Premium Sellers vs. Option Buyers

[darwin666]

thanks maverick, for the wonderful insight .
I was debating with someone for the cons of trying to get rich by selling options. and during the argument. just for a hypothesis, assume u r Warren buffet with infinite deep pockets. Wont you just sell deep OTM options and keep pocketing the 30% as Karen has been doing. If so why isnt he doing it? Why is it so hard to make 10-15% in equity while you can make 30% doing what Karen has done. She is plain lucky and time will catch up sooner or later.

Also, I loved the best suggestion given here for hedge. it was so simple. just close the damn loss making position. !. couldnot have been said better. imho , the successful trade is the one who can quickly cut his loss and move on to another setup

 

[newwurldmn]

thanks maverick, for the wonderful insight .
I was debating with someone for the cons of trying to get rich by selling options. and during the argument. just for a hypothesis, assume u r Warren buffet with infinite deep pockets. Wont you just sell deep OTM options and keep pocketing the 30% as Karen has been doing. If so why isnt he doing it? Why is it so hard to make 10-15% in equity while you can make 30% doing what Karen has done. She is plain lucky and time will catch up sooner or later.

if you have infinite deep pockets then your denominator on your return calculation will be infinity.

Warren Buffet doesn't have infinite deep pockets. He infamously sold 5-7Y puts at a time when everyone was required to buy them (regulatory arb that sle mentioned in another thread) and no one else could suffer the marked to market risk by selling it. Further, he didn't have to put up collateral, which was unheard of in the derivatives markets. Even then it nearly cost his firm its credit rating, but also that of his counterparty: goldman in 2009.

 

[drmark27]

Here's another point that has probably been debated ad nauseum: closing the position is a great suggestion in retrospect. If I were just to close my position every time X happened [e.g. a break below the lower BB, a moving average (crossover), a feeling of impending doom or not being able to sleep at night], then how many times would I be stopped out for a loss only to see the market rebound and take my anticipated profits with it? Sure if the Black Swan happens then I'm safe but aren't "all other occasions" enough to land me broke or without a profitable trading approach?

thanks maverick, for the wonderful insight .
Also, I loved the best suggestion given here for hedge. it was so simple. just close the damn loss making position. !. couldnot have been said better. imho , the successful trade is the one who can quickly cut his loss and move on to another setup

 

[OddTrader]

Here's another point that has probably been debated ad nauseum: closing the position is a great suggestion in retrospect. If I were just to close my position every time X happened [e.g. a break below the lower BB, a moving average (crossover), a feeling of impending doom or not being able to sleep at night], then how many times would I be stopped out for a loss only to see the market rebound and take my anticipated profits with it? Sure if the Black Swan happens then I'm safe but aren't "all other occasions" enough to land me broke or without a profitable trading approach?

Good question!

 

[darwin666]

Here's another point that has probably been debated ad nauseum: closing the position is a great suggestion in retrospect. If I were just to close my position every time X happened [e.g. a break below the lower BB, a moving average (crossover), a feeling of impending doom or not being able to sleep at night], then how many times would I be stopped out for a loss only to see the market rebound and take my anticipated profits with it? Sure if the Black Swan happens then I'm safe but aren't "all other occasions" enough to land me broke or without a profitable trading approach?

hmm- see there is no correct-answer here. it is the BOY who cried wolf.. market will CHOP CHOP and do that all the time.. but it does pause even in a down trend. example is OCT 2014. i was short many puts on SPY.. i looked for a pause -eventually I got one and got our for a severe loss only to see a V shape rebound.. screw that. .that week mid OCT.. i lost on the downside. i even sold calls to offset the loss and lost on them also when the market sharply rebounded.
so - there is no answer here... what I have noticed is- u set ur pain limit and once it is crossed GTFU.. and dont regret. .if your threshold is set too close. then u will experience too many trades or decisions to make.

 

[ktm]

As Maverick noted earlier, it's a tough game. The positive expectations and juicy premium are tempting to everyone. Lots of people make huge returns month after month...sometimes for years going to that well - then one day the wheels come off and it all comes crashing down. I've done it.

The problem is that you never know when that day will come. They don't exactly ring a bell or send a tweet when the market dynamic is about to change in a huge way.

My own thoughts and trading evolution have been shaped by those times, same with Maverick and others that have been around for a while. The only way you can do this for any serious amount of time is to learn and evolve.

For me, it's just spreads now. Limited risk and limited reward but all of it clearly defined and reliably in place every minute of every day. I'm always looking at better and cheaper ways of hedging or setting up the structures to increase profitability. Much of what I look at is either too expensive or too risky. Trading derivatives is like blackjack. There are edges out there to be had and you can do quite well (over the long run) if you work them with discipline and consistency.

 

[Timetwister]

NNT: Exactly. When they pay off, [the reward] is huge. But when you’re selling options, you need a lot of traders. For example, two or three traders can trade long out-of-the-money options on 500 instruments, but when you’re using long and short strategies, two or three traders can only monitor 50 or 60 positions. We invest in traders who sell at-the-money options, and we concentrate on just buying the “wings” (the out-of-themoney puts and calls of the butterfly position).

http://www.fxtsp.com/education/fx-t...ew-with-top-trader-nassim-nicholas-taleb.html

That link is broken, you can read the interview here: http://www.forex-ratings.com/forex-interviews/?id=12083

"Taleb has spent the past two decades studying the characteristics of options, but it was his windfall following the 1987 stock market crash that put him on the map. His long position in frontmonth eurodollar options gained 67,000 percent as the market gapped up 370 basis points on Oct. 20, the day after the crash."

"NNT: I was long out-of-the-money OTM options in about anything that traded. People were laughing at me."

"AT: On both sides of the market? Calls and puts?

NNT: Yes, particularly in financials and currencies — eurodollars, the deutschemark, and the Japanese yen. My largest position was in the yen because its volatility was tremendously low. I also had a collection of [other long OTM currency options], like Swiss franc/Australian dollar and Swiss/Kiwi (New Zealand dollar)."

"Here’s one thing you can learn from this: If you owned an option that was 20 standard deviations out of the money — and I had plenty of those — how many cumulative months of time decay could you sustain if it moved into the money?"

"NNT: I quizzed traders, and they were telling me two or three years. But it was 67,000 months of time decay. You get paid 67,000 times your bet."

"But if you have a 24-sigma event on an option that’s 24 standard deviations out of the money, your payoff is 750,000 times your bet, which is what happened in eurodollars."

How is that even possible? I wonder what was the implied volatility of that moment.

Is that still possible nowadays, or OTM options are much more expensive now than before the Black Monday?

 

[OptionGuru]

"Taleb has spent the past two decades studying the characteristics of options, but it was his windfall following the 1987 stock market crash that put him on the map. His long position in frontmonth eurodollar options gained 67,000 percent as the market gapped up 370 basis points on Oct. 20, the day after the crash."

How is that even possible? I wonder what was the implied volatility of that moment.

Is that still possible nowadays, or OTM options are much more expensive now than before the Black Monday?

Recent cases where the OTM weekly options produced 10,000% plus gains.

• GMCR
• Friday December 04 $52.00
• Monday December 07 $89.00
• Unexpected news - takeover bid

• CMG
• November 20 before 13:30 EST $600.00
• November 20 after 13:30 EST $540.00
• Unexpected news - e-coli

 

[Timetwister]

Recent cases where the OTM weekly options produced 10,000% plus gains.

• GMCR
• December 05 $52.00
• December 06 $89.00
• Unexpected news - takeover bid

• CMG
• November 20 before 13:30 EST $600.00
• November 20 after 13:30 EST $540.00
• Unexpected news - e-coli

On the interview he talks about 67000 times and 750000 times. The introductions seems to be wrong. I can't even imagine an scenario where an option could multiply its price by 67000... That means both getting into the money from being extremely far of the money and implied volatility raising to astronomical levels.

Take a random SPY option priced at $0.01 (ignoring transaction costs, which are quite relevant when dealing with so cheap options). How could it ever jump to $670? You need it to get ATM/ITM and implied volatility jumping to like 600%.

 

[Maverick74]

On the interview he talks about 67000 times and 750000 times. The introductions seems to be wrong. I can't even imagine an scenario where an option could multiply its price by 67000... That means both getting into the money from being extremely far of the money and implied volatility raising to astronomical levels.

Take a random SPY option priced at $0.01 (ignoring transaction costs, which are quite relevant when dealing with so cheap options). How could it ever jump to $670? You need it to get ATM/ITM and implied volatility jumping to like 600%.

I think you are missing the point he is making.