Options writers and currency futures

[Pa(b)st Prime]

Au' contraire. An immediate 5% index move (unhedgable) will cause a 50-80% DD for an aggressive premium collection fund.

You're assuming worst case on opex. Unfortunately margins and account balances are in real time. All those 1350 and 1360 puts that are expiring worthless to-morrow provide little solace to those who paid 17 covering shorts from 3.

Just to give you an example: In the past month, two of the best know S&P premo sellers are down between 20-30% on what IMO has been a shallow, well behaved break. Even the 27th was only like the 103rd worst one day % drop. It was also "hedgable." IOW's it's not like the market opened 300 lower.

Quote from asap:

in my opinion those events fall into the normal distribution perfectly well. Maybe the upside move went through 1 std deviation up to 2 or even 3 std devs which is perfectly described by the bell curve. They would take a loss on their call inventory, but within the limits of their expectations, as most professional call sellers, use strikes in the range of 1.5 up to 2.5 std deviations OTM. under this approach, an outlier would be an upside move of 4 or more standard deviations. That would be a catastrophic event for those options sellers. To illustrate this, imagine the S&P moving up 300 points in less than one month, that would be +4 std devs.

 

[Wayne Gibbous]

Quote from Pa(b)st Prime:



Just to give you an example: In the past month, two of the best know S&P premo sellers are down between 20-30% on what IMO has been a shallow, well behaved break. Even the 27th was only like the 103rd worst one day % drop. It was also "hedgable." IOW's it's not like the market opened 300 lower.

Interesting!

"Free no-risk money..." doesn't last forever.

 

[asap]

Quote from Pa(b)st Prime:

Au' contraire. An immediate 5% index move (unhedgable) will cause a 50-80% DD for an aggressive premium collection fund.

You're assuming worst case on opex. Unfortunately margins and account balances are in real time. All those 1350 and 1360 puts that are expiring worthless to-morrow provide little solace to those who paid 17 covering shorts from 3.

Just to give you an example: In the past month, two of the best know S&P premo sellers are down between 20-30% on what IMO has been a shallow, well behaved break. Even the 27th was only like the 103rd worst one day % drop. It was also "hedgable." IOW's it's not like the market opened 300 lower.

You're talking about downside moves while I was talking about upside moves. Like I said before, since LTCM the professional options traders tend not to sell downside premium because of the perceived imminent risk of an outlier and its devastating results for such a strategy. Your example only demonstrates my point.

Also, selling OTM calls is part of mathematical model that establishes the certainty of possible outcomes. That is, the daily price increase has an effect that is offset by time decay and volatility decrease, which leads to constant portfolio appreciation within a pre established risk benefit framework.

 

[segv]

Quote from Pa(b)st Prime:


Just to give you an example: In the past month, two of the best know S&P premo sellers are down

What two best known S&P premium sellers are you referring to?

 

[LeonPhelps]

Quote from asap:

LTCM did in the 90s. they were the biggest S&P option seller then. And all learnt the lesson.

Dude, uh, it was widening bond spreads in 98 that did in JM and the boys.

 

[asap]

Quote from LeonPhelps:

Dude, uh, it was widening bond spreads in 98 that did in JM and the boys.

so are you saying that LTCM wasnt a S&P premium seller back in the 90s??? and their loss came solely from convergence trades?

 

[nravo]

Quote from LeonPhelps:

I thought most of these guys wrote index puts ala VN. Thus the occasional blowout in a downdraft.

Thats a new one to me -- calls only? Ansbacher may do that sometimes, but usually writes both sides. VN, obviously. But there are a dozen or so others -- check Futures magazine over the past 10 years and the pack of the magazine trader profiles -- who write only premium as a strategy and they are selling SP puts -- naked, or strangles and iron condors -- with the ocassional foray into bond futures. I'd be curious to know the names of short call only CTAs. I explored the strategy and can't get much of a return out of it.

 

[nravo]

Quote from Wayne Gibbous:

Interesting!

"Free no-risk money..." doesn't last forever.

Names please? VN and .....?

 

[nravo]

Quote from nravo:

Thats a new one to me -- calls only? Ansbacher may do that sometimes, but usually writes both sides. VN, obviously. But there are a dozen or so others -- check Futures magazine over the past 10 years and the pack of the magazine trader profiles -- who write only premium as a strategy and they are selling SP puts -- naked, or strangles and iron condors -- with the ocassional foray into bond futures. I'd be curious to know the names of short call only CTAs. I explored the strategy and can't get much of a return out of it.

I was quotng ASAP's comment, btw.

 

[nravo]

Quote from asap:

so are you saying that LTCM wasnt a S&P premium seller back in the 90s??? and their loss came solely from convergence trades?

Read Lowenstein's book. Pairs trading between 29- and 30-year bonds, foriegn debt, a short squeeze, all sorts of stuff.