The problem with options and newbies is that they'll often be drawn to options on a stock that's just made a large move which they expect to be reversed. They'll buy options with large IV, then watch as the stock either doesn't go in their desired direction and the options expire worthless, or the stock does move but the options IV drops and their options still lose value.
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Options trading question
- Thread starter c4495237
- Start date
If you write, you take on risk for a premium.
Personally, if I were trading for myself, I'd just sell crash puts. Logic is simple:
(a) Crash is way overpriced due to new regulations and economic capital requirements. E.g. desks are forced to cover all sort of unrealistic scenarios like -20% and -35% down gap in index as well as +50%/-50% gap risks in single stocks.
(b) The usual players like funds have consolidated and now vol arb PMs are not really allowed to sell crash risk. Some of the old semi-instututional players (like MMs) have had their crash limits reduced after 2008 and further after 2011.
(c) As a retial trader, you are not really tied to any performance metric or risk managment limits aside form those implied by the margin calculation and your own. Of course, the return profile is still typical to risk premium seller (that is, you might have some bad years and definitely bad months). However, if you size-up your crash risk intelligently, you can achieve very nice risk-rewards.
(d) You do need portfolio margin for this, otherwise reg-T will limit your yields. Other nessesary bit is to keep up with banking/risk regulatiory environment to understand how banks are forced to cover their crash risk.
Personally, if I were trading for myself, I'd just sell crash puts. Logic is simple:
(a) Crash is way overpriced due to new regulations and economic capital requirements. E.g. desks are forced to cover all sort of unrealistic scenarios like -20% and -35% down gap in index as well as +50%/-50% gap risks in single stocks.
(b) The usual players like funds have consolidated and now vol arb PMs are not really allowed to sell crash risk. Some of the old semi-instututional players (like MMs) have had their crash limits reduced after 2008 and further after 2011.
(c) As a retial trader, you are not really tied to any performance metric or risk managment limits aside form those implied by the margin calculation and your own. Of course, the return profile is still typical to risk premium seller (that is, you might have some bad years and definitely bad months). However, if you size-up your crash risk intelligently, you can achieve very nice risk-rewards.
(d) You do need portfolio margin for this, otherwise reg-T will limit your yields. Other nessesary bit is to keep up with banking/risk regulatiory environment to understand how banks are forced to cover their crash risk.
aka, "why skew exists"
You're swapping vol-edge for gamma risk, but compensated as the gamma is fat. So it's reduced to legal/regulatory edge as you say. Ideally you'd sell the overwrite (some ratio under the synthetic straddle) and but some DOTM wings to further reduce the haircut with minimal impact on the vol-edge (short vs. atm strike).
I have been trading options for the last six months and havent touched stocks since. I prefer options because of the ability to sell naked puts or calls.This guarantees some sort of profit in any market condition, provided your strikes are way OTM.
For example, if you are a technical and fundamental trader and havr determined stock abc is overvalued and wouldnt mind owning it at 20% less, why not sell a put to someome with that strike price? you were going to buy it anyway. At least this way you can collect some money and lower your cost basis.
The goal is to stay small and allow probability to be in your favour. Using a std move, you can determine your theoretical probability of success, which generally rings true. So your goal is to not get wiped out on those 1% chances that a trade doesny go in your favour.
I also think they arent as complicated as people would like you to think.
For example, if you are a technical and fundamental trader and havr determined stock abc is overvalued and wouldnt mind owning it at 20% less, why not sell a put to someome with that strike price? you were going to buy it anyway. At least this way you can collect some money and lower your cost basis.
The goal is to stay small and allow probability to be in your favour. Using a std move, you can determine your theoretical probability of success, which generally rings true. So your goal is to not get wiped out on those 1% chances that a trade doesny go in your favour.
I also think they arent as complicated as people would like you to think.