Statistical edge with option spreads -none?

timbo · May 13, 2009

Quote from dmo:

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.

I bet you would. Sorry no freebies today.

spindr0 · May 13, 2009

Quote from optionsgirl:

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.

+1 for that conclusion.

I believe that it's possible to find set ups where there's a statistical edge but as you noted, nothing worthwhile. Retail (us) can't find enough of them and in sufficient size to get anywhere.

I'd also add to your list: appropriate strategy selection for the environment you're in as well as disciplined money management

xflat2186 · May 13, 2009

Quote from dmo:

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.

DMO as usual you're correct also as usual there are people who cant handle the anonymity of the internet and they will argue the impossible but cant present the proof.

DMO I thank you again for the always good conversation, accurate info and opinions which myself and others appreciate.

Does anyone really believe consistant statistical edge exists and only a few secret people know it and exploit it? Seriously ? LOL

There would be no price tag you could put on it since you'd own the world over a short period of time

timbo · May 13, 2009

X. Get a life. Consistency? There's no money in TBills. MM's rarely get it right.

Quote from xflat2186:

Does anyone really believe consistant statistical edge exists and only a few secret people know it and exploit it? Seriously ? LOL

There would be no price tag you could put on it since you'd own the world over a short period of time

dmo · May 13, 2009

Look at the OP's question this way. Let's say you can either bet that a coin toss will come up heads, or you can bet that a roll of a die will come up 6.

So which is the better bet?

It's a stupid question, because you cannot possibly answer it without more information, such as the cost of each bet and the payoff of each bet. If you can pay less than fair value for one but not for the other, then obviously the less-than-fair-value bet is the better bet.

Yet, that is the equivalent of asking "what is the best option strategy?"

Any option strategy is a bet, and to know the fair value of any bet you need to know 3 things:

1) The cost of the bet
2) The payoff of each possible outcome
3) The probability of each possible outcome

With any option strategy it's easy to see the cost of the bet and the payoff of each possible outcome. The skill comes in determining the probability of each outcome. Option pricing models will help you find relative mispricings between options, but won't help you much in finding absolute mispricings, since the lognormal distribution on which they are based corresponds poorly with the real world. Even if it corresponded perfectly, you don't know what the volatility will be between now and expiration.

So success depends really on the skill of the option trader in finding bets that are underpriced. There's no one strategy that is always underpriced more than every other, so there cannot possibly be a best strategy.

xflat2186 · May 13, 2009

Quote from timbo:

X. Get a life. Consistency? There's no money in TBills. MM's rarely get it right.

Who cares if a MM is right or wrong in your opinion ? what was the point of your comment, other than to display to a higher degree that the vast anonymity of the internet is a bit much for some people?

timbo · May 13, 2009

Quote from xflat2186:

Who cares if a MM is right or wrong in your opinion ? what was the point of your comment, other than to display to a higher degree that the vast anonymity of the internet is a bit much for some people?

Well, you imply it's impossible to gain edge in any strategy -- albeit, favoring dmo. Who cares about hv (or any statics). I'm just saying edge doesn't depend on a number, but favors the expectation. It's forward, not backwards.

El OchoCinco · May 13, 2009

My edge has always been derived from my thexthyness...

timbo · May 13, 2009

Quote from optioncoach:

My edge has always been derived from my thexthyness...

You've been watch too much redtube again. huh?

dagnyt · May 13, 2009

Quote from dmo:

With any option strategy it's easy to see the cost of the bet and the payoff of each possible outcome. The skill comes in determining the probability of each outcome. Option pricing models will help you find relative mispricings between options, but won't help you much in finding absolute mispricings, since the lognormal distribution on which they are based corresponds poorly with the real world. Even if it corresponded perfectly, you don't know what the volatility will be between now and expiration.

I like to look at a strategy as just buying and selling a bunch of options that give you risk to manage: theta, gamma, vega, delta. If you mange the risk well and if you are not forced to overpay when buying or collecting too little when selling, you will have success.

Does it matter if it's a 'statistical' edge or a 'trading' edge or a 'market timing' edge? Not to me If you have an edge you will prevail. I believe that my edge comes in the form or risk management.

Mark