<<< If the hit is small naked puts are better, if the hit is large spreads are better. >>>
On this we can agree.
On this we can agree.
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Seeking advice on writing (and covering) short options
- Thread starter noregrets
- Start date
You can win, but for that you have to predict something right (price of the stock, volatility, relative value, whatever). There is no magic to being short options or long options in the long run.Quote from oldnemesis:
So we can't win???
Right. So you are trying to predict the terminal distribution based on the idea that options are overpriced. The edge you are implying is not in the fact that you are winning every day, it's in the fact that you think vol is overpriced.Quote from oldnemesis:
Well... people who own stock buy puts to protect themselves from a disasterous downdraft. PM and I sell them the puts... I try to sell them puts with a positive expectation on my side.
Here is an example of a similar view - in some situations, I like buying put spreads of VIX, it's a strategy that worked very well for me over the years. Note that I am a buyer of options in this strategy, however, I am short volatility. Again, the edge is not in the direction of convexity or premium, not in percent of winning trades, but in the ability to predict something which drives the overall expectation of the strategy.
I will say it again. You can not compare insurance policy or lottery tickets to the options markets - the former two have a limited number of providers that dictate the price and structures that are, more or less, rigged against the buyer. In a liquid market, supply from people like yourself sooner or later drives the "insurance premium" to roughly break-even levels. Also, the adsorbing nature of the possible ruin prevents these products trading at perfectly break-even prices.Quote from oldnemesis:
It's just a matter of when the downdraft occurs relative to how many nickels we have collected, and can we see it comming or not. If we see it comming we can cancel the insurance policy and maybe miss the knife.
<<< So you are trying to predict the terminal distribution based on the idea that options are overpriced. The edge you are implying is not in the fact that you are winning every day, it's in the fact that you think vol is overpriced. >>>
As a put seller, I have to disagree with the part about being over priced.
A put seller will only know in hindsight if his option was under priced, reasonably priced, or over priced.
Suppose you wait on a trade hoping for a better credit, and VIX/IV drops, and keeps dropping.
In that case, the credit you passed up hoping for an over priced one.... turns out to have been the over priced credit you were looking for.
OOPS! You missed it.
Suppose you grab a credit because you think it's over priced, and then the VIX/IV rise and never turn around.
That over priced option now looks under priced.
Thus, the issue is NOT over or under priced options, as you will only know in hindsite.
The issue is one of personal analysis.
Is the credit worth the risk I am taking, relative to all the variables of my trade.
That being strike price, % otm, tech support, expy date, earnings release date, % return, quality of company, price value of company, probability of success, ect....
The only way to get a "potential credit edge" is, if the bid/ask is $0.25 by $0.40 and you get lucky with a $0.35 fill.
Perhaps there was a quick, sudden, and temporary movement in stock and/or IV.
Perhaps someone on the other end of the trade goofed.
And if you are comparing todays IV and credit with last years IV and credit, you are assuming it is still the exact same company, operating under the exact same circumstances.
Maybe it is, but maybe it's not. Either way, you'll never know.
Just because we may think a credit is currently over/under priced, doesn't mean it is. Your opinion does not make it so.
You'll only know in hindsite.
Hence, the best time to lock in the best credit, is when your analysis of your trade, indicates the risk is worth the credit.
As a put seller, I have to disagree with the part about being over priced.
A put seller will only know in hindsight if his option was under priced, reasonably priced, or over priced.
Suppose you wait on a trade hoping for a better credit, and VIX/IV drops, and keeps dropping.
In that case, the credit you passed up hoping for an over priced one.... turns out to have been the over priced credit you were looking for.
OOPS! You missed it.
Suppose you grab a credit because you think it's over priced, and then the VIX/IV rise and never turn around.
That over priced option now looks under priced.
Thus, the issue is NOT over or under priced options, as you will only know in hindsite.
The issue is one of personal analysis.
Is the credit worth the risk I am taking, relative to all the variables of my trade.
That being strike price, % otm, tech support, expy date, earnings release date, % return, quality of company, price value of company, probability of success, ect....
The only way to get a "potential credit edge" is, if the bid/ask is $0.25 by $0.40 and you get lucky with a $0.35 fill.
Perhaps there was a quick, sudden, and temporary movement in stock and/or IV.
Perhaps someone on the other end of the trade goofed.
And if you are comparing todays IV and credit with last years IV and credit, you are assuming it is still the exact same company, operating under the exact same circumstances.
Maybe it is, but maybe it's not. Either way, you'll never know.
Just because we may think a credit is currently over/under priced, doesn't mean it is. Your opinion does not make it so.
You'll only know in hindsite.
Hence, the best time to lock in the best credit, is when your analysis of your trade, indicates the risk is worth the credit.
Quote from Put_Master:
<<< So you are trying to predict the terminal distribution based on the idea that options are overpriced. The edge you are implying is not in the fact that you are winning every day, it's in the fact that you think vol is overpriced. >>>
As a put seller, I have to disagree with the part about being over priced.
A put seller will only know in hindsight if his option was under priced, reasonably priced, or over priced.
Suppose you wait on a trade hoping for a better credit, and VIX/IV drops, and keeps dropping.
In that case, the credit you passed up hoping for an over priced one.... turns out to have been the over priced credit you were looking for.
OOPS! You missed it.
Suppose you grab a credit because you think it's over priced, and then the VIX/IV rise and never turn around.
That over priced option now looks under priced.
Thus, the issue is NOT over or under priced options, as you will only know in hindsite.
The issue is one of personal analysis.
Is the credit worth the risk I am taking, relative to all the variables of my trade.
That being strike price, % otm, tech support, expy date, earnings release date, % return, quality of company, price value of company, probability of success, ect....
The only way to get a "potential credit edge" is, if the bid/ask is $0.25 by $0.40 and you get lucky with a $0.35 fill.
Perhaps there was a quick, sudden, and temporary movement in stock and/or IV.
Perhaps someone on the other end of the trade goofed.
And if you are comparing todays IV and credit with last years IV and credit, you are assuming it is still the exact same company, operating under the exact same circumstances.
Maybe it is, but maybe it's not. Either way, you'll never know.
Just because we may think a credit is currently over/under priced, doesn't mean it is. Your opinion does not make it so.
You'll only know in hindsite.
Hence, the best time to lock in the best credit, is when your analysis of your trade, indicates the risk is worth the credit.
I hate to break this to you. But ALL trades fall into that category of not knowing until after the fact. That is why Sle is saying you have to PREDICT something. The art of PREDICTING means you are using some form of analysis to ascertain the future value of some product.
What is frustrating about this conversation is the fact that in all your posts, you are basically telling us that you are not PREDICTING anything. You are simply putting on credit spreads for the sake of doing so.
I don't use credit spreads. You have me confused with oldnemesis.Quote from Maverick74:
I hate to break this to you. But ALL trades fall into that category of not knowing until after the fact. That is why Sle is saying you have to PREDICT something. The art of PREDICTING means you are using some form of analysis to ascertain the future value of some product.
What is frustrating about this conversation is the fact that in all your posts, you are basically telling us that you are not PREDICTING anything. You are simply putting on credit spreads for the sake of doing so.
Saying option sellers are initiating trades simply for the sake of a trade is so silly I'll ignore that statement.
We initiate trades because we "predict" the trade is of high enough probability to succeed, and that the risk is worth the reward.
The implication from SLE, you, and others is, that the retail trader can do an analysis, and know when a credit is over valued.
That they should wait for a credit to be over valued or with an edge.
Time is money.
You can't keep waiting and hoping.
You can only do an analysis of your trade for "risk/reward/probability", and then make a decision.
Comparing todays IV and credit to last years is silly.
Comparing todays IV and credit to last month is silly.
All you have is the reality of today.
Thus the only question is, is the trade worth the risk/reward/probability right now, based on your analysis of the future.
If the % return, and dollars earned are not adequate, for the risk and probability incurred, then the trade should not be initiated.
There is no such thing as over priced credit for the retail trader.
Keep waiting and maybe you'll get a better credit, but maybe you'll end up with a worse credit.
All you can do, is try and pick the "optimum time" to initiate the trade, based on all the variables that make up the trade.... including technical support.
Quote from Put_Master:
I don't use credit spreads. You have me confused with oldnemesis.
Saying option sellers are initiating trades simply for the sake of a trade is so silly I'll ignore that statement.
We initiate trades because we "predict" the trade is of high enough probability to succeed, and that the risk is worth the reward.
WHAT are you predicting? Good lord, we keep going around and around in circles here. What EXACTLY are you predicting when you initiate this trade? And like Denzel Washington use to say, explain it to me like I'm a 5 year old. And why are you even using the word probability after you demonstrated that you did not even understand how probability even works with options. So let me ask my 2nd question. How EXACTLY are you determining the trade is high probability? Again, like I'm a 5 year old.
The implication from SLE, you, and others is, that the retail trader can do an analysis, and know when a credit is over valued.
That they should wait for a credit to be over valued or with an edge.
Credit spreads CAN'T be overvalued! They are a relative value trade. Since you are selling one option and buying another. You don't sell credit spreads because they are overvalued, you sell them due to RELATIVE value. In other words, you are trading the skew.
Time is money.
You can't keep waiting and hoping.
You can only do an analysis of your trade for "risk/reward/probability", and then make a decision.
But you won't tell us how you are analyzing the risk/reward or the probability. Around and around we go.
Comparing todays IV and credit to last years is silly.
Nobody here suggested that.
Comparing todays IV and credit to last month is silly.
Nobody here suggested that.
All you have is the reality of today.
Thus the only question is, is the trade worth the risk/reward/probability right now, based on your analysis of the future.
And how are you ANALYZING the future? LOL.
If the % return, and dollars earned are not adequate, for the risk and probability incurred, then the trade should not be initiated.
What does this even mean?
There is no such thing as over priced credit for the retail trader.
Keep waiting and maybe you'll get a better credit, but maybe you'll end up with a worse credit.
Who are you talking to? Nobody ever mentioned this. You obviously are struggling between bets on absolute vol and bets on skew.
All you can do is try and pick the "optimum time" to initiate the trade, based on all the variables that make up the trade.... including technical support.
Optimum time? That's like saying I can win the lottery if I just pick the optimum time to buy my ticket. And of course the optimum numbers would help too. LOL.
[b/]
Of course we are predicting something.
Every put seller is predicting where the underlying price will NOT go.
If our prediction is right we win if our prediction is wrong we lose.
If I sell puts at $30 I am predicting that the price will remain above $30.
I don't see how a sane person could say otherwise.
Also you have to realize that Put Master simply does not understand probability and expectation and how they relate to price distributions. I have gone in endless circles with him on this and you just have to take it as a given that he will NEVER make sense on this issue. NEVER
Every put seller is predicting where the underlying price will NOT go.
If our prediction is right we win if our prediction is wrong we lose.
If I sell puts at $30 I am predicting that the price will remain above $30.
I don't see how a sane person could say otherwise.
Also you have to realize that Put Master simply does not understand probability and expectation and how they relate to price distributions. I have gone in endless circles with him on this and you just have to take it as a given that he will NEVER make sense on this issue. NEVER
Quote from oldnemesis:
Of course we are predicting something.
Every put seller is predicting where the underlying price will NOT go.
If our prediction is right we win if our prediction is wrong we lose.
If I sell puts at $30 I am predicting that the price will remain above $30.
I don't see how a sane person could say otherwise.
So you are betting on distribution. And the distribution is based on probability. Only you and your partner in crime here are not using probability to determine the distribution. So how EXACTLY are you predicting the future distribution of prices?
I may have said this before in a similar Put_Master v. The World thread, but his style of investing/trading reminds me of a guy named Ron99 on the BigMike forum. Ron sells options on physical commodity futures and sometimes he trades futures. He's got a mega thread going and it's interesting to read the war stories about his bad trades.
Anyway, someone asked Ron about IV and he acted like he had never heard of the term. Another person asked how he enters orders and he said he uses the previous day's delta x today's price change. In other words, he's doesn't use all the jargon and statistics, and he seems to have only a passing interest in the option model(s), but he's been doing this for a decade, he's diversified and apparently he does quite well. It also sounds like he does a LOT of fundamental research, manages his margin like a hawk and never uses more than one-third of his trading capital.
Will Ron or Put_Master ever blow up? Who knows, but if they're not over-leveraged, if they are well diversified and if they really study the fundamentals, they can probably take a fair amount of heat, and far more than the knuckleheads who are over-concentrated in short puts on index options.
Old School (experience, intuition, discipline) v. New School. Pick your poison or create a custom blend. We've seen all types blow up.
Anyway, someone asked Ron about IV and he acted like he had never heard of the term. Another person asked how he enters orders and he said he uses the previous day's delta x today's price change. In other words, he's doesn't use all the jargon and statistics, and he seems to have only a passing interest in the option model(s), but he's been doing this for a decade, he's diversified and apparently he does quite well. It also sounds like he does a LOT of fundamental research, manages his margin like a hawk and never uses more than one-third of his trading capital.
Will Ron or Put_Master ever blow up? Who knows, but if they're not over-leveraged, if they are well diversified and if they really study the fundamentals, they can probably take a fair amount of heat, and far more than the knuckleheads who are over-concentrated in short puts on index options.
Old School (experience, intuition, discipline) v. New School. Pick your poison or create a custom blend. We've seen all types blow up.
I use probability and distribution to determine the probability that price will not go below my put strike.
This is how I get expectation
http://en.wikipedia.org/wiki/Expected_value
Put Master gets what he calls 'probability' but it is not the probability that you and I know as probability from statistical distribution.
He thinks that there are too many other factors involved in determining whether a price will or will not go to a certain place. He develops a 'feeling' about it, based at least partially on fundamentals, and calls it 'probability'.
If he used another term (e.g. 'likelyhood' or 'gibnix') perhaps we would not even have this argument.
This is how I get expectation
http://en.wikipedia.org/wiki/Expected_value
Put Master gets what he calls 'probability' but it is not the probability that you and I know as probability from statistical distribution.
He thinks that there are too many other factors involved in determining whether a price will or will not go to a certain place. He develops a 'feeling' about it, based at least partially on fundamentals, and calls it 'probability'.
If he used another term (e.g. 'likelyhood' or 'gibnix') perhaps we would not even have this argument.