Success in trading stocks a prerequisite for success in trading options?

Quote from rew:

I am largely in agreement. The most obvious exception would be delta hedgers, who dynamically hedge their option position with stock or futures so as to remain delta neutral. They make money if they correctly judge whether the implied volatility is too high or too low, rather than by betting on the stock price direction. Of course very few retail traders do this kind of trade. But even delta hedgers are to a degree betting on stock price direction because there is such a strong inverse correlation between stock price direction and volatility.

Some option trades give you more slack than stock traders have -- you can sell credit spreads that make money if the asset moves in the right direction or at least doesn't move too far in the wrong direction. But if you misjudge and the asset moves strongly in the wrong direction you lose money anyway.
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Delta neutral trading though a retail broker will produce a horrific return on investment under retail margin. You are making pennies while tieing up large amounts of capital.

Also, delta hedging again comes down to trading direction well. If you sell stock on XYZ as its breaking out then you will bleed out all the gamma that is generating positive deltas so you will not have an opportunity to buy the stock back.

And like you mentioned, whether you buy or sell vol will be largely affected by the stock going higher or lower. It will be really hard to make money being long vol in a rising stocks and vice versa. And if the stock trends, you are done! So again, you need to be a competent directional trader. Not saying master stock trader, but competent.
 
Quote from Maverick74:

Delta neutral trading though a retail broker will produce a horrific return on investment under retail margin. You are making pennies while tieing up large amounts of capital.

Also, delta hedging again comes down to trading direction well. If you sell stock on XYZ as its breaking out then you will bleed out all the gamma that is generating positive deltas so you will not have an opportunity to buy the stock back.

And like you mentioned, whether you buy or sell vol will be largely affected by the stock going higher or lower. It will be really hard to make money being long vol in a rising stocks and vice versa. And if the stock trends, you are done! So again, you need to be a competent directional trader. Not saying master stock trader, but competent.
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I don't think there's much disagreement here. It's the rare retail trader who even attempts delta hedging, for the reasons you stated. And pure option strategies that start delta neutral don't stay delta neutral for long.
 
Quote from Maverick74:

Delta neutral trading though a retail broker will produce a horrific return on investment under retail margin. You are making pennies while tieing up large amounts of capital.
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It seems like there are alot of people on ET who at least claim to do quite well on Long Iron Condors though. Don't you think that is possible, or do you think they are probably making money for 3 or 4 months, only to get pounded the next month, etc.

I guess if a person is capable of making money consistently using Long Iron Condors on Indexes, they really wouldn't need to be a good stock trader. The question then is do they really make money in the long run?

JJacksET4
 
Quote from JJacksET4:

It seems like there are alot of people on ET who at least claim to do quite well on Long Iron Condors though. Don't you think that is possible, or do you think they are probably making money for 3 or 4 months, only to get pounded the next month, etc.

I guess if a person is capable of making money consistently using Long Iron Condors on Indexes, they really wouldn't need to be a good stock trader. The question then is do they really make money in the long run?

JJacksET4
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Over the years on ET I've spent a lot of time ripping apart the iron condor strategy so I hate to re-hash all that on here. I'll try to keep it brief. Not a single prop trader at my firm has been able to execute the strategy without blowing up eventually. The guys that teach it on the seminar circuit (Dan Sheridan, etc) won't go near it with their own money.

I've also asked this question over and over again and I never get a satisfactory answer, if this strategy is the be all end all of option strategies, why is there not a single hedge fund that does it? Why no CTA's? Sure, there are a lot of put selling CTA funds, but no pure iron condor funds. If this is such easy money, why are the 10,000 plus hedge funds out there spending a fortune on coding software and hiring 100 PhD's to come up with strategies when all they have to do is iron condors? The answer is it doesn't work.

Look, let's break this down. An iron condor is 4 options (two verticals) right? Every option in this spread is either priced above fair value, at fair value or below fair value. Over an infinite number of trades, the only way this strategy can produce a positive expectancy is for the trader to consistently sell each option above it's fair value and to buy each option below it's fair value. Anything else will produce a negative expectancy. There is no way around this.

The argument is often given, Oh, I'll adjust it. But the adjustment is a whole other trade and that trade itself has to be executed at better then fair value prices or it too will have a negative expectancy. There is no mathematical way around this.

I understand why it sells on the seminar circuit because it's easy to teach, it's great for lazy people who don't want to put any effort into trading and it's perfect for guys that are scared shitless to take a directional view. The problem is it just doesn't work.

Of course it works for awhile, until it doesn't. Now, let me add one more thing. I'm not saying it's not possible to make money trading volatility. One can put on an iron condor in GOOG if they think the two component verticals are trading above fair value. Selling the verticals in this example should produce a positive expectancy if the trader is correct on their volatility assessment. But that is not how guys are taught to trade it. They routinely put it on an index usually every single month on the same day of the week even and then sit back and pray and hope the market doesn't go anywhere.

Trading is 1000 times harder then that. Goddamn I wish trading was that easy. I really do.
 
Quote from Maverick74:

Over the years on ET I've spent a lot of time ripping apart the iron condor strategy so I hate to re-hash all that on here. I'll try to keep it brief. Not a single prop trader at my firm has been able to execute the strategy without blowing up eventually. The guys that teach it on the seminar circuit (Dan Sheridan, etc) won't go near it with their own money.

I've also asked this question over and over again and I never get a satisfactory answer, if this strategy is the be all end all of option strategies, why is there not a single hedge fund that does it? Why no CTA's? Sure, there are a lot of put selling CTA funds, but no pure iron condor funds. If this is such easy money, why are the 10,000 plus hedge funds out there spending a fortune on coding software and hiring 100 PhD's to come up with strategies when all they have to do is iron condors? The answer is it doesn't work.

Look, let's break this down. An iron condor is 4 options (two verticals) right? Every option in this spread is either priced above fair value, at fair value or below fair value. Over an infinite number of trades, the only way this strategy can produce a positive expectancy is for the trader to consistently sell each option above it's fair value and to buy each option below it's fair value. Anything else will produce a negative expectancy. There is no way around this.

The argument is often given, Oh, I'll adjust it. But the adjustment is a whole other trade and that trade itself has to be executed at better then fair value prices or it too will have a negative expectancy. There is no mathematical way around this.

I understand why it sells on the seminar circuit because it's easy to teach, it's great for lazy people who don't want to put any effort into trading and it's perfect for guys that are scared shitless to take a directional view. The problem is it just doesn't work.

Of course it works for awhile, until it doesn't. Now, let me add one more thing. I'm not saying it's not possible to make money trading volatility. One can put on an iron condor in GOOG if they think the two component verticals are trading above fair value. Selling the verticals in this example should produce a positive expectancy if the trader is correct on their volatility assessment. But that is not how guys are taught to trade it. They routinely put it on an index usually every single month on the same day of the week even and then sit back and pray and hope the market doesn't go anywhere.

Trading is 1000 times harder then that. Goddamn I wish trading was that easy. I really do.
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+1

Excellent post and a great assessment.

Joe.
 
Quote from daveb351:

Maverick74: Have you considered iron condors on weeklies?
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Time does not matter. Negative edge is negative edge. You can't manipulate negative edge into positive edge through time or adjustments. But again let me say, I'm not saying one can't trade iron condors profitably on weeklies, you simply need to have a volatility edge to make the trade. Just slapping them on every week is not going to make you money and why should it? Markets don't just give money away because you have the ability to use a mouse.
 
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