Good points. For a newbie starting out in options would you say that spreads are the best way to go rather than just being long?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.
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Option selling. Too good to continue?
- Thread starter draft730
- Start date
Do you just buy call and put options for your directional bets?Thank you for your suggestions.
Short answer is been there done that on straddle and calendar.
Long straddle prior to earning did not work for me. Essentially I paid twice for the move: Long a call and a put. Most of the time the outcome was already priced in. On the other hand, guessing the direction and long call or long put did work for me, sometimes, when my guesses of the directions were correct.
As for calendar, I bought Terry's book and visited his website (Terry's Tips). Tried that, didn't work either.
For me, the only thing that worked since 2013 was a simple directional bet based on my opinion of the directional of the equities I own.
Regards,
Yes, but if I am not sure about the direction, and when I think conditions are right, I write calls or puts.Do you just buy call and put options for your directional bets?
Spreads didn't work well for me.Good points. For a newbie starting out in options would you say that spreads are the best way to go rather than just being long?
Did you ever ratio, up to a max of 1 x 2 to cut down on theta??
Spreads didn't work well for me.
No, never thought of doing that.Did you ever ratio, up to a max of 1 x 2 to cut down on theta??
Thanks for the suggestion. I will take a look.
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
Tao, thanks for posting this research. Goldman laid it out nicely. I would be curious to know how much of those returns come from the interest on 1m treasuries that the collateral is being invested in. If selling 20D puts only resulted in a 5% return, when t 1m was ~4% for at least half of this testing period, then I would assume a good chunk of those gains were from interest alone. Meaning, when you lever up the gains don't increase linearly(and sharp drops dramatically). Would you agree?
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This is very similar to the CBOE Put-Write index: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..
https://www.cboe.com/publish/micropdf/CBOE-SP500-One-Week-PutWrite-WPUT-Methodology-Paper.pdf
http://www.cboe.com/micro/buywrite/bondarenko-oleg-putwrite-putw-2019.pdf
For most of us retails, the result is not worth the effort unless we can automate the trade. If we automate the trade, we might just as well buy the Put-Write index. We want to shoot for outsize returns doing it ourselves . The only way to do it mechanically is through leverage which then leads to blow up.
The angle on selectively write is the key to getting an edge. For that it is a very excellent article. Friend who wrote puts for a living for over a decade essentially found his edge in a similar fashion.
Regards,
But then again, if you know how to selectively pick up your spots and strikes (based on some suggested fundamentals) then you might as well go out-right for the spot .. better edge there than capping the potential gains..This is very similar to the CBOE Put-Write index:
https://www.cboe.com/publish/micropdf/CBOE-SP500-One-Week-PutWrite-WPUT-Methodology-Paper.pdf
http://www.cboe.com/micro/buywrite/bondarenko-oleg-putwrite-putw-2019.pdf
For most of us retails, the result ...,,
The angle on selectively write is the key to getting an edge. For that it is a very excellent article. Friend who wrote puts for a living for over a decade essentially found his edge in a similar fashion.
Regards,
NVM