what am I missing about writing options?

[OptionsOptionsOptions]

.......Everybody says writing options is a "good way to make money," the "super secret no one knows," etc......

• I don't say those things.
  
• IMO .....Selling highly volatile derivatives such as options is pointless.

 

[panzerman]

Being the insurance company sounds dandy, until you read about LTCM or Supertrader Karen.

 

[caroy]

Everybody says writing options is a "good way to make money," the "super secret no one knows," etc.

I get it. You write an option. You get paid. Ok. But this profit curve looks shit:

If you think is gonna go one way, why not just buy (or sell) the stock? What am I not seeing? They says 80% of option expire worthless so I guess someone is making money yet is this like option writing is heaps of small wins and some giant losses reverse of trend trading?

Best fool proof way to sell options is to really leverage up with commodity options. Sell ATM calls on natty gas on January 1st and ATM FCOJ calls same time. Really can't lose. Ask Cordier and Mortimer and Randolph Duke about it.

 

[Spaghetti Code]

I've spent a fair amount of time backtesting put/call writing. On individual names, it is not as clear cut. But on SPY (or SPX), volatility always mean reverts and rarely stays elevated for long periods of time. You can calculate the variance premium using the EWMA of ATM IV. You can see the results attached - basically 100% profitable, but the drawdowns can be significant while you wait.

Does your data go farther back than 2018? SPY has been a bumpy road since 1993.

 

[Spaghetti Code]

I get it. You write an option. You get paid. Ok. But this profit curve looks shit:

That's the curve at expiration. Not many options are held to expiration, with most traders preferring to close out their position before then. The more interesting graph is how it change over time.

 

[IronFist]

Wait really? Why would they buy them earlier?

 

[Spaghetti Code]

Wait really? Why would they buy them earlier?

Call on XYZ with strike 25, and the price is currently 30. Buying back the option costs the writer $500. Waiting until expiration costs the writer $3,000, which he needs to use to buy 100 shares. Letting an option expire requires way more collateral. It only makes sense if you have gobs of shares on hand, or gobs of cash to buy on close. The loss is the same, but the collateral is higher.

(note that this is less a problem for futures options, which don't transact the underlying, and instead deliver a future).

 

[newwurldmn]

Everybody says writing options is a "good way to make money," the "super secret no one knows," etc.

I get it. You write an option. You get paid. Ok. But this profit curve looks shit:

If you think is gonna go one way, why not just buy (or sell) the stock? What am I not seeing? They says 80% of option expire worthless so I guess someone is making money yet is this like option writing is heaps of small wins and some giant losses reverse of trend trading?

options both long and short have unfavorable distributions. You ideally want to build strategies that build portfolios that take these skewed distributions and make them a more normal with some positive skewness.

 

[ensemble]

Does your data go farther back than 2018? SPY has been a bumpy road since 1993.

I don't have data prior to 2018... would need to buy it from CBOE. But this includes the periods of volatility in Feb/Apr/Oct/Dec 2018 and the 2020 crash. The VIX calculation can be applied to any underlying but only SPX returns are negatively correlated to volatility over long periods. So when call IV > VIX EWMA, the program writes SPY calls, and when put IV < VIX EWMA, it writes puts.

 

[systematictrader]

Being the insurance company sounds dandy, until you read about LTCM or Supertrader Karen.

What happened to super trader karen after all? she survived the investigation or what?