not for proportion of successful trades.
As I keep telling people on a certain other board, when your investment strategy is picking up pennies in front of a steamroller, the steamroller only has to win once.
Quote from chrismontez:
"The reason there's no edge in buying vs selling is that options are priced very efficiently these days, so you cannot beat the market by just selling options (or buying them, for that matter)."
Of course I understand the efficiency of the pricing on the options. But the strategy of selling options can be oriented to the probability of movement and not the efficiency of the pricing. ie I used to sell puts on IBM. IBM has not dropped below $70 in many years and I used to collect $300-$500/ put on $70 puts. If you had been selling even just 5/ year and collecting $2000/yr for the last 5 years. I 've also sold puts on tasr and learned the hard way why trying to sell IV is dangerous. But with the right stocks, it has potential.
The term "edge" is most commonly referred to as capitalizing on inefficiencies in the pricing of options. It's not really a comment on guessing direction and then selling options on the opposite side of that guess.
IBM is listed on 6 exchanges with hundreds of market makers, its priced pretty efficiently. Selling a put is not getting edge its taking a speculative directional position. You're also assuming all the economic and geopolitical risk for not a lot of premium.
To comment on the dispersion of the SPX or the OEX someone was talking about earlier in the thread... No individual is going to be constructing their own dispersion matrix off one of these indexes. Yes firms do it and they use ETF's and other sector indexes but its capital intense, order flow intense and it takes a lot of statistical research. You need deep pockets, no one here is doing it or would that be able to.
"The term "edge" is most commonly referred to as capitalizing on inefficiencies in the pricing of options. It's not really a comment on guessing direction and then selling options on the opposite side of that guess. "
That answer I can understand. Thanks.
That answer I can understand. Thanks.
Our OP may want to wander down to a public library and have a look at the Value Line Options Survey (link). Its introductory report discusses reasonable expectations for profit when trading options. As I recall, for those willing to assume the risk of selling (writing) options, VL says to expect an annual return around 75%. But it's been five years since I looked, maybe they've changed their tune.
"We play for cash, not for proportion of successful trades."
Interesting comment. I play for cash also because I'm small time and occasionally do pick up 1000% return. However, I believe the people who consistently make $ from options use the same strategy the casinos use which is to play for a consistent small return on a large sum of $. I don't remember exactly but think it was about 4-6 %.
Interesting comment. I play for cash also because I'm small time and occasionally do pick up 1000% return. However, I believe the people who consistently make $ from options use the same strategy the casinos use which is to play for a consistent small return on a large sum of $. I don't remember exactly but think it was about 4-6 %.
Quote from chrismontez:
I believe the people who consistently make $ from options use the same strategy the casinos use which is to play for a consistent small return on a large sum of $. I don't remember exactly but think it was about 4-6 %.
Yeah, but casinos know in advance what proportion of big losses they will sustain, and for how much money. Games like blackjack and roulette have such high sample sizes and small maximum losses that they quickly converge to known statistical means. Games like slots with big payouts also converge, but even the jackpot is sized so that it leaves the house in the black.
An option trader will never trade enough contracts in enough securities to be able to rely on statistical convergence, and he will never be able to statistically predict how many losses he will sustain or for how much.
That's why I prefer to think of options more as insurance policies rather than casino bets. It's also why you should manage your risk like an insurance company, not like a casino.
I guess if you want to consider them casino bets thats fine. Just realize that you're NOT the house you're the guy who walks into the casino off the street. I dont the feel the "casino" is a good analogy but the casino does rely on mean reversion and you ( the general public ) does not have that opportunity.