The only quantifiable and guaranteed edge is something called "Price Drivers" that Marketsurfer discovered.
Just trade the reverse of these signals and you would have won 3 out of 4 this year alone!
Seeking advice on writing (and covering) short options
- Thread starter noregrets
- Start date
The only quantifiable and guaranteed edge is something called "Price Drivers" that Marketsurfer discovered.
Just trade the reverse of these signals and you would have won 3 out of 4 this year alone!
PM, Maybe one of the reasons you bump heads with the numbers guys is because you're making an assumption that their analysis is static and they're making long term trades.
First, I'd wager that a lot of their trades are relatively short term, and therefore less prone to the outside fundamental influences you (justifiably) worry about, and try to incorporate into your analysis and trade selection.
Second, probability analysis (used as a catch-all term) is not static. You only see their numbers at trade initiation, but that doesn't mean they aren't monitoring the changes every day while the trade is on. When the probabilities/projections change, they may hedge with the underlying, add or subtract option legs, reduce size, or simply get out sooner than planned and move on to something else.
Their analysis software is helping them follow the old but good advice to "forget what you paid for it, based on conditions today, would you buy the stock?"
It might not be your cup of tea, but what I've described above is by no means cutting edge. The educational and software tools are available to anyone.
First, I'd wager that a lot of their trades are relatively short term, and therefore less prone to the outside fundamental influences you (justifiably) worry about, and try to incorporate into your analysis and trade selection.
Second, probability analysis (used as a catch-all term) is not static. You only see their numbers at trade initiation, but that doesn't mean they aren't monitoring the changes every day while the trade is on. When the probabilities/projections change, they may hedge with the underlying, add or subtract option legs, reduce size, or simply get out sooner than planned and move on to something else.
Their analysis software is helping them follow the old but good advice to "forget what you paid for it, based on conditions today, would you buy the stock?"
It might not be your cup of tea, but what I've described above is by no means cutting edge. The educational and software tools are available to anyone.
He bumps heads with people because he makes grand statements where are pretty ignorant and then hypocrites himself later.
He'll mention that he doesn't care about underlying prices and then say that he's waiting for the underlying price to fall further.
He'll be talking about the probability of a trade being profitable and then confuse the topic with position sizing.
He'll be talking about the probability of his puts being in the money and then out of the blue compare that to a put spread trader.
He'll talk about all the analysis he conducts but then in the same sentence claim that no other trader (be in a long option or spread trader) would do such an analysis.
He'll mention that he doesn't care about underlying prices and then say that he's waiting for the underlying price to fall further.
He'll be talking about the probability of a trade being profitable and then confuse the topic with position sizing.
He'll be talking about the probability of his puts being in the money and then out of the blue compare that to a put spread trader.
He'll talk about all the analysis he conducts but then in the same sentence claim that no other trader (be in a long option or spread trader) would do such an analysis.
All good points.
BTW, I've stated repeatedly, that my statements refering to my "opinion" regarding probability analysis formulas, do NOT refer to S-T trades. But rather trades lasting multiple months.
The more the # of months, the less it's relevance.
My point being, I don't see the value in putting an actual % number on a L-T trade, when that number changes daily.
Either a trade is high probability or it's not.... based on common sense analysis.
It's irrelevant whether the number is 79%, 85% or 95%.
Either way, it's unlikely the trade would have been cancelled, because the cal prob was only 80% vs 92.
Either way, it's % number is likely to change again tomorrow.
I just think relying a prob calc analysis to form an opinion, on a trade that is several months long, goes through multiple earning cycles, and is going to be influenced by multiple other variables over those months.... is silly.
And again, my discussion is NOT about S-T trades.
Just my opinion.
But you make good points and I appreciate you sharing them.
i don't like unbounded (including those bound by 0) trades, especially path-dep, and don't typically sell puts as a position. I do run some money that is limited to CC or the synthetic; so I am in that mkt every day.
putmaster needs to adjust his definition of probability. It's rarely used in the context of applying a fundamental or macro outlook. The put-sale is a wager on an outcome (S > (strike - prem)) at expiration or assignment.
Options ARE volatility. In the OTC market you're quoted a vol-figure and the premium appears on your sheets. The vol-figure reduces to the mkts estimate of the probability of touch, expiring ITM, etc. To ignore it is to ignore PRICE. OK, but then what is best-practice? You see the ticker in the news and decide that the annual return is sufficient?
I know a guy who makes millions selling puts on bank stocks (CC). He has no clue as to what decile he's selling or if there is any kinks in the smile. He can't derive a synthetic and didn't know until recently that a short put = a CC. He's always in the mkt and hedges well in spot. His edge is blatantly on the delta1 side and the options are a distraction, but who's to argue with success.
putmaster needs to adjust his definition of probability. It's rarely used in the context of applying a fundamental or macro outlook. The put-sale is a wager on an outcome (S > (strike - prem)) at expiration or assignment.
Options ARE volatility. In the OTC market you're quoted a vol-figure and the premium appears on your sheets. The vol-figure reduces to the mkts estimate of the probability of touch, expiring ITM, etc. To ignore it is to ignore PRICE. OK, but then what is best-practice? You see the ticker in the news and decide that the annual return is sufficient?
I know a guy who makes millions selling puts on bank stocks (CC). He has no clue as to what decile he's selling or if there is any kinks in the smile. He can't derive a synthetic and didn't know until recently that a short put = a CC. He's always in the mkt and hedges well in spot. His edge is blatantly on the delta1 side and the options are a distraction, but who's to argue with success.
My prob analysis is not based on fundamentals.
It's based on the "overall big picture", which the trade is comprised of and influenced by.
The stocks fundamentals are merely a piece of that big picture.
The fundamental part pertains mainly to the stocks "recovery potential", if bad news or a bad market takes it down.
My overall probability analysis is based on the likelihood of the trade being successful at expy.
The fundamentals are more of a "Plan B" type thing.
That being, does the stock have "recovery potential", if "Plan A" fails, and the stock drops below my strike.
That being, should I close the trade... or buy it.
BTW, don't compare me to that guy. That guy sounds like he is even crazier than I am!
Or should I say more lucky!
I'm afraid we are talking apples and oranges here. When we say probability, we refer to statistical probability.
When PM uses the expression, it seems to be in a non-statistical sense, as in based on his analysis it is probable that price will not reach the level at which he sells the put(s).
Probability - The extent to which something is probable.
Probable - Likely to be the case or to happen.
It's still a measure. He has his own statistical measures while berating an actual probability derived from what he's selling. The OTM% is meaningless in comparison to what the vol-figure suggests (unless equal). The delta is an acceptable QND measure and far less dirty than what he's offering. If he's willing to sell the put he should understand the market's assumptions explicit in that sales-price.
Do you value a car simply on the price and not the value represented in that price? If you "value" value, then how would you go about measuring it in an OBJECTIVE manner? I like the guy, but he's got the "putmaster'isms" that are silly. Use an annualized return, but not if the position is under three weeks duration. C'mon.
Back to the car-analogy. I went car shopping with my nephew who drove off the lot with a Subaru WRX. Suppose there was no MSRP on the window but a dealer tag with a price written in Sharpie showing "$40,000". It's a reliable car with great handling and 300bhp, so $40k seems reasonable, no?
PM would get zero grief if he simply posted the time and price of his shorts. It's obvious that he likes the shares to the extent he's willing to short the put.
P.S. Always run Motul 300V racing oil if you've got a Subie or Porsche turbo. Thank me later.
Correct.
I thought I made that very clear from day one.
I consider the same variables others include in their statistical analysis. But my analysis is more inclusive, foward looking, and common sense based.
For example, obviously a stocks volatility variable is very relevant.
But for me, 2 stocks with similar volatility ranking are NOT equal,... if one shows multi-year, multi-frequently, and multi-successfully tested tech support, at or above my strike,... and the other has no tech support anywhere under it.
Similarly, if 2 stocks have similar volatility ranking, but one is in a sector under pressure, and the other is in a strong sector,... they are also NOT considered of equal ranking by me.
Similarly, if 2 stocks have similar volatility ranking, but one has an earnings release before the contract ends, and the other doesn't,... they are also NOT considered of equal ranking by me.
Bottom line,.... I'm more focused on foward looking and common sense based analysis, than merely statistical.... which I feel lacks "context".