Well for one I would get everything they say in writing. The laws in this particular area are very specific. I did extensive research in this area and found some great places that will help you set up a JBO and do this thing correctly. Now I may be wrong but unless you form some kind of back office with that broker they simply can't just bend around reg t because they have market maker experience. I understand what you want to do. The margin you have to put up on any short options will kill you and eat up all your capital. But the correct legal way to be able to trade with a haircut is to form a back office with a broker who is affiliated with an exchange, also known as a JBO (joint back office). But if these guys say they can do it, have them put everything in writing and make sure to inquire about every single detail. Also make sure if you open an account with these people that the account is in your name. If they are letting you trade like that but putting your money in their account, good luck ever getting that money back. You just need to be really careful in this business OK. Check and re-check and then check again. Nobody's word over the phone means anything. I hope that helps.
Let's talk about our returns. Got any?
- Thread starter Adamoptions
- Start date
Well for one I would get everything they say in writing. The laws in this particular area are very specific. I did extensive research in this area and found some great places that will help you set up a JBO and do this thing correctly. Now I may be wrong but unless you form some kind of back office with that broker they simply can't just bend around reg t because they have market maker experience. I understand what you want to do. The margin you have to put up on any short options will kill you and eat up all your capital. But the correct legal way to be able to trade with a haircut is to form a back office with a broker who is affiliated with an exchange, also known as a JBO (joint back office). But if these guys say they can do it, have them put everything in writing and make sure to inquire about every single detail. Also make sure if you open an account with these people that the account is in your name. If they are letting you trade like that but putting your money in their account, good luck ever getting that money back. You just need to be really careful in this business OK. Check and re-check and then check again. Nobody's word over the phone means anything. I hope that helps.
What a bunch of BULL!!!
(sike)
The above statement is ALL true. As an X-Futures broker I made alot of people "broker" with my options plays. BUT I MADE SOOOOOOOOOOOOOO MUCH MONEY IN ROUND TURN COMMISSIONS!!!!!! .........As a broker I LOVED Options. Talk about printing money........I sure did. I traded options in the Coffee market, Cotton, Soybeans, Wheat, Corn, Crude Oil, Heating Oil, Unleaded Gas, Cocoa, Sugar, Live Cattle, Lean Hogs, Copper, Dow Jones, S&P 500.
NONE OF THEM WERE WINNERS!!!!!!!
......EXCEPT.......for the Dow Jones & S&P 500 Options. These were gold mines! I made BIG money for clients with these 2 indicies. Some of my biggest trades of my career were in these 2 instruments.
Hope that helps.
p.s. The reason why my clients made NO money in the other instruments is because in LOW volatility markets only the sellers of Options make money. The buyers lose.
Yes, it is true that most out of the money options expire worthless. But that by itself does not give options sellers an edge. Why? Because out of the money options than expire in the money are generally many times more valuable than when they were originally bought. This is a zero sum game, after all.
Example: On 10 different occasions, Trader buys OTM calls on Lunchmeat futures with a delta of 10 for a price (premium) of 10. Trader holds these options to maturity. 9 times these calls expire worthless, but one time Trader's call expires in the money, with a value of 100.
This is fascinating -- Trader lost money 9 times out of 10, but still broke even! Why is this? Because of the non-linear equity curve options have. OTM options are highly likely to expire worthless, but if they expire in the money they generally increase in value manifold. In fact, the potential upside is so great that the low frequency but large win is enough to make up for the much more frequent small losses. This assumes, of course, that the option's implied volatility is actually equal to the experienced volatility of the underlying asset. Poor liquidity and commissions obviously take their cut to make this a negative sum game for the trader.
Interestingly enough, most commodity options are well priced so that their IV is roughly equal to the historical volatility of the underlying asset. There we are dealing with a negative sum game just as for any futures market.
However, stock index options in general are overpriced, so that their IV is substantially greater than HV. And puts in particular are extremely overpriced as a result of their use by institutional stock portfolio investors as portfolio insurance. The farther out of the money you look, the higher the difference in IV from HV. This is known as the IV "smile".
Thus, as a stock index option trader, you have a very concrete edge in selling deep OTM stock index options, and in particular puts. Your challenge will be to manage your risk properly and cut your losses short instead of holding on too long or doubling down.
Example: On 10 different occasions, Trader buys OTM calls on Lunchmeat futures with a delta of 10 for a price (premium) of 10. Trader holds these options to maturity. 9 times these calls expire worthless, but one time Trader's call expires in the money, with a value of 100.
This is fascinating -- Trader lost money 9 times out of 10, but still broke even! Why is this? Because of the non-linear equity curve options have. OTM options are highly likely to expire worthless, but if they expire in the money they generally increase in value manifold. In fact, the potential upside is so great that the low frequency but large win is enough to make up for the much more frequent small losses. This assumes, of course, that the option's implied volatility is actually equal to the experienced volatility of the underlying asset. Poor liquidity and commissions obviously take their cut to make this a negative sum game for the trader.
Interestingly enough, most commodity options are well priced so that their IV is roughly equal to the historical volatility of the underlying asset. There we are dealing with a negative sum game just as for any futures market.
However, stock index options in general are overpriced, so that their IV is substantially greater than HV. And puts in particular are extremely overpriced as a result of their use by institutional stock portfolio investors as portfolio insurance. The farther out of the money you look, the higher the difference in IV from HV. This is known as the IV "smile".
Thus, as a stock index option trader, you have a very concrete edge in selling deep OTM stock index options, and in particular puts. Your challenge will be to manage your risk properly and cut your losses short instead of holding on too long or doubling down.
Nice insights D E M .
Furthermore, where is the proof that 90% options expire worthless. Even if they do, they don't take into consideration that most of the strikes that expire worthless are not even traded. Ex XYZ at $50, sometimes there are strikes in the 70,80,90 especially in the bubble yyears. So they may have expired worthless but they were teenie options to begin with, with a 5% chance off ever going ITM.
There is a great chaprter in a book by Gallacher called options edge which creates a phantom straddle and compares returns of a trader who writes 1 straddle per dayfor x days and jots down the premiums made vs. premiums paid out. His study conclude that the edge of writing over buying is not as big as people in the "90% options expire worthless" postulates.
howver, I strongly agree that if you are writing, go with the index options since there are no natural sellers in those strikes.
Furthermore, where is the proof that 90% options expire worthless. Even if they do, they don't take into consideration that most of the strikes that expire worthless are not even traded. Ex XYZ at $50, sometimes there are strikes in the 70,80,90 especially in the bubble yyears. So they may have expired worthless but they were teenie options to begin with, with a 5% chance off ever going ITM.
There is a great chaprter in a book by Gallacher called options edge which creates a phantom straddle and compares returns of a trader who writes 1 straddle per dayfor x days and jots down the premiums made vs. premiums paid out. His study conclude that the edge of writing over buying is not as big as people in the "90% options expire worthless" postulates.
howver, I strongly agree that if you are writing, go with the index options since there are no natural sellers in those strikes.
Plain and simple being long options entails much greater risk than being short by virtue of the premium paid and the time frame that the buyer has boxed himself into. I have made many profitable trades from the long side, however, over time I will surely be a loser. If one is going to play this game as a longer term money making venture it must be approached from the short side (premium capture).
After spending many years trading options of all kinds, I now only use them to trade events such as earnings, economic reports, fed meetings, etc. and 100% form the long side.
Dood luck to ya!
After spending many years trading options of all kinds, I now only use them to trade events such as earnings, economic reports, fed meetings, etc. and 100% form the long side.
Dood luck to ya!
I did not know people were replying to my answers. Well, the man I am talking about does not daytrade gamma sacalping. That is more of a way to hedge. He did high risk directional trades for his massive turnarounds. Like the qqq etc he only traded the index options. Gamma scalping was a way to constantly grow his extra money. This guy was worth $3-4million already from his previous biz. So this combined with his methods were awesome. The gamma scalping should only be done on items with high voltility and that are way liquid.
the problem with options is that most people do not make money in them. They say that you only need a couple of dollars to make money with options. That's the big lie. Most people (most) that make money have lots to begin with. That's so they can buy the stock etc. to help hedge there position. The small traders must use synthetic positions to help hedge with and create boxes. with wide strikes they suck. The qqq is the way to go for most traders and go to cboe website to see which stocks have the most traded options (like dell, msft, mmm etc). Most of the tech companies are good choices. Hope this helps.
To make money call charles Cottle from thinkorswim. Also read his book. This guy is the guy to go to for options (IMO). He understands all of them and there posiblilties.
the problem with options is that most people do not make money in them. They say that you only need a couple of dollars to make money with options. That's the big lie. Most people (most) that make money have lots to begin with. That's so they can buy the stock etc. to help hedge there position. The small traders must use synthetic positions to help hedge with and create boxes. with wide strikes they suck. The qqq is the way to go for most traders and go to cboe website to see which stocks have the most traded options (like dell, msft, mmm etc). Most of the tech companies are good choices. Hope this helps.
To make money call charles Cottle from thinkorswim. Also read his book. This guy is the guy to go to for options (IMO). He understands all of them and there posiblilties.
Quote from T-REX:
What a bunch of BULL!!!
(sike)
The above statement is ALL true. As an X-Futures broker I made alot of people "broker" with my options plays. BUT I MADE SOOOOOOOOOOOOOO MUCH MONEY IN ROUND TURN COMMISSIONS!!!!!! .........As a broker I LOVED Options. Talk about printing money........I sure did. I traded options in the Coffee market, Cotton, Soybeans, Wheat, Corn, Crude Oil, Heating Oil, Unleaded Gas, Cocoa, Sugar, Live Cattle, Lean Hogs, Copper, Dow Jones, S&P 500.
NONE OF THEM WERE WINNERS!!!!!!!
......EXCEPT.......for the Dow Jones & S&P 500 Options. These were gold mines! I made BIG money for clients with these 2 indicies. Some of my biggest trades of my career were in these 2 instruments.
Hope that helps.
p.s. The reason why my clients made NO money in the other instruments is because in LOW volatility markets only the sellers of Options make money. The buyers lose.
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Like index options-
still buy occasionaly because trend = friend;
if i did it over again would shop around more ,read more
& trade less.
Would also keep in mind Jim Rogers & Don Bright dont think to much of buying options, that's my read also .
Enjoyed shopping around for airline puts;
but shorted the underlying NYSE stock -good bid /ask with specialist.
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The diligent find freedom in thier work. Solomon,trader king.
Concerning stock option index calls;
good thing on starting scale in buy this am because even the most liquid arent very liquid at exact bottoms lately.
good thing on starting scale in buy this am because even the most liquid arent very liquid at exact bottoms lately.