Options traders or spread traders.
- Thread starter Rumblefish
- Start date
Interesting. I think the question should be: when, besides buying and selling straddles, does it make sense to use options viz-a-viz an outright stock position?
Say I have a model for the S&P500 with a high sharpe ratio, long-only, holding period is 1 day. Because of the high sharpe this means that volatility will go down during my trade. Therefore by selling puts I could make more money than trading the stock outright. Now from the distribution of 10'000 simulated trades I could build an implied distribution and build a combo based on this distribution. In my view it is unlikely, that a) a discretionary trader will ever have a view which is that accurate, b) even given this accuracy one will make more money by trading options than the outright stock. So I agree with the basic sentiment, that basically very few people really need options and the world wouldn't change that much if all options would disappear tomorrow. Same thing with most trading related matters. But then, one could say the same about a lot of other activities and industries.
Say I have a model for the S&P500 with a high sharpe ratio, long-only, holding period is 1 day. Because of the high sharpe this means that volatility will go down during my trade. Therefore by selling puts I could make more money than trading the stock outright. Now from the distribution of 10'000 simulated trades I could build an implied distribution and build a combo based on this distribution. In my view it is unlikely, that a) a discretionary trader will ever have a view which is that accurate, b) even given this accuracy one will make more money by trading options than the outright stock. So I agree with the basic sentiment, that basically very few people really need options and the world wouldn't change that much if all options would disappear tomorrow. Same thing with most trading related matters. But then, one could say the same about a lot of other activities and industries.
With all due respect, I will politely disagree with your basic sentiment. IMO, the more precise basic sentiment is that very few people know how to correctly exploit the added flexibility and dimensionality afforded by options.
Much of this is perpetuated by questionable educators and promoters who have been hawking systems for selling covered premium, and indeed even Bernie Madoff hoodwinked his investors with a similar strategy that was uncovered and ultimately ignored by regulators.
I'm interested in hearing about this. What is this flexibility exactly? How can I leverage my edge via options if I have one? If I have a view on vol I can trade straddles, if I have a view on delta I can trade the underlying. I can't see how complex combos add anything to this.