Selling both Puts & Calls - Strategy idea

[Martinghoul]

Quote from sondermark:
In a trending environment (in either direction) the hedge only needs to be bought or sold once before expiration - so in that scenario the strategy will be profitable.

The user “meanreversion” argues that the market have priced in the number of whipsaws (each is obviously a cost) that can be expected. He might be right, but I would really like to see some data on this.


Kind regards,
Steffan

How do you figure that? I think there's a few things that you're missing about how options work. Do you want to think about what happens with your GOOG trade under various scenarios?

 

[sondermark]

Quote from Martinghoul:

How do you figure that? I think there's a few things that you're missing about how options work. Do you want to think about what happens with your GOOG trade under various scenarios?

Yes, sure; buy could you elaborate a bit?

 

[Martinghoul]

Quote from sondermark:
Yes, sure; buy could you elaborate a bit?

Sure, but let's take your specific AAPL trade (sorry, for some reason, I thought it was GOOG). Let's say you have sold 1 AAPL $350 straddle at time 0 and AAPL is at $351 at time 1. How much AAPL stock are you intending to buy to hedge?

 

[sonoma]

Quote from sondermark:

The idea here is to be fully hedged while collecting the option premium on both Puts and Calls. I see the largest risks in large overnight gaps and transactions costs/slippage if the stock price whipsaws.

Besides the good comments you've already received, spend some time with Natenberg and Sinclair.

 

[sondermark]

Quote from Martinghoul:

Sure, but let's take your specific AAPL trade (sorry, for some reason, I thought it was GOOG). Let's say you have sold 1 AAPL $350 straddle at time 0 and AAPL is at $351 at time 1. How much AAPL stock are you intending to buy to hedge?

In that case I would but 1 long stock (x 100) to hedge the call sold. No need to hedge the put.

kr,
Steffan

 

[HowardCohodas]

Quote from meanreversion:

Are you Howard Cohodas in disguise?

And pitch such easy ones for you and MG? :eek: Hardly! Groundhog Day is not one of my favorite movies.

 

[heech]

Quote from sondermark:

[B
The user “meanreversion� argues that the market have priced in the number of whipsaws (each is obviously a cost) that can be expected. He might be right, but I would really like to see some data on this.


Kind regards,
Steffan [/B]

He's not the only one making that argument. That argument is, in fact, the core of how the Black-Scholes formula is derived/proven. The number of expected whipsaws/hedging costs is what the BS formula is calculating for given strike, expiration, and volatility.

 

[meanreversion]

Quote from sondermark:

I did not mean to put the burden of proof on you, I would like to test it myself but do not have data for a backtest. Therefore I need to do a slow “forward” test and take all the advice I can get from experienced traders.

For the record: I do believe in efficient markets but there are many reasons for buyers to purchase options e.g. protection. Writing hedged options is basically acting as an insurance company; if there is no “edge” here then the options would effectively be free to the buyer.


Kind regards,
Steffan

The major differences between you and an insurance company are

1. they have a vast number of positions, thereby achieving a (mostly) balanced portfolio effect

2. they sell insurance at a decent clip above the offer price - this is their built-in profit margin

 

[ogarbitrage]

You're selling vol without realizing your selling vol. If you want to short vol, why not hedge with the deltas and manage your risk.

The way you propse, you're one gamma spike away from blowing up.

 

[meanreversion]

It is now my firm belief that if anyone decides that selling options is a viable strategy, they cannot be convinced otherwise.

Thus this thread is fairly pointless... Steffan, go off and sell options and see what you think.