Statistical edge with option spreads -none?

O

optionsgirl

We read about the implied statistical edge concerning options all the time, but it seems that there is no statistical edge with any options strategy that I can think of. Now my mathematical aptitude isn't that great, but this is why I am posting it here for critique. I think most option strategies act more or less as a stop loss. Supposedly, the most conservative strategy would be a butterfly, but is it that much more conservative than a regular vertical spread? If there isn't a statistical edge with a butterfly over a simple vertical spread, then people are losing money on commission.

Here is a pattern that I see with a 50/50 chance with a random option. Get out when I double my money. Get out when I lose half. Double your money. Lose half. Double your money. Lose half. If I started with $100, I would end up with about $100 (not counting commission) no matter what the strategy is. Obviously, this isn't a realistic scenario, but it's just an idealized illustration of profits and losses with option hedging.

I thought there is a statistical edge with a far out-of-the-money short spread. This would be a steady trickle of money, but I think once in a while all those pennies will be lost by a major move and you end up about breaking even again.

I realize this is quite an inaccurate way to describe statistical probabilities, but this is just my guestimation that there is no statistical edge with options --or at least anything worthwhile. I think the only way to have an edge is to predict one or all of these things: implied volatility, historical volatility, and price movement of the stock.
 
Quote from optionsgirl:

Here is a pattern that I see with a 50/50 chance with a random option. Get out when I double my money. Get out when I lose half. Double your money. Lose half. Double your money. Lose half. If I started with $100, I would end up with about $100 (not counting commission) no matter what the strategy is. Obviously, this isn't a realistic scenario, but it's just an idealized illustration of profits and losses with option hedging.
More...

This method does NOT leave you with $100. It leaves you wealthy.

Juts bet $100 every time, rather than trying to compound...100, 200, 150, 250, 200, 300...

Mark
 
Quote from optionsgirl:

We read about the implied statistical edge concerning options all the time, but it seems that there is no statistical edge with any options strategy that I can think of. Now my mathematical aptitude isn't that great, but this is why I am posting it here for critique. I think most option strategies act more or less as a stop loss and risk control. Supposedly, the most conservative strategy would be a butterfly, but is it that much more conservative than a regular vertical spread? If there isn't a statistical edge with a butterfly over a simple vertical spread, then people are losing money on commission.

Here is a pattern that I see with a 50/50 chance. Get out when I double my money. Get out when I lose half. Double your money. Lose half. Double your money. Lose half. If I started with $100, I would end up with about $100 (not counting commission) no matter what the strategy is. Obviously, this isn't a realistic scenario, but it's just an idealized illustration of profits and losses with option hedging.

I thought there is a statistical edge with a far out-of-the-money short spread. This would be a steady trickle of money, but I think once in a while all those pennies will be lost by a major move and you end up about breaking even again.

I realize this is quite an inaccurate way to describe statistical probabilities, but this is just my guestimation that there is no statistical edge with options --or at least anything worthwhile. I think the only way to have an edge is to predict one or all of these things: implied volatility, historical volatility, and price movement of the stock.
More...

Bravo Optionsgirl. Nice to see someone thinking intelligent thoughts and asking intelligent questions.

You are 100% correct. There is no option "strategy" per se that gives you a statistical edge. They're all just different ways of slicing and dicing the same old risk/reward pie.

People are always asking me "what's the best strategy? What's your favorite strategy." THIS IS THE WRONG QUESTION! NO SUCH THING! I've shouted this until I'm blue in the face since I've been on this board, but few want to listen. I guess people want a simple recipe, and cookie-cutter strategies fill that need. But it just doesn't work that way.

So how DO you get a statistical edge?

Your edge comes not from some ontologically superior strategy, but from executing the right strategy at the right time (hopefully a custom-designed strategy with no name rather than a cookie-cutter strategy), then playing it right too. That's why it's so important to understand IV, skews, option pricing, and greeks.

I wish there was an easy recipe, but there isn't. Everyone who's become a successful trader has worked very hard and thought very independently to come up with a setup, a correlation, an approach that works for them.

You're asking the right questions. Just keep looking and thinking. Don't expect it to be easy. You'll find that it's the most seasoned traders here who are most ready to admit that trading successfully is damned hard.

There's another thread currently where the OP is looking to download and crunch IV numbers for hundreds of stocks going back a few years. I don't know what his hunch is or what he's looking for, but that's exactly the kind of hard work and original research that goes into becoming successful.

As my dad liked to say - trading is the hardest way to make an easy buck.
 
Quote from dmo:

There is no option "strategy" per se that gives you a statistical edge. They're all just different ways of slicing and dicing the same old risk/reward pie.
More...

Apparently statistics eludes you.
 
Quote from timbo:

Apparently statistics eludes you.
More...

It's not the strategy that gives you an edge, it's the price you paid for it. The edge comes from paying less than fair value, not from the option or spread itself. As obvious as that sounds, it's not widely understood.

So to answer Optiongirl's question a little differently, success in option trading comes from finding undervalued options or spreads and buying them (or selling overvalued ones). The skill then is your ability to intelligently evaluate options and find spreads that are undervalued or mispriced.
 
Great observation. The casino does tend to win; however, they aren't always good in unusual situations. Take your money from the uniformed.

Good trading.
 
Quote from dmo:

It's not the strategy that gives you an edge, it's the price you paid for it. The edge comes from paying less than fair value, not from the option or spread itself. As obvious as that sounds, it's not widely understood.
More...

What's not obvious is the wet blanket mentality of academics and the like. But statistical edge exists.
 
Quote from timbo:

What's not obvious is the wet blanket mentality of academics and the like. But statistical edge exists.
More...

Are you saying that there are strategies that give you a statistical edge regardless of what you pay? I hope you will share them with me.
 
Having seen many of dmo's posts, I'd have to say that he's been generally right. There is no statistical edge to any particular strategy all the time, no magic bullet position guaranteed to be profitable under every circumstance. Many of us prefer certain strategies and have a different level of risk tolerance, but every strategy has its own flaws and there are circumstances which cause unfavorable returns for any strategy. As an example, bull put spreads are horrible in declining markets. Iron condors can be painful in fast moving markets, or if volatility is rising. Butterflies, calendars, and other strategies all have their unpleasant downsides under various conditions.

Flexibility to use various strategies in different situations is very valuable. Money management is obviously important, coupled with the humility required to take losses or change positions when the market turns. The other thing I think is important is that you have to take advantage of opportunities. If your market judgment leads you to think something is mispriced, you need to be able to make decisions fairly quickly and catch them. These things will give you an "edge".
 
You must log in or register to reply here.
Back
Top