I am sure if a new underlying is created that the price is randomly generated by a machine. I am sure we would still see successful traders(at-least for sometime), no? Maybe luck?
Re-centering a short strangle
- Thread starter MrAgi1
- Start date
Neither one is actually "random" - there's a number of calculable risk/reward elements in both. Trading has true two-sided markets, much better spreads, and (at least via options) ways to express a variety of views. Casino bets don't. But yes, there are a lot of parallels - and a large base of necessary knowledge in common if you're going to engage in either one. (E.g., John Kelly tested out his famous criterion at the card tables in Vegas.)
That's not how it works at all. Sorry, I don't feel like trying to explain the whole thing right now... there's a lot of reading you can do on the topic. Suffice it to say that on a new issue, buyers and sellers will work out a "fair" price between them almost instantly.
Oh yes, I was wrong, my question made no sense. Buyers and Seller is what actually move price.
Short strangle is not a directional bet; it's a volatility bet. It bets that the market will be calm and will only move around the strikes of the two legs in the spread. So once the market goes crazy, no matter which direction you go to, unless it's the right direction, you are still f***'ed. If you look at the possible scenarios of what can happen with the market, there are four possible scenarios that can happen, the market doesn't move at all, the market moves up(down) and then down(up) past the strikes, the market moves up all the way, the market moves down all the way. Out of the four possible scenarios, there is only ONE scenario where you would win with short strangles, basically a 25% chance of making money. A lot of traders choose to roll it forward to try again but I am not a fan of that, because if the possibility of profiting with the short strangles overall is only 25%, you are still going to have just 1/4 chance of winning even if you roll them forward so what's the point, betting more money to have the same chance of losing? Unless you have a crystal ball that tells you for sure that in the future expiration, the market is going to be super quiet and will be guaranteed to not move past your strikes, rolling them forward again is just what I call donating to the market and the broker. And when you short options, you need to remember, the premiums that you get from shorting is *never* enough to cover the potential losses. It's designed like that otherwise it'll create riskless profit. And in the financial markets, there is no free lunch hence there is no riskless profit, well there is but the return is very very low and you won't be able to make a living on it.
So don't be fooled by those people who are claiming that shorting options produces streams of safe income or whatever. It's not; shorting options is very very risky and is a lot riskier than what people realize. The premiums that you earn from shorting options is more like a borrowed loan. Eventually you will be giving them back, ten times over.
With everything, there is always always an outlier. With every single lottery draw, there are always huge winners who get a windfall and then numerous winners that win various amounts but does that mean playing the lottery ticket is a profitable endeavour??
Options seem simple but it's actually not more complicated and riskier than what people think.
But then does buying options work(I doubt that)? Or nothing really works?
Buying options has its own risks as well. They are not easy either but at least your loss is capped unlike shorting options where your loss can be unlimited depending on what type of options you shorted. Long story short, options is very very different from basic assets like stocks, bonds, commodities or term deposits. It's a derivative meaning its value is derived from the value of another. So when you are trading a derivative like options, you are not just betting on the derivative itself but also on the asset that the derivative is based on so you are double-betting sort of speak so your risk is actually amplified along with the returns of course. And the problem is people tend to look at its amplified returns and choose to ignore its amplified risks.
There are ways to profit with options yes but one has to be very very careful in selecting the correct options and/or the combinations of them that fits the market condition as well as the underlying (the asset that the option's value is based on).
The default expectancy of any trade is zero (minus friction - fees, etc.) Nothing obvious or simple works, no.
And yet, there are many people - I'd hesitate to say "millions", but certainly thousands - who do it professionally, day in and day out, and take home excellent pay (or build fortunes.) There are edges to be had, but no one is going to give you one; that's the most individual thing of all, and identifying/keeping/maintaining it is hard. If you can't find one for yourself, then all you're going to do is struggle and lose money.
Yes, the key word is edge. Hopefully, I do one day.