The EDGE of premium decay

[justrading]

You make my head spin with your complicated ideas, so I'll leave it to others to comment.

I only ever traded debit spreads. I modelled Iron Condors many times, but I could never bring myself to trade even one. The crappy R:R put me off.

 

[Stymie]

The market maker and broker are the only ones with an edge in this game. There are two sides to each trade and both believe they will win over time. You only have to have a 10 times loser from your short option position to teach you that lesson. Your broker has the added benefit of liquidating your short positions when you're margin runs out at market extremes and collecting more commissions. Those who rollover losing short positions which start small are exposed to higher Delta as the position goes from out of the money to in the money. The risk just keeps getting bigger. It's a shame that new traders struggle to get good advice and clarity on the expected profitability of trading vs probability of winning. My advice is don't quit your day job!

 

[W.J. Feathermaker III]

The market maker and broker are the only ones with an edge in this game. There are two sides to each trade and both believe they will win over time. You only have to have a 10 times loser from your short option position to teach you that lesson. Your broker has the added benefit of liquidating your short positions when you're margin runs out at market extremes and collecting more commissions. Those who rollover losing short positions which start small are exposed to higher Delta as the position goes from out of the money to in the money. The risk just keeps getting bigger. It's a shame that new traders struggle to get good advice and clarity on the expected profitability of trading vs probability of winning. My advice is don't quit your day job!

Good point there...Just last week, I'd bet good money there were at least some 10x losing short options positions...I'd always want to be on the other side of that trade. I'd rather buy $1 or $2 options a bunch of times and wait for the 10x winner, as opposed to the opposite. Max risk $1, the opposite side has no idea and they usually aren't disciplined enough to hedge before it turns into a disaster.

 

[Trading Education Buyer]

The market maker and broker are the only ones with an edge in this game.

You make good sense.I have actually taken care of it by a system of short futures etc
If it hits me lower , it will have to pay me a lot to get there.

Hint here

Option trades with managed risks

 

[W.J. Feathermaker III]

True ! But you can get someting close to an edge , if you appply it to stock indices .A true edge is present , before any trade is placed .Over a series of trades , rather than a single trade , it does become an edge.

You need to learn advanced trading and rollover your losing position , that adds to your edge.There is an edge over a series of trades .

Five fundamental truths:
1. Anything can happen.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.
– Mark Douglas

There are too many emotional pitfalls to implement something like this with any consistency..."rollover losing positions" = sounds fine in theory, very difficult for 90% of trader's to ever do...What constitutes a "losing position" (i.e. how far do you let it go against you before you "rollout" to a higher strike? And then what do you do when the trend persists and you have to "rollout" again?

"One way moves" are far more common in today's algo-driven, central bank managed markets. The old chop and stop style mean reversion will persist for long stretches of time and then abort, leading to these unidirectional moves. So implementing something like you suggest requires a certain level of discretion, it certainly isn't one of these "one stop shopping" style strategies.

Again, I'd rather take the opposite side of this trade at opportune times...I don't believe in the notion that "premium decay" can overcome the hurdle of extreme short term "gamma" moves against these types of positions.

 

[Trading Education Buyer]

Again, I'd rather take the opposite side of this trade at opportune times...I don't believe in the notion that "premium decay" can overcome the hurdle of extreme short term "gamma" moves against these types of positions.

Bro, theta is not edge. The market is aware that time passes.

https://www.elitetrader.com/et/thre...-writing-option-spreads-by-dr-spreads.304319/


You have multiple strategies , one strategy will gain from theta and another will gain from gamma , gamma moves are rare on indexes if strategy conducted in a calculated way.

Each formula on this excel sheet is a gamma . theta , delta or neutral set of trades , combine them to make a robust strategy.

 

[Trading Education Buyer]

There are too many emotional pitfalls to implement something like this with any consistency..."rollover losing positions" = sounds fine in theory, very difficult for 90% of trader's to ever do...What constitutes a "losing position" (i.e. how far do you let it go against you before you "rollout" to a higher strike? And then what do you do when the trend persists and you have to "rollout" again?

"One way moves" are far more common in today's algo-driven, central bank managed markets. The old chop and stop style mean reversion will persist for long stretches of time and then abort, leading to these unidirectional moves. So implementing something like you suggest requires a certain level of discretion, it certainly isn't one of these "one stop shopping" style strategies.

Again, I'd rather take the opposite side of this trade at opportune times...I don't believe in the notion that "premium decay" can overcome the hurdle of extreme short term "gamma" moves against these types of positions.

I usually rollout on a weekly , a few times on long calls , then monthly , usually it works on stock indices.

 

[ironchef]

The market maker and broker are the only ones with an edge in this game. There are two sides to each trade and both believe they will win over time. You only have to have a 10 times loser from your short option position to teach you that lesson. Your broker has the added benefit of liquidating your short positions when you're margin runs out at market extremes and collecting more commissions. Those who rollover losing short positions which start small are exposed to higher Delta as the position goes from out of the money to in the money. The risk just keeps getting bigger. It's a shame that new traders struggle to get good advice and clarity on the expected profitability of trading vs probability of winning. My advice is don't quit your day job!

Very true. One thing I learned from ET is writing OTM calls and puts is a very dangerous game. If the market goes against me, the losses snowball faster than I can roll. But I already quitted my day job long time ago and will have to made do.

 

[Trading Education Buyer]

Very true. One thing I learned from ET is writing OTM calls and puts is a very dangerous game. If the market goes against me, the losses snowball faster than I can roll. But I already quitted my day job long time ago and will have to made do.

Now you learn all these authors who write books on options , never really were succesful at trading them.

Writing options is dangerous , Writing options using calculated covered risks is doable successfully.

 

[W.J. Feathermaker III]

I haven't perused the other couple of dozen threads with the same OP talking about this strategy, so all I read are vague references to what he is talking about. Let's talk about what you did (or hypothetically did) during the week of December 5-9. ES range was essentially 2179.00 (Sunday night low) to approx 2260.00...81 pts or so. Big move for the index.