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Profit from market neutral options writing - possible or not?
- Thread starter 1.6180340
- Start date
Quote from 1.6180340:
Hi,
I know some people that make their money by every month writing out of the money calls and puts on an equity index. The intention is to make profit on the decay of the time premium. It is supposed to be a market neutral strategy.
As long as the priceswings of the underlying equity index are not too much, the position is more or less neutral and when big market moves happen they just roll their positions to different strikes (taking some loss of course). They claim that although they sometimes lose money in extreme markets, they are profitable in the long run.
I have difficulties believing this, since this would imply imo that these options are not correctly priced. I think all they are doing is distributing the chances of profit and loss in a different way (i.e. big chance of small profit almost every month and a small chance of catastrophic loss once in a while, but eventually a zero-sum game).
Is there any reason to believe that this kind of strategy can really be profitable in the long run and if so, what is the fundamental reason for that?
Thanks!
Some sprinters can finish a 100-meter race under 10 seconds. Some tennis players can return serves over 125 mph at Wimbledon. Can everyone on Earth achieve such tasks ?
IMHO:
The answer to your question is "YES". However, it is very difficult to have good returns with small draw-downs for a long period of time (eg. 20 years). It requires a lot of hard-work, talent and luck.
Quote from Prevail:
in my analysis the market only moves against a short option position when it attains a steepness level of x. when this level is hit I buy back month hedges. usually, this is wasted $, but when not, and even as such, the equity curve is smoothened.
What is a steepness level?
Quote from 1.6180340:
Hi,
I know some people that make their money by every month writing out of the money calls and puts on an equity index. The intention is to make profit on the decay of the time premium. It is supposed to be a market neutral strategy.
As long as the priceswings of the underlying equity index are not too much, the position is more or less neutral and when big market moves happen they just roll their positions to different strikes (taking some loss of course). They claim that although they sometimes lose money in extreme markets, they are profitable in the long run.
I have difficulties believing this, since this would imply imo that these options are not correctly priced. I think all they are doing is distributing the chances of profit and loss in a different way (i.e. big chance of small profit almost every month and a small chance of catastrophic loss once in a while, but eventually a zero-sum game).
Is there any reason to believe that this kind of strategy can really be profitable in the long run and if so, what is the fundamental reason for that?
Thanks!
You my want to read the first 20-30 pages of this thread. Remember that though one could argue that long put is synthetically equivalent to short call, Short call has theoreticaly unlimited risk (takeover, earnings surprise, etc) so that the risk profile is different. Maybe they should say unquantified risk, the word unlimited I reserve only for deity.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=53037
Quote from jonbig04:
Im a noob., but im VERY interested in writing out of the money options because dont the VAST majority of options expire worthless? Something like 85%? Seems like all that money has to go somewhere. As long as you hedge your self I think it can work. Im in the process of trying it with fake money.
Option writers will discover just how efficient the pricing of options is. After you allow for all fees and expenses (not to mention risk), the average option writer over a 20 year period will likely find they did not make any money.
Yes, time decay. But you also have capped the profit potential, so you will find it a wash long-term. That is, if you don't get wiped out and blindsided by the event that you thought you had accounted for.
Quote from jonbig04:
I guess the best thing to look for is to take advantage of the people that buy out of the money options. If we can somehow be the "house" and take the money of all the people that are gambling. This helps me put everything into perspective.
*sigh* so young, yet so gullible...
You are not going to find an edge by being clever or through trickery. You are just going to enrich your broker.
Stay away from Liberty "Write options Instead!" or TMTT or Investools or get-rich-quick seminars. Your current level of understanding is similar to road kill.
Quote from TraderZones:
Option writers will discover just how efficient the pricing of options is. After you allow for all fees and expenses (not to mention risk), the average option writer over a 20 year period will likely find they did not make any money.
Yes, time decay. But you also have capped the profit potential, so you will find it a wash long-term. That is, if you don't get wiped out and blindsided by the event that you thought you had accounted for.
this guy has one of the best records in managed money. he sells options.
selling puts is no more risky than owning stock. selling calls is no more risky than shorting stock.
http://www.ansbacherusa.com/files/optionstrader0106article.pdf
Possible, yes. Ansbacher has done so, for years. He has proven it is possible. Are you as talented as Ansbacher? It will take 20 years to find out.
You can write uncovered ("naked") options, or covered ("spread") options. They have different risk/reward profiles. Ansbacher offers both, but the vast majority of his customers have invested their money in his "naked" option selling program. For what it's worth.
Remember that just because you refuse to forecast future PRICE DIRECTION (your "market neutral" selling point), doesn't mean that you also must refuse to forecast future VOLATILITY. You can sell options when you forecast volatility to decline, and not sell options when you forecast volatility to increase. If your forecasts are accurate, it will improve your option selling profits.
You can also use the Don Fishback "ODDS" method of market neutral option selling. You can calculate (using some proprietary and hopefully positive-expectation formula) the "fair value" of selling an option strangle (for naked options) or selling an option condor (for covered options). You can place a limit order which only sells these options when you are getting paid more than "fair value". If your calculations of fair value are accurate, it will improve your option selling profits.
Fishback will sell you his "ODDS" methodology for $0.5K to $5.0K depending on the venue. It's not worth the money; his idea of "fair value" is just the Black Scholes option valuation.
You can write uncovered ("naked") options, or covered ("spread") options. They have different risk/reward profiles. Ansbacher offers both, but the vast majority of his customers have invested their money in his "naked" option selling program. For what it's worth.
Remember that just because you refuse to forecast future PRICE DIRECTION (your "market neutral" selling point), doesn't mean that you also must refuse to forecast future VOLATILITY. You can sell options when you forecast volatility to decline, and not sell options when you forecast volatility to increase. If your forecasts are accurate, it will improve your option selling profits.
You can also use the Don Fishback "ODDS" method of market neutral option selling. You can calculate (using some proprietary and hopefully positive-expectation formula) the "fair value" of selling an option strangle (for naked options) or selling an option condor (for covered options). You can place a limit order which only sells these options when you are getting paid more than "fair value". If your calculations of fair value are accurate, it will improve your option selling profits.
Fishback will sell you his "ODDS" methodology for $0.5K to $5.0K depending on the venue. It's not worth the money; his idea of "fair value" is just the Black Scholes option valuation.