SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Yip,
I might agree with you, still thinking..... The underlying can only have one realized (ex post) volatility. It is unknown in advance. But skew exists, there are different IV's at each strike. Only one can be proven 'correct' after the fact. Is that the logic that underpins your statement?
If so, does it follow that the sale of call verticals and the purchase of put verticals also yields positive expectancy (before commissions/slippage)?
I might agree with you, still thinking..... The underlying can only have one realized (ex post) volatility. It is unknown in advance. But skew exists, there are different IV's at each strike. Only one can be proven 'correct' after the fact. Is that the logic that underpins your statement?
If so, does it follow that the sale of call verticals and the purchase of put verticals also yields positive expectancy (before commissions/slippage)?
Quote from TrendSailor:
Rallly, sorry I am not selling an option on satisfaction so I don't owe a debt for no received premium nor can be freely assigned. There is a fundamental principal hiding here within the structure of this reply.
To get an empirical hint why not just look at the percentage of losers and winner who are buying options verses the loss rate for writers of options. I think you will find that the majority of buyers on average lose about 80% more of the time than do options writers. Of course there are different degrees of loss - but I think you get my thinking. Of course there are a lessor number of traders who can temporarily beat this loss rate with superior trending and intelligent guessing or by offsetting risk and partially enjoying the writer advantage by forming a hybrid long position (e.g. by also participating on the short side as a naked writer farther out).
But options originally were written for simple hedging insurance and were just "another business expense" to mitigate risk. As such they were "consumables" and many buyers hoped to never need them since if they did that meant market calamity. The motivation for options and the character has since changed over the years however. Now there are a large number of traders only buying options primarily with the intention of second guessing the market and to beat the market to generate profits with the change in value of the option instrument itself. But the fundamental character of options are still "insurance products" and the price structure mirrors this with a time for premium and volatility and the time attrition mechanism that decisively favors writers.
The real reason most buy options now is for the generally less than 50% (45% win rate is considered stellar performance) probability of winning large to offset the higher win rate advantage that sellers have. If the loss frequency was par no one would write options. If this where not true why would they put their very expensive underlying on the line for a pittance of premium. Or would they? There are of course some of us who sell options with the intention of getting paid to wait for an assignment/sale.
At any rate the win-loss numbers should give a general idea of the average probability distribution and price relationship advantage to writers without even algebraically dissecting the price model. Call it proof by live fire Monte Carlo. I know that you are still not satisfied but I am also not trying to sell anyone anything or impress anyone here either.
TS
This is 100% false. Options are empirically undervalued, especially the fat tails, which means the seller actually has a negative expectancy. Over a small series of data points, the expectancy is relatively flat. However, over a large series of data points, options become more and more undervalued. How is this possible. Because it's not possible to price a put on 9/11. It's not possible to price a put on Enron. It's not possible to price a put for the crash of 87. These puts are substantially undervalued. What this means is, if you sell enough puts over a long enough period of time, your expectancy will go from zero to more and more negative.
There have been numerous amounts of academic papers written in the difficulties of pricing fat tail options, particularly by Nasim Taleb.
While I find these credit v. debit discussion academically fascinating 
I will repeat my usual mantra...
The strategy is meaningless. If you have good risk management and portoflio management and a reasonable analytical approach to selecting underlyings, strikes and debits/credits then you have a great shot at making money whether you choose OTM spreads, CTM spreads, Double diagonals, Iron Condors, Ratio spreads or straddles or what have you.
Let the academics who mostly do not trade argue the finer points of zero sum game, expectancy and randomness, that is all they are good for. Trade and make money, that is all you need to focus on.
For example, I am often told that the OTM credit spreads I do have a negative expectancy or negative expected return (I forget which is the right term since I care not
). When they show their calculations they often ASSUME the losses are with the credit spreads at maximum loss value. Now who in the world would ever trade far OTM spreads and let them reach maximum value consistently. Such "theories" ignore risk management which do not result in maximum loss, significant loss on a swan but not maximum. Just an example for illustrative purposes.
I think credits are better than debits for mebecause it fits my trading style, period. Not an objective statement just a personal one.
Just my opinion, if theories worked as is in the real world, they would not need so many irrational assumptions or pre-conditions
I will repeat my usual mantra...The strategy is meaningless. If you have good risk management and portoflio management and a reasonable analytical approach to selecting underlyings, strikes and debits/credits then you have a great shot at making money whether you choose OTM spreads, CTM spreads, Double diagonals, Iron Condors, Ratio spreads or straddles or what have you.
Let the academics who mostly do not trade argue the finer points of zero sum game, expectancy and randomness, that is all they are good for. Trade and make money, that is all you need to focus on
.For example, I am often told that the OTM credit spreads I do have a negative expectancy or negative expected return (I forget which is the right term since I care not
). When they show their calculations they often ASSUME the losses are with the credit spreads at maximum loss value. Now who in the world would ever trade far OTM spreads and let them reach maximum value consistently. Such "theories" ignore risk management which do not result in maximum loss, significant loss on a swan but not maximum. Just an example for illustrative purposes.I think credits are better than debits for mebecause it fits my trading style, period. Not an objective statement just a personal one.
Just my opinion, if theories worked as is in the real world, they would not need so many irrational assumptions or pre-conditions
Coach, actually any adjustment you make to your credit spread only adds to the negative expectancy as the new trade carries it's own negative expectancy with it as well. Sorry, didn't mean to interrupt you. 