Eddie said it perfectly. The market-maker is just the bookie. The casino at the craps table. Your mistake is not having a conflicting opinion. Your mistake is crossing his bid-offer and starting at a deficit to fair value.
Option selling. Too good to continue?
- Thread starter draft730
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Eddie said it perfectly. The market-maker is just the bookie. The casino at the craps table. Your mistake is not having a conflicting opinion. Your mistake is crossing his bid-offer and starting at a deficit to fair value.
Probably...You overpay by 0.25, but the fair value is overvalued 10 times that due to skewness
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Your welcome. Thank you for reminding me that the market maker has an edge
Is there evidence or study supporting that skew is overvalued 10x?
Goldman had a research paper ,The Art of selling Puts..
http://optionsoffice.ru/wp-content/uploads/2016/03/Goldman-Sachs_The-art-of-put-selling.pdf
Its a bit old,and vol was higher so returns were higher than they would be today.The study was a 10 year period,selling ATM vol.The returns were less that the market,but volatility was lower producing a higher Sharpe.
The paper also looked at selling OTM puts.It reduces returns
Selling further out-of-the-money (OTM) puts increased the Sharpe ratio of the strategy, but reduced the absolute annual returns. We studied selling puts on all stocks in the S&P 500 at strike prices based on their moneyness (ATM to 15%OTM), their sensitivity to stock price moves (20-delta to 70-delta), and a target premium collected (1%- 3% per month).
The bottom line is premium sellers that take the leverage that the OP did have more guts than brains.I did exactly the same early on,and,mercifully it was not my money.Selling the garbage is the newbie/lazy mans way of approaching the market..
http://optionsoffice.ru/wp-content/uploads/2016/03/Goldman-Sachs_The-art-of-put-selling.pdf
Its a bit old,and vol was higher so returns were higher than they would be today.The study was a 10 year period,selling ATM vol.The returns were less that the market,but volatility was lower producing a higher Sharpe.
The paper also looked at selling OTM puts.It reduces returns
Selling further out-of-the-money (OTM) puts increased the Sharpe ratio of the strategy, but reduced the absolute annual returns. We studied selling puts on all stocks in the S&P 500 at strike prices based on their moneyness (ATM to 15%OTM), their sensitivity to stock price moves (20-delta to 70-delta), and a target premium collected (1%- 3% per month).
The bottom line is premium sellers that take the leverage that the OP did have more guts than brains.I did exactly the same early on,and,mercifully it was not my money.Selling the garbage is the newbie/lazy mans way of approaching the market..
Yes, absolutely buy what you posted. My understanding is the relative change in IV (strike to strike) way OTM compared to ATM is larger and can be seen on the skew graph
Also, very iffy to analyze options in that manner, as it entirely ignores dynamic hedging. Law of big numbers might make it less terrible, but still a failed methodology. I've had many a days I walked away with a big smile watching my long OTM's go more OTM.