Premium Sellers vs. Option Buyers

Quote from RedDuke:

I have data going back to 1997. With various crises over past 16 years, that probably should be enough.
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Could be enough and could be not, depending on the inception moneyness (obviously). If you are mainly trading ATM options, it's kinda ok, if you are selling 10-delta options however, it's not. You have to make up your mind if you are trading 2nd, 3rd or 4rth moment of the distribution - the higher the moment, the more data you need to backtest it properly (roughly to the power of the order).
 
Quote from Maverick74:

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.
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you should write a book Mav

you really should
 
I think there is a slight "edge" in short the straddles/long the strangles with deltas < 0.20

Not with 1:1 ratio

Need a bit of vola ramp , so pre reporting candidates are the best

Anyone tried this before?
 
Quote from daniel5198:

As a 2008 survivor, all I have to say to this post is +1 and Amen.
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I can better that :D I was short in 2007 using [bought not sold] long dated options [actually LEAPS] and ended up making no money.
 
I believe most research on this has concluded that selling options indeed is profitable overall, but with occasionally large losses. So you make money over several small trades but can lose it all in one trade. Overally though, it should be profitable but with very large drawdowns. Consider that options are seen as insurance to most, it's a small price to pay to sleep better at night and reduce portfolio volatility. As a result cash flows from buyers to sellers. Like in all forms of insurance, the insurance companies and lotto companies make the profit, not the buyers. Options are no different.

As for the risk of short vol it has been debated several times on here. The biggest vol blowout in history was long vol. Just ask all the buyers what happned to them in 2000, or look at 2008 where many fundamentally long vol, even some of them hedged, lead to total annihilation.
 
There is a fund called ljm partners, they mostly sell s&p options. They manage 100s of millions. They periodically have large draw downs, but overall make tons of $. I assume they somehow hedge their short positions.i
 
Like TskTsk said, options are overpriced because they are primarily used as insurance against equity portfolios. They are more like business interruption insurance than home owners insurance. A business will only buy business interruption insurance if it is substantially less than the amount he makes running his business.

This means that selling options should produce lower returns than the equity portfolios they are hedging. Any returns realized greater than a long only equity portfolio is a function of leverage instead of "edge."
 
Quote from RedDuke:

There is a fund called ljm partners, they mostly sell s&p options. They manage 100s of millions. They periodically have large draw downs, but overall make tons of $. I assume they somehow hedge their short positions.i
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Yes, I think ETer Comintel has read up on them; I recall some long term performance charts being posted. Big hit in 2008 but I don't think it was worse than the S&P 500 from Jan 1 to Dec 31 (-37% I believe).

LJM, Victor N. and Karen the Super Trader (if her numbers are real) all seem(ed) to focus on selling equity index options. Anyone know if there are big funds that don't specialize in selling index options, e.g. someone with a long track record selling ETF options, commodity options, or a hodge podge of individual stocks? I'd be curious to know if they were able to side step the worst of 2008 and the rough spots of 2010 and 2011, or if, in fact, everything has a tighter correlation in our 'clap on, clap off' world.
 
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