Profitable Options Traders - Long Term

TheBigShort said:
like what @sle does/did
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sle was epic. I miss him.

And the goal is to know when it's cheap and when it's "market" and when it's expensive, but use that as context to inform a directional decision... I.e. Buying a call that factoring in volatility is a 55% play, but a 100%+ gain if it's a winner....and having the discipline to adhere to the rules that consistently give that payoff. So, paying for extra days (under the presumption of selling them later) will increase your chances in short term plays. If you drop a few fishing lines and take the ones that get bites, you can flip the odds of options slightly in your favor (long or short) for the coin-flip up/down and bring the vast upside exposure into your portfolio...

Once you get higher payoff with coin-flip odds, it's only a matter of discipline to make money...and improved skills to make more.
 
beerntrading said:
And the goal is to know when it's cheap and when it's "market" and when it's expensive
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Well you never really find absolute cheap vol(which is why directional trading is so hard with options) BUT you always find relatively cheap vol. An example would be buying RUT gamma selling SPX. If someone is good with direction they will almost always be more profitable in the long run trading the underlying (tighter spreads, 0 convexity risk premia). Which is why I am curious why people (and I guess you fall in this group) like to trade options instead of the underlying. Would you mind explaining? Or do you take a direction on volatility as well?

beerntrading said:
it's only a matter of discipline to make money
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I never understood the "discipline/psychology" phenomenon in trading. It either has a positive expected value or not. If you take a negative EV trade knowingly you should not even be near the mouse.
 
TheBigShort said:
Why would you wan't to add unnecessary risk to a directional trade? To start, gamma is usually over priced. "If you wan't delta trade the underlying" ~ a successful options trader. Taking a view on both direction and vol and being successful at it would put you in the top tier of traders on this board (I am not saying you aren't, in fact I would love to learn more about your strat).

Take my advice with a grain of salt as I am at the bottom of the barrel. Trading options is about buying "cheap" vol and selling "rich" vol. This could be as simple as: same asset same cycle - like what @destriero (highly recommend you read his vol journals) to a more advanced cross asset different cycles like what @sle does/did RIP (also recommend reading his 191 pages of posts). Deciding what is rich and cheap is where the gold lies.

"There are many ways to skin this cat" ~ Sle.
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The reason I trade options directionally is the higher return. I tried options spreads and I lost thousands doing so! The couple of hundred dollars you earn from selling options premium is not worth it when you get whacked and suffer the big losses. Buying calls and puts caps my losses to the cost of the premium. That is the worst case scenario. I can exit the trade sooner if I wish if it goes against me and save the residual value of the premium for the next trade. There is always risk when you place a trade. I do not use volatility values to determine when I get into a trade. When a stock is starting to move the opposite way, options premiums would be higher but, still lower in the case of a multiple day pullbacks. I do try to buy ITM or ATM calls and puts to put the odds in my favor. Not sure about the buying "cheap" volatility and selling "rich" volatility. That is useful when you sell options for the premiums. When you buy call or put options, most times, when the option is cheap, it is trading sideways and hardly moving. Your option will just expire worthless because the stock is not moving! You need the volatility and higher options premiums to make those huge monies!
 
Long-time vertical credit spread seller here. Have done pretty well. ("Uh-ohhhh.)

Confronting Groundhog Day, I had to force myself to pay attention to IV↔HV, and to simply NOT enter the market (or even roll in the market) unless IV>HV.

To fill in the less-than-100% use of capital, I'm targeting a momentum system that will take long and short positions based on end-of-day signals. Sweet beginnings thus far, AND I don't have the options-in-a-shitty-environment sleeplessness anymore. Swee-eeeet. Testing on equities now. (RIGHT now -- freakin' 12:30am 'now'....)
 
TheBigShort said:
Well you never really find absolute cheap vol(which is why directional trading is so hard with options) BUT you always find relatively cheap vol. An example would be buying RUT gamma selling SPX. If someone is good with direction they will almost always be more profitable in the long run trading the underlying (tighter spreads, 0 convexity risk premia). Which is why I am curious why people (and I guess you fall in this group) like to trade options instead of the underlying. Would you mind explaining? Or do you take a direction on volatility as well?


I never understood the "discipline/psychology" phenomenon in trading. It either has a positive expected value or not. If you take a negative EV trade knowingly you should not even be near the mouse.
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One more reason why I trade options is the lower cash outlay. If you buy 100 shares of a $50.00 stock, that is $5,000.00 at risk. I can buy a call option and control 100 shares and maybe, pay just $300 for it. Second reason is leverage. A 10% move in the stock would result in maybe, a 40-50% gain in the option. TWTR was in a trading range. On 07/27/18, it gapped down. I shorted it buying put options, TWTR Aug 17 2018 $35.00 put @$156.00 each. I bought 12 contracts. Sold all 12 contracts on 07/31/18 @$380.00 each. That is $2,688 profit on one trade or 143.59%. It is one of those windfall profit trades that just fell into my lap. Could I have shorted the stock, sure but, your risk to the upside is unlimited. Now, why would I trade stocks when options offer a higher return with less capital at risk too?
 
smallfil said:
The couple of hundred dollars you earn from selling options premium is not worth it when you get whacked and suffer the big losses.
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I mean you should be expecting a big loss, it's in the nature of the trade. Lot of little gains and a big loss. But if it has a positive expected value it's a good strategy. You like the opposite profile. A lot of small losers and an occasional big winner.
smallfil said:
You need the volatility and higher options premiums to make those huge monies!
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But what if the implied vol is already pricing in the move? Like how do you decide if the option is cheap enough for you to buy? Something I do with relatively good success is sell ATM SPX/QQQ/IWM calls and long the ATM call of the stock I think will outperform and vega weight them. Something you could maybe look into.
 
smallfil said:
Could I have shorted the stock, sure but, your risk to the upside is unlimited. Now, why would I trade stocks when options offer a higher return with less capital at risk too?
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See how comfortable you feel trading the option. "limited loss potential" etc..This is why there is a risk premium in owning convexity. Higher return on capital FORSURE!! BUT that's when you are right. I can't recall the last time I lost 100% of my capital investing in a stock ( - 100% ROC when option expires worthless).

I will also note that buying slightly ITM options would be equivalent to buying slightly OTM puts and long stock. Slightly OTM puts are the most expensive options.
 
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