what am I missing about writing options?

[IronFist]

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?

 

[ZBZB]

IV rank

 

[MrMuppet]

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

Is everybody making money?

 

[Overnight]

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?

Have you been asleep since the Cordier incident on natural gas, and the latest Gamestop thing?

When writing options, you obviously need them to be hedged with a cover.

And that is where it gets over my head.

But at least I learned from watching these fiascos that selling naked options is a very bad idea. You know, like BAD...

 

[IronFist]

] Cordier

No idea what that is.

] Gamestop

Followed lots of that on reddit.

I totally get SELLING at put if you want more stock at a better price. Stock is 100. You want more at 90. Look sell a 90 put. Then, if price goes down, you get the money from the put and the shares you were going to buy regardless.

But just selling it cuz you think price is going higher? I don't get it. Why wouldn't you just buy a call?

 

[Justrade]

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?

https://www.elitetrader.com/et/threads/writing-options-for-a-living.53037/

 

[qlai]

If you think is gonna go one way, why not just buy (or sell) the stock? What am I not seeing?

The time decay is something you don’t get with stocks. The win percentage is very high, so if you don’t stretch yourself too thin, you should be able to survive and recover.

 

[systematictrader]

https://www.elitetrader.com/et/threads/how-come-you-would-write-a-put-rather-than-buy-a-call.356210/

 

[systematictrader]

The three Ds

Direction (up or down)
Duration (how long)
Destination (how high or low)

In your case a call. so you picked the direction up but for you to get the other two correct up and in how long and how far is difficult that even if you do rarely you make big money

Where as selling a put you only have to be right on one of them, direction, time is on your side, no rush, you can exit any time even if options has not expired but stock simply moved up,

and you can also be wrong on the destination, where stock drops assuming not much and can still make money (margin of safety) remember its safety versus leverage, so lots less stars to line up than buying a call. Also selling a put depending how much money is in the account is NOT necessarily leverage it can be simply wanting to get in, where as buying a call even if you have all the money in the account its built in leverage because now your racing against time, were assuming otm call

the people I've seen make money on calls are ones that are constantly buying them, and they try their best in timing it but most importantly they stick to that strategy, 8 out of 10 times they are WRONG and they are OKAY with it because the two times it pays off it covers all of it

for me that's too much psychological pressure and stress on those two trades to work, its like you have a soccer team and your expecting two players to do all the scoring.

 

[ensemble]

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.