Option selling. Too good to continue?
- Thread starter draft730
- Start date
Thanks buddy..So it seems like you are good for one down and out roll..With the leverage you employed 20 percent isnt bad at all,especially if you were taking offers and hitting bids..
I would not sell calls against your puts unless they are jacked.Again,if its your first tempatation,its probably the wrong move.Whats an ATM call trading for less than 2 % of spot going to do??
Ill tell you 2 war stories from my career that pop into my head..I left the IB i worked for with a substantial amount of stock.Off the top of my head,the stock was trading around 55.I believe i sold the 2 month 50 calls at 6 -7..I was fucking around to pick up an extra dollar..Someone,somewhere was watching over me as I did get assigned and cashed out.Months later,in the depth of the financial crisis,the stock traded at 1.50...I will NEVER sell calls to hedge unless the VOL is trading thru the roof...
Another story is the IB I was working for was looking to purchase another IB which had the rep of having the best prop traders on the street.As I was the head trader of equity drivatives,I had the misfortune of having to meet and interview their traders.They were all MBA's from top schools or worse,Phd's and they looked at me like I was the lowest form of life imaginable as I was a lowly colege grad who worked his way up the ranks.The discussion eventually turned to hedging gamma risk,and i was fervently in the camp of continuously delta hedging as if your life depended on it.They sneered and scoffed at me,and instructed me that the slippage costs of hedging intraday far exceeded the risk...They only flattened deltas at the opening
Well guess what,before we acquired them they got caught in a double limit down move and sold thousands of futures at the low of the day,losing well over 150 mil...which by the way was nothing compared to the hickey the fixed income boys blessed us with..
Hope for the best,but prepare for the unexpected
I would not sell calls against your puts unless they are jacked.Again,if its your first tempatation,its probably the wrong move.Whats an ATM call trading for less than 2 % of spot going to do??
Ill tell you 2 war stories from my career that pop into my head..I left the IB i worked for with a substantial amount of stock.Off the top of my head,the stock was trading around 55.I believe i sold the 2 month 50 calls at 6 -7..I was fucking around to pick up an extra dollar..Someone,somewhere was watching over me as I did get assigned and cashed out.Months later,in the depth of the financial crisis,the stock traded at 1.50...I will NEVER sell calls to hedge unless the VOL is trading thru the roof...
Another story is the IB I was working for was looking to purchase another IB which had the rep of having the best prop traders on the street.As I was the head trader of equity drivatives,I had the misfortune of having to meet and interview their traders.They were all MBA's from top schools or worse,Phd's and they looked at me like I was the lowest form of life imaginable as I was a lowly colege grad who worked his way up the ranks.The discussion eventually turned to hedging gamma risk,and i was fervently in the camp of continuously delta hedging as if your life depended on it.They sneered and scoffed at me,and instructed me that the slippage costs of hedging intraday far exceeded the risk...They only flattened deltas at the opening
Well guess what,before we acquired them they got caught in a double limit down move and sold thousands of futures at the low of the day,losing well over 150 mil...which by the way was nothing compared to the hickey the fixed income boys blessed us with..
Hope for the best,but prepare for the unexpected
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The truth is I see alot of me in him...
I shudder at the things I used to do,at the level of "stupidity" mixed in with a touch of infallibility..
Im not sure how long he has been trading,but he has the same tendency as all premium sellers.
We dont look to maximize profitability,we look to maximize the likelihood of profitability...
I still turn on the screen and look for shit to sell,the only difference is now I dont pull the trigger in a size that could hurt me...
My battle is trying to become a decent directional trader..
I shudder at the things I used to do,at the level of "stupidity" mixed in with a touch of infallibility..
Im not sure how long he has been trading,but he has the same tendency as all premium sellers.
We dont look to maximize profitability,we look to maximize the likelihood of profitability...
I still turn on the screen and look for shit to sell,the only difference is now I dont pull the trigger in a size that could hurt me...
My battle is trying to become a decent directional trader..
I agree with everything you say, and the results are as I expect they would be. But the reasoning for skew is based on how I see options, not how he sees options. When I tried to explain that and why it is now called MODIFIED BSM I got pissed on and confronted idiocy about IV vs realized. Piled on top of the ignorance of risk and everything else I agree with you on such as lazy man trading, and wanting to hold onto your one trick pony despite everyone telling you it is going to kick you in the head, except for me, who is trying to say you don't even have a pony.l, but you're still going to get kicked in the head. This thread has been utterly the most annoying one I have participated in since I have been here. I even almost asked you to stop commenting because I felt you trying to explain to a 6 lot trader what they were doing was a kindness, but beyond that, arguing was demeaning yourself. Imagine if one of the juniors on your desk was watching that. They'd probably be like WTF.
Now the ignore button is my new best friend
I like a lot of people here, happy to help, but not going to argue with stupid. And this thread was a smorgasbord of stupid. Fuck even dest who has a tendency to keep arguing ad infinitum ran away at page one.
Yep.. Once you start selling options, its hard to stop.. I swore I will stop, only trade directional, but then what keeps pulling me back is exactly what you wrote. The notion that I can be "right" time and time again when selling puts. I dont think any of us really understands what a true black swan even really means. We think of VIX spiking to 50 all of the sudden, market crashing 8 % daily and then another 5 % the next day.. But this is far from it.. The real black swan is like Taleb says something you really cannot even imagine. Now how do you put price on that.. How do you hedge that.. And I still remember one of this quote: no option seller survives in the long run.. He was talking about selling tails and probably in huge quantities to make up for small premiums.. What would work is if you do it on some money you can loose or if you take money out all the time. This way if you make 50 % year after year and trade each year with same amount of money, even if you blew up in year 15, you only loose 1-2 years of money and can get back in.. But this too only works if you dont blew out in year 1 or 2 already… So yeah, no free lunch in selling options for sure..
and so will summer... some prediction lol
It’s meaningless to state VIX bottomed.
what other trader “hopes” another blows up? Get a grip dude
Two reasons (been there done that myself):
1. Making money going long directional is hard work, after all our counter parties are not idiots. The devil is in the details and most of us find it very hard to stomach the theta decay, watching our premium eroding.
2. Most newbies view selling premium as generating income. Indeed if we start with DOTM, we see very high win rates. After a few wins, we get bolder and use leverage to juice our return....
Regards,
PS, I am still working on my butterfly.
Why?
My dream is to be able to trade non directional and make money.
Stop banging your head against the wall - not good.
@ironchef don't know if you're interested, but steadyoptions.com does non-directional long straddles and calendars price-earnings.
The theory for the straddle is that prior to earnings IV climbs and helps minimize theta decay and hopefully there's enough movement in the stock to make a profit
Admittedly I couldn't make it work, but if I stuck with it, CMLviz might have been a service to help find stock candidates to increase the probability of success with the long straddles. Also, Kim gives a full list of his trades to make up a good watch list
While you want stocks to move for the long straddles, the long calendars was a good counter when the market wasn't moving. The pre-earnings kept the back strike stable-ish. Using a service like www.chartaffair.com helped use historical option pricing to pick inexpensive calendars. I was starting to get the hang of trading the calendars.
I quit steady options because my head hurt from the head banging
I probably should have been more clear...
IMHO,in this vol environment,the market has taken away the "easy-er" money..That being selling puts,straddles ,aggressive ratios,and most definitely selling index upside...
The sale of 10 delta puts in this vol environment affords you no wiggle room...
The OP's returns sounded too good to be true,and if you dug a little bit,you discovered he was taking a very very large bet with massive downside risk..And that was in a higher vol market..
My main point,which you brought up is, he could have done almost as well employing option strategies that didn't mortgage the farm and then some.But you would need to make a directional call..
Notice I never said go long theta,but thats a discussion to be had after your butterfly homework is complete
As for #2,see Marty Schwartz..Not just newbies
IMHO,in this vol environment,the market has taken away the "easy-er" money..That being selling puts,straddles ,aggressive ratios,and most definitely selling index upside...
The sale of 10 delta puts in this vol environment affords you no wiggle room...
The OP's returns sounded too good to be true,and if you dug a little bit,you discovered he was taking a very very large bet with massive downside risk..And that was in a higher vol market..
My main point,which you brought up is, he could have done almost as well employing option strategies that didn't mortgage the farm and then some.But you would need to make a directional call..
Notice I never said go long theta,but thats a discussion to be had after your butterfly homework is complete
As for #2,see Marty Schwartz..Not just newbies
Two reasons (been there done that myself):
1. Making money going long directional is hard work, after all our counter parties are not idiots. The devil is in the details and most of us find it very hard to stomach the theta decay, watching our premium eroding.
2. Most newbies view selling premium as generating income. Indeed if we start with DOTM, we see very high win rates. After a few wins, we get bolder and use leverage to juice our return....
Regards,
PS, I am still working on my butterfly.