Premium Sellers vs. Option Buyers

S

Squilly_D

Hello All,

I’m relatively new to ET, I’ve had an account for a while but didn’t post much. I started to take trading, and specifically option trading, seriously in November of 2012 (practiced the month of October with papermoney then went live with real money in Nov). Anyway, now that I’ve gained experience option trading (learning from the service tastytrade) I wanted to poll the option forum for people’s experiences, opinion, etc. on how individuals here trade options.

I myself lean more toward selling premium in options strategies. I use an assortment of strategies, but at any point in time, I like to keep my THETA positive across my entire portfolio. My portfolio currently consist of IC’s, Credit/Debit verticals, a calendar/diagonal or two, naked calls and/or puts, and maybe a short straddle or strangle. I make the decision of strategy based on vol in the underlying and I augment my portfolio with different strategies based on market conditions.
Prior to being a member of tastytrade (before November 2012), say around 2010 when I first dabbled with options, I would buy calls and puts, but at the time I didn’t really understand option trading, I just knew that I could use these “things” to possibly make a greater sum of money. I’ve come a long way sense then and I’ve also learn to incorporate more TA into my strategic approach to trading.

Anyway, I haven’t purchased a call or put sense. But now I believe I can also incorporate them into my portfolio. It’s not often when I’m right on direction, but there have been times where my conviction was high, the probability of the direction was high and it turned out that I was right. When those scenarios approach me again, I will utilize them to see how I do.

Finally, some personal stats: YTD, my win/loss ratio (defined as a winning or losing trade/position at close) hovers around 71%. YTD, I’m up ~45% on my entire portfolio (~$30K). This while having a full time job (shift work overnight…the only reason I can participate!) I’ve made back ALL my losses that I accrued sense I started trading, primarily to staying small in trading when I was learning throughout the years (started in 2008).
Discuss!
 
That's good!

However, just remember that a very common pattern for option sellers who do not have enough risk control is two or three years of strong gains, followed by a devasting loss that wipes them out.

In other words, it is the rare events that equal things out, but only once every few years.

So you cannot judge by anything short of many years' results, and maybe not even then unless you also study the risk closely.

In my opinion (and that of authors such as Baird), all short positions should always be hedged.

Maybe this does not apply to you and you have good risk control. I am just saying that you cannot judge from a year or two's results alone.
 
Quote from Squilly_D:

Hello All,

I’m relatively new to ET, I’ve had an account for a while but didn’t post much. I started to take trading, and specifically option trading, seriously in November of 2012 (practiced the month of October with papermoney then went live with real money in Nov). Anyway, now that I’ve gained experience option trading (learning from the service tastytrade) I wanted to poll the option forum for people’s experiences, opinion, etc. on how individuals here trade options.

I myself lean more toward selling premium in options strategies. I use an assortment of strategies, but at any point in time, I like to keep my THETA positive across my entire portfolio. My portfolio currently consist of IC’s, Credit/Debit verticals, a calendar/diagonal or two, naked calls and/or puts, and maybe a short straddle or strangle. I make the decision of strategy based on vol in the underlying and I augment my portfolio with different strategies based on market conditions.
Prior to being a member of tastytrade (before November 2012), say around 2010 when I first dabbled with options, I would buy calls and puts, but at the time I didn’t really understand option trading, I just knew that I could use these “things” to possibly make a greater sum of money. I’ve come a long way sense then and I’ve also learn to incorporate more TA into my strategic approach to trading.

Anyway, I haven’t purchased a call or put sense. But now I believe I can also incorporate them into my portfolio. It’s not often when I’m right on direction, but there have been times where my conviction was high, the probability of the direction was high and it turned out that I was right. When those scenarios approach me again, I will utilize them to see how I do.

Finally, some personal stats: YTD, my win/loss ratio (defined as a winning or losing trade/position at close) hovers around 71%. YTD, I’m up ~45% on my entire portfolio (~$30K). This while having a full time job (shift work overnight…the only reason I can participate!) I’ve made back ALL my losses that I accrued sense I started trading, primarily to staying small in trading when I was learning throughout the years (started in 2008).
Discuss!
More...

There have been a lot of threads on this topic over the years. Some good, some not so good. But we might as well talk about religion and politics. We'll have about the same amount of agreement. LOL. I understand where you are in your learning cycle. I was there too at one point. You'll evolve. I'm pretty opinionated about theta. I'm on record as stating it's not really real. But I don't want to re-hash that.

I've been trading for 16 years and my philosophy over the years has ebbed and flowed. I'm heavily influenced by guys like Taleb. But his ideas are just background music in my head. I have formulated my own views based on my 16 years of trading. I personally give little weight to premium selling. In fact, it's the antithesis of my core beliefs about the markets.

As a disclaimer I'll say for the record, there is no wrong or right way to trade. And every trader has to line up their personality with their strategy. Having said that, having traded for several prop firms, having been around 1000's of traders in my life, having studied 100's of some of the greatest traders that ever walked the earth, my conclusion is, you are more likely then not to not be successful if your strategy seeks out small winners. And no I'm not including HFT traders, flow traders, algo traders etc that make 1000's of trades a day eeking out small winners. I'm talking about joe sixpack. I think the only way you stand a chance is to make sizeable gains. In other words, you're going to have to get lucky every now and then. Without big winners, if you are selling premium and collecting pocket change, over time you are likely not going to outperform a broad based index on a risk adjusted basis.

Let me also point out before anyone gets too excited and tells me how much they made the last 4 years, the p&l symmetry of a premium seller is highly correlated to a broad based index. In other words, the market has gone up for 4 years straight and vol has gone down for 4 years straight. You SHOULD be making money in this environment. But don't kid yourself, your basically just long an index. The second this trend changes, you're going to start learning a lot about yourself.
 
Quote from comintel:

That's good!

However, just remember that a very common pattern for option sellers who do not have enough risk control is two or three years of strong gains, followed by a devasting loss that wipes them out.

In other words, it is the rare events that equal things out, but only once every few years.

So you cannot judge by anything short of many years' results, and maybe not even then unless you also study the risk closely.

In my opinion (and that of authors such as Baird), all short positions should always be hedged.

Maybe this does not apply to you and you have good risk control. I am just saying that you cannot judge from a year or two's results alone.
More...

I manage my risk control on under entry. I trade extremely small on naked positions. I don't sell naked in stocks I can't afford to buy 100 shares in, I stay with credit spreads in that case (if vol is high of course).
When it comes to spreads, if I'm not willing to lose the max lose, then I build a spread that I can handle (in terms of loss). Stated again, my risk management is handled on order entry.
 
Quote from Squilly_D:

I manage my risk control on under entry. I trade extremely small on naked positions. I don't sell naked in stocks I can't afford to buy 100 shares in, I stay with credit spreads in that case (if vol is high of course).
When it comes to spreads, if I'm not willing to lose the max lose, then I build a spread that I can handle (in terms of loss). Stated again, my risk management is handled on order entry.
More...

That's outstanding then!

That is the correct way to do it.

I would note that volatility has been mostly decreasing or flat for the past couple of years and it will not be quite so friendly an environment when it starts increasing.
 
Squilly,

You must have caught Maverick on a good night. Some time in the last couple of weeks he called premium selling as a primary activity "for the brain-dead and the lazy" and probably a few more pejoratives.

:p

That said, I'd recommend re-reading his message carefully. He's right that this subject has been hotly debated and it's worth your time to check out some of the old discussions. Tip: You can sort all posts in a forum by activity - some of the "options selling" posts have a very high count so they're easy to find. He and Comintel are also right that you haven't been doing this for very long and you've been doing it in a very tranquil environment.

My advice: Use leverage responsibly and make sure you're stress-testing your portfolio for price and volatility shocks. Some of the "limited risk" spreads you have can put you in a world of hurt if volatility explodes.
 
Squilly_D
Glad to hear the same opinion on premium sellers vs. option buyers topic. I've posted my papermoney results. Though I've had live money acc with TOS and now going with IB. There're fresh ones in attach. Prefer to short naked strangles deep OTM on commodities.


Quote from comintel:
I would note that volatility has been mostly decreasing or flat for the past couple of years and it will not be quite so friendly an environment when it starts increasing.
More...
Increased vol means increased premium means you can widen your strikes far away, doesn't it?
 
Quote from comintel:

I would note that volatility has been mostly decreasing or flat for the past couple of years and it will not be quite so friendly an environment when it starts increasing. [/B]
More...

I guess that depends on trade strategy ;) I'm anxious to be part of an increasing Vol environment as a premium seller. I believe it will allow me get FURTHER out of the money (3 - 4 standard deviations away from the ATM) and collect premium (for those types of strategies of course).
 
Papermoney results from April till now. The only risky trade I've had was last expired 6EU3 strangle (1.22/1.34) being almost near call strike at the expiration. I've had my finger on a trigger to rollover call side.
 

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Quote from Squilly_D:
I believe it will allow me get FURTHER out of the money (3 - 4 standard deviations away from the ATM) and collect premium (for those types of strategies of course).
More...
How far in SD's you choose strikes when going in? I usually keep them between 1.5 and 2 SD's, thinging it's a good balance of premium and success probability.
 

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