Profit from market neutral options writing - possible or not?

[Maverick74]

Quote from vhehn:

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

This statement is completely false. On a risk adjusted basis, there is a huge difference. Yes, selling a put is very much like owning stock, except for one huge difference. When I sell a naked put in AAPL for 1.00, if I win, I make a dollar. If I lose, I could lose 20 dollars. If I buy the stock, I could also lose 20 dollars, but I could make an infinite amount of money.

This is what people simply don't get. If you want to make money in this business over the long run, you need to have big winners, even if they come merely by luck. Because every trader is going to have their fair share of hits.

Taking an unlimted amount of risk for .50 or 1.00 or some finite amount is not going to add up over the long run.

This is why a good stock trader will kill a good option seller over the long run. Sure, Ansbacher has decent numbers. He is one of the few survivors. Put his numbers next to Dan Zanger and get back to me.

Same is true for selling naked calls with the exception that a stock can only go to zero, so the short stock seller actually has a finite return, albeit, usually a very large one.

 

[jonbig04]

Quote from TraderZones:

*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.

Road kill? Ok fair enough. I'm sure I will find an edge though. Somehow. I know enough to stay away from schemes. I'm not sure exactly what makes you think im gullible...young? yes. Im 20, but I've also started a successful company, and made some damn good money. More importantly I've lost hundreds of thousands of dollars, but I've learned a lot...I'm not sure why you think I'm not going to find and edge, but somehow you can? Im new to all of this yea....Im just doing basic spreads with fake money, beginner's stuff, but i wouldnt pigeonhole me as some pipe-dreamer who thinks he's going to make billions and never lose and in doing so lose everything. I will put in the work, time, effort, losses, gains etc b/c this isnt my first endeavor. I may be a noob, but I'd put my resolve against yours any day.

 

[1.6180340]

Quote from kinggyppo:

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

Thanks, that thread is full of good information!
And btw it seems to confirm what I already thought.

 

[Free Thinker]

Quote from Maverick74:

This statement is completely false. On a risk adjusted basis, there is a huge difference. Yes, selling a put is very much like owning stock, except for one huge difference. When I sell a naked put in AAPL for 1.00, if I win, I make a dollar. If I lose, I could lose 20 dollars. If I buy the stock, I could also lose 20 dollars, but I could make an infinite amount of money.

This is what people simply don't get. If you want to make money in this business over the long run, you need to have big winners, even if they come merely by luck. Because every trader is going to have their fair share of hits.

Taking an unlimted amount of risk for .50 or 1.00 or some finite amount is not going to add up over the long run.

This is why a good stock trader will kill a good option seller over the long run. Sure, Ansbacher has decent numbers. He is one of the few survivors. Put his numbers next to Dan Zanger and get back to me.

Same is true for selling naked calls with the exception that a stock can only go to zero, so the short stock seller actually has a finite return, albeit, usually a very large one.

nonsense, you can make money in this business with steady single hits. for every apple there is the ge or msft over the last 10 years. its easy to look at apple in hindsite.
you shouldnt be selling premium on stocks anyhow because of specific stock risk but a put selling program on a a good index or etf will get you an average 12-15% per year. most mutual fund managers would love that performance. sure a "good" stock picker can kill those numbers but i have found that most stock pickers think they are better than their results show. if you are that "good" stock picker you should be buying options, not selling them. as a seller you exchange the potential big hit for slow and steady.

 

[Maverick74]

Quote from vhehn:

nonsense, you can make money in this business with steady single hits. for every apple there is the ge or msft over the last 10 years. its easy to look at apple in hindsite.
you shouldnt be selling premium on stocks anyhow because of specific stock risk but a put selling program on a a good index or etf will get you an average 12-15% per year. most mutual fund managers would love that performance. sure a "good" stock picker can kill those numbers but i have found that most stock pickers think they are better than their results show. if you are that "good" stock picker you should be buying options, not selling them. as a seller you exchange the potential big hit for slow and steady.

Did you read my post? Or yours for that matter? I was responding directly to what you said which was "selling puts is no more risky than owning stock. selling calls is no more risky than shorting stock."

I said nothing about slow and steady gains. I said nothing about indices. My comment was in response to yours about selling naked puts and calls is no more risky then buying and shorting stock. You then respond with "you shouldn't be selling premium in stocks anyhow".

I also never commented on how easy or hard it was. Simply that on a risk adjusted basis, selling naked calls and puts in stocks is NOT the same thing as simply buying shares or selling them short. Completely different risk/reward characteristics.

 

[makloda]

Quote from vhehn:
a put selling program on a a good index or etf will get you an average 12-15% per year.

Sure, you will have 15 years in a row where you make 13% and one year where you're down 75%.

Again, the risk adjusted returns are not better than going long SPY and simply holding for 16 years and reinvesting dividends.

 

[TraderZones]

Quote from jonbig04:

Road kill? Ok fair enough. I'm sure I will find an edge though. Somehow. I know enough to stay away from schemes. I'm not sure exactly what makes you think im gullible...young? yes. Im 20, but I've also started a successful company, and made some damn good money. More importantly I've lost hundreds of thousands of dollars, but I've learned a lot...I'm not sure why you think I'm not going to find and edge, but somehow you can? Im new to all of this yea....Im just doing basic spreads with fake money, beginner's stuff, but i wouldnt pigeonhole me as some pipe-dreamer who thinks he's going to make billions and never lose and in doing so lose everything. I will put in the work, time, effort, losses, gains etc b/c this isnt my first endeavor. I may be a noob, but I'd put my resolve against yours any day.

Spend time reading all your words. You are pushing pretty much the same buttons new traders do. You are currently a poster child for all those noobs who are ready to take on the market.

I have been doing this for 20 years. You are just now putting on your shoes. Don't confuse the two. The only thing your "resolve" will earn you is another chance to say "I've lost hundreds of thousands of dollars"

 

[ed_berk]

I bought an eBook on a strategy that trades the theta decay of options. The strategy is interesting because of the use of the underlying to hedge the risk of the option positions.

A bit different than the topic here, but basically the strategy is selling ATM options and trading the underlying (www.capturingtheta.com).

 

[El OchoCinco]

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!

It can be profitable like any other strategy if you use it correctly. In other words, manage the risk exposure of your whole portfolio and each position and yada yada yada..

However in the long run the market changes and writing options works better during low vol (ironic but true) then it does in higher vol situations with much more whipsaws and stop outs and upset stomachs then low vol environments where the market is sideways or usually rising slowly over time. However recognizing the change in the environment, such as since last August, is key in moving away from the strategy to other forms of spreads so that you adapt to the market.

Like every position it comes down to risk management. Selling options month to month or even spreads without considering the change in market conditions and continuing to do so to me is not good risk management.

 

[Free Thinker]

Quote from Maverick74:

Did you read my post? Or yours for that matter? I was responding directly to what you said which was "selling puts is no more risky than owning stock. selling calls is no more risky than shorting stock."

I said nothing about slow and steady gains. I said nothing about indices. My comment was in response to yours about selling naked puts and calls is no more risky then buying and shorting stock. You then respond with "you shouldn't be selling premium in stocks anyhow".

I also never commented on how easy or hard it was. Simply that on a risk adjusted basis, selling naked calls and puts in stocks is NOT the same thing as simply buying shares or selling them short. Completely different risk/reward characteristics.

as a risk its exactly the same.