Trading Index or Stock Options Preference

[comintel]

Quote from newwurldmn:

Actually that edge went away like 7 years ago.

Equity index options are still systematically overpriced, though, even if somewhat less so than earlier (leaving aside for a moment whether more so than individual stocks). Would you agree with that?

Some of the research along the lines you cite has been questioned. See e.g. http://www.donfishback.com/blog/201...orresponding-etf-options-what-does-don-think/ ,

I do not know for sure who is right on that, but in any case, for credit strategies, it seems to me that most traders who are selling premium favor selling index options over individual stocks premium for other reasons as well. The distribution is going to have much more extreme tails for individual stocks because of takeovers, earnings surprises, etc.

Now over a broad enough portfolio, that might be manageable.

In any case, most are probably going to apply additionally trade selection and timing to their trades, so that the systematic results are not necessarily determining. There will be good times to buy and to sell individual stock options and to buy and sell index options, and they will differ.

 

[CBC]

I thought that volatility made sure that all options were equal?

Isn't that what volatility was designed to do?

 

[kapw7]

In general, part of the index options "overpricing" should be correlation risk premium. An option that appears overpriced by comparing for example IV with RV might carry a high correlation RP.

My guess, or wishful thinking is that there should be index/ETF options that are overpriced. Some time ago I was looking to the main biotech ETF's - unfortunately I never had enough time and knowledge to find out. They possibly have (il)liquidity RP too.

 

[newwurldmn]

Quote from kapw7:

In general, part of the index options "overpricing" should be correlation risk premium. An option that appears overpriced by comparing for example IV with RV might carry a high correlation RP.

My guess, or wishful thinking is that there should be index/ETF options that are overpriced. Some time ago I was looking to the main biotech ETF's - unfortunately I never had enough time and knowledge to find out. They possibly have (il)liquidity RP too.

There's a paper on Ssrn that shows how the correlation risk premium has largely gone to zero. I would share thenlink but cant figure it out on ipad. They claim that the correlation risk premium was really a liquidity premium and not a risk averse ness premium. Market access has eliminated this premium.

My experience follows their conclusions. Dispersion desks made far more money prior to 2001 than after. Afterwards it all became about basket selection and basis risk.

 

[kapw7]

Cool. I can only transfer my encyclopedic knowledge so it's good when someone with experience posts.

(I'm not that modest in real life, I just don't want to mislead any newbies like me in the forum)

Do you think it is still worth looking for in less liquid/less poular/more specialised indexes for smaller players?

 

[newwurldmn]

Quote from kapw7:

Cool. I can only transfer my encyclopedic knowledge so it's good when someone with experience posts.

(I'm not that modest in real life, I just don't want to mislead any newbies like me in the forum)

Do you think it is still worth looking for in less liquid/less poular/more specialised indexes for smaller players?

yes. i think dispersion is still a viable strategy, but it's not the "buy and hold" that it was 10+ years ago.

 

[jerry2dt]

I thought this puppy being traded massively worldwide could not sell off as quickly as it did the weekend of 4/12/03 and that hurt a lot. I've recovered about 50% but am staying away from GLD because it appears to have been manipulated. Since then looks like it's taking a "dead cat bounce"...

Best to all,

Jerry

 

[rfriend73]

Quote from ktm:

I trade exclusively index options.

The lies told by corporations and book cooking just got to be too much for me about 10 years ago.

KTM,
you have only traded index options for the last 10 years ? Have you seen significant changes due to HFT and decreased volumes over the last few years ?

 

[IV_Trader]

I am long vola on SPY for a few months now…I truly don’t understated how one can go short on instrument with vola of 11…Japan/Europe openings, heavy macro econ calendar days…plenty of opportunities for gamma adjustments to pay for decay

May was a very good month for me , especially last week

 

[RichardRimes]

Quote from Mitch89:

Hi guys,
I am interested at learning from more experienced options traders, so...

1. What do you find more profitable trading Index or Stock Options (not considering
Asset insurance as trades, just pure options trading for profit)?

2. If you trade American Options do you trade them successfully as a Day Trader
or as a Strategy Trader?

3. If you trade European Options do you trade them successfully as a Day Trader
or as a Strategy Trader?

Thanks in advance

My experience has been to strategy trade (swing..longer term) equity options and day trade..short term index future options/futures cash. To be profitable you must be right on either direction or volatility and plan your trade so you know exactly how you will manage it if you are right or wrong. Unless you are very comfortable and knowledgeable about a particular stock its best to stick to indices.