Wealthy Option Traders

[Gaddock]

Quote from rew:

If options are priced efficiently (and I believe that they usually are) there is no particular advantage to buying or selling them. Sellers have the advantage of time decay, but they take on the gamma risk. Buyers of options may steadily lose money, but to find an option trader who blew up real good you have to look at the sellers.

There is a gigantic difference. Institutions sell and retail buys. You should read up on 'max pain' The very BEST odds on a buy is 50% with a degrading theta. Selling can have 99% probs with time value decay on your side. The market can do three things, go up, down or sideways. You have two of three against you out of the gate. Black Scholes is chuck full of inefficiencies, look at the prices on LEAPS. 10 to 1 odds with 100 to 1 pay outs

To put 50% of your bank role on one bet is foolish and certain death.

 

[rew]

Quote from akivak:

I described what I did few posts ago:

Few weeks ago I sold RUT Jan 650/660 bear call spread for $1.25 credit. RUT was at 598. My plan was to sell OOM bull call spread on pullback. That pullback never came, and when RUT reached 640 few days ago, I was facing a dilemma. The 650/660 was worth around $2.5, and RUT was too close to the short strike. So I could cover the spread for $1.25 loss, or I could convert it to butterfly by selling 640/650 bull call spread for $6.5. I chose the second option.

I received total credit of $7.75. My maximum loss was fixed ($2.25) but I had a decent chance of at least some profit.

So today I took advantage of intraday moves to cover the butterfly. When RUT went down to 634, I covered the 650/660 call spread for $0.3. When RUT was at 644, I covered the 640/650 put spread for $5.1. My total profit: $2.35 on $2.25 margin (104%).

I'm confused. You were initially short a 650/660 bear call spread (short the 650 call, long the 660 call). To convert that to a butterfly you would need to buy a 640/650 bull call spread (long the 640 call, short the 650 call). that would cost you a net debit. If instead you sold the 640/650 bull call spread you would wind up short the 640 call and long the 660 call -- you would have simply widened the short bear call spread from 650/660 to 640/660, and doubled your margin requirement.

 

[rew]

Quote from Gaddock:

There is a gigantic difference. Institutions sell and retail buys. You should read up on 'max pain' The very BEST odds on a buy is 50% with a degrading theta. Selling can have 99% probs with time value decay on your side. The market can do three things, go up, down or sideways. You have two of three against you out of the gate. Black Scholes is chuck full of inefficiencies, look at the prices on LEAPS. 10 to 1 odds with 100 to 1 pay outs

To put 50% of your bank role on one bet is foolish and certain death.

The expected value, not the probability, is what matters. Sure you can find far OTM options you can sell that will expire worthless 99% of the time, but that 1% of the time they expire ITM might cost you 200 times the premium you received. In that case it still wasn't a good trade. Black Scholes is not "chuck full of inefficiences", whatever that could possibly mean. It is well known that most prices do not follow the log normal distribution assumed by Black Scholes. That's an issue of accuracy, not efficiency. But who says options have to be priced according to Black Scholes? The fact that the volatility smile exists shows that nobody is pricing OTM options using Black Scholes. You are basically asserting that options are consistently overpriced. Where is the evidence? Nassim Taleb made a lot of money buying those "overpriced" OTM puts just before the 2008 crash.

Your last sentence is a complete non sequitor. Who said anything about putting 50% of their "bank role" (sic) on one trade?

 

[Gaddock]

Quote from rew:
Your last sentence is a complete non sequitor. Who said anything about putting 50% of their "bank role" (sic) on one trade? [/B]

I'm glad you disagree. The more like you that do the better off I'll be.

"non sequitor" You do mean 'sequitur' right? If your trading uses the same attention to detail as your post you may want to find a decent broker before you're broke.

 

[tradingjournals]

Quote from Gaddock:

Black Scholes is chuck full of inefficiencies, look at the prices on LEAPS. 10 to 1 odds with 100 to 1 pay outs

Could you give give a proof for the 10/1 and 100/1 ratios? Unless you can give a proof, it is prudent if one assumes that the statement is wrong.

 

[Gaddock]

Quote from tradingjournals:

Could you give give a proof for the 10/1 and 100/1 ratios? Unless you can give a proof, it is prudent if one assumes that the statement is wrong.

I'm not going to give you setups or offer proof, but I might give you some food for thought.

I've dropped over 6k tickets year to date, twice that in 09, on various proprietary option models. From time to time I find very strange things that should not exist, but they do.

At one point after being able to isolate the setup of one of these events I thought a one in a million (a figure of speech, not an actual stat) event/anomaly, I tweaked OpTrack to search for them. It turns out the frequency of these events were enough to consider them distortions vs. a one time anomaly. One version of such an event,and there are many models I use, I believe are caused by information that is not yet public. A good example would be the spike in option volume the Friday before NYB announced the FDIC was giving them the clean assets from a bank that was just shut down. Clearly a case of insider trading and one that I've been able to establish a sequence of other like events that has unfortunately since ended as far as I'm able to detect.

If you can isolate huge spikes of implied volatility on an issue with a thinly traded option chain, with no news or other known cause, you may just find unexpected setups with the probabilities and risk/reward ratios that are similar to what I described.

You're probably better off just concluding I'm full of crap.

 

[medisoft]

I think it is possible to get a good return with options using covered calls. They don't give stunning gains, but small, consistent gains of about 1.5%-3.5% monthly. Over time this could compound to a level that the 1.5% monthly will be enough for living. And yes, that will take some time, maybe 10 years with an starting equity of $10k.

10 years at different monthly gains, starting with $10k:

1.5% = $59,693.23
2.5% = $193,581.5
3.5% = $620,643.16

After 10 years you get monthly:

1.5% = $895.40
2.5% = $4,839.53
3.5% = $21,722.51

I think on most places you can live with the 2.5% monthly and in more expensive places with 3.5%.

What do you think?