Quote from gangof4:
when you're done laughing out loud (if only i were so easily amused), care to elaborate? the person who is on the wrong side of probability is the buyer. what % of long strangles with 70%+ IV's purchased the day b4 earnings are profitable the next day?
i didn't want to make the question so long as to not be read- so i didn't go into the obvious details. ie: use the strategy when the position is priced so dearly that, based on historical vol and historical earnings vol, the strangle is priced for the 100 year flood. ISRG was an example to show that even high vol stocks needed monster moves to work out on the long side. most of the positions i have been noticing are in stocks that were priced so as to require a >20% move to break even, when the stock has no history of such a move and the technical set up made it even more unlikely.
so, please explain why i am so embarrassingly wrong so as to elicit mocking laughter...
Forgive my laughter please, it's probably just carryover from chit chat. LOL. I'm still laughing, jeez.
OK, let me try to explain. Do you have health insurance? Car insurance? Any form of insurance? Well, if you do, you would know that insurance rates have gone ballistic the last few years. For all practical purposes, you are probably grossly over paying on all your insurance. In other words, you are a long premium holder getting a bad deal. Or so it would seem.
The insurance companies, the premium sellers, are raking it in selling you this premium, or so it would seem. What you don't see are the substantial increase in medical claims the last couple of years, or the large outlier events if you will.
They are there, trust me. Most people don't see them because we are not looking for them. Everyday there are catastrophic moves in stocks, just about every day. Moves large enough, that if you sold enough size in naked straddles, you would be out of business. But chances are, if CNBC doesn't mention it, or if you don't have money on it, it will pass you by. In your mind, it doesn't exist. The proverbial if a tree falls in the forest and nobody hears it, did it really fall?
Where I am going with this? If you sell enough of these, you will hit a pothole, a big pothole. The profits you earn on these will be tiny, but they will occur often. The losses will be catastrophic.
Look at how many insurance companies go out of business every year, especially during hurricane season. This is despite the fact they are raping their customers with serious over charges. The bottom line is, you can't sell enough premium at high enough prices to cover the debacles. The reason for this has been explain ad infinitum by Nassim Taleb. That is, all large unexpected price moves are seriously underpriced. Sometimes to the magnitude of 50 to 100 times. It's almost embarrassing how underpriced the options are. Even when the implieds are trading at ridiculously high levels.
The irony is, by spreading out and doing a lot of these, you are actually increasing the probability of blowing out. Think about like this. Say you were going to have unprotected sex with another woman (assuming you are a male). Let's say there are 10k women to choose from in a certain subset. Let's say 100 of them has AIDS. Your best bet is to pick the hottest chic and have a go at it. Assuming there are no other men entered into the equation where we then enter a game theory situation where the most men will choose the hottest women (John Nash wrote a paper on this). If it's only you and you know 100 of these women have AIDS, you certainly do not want to sleep with all of them! In fact, the greedier you get by sleeping with more and more women, the higher the probability you have of contracting AIDS. Your optimal situation would be to select one. Every additional one you select, is not spreading your risk around, but increasing it.
So no matter what you do, as long as you sell naked straddles, you are exposing yourself to catastrophe. It does not matter the duration in which you hold the short straddle. And it does not matter if you do 1,000 of them, sooner or later, your Katrina will come, the hurricane, not the attractive girl. LOL.
There are a million ways to make money trading that do not carry the disaster tag with it. It's the same reason young people opt to go to medical school or law school instead of becoming a drug dealer even though it pays the same and in some cases more. No one wants the extra risk if they can avoid it.
