What strategy works like selling DOTM naked call?

I was under the impression you sold naked options. Has your strategy changed in the last half hour?
Perhaps if you actually read any of the material on this thread rather than the first words and saying, "Oh, another naked seller, I'll show him how he's wrong."

Let see, you've called me a fool, illogical, inconsistent, misinformed, presumptuous, and have repeatedly shredded a trading strategy you ascribed to me despite knowing absolutely zero about my trading strategy.

Now who's presumptuous?

All of this in response to someone who said the "risk/reward" of winning $20 to losing $1000 was a bad bet. My only argument was that you have *no idea* if it's a bad bet if you don't know the odds.

Presumably we can all agree on that.
 
Quote from FullyArticulate:


Perhaps if you actually read any of the material on this thread rather than the first words and saying, "Oh, another naked seller, I'll show him how he's wrong."

Let see, you've called me a fool, illogical, inconsistent, misinformed, presumptuous, and have repeatedly shredded a trading strategy you ascribed to me despite knowing absolutely zero about my trading strategy.

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Yes, I did call you those things. Here are "your" quotes that I used to base that information off of. Enjoy!


In any case, it's not a bad bet just because the risk/reward is too high (1000/20). Absent probabilities, people will always buy DOTM options ("you mean I can bet $20 and win $1000 if I'm right! Wow!" When in fact, that's a losing bet in the long term).

Long OTM calls are expensive for a reason--most people want to buy them because they think it's a "good deal".

I am familiar with Taleb's work. I also know his hedge fund (which buys extremely OTM options in the hopes of getting that black swan) is doing horribly, whereas funds (LJM for example) that sell OTM options are doing great. LJM has been making money selling S&P options for 15 years. Taleb has been losing money since his fund's inception.

I have no problem selling options as long as the odds are in my favor and I can survive improbable events. At the moment, there are plenty of opportunities where the price of a long-shot option (and occasionally even the near money option) has been bid up enough to give you the statistical edge.

Maverick's view is pretty widespread and causes an edge to exist. If no one is willing to sell a call, but everyone is happy to buy one, the price goes up. Just look at the vol smile for the S&P options--really expensive puts, very cheap calls. Supply and demand overwhelms statistics in some surprising ways.

But I'm very happy to keep taking the money of people who overpay for options month after month. And to do so in a way that will allow me to survive the series of improbable events. There are hedge funds that have been around for 20 years that do the same thing.

I've never read so much baloney in my life. Well, that's not true, but it's been awhile. LOL. I love the Taleb vs LJM comparison. Coming from a guy that is arguing statistics, you make this lousy statistical comparison. It's called data mining. Good job buddy, you failed your stats exam.
 
Quote from Maverick74:

I love the Taleb vs LJM comparison. Coming from a guy that is arguing statistics, you make this lousy statistical comparison. It's called data mining. Good job buddy, you failed your stats exam.
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Fine. You find me 5 other funds that only buy OTM options for at least 15 years and post their track records.

I'm amused you find the concept that someone would want to sell options so infuriating. For the record, I am perfectly happy to sell people overpriced options. That doesn't mean that's all I do.

By the way, it was most likely Thomas Huxley, 150 years ago who posed the "monkey/typewriter" quote. And he was basing his idea on Aristotle. It's amazing the things you think Taleb invented.
 
Quote from FullyArticulate:

Fine. You find me 5 other funds that only buy OTM options for at least 15 years and post their track records.

I'm amused you find the concept that someone would want to sell options so infuriating. For the record, I am perfectly happy to sell people overpriced options. That doesn't mean that's all I do.

By the way, it was most likely Thomas Huxley, 150 years ago who posed the "monkey/typewriter" quote. And he was basing his idea on Aristotle. It's amazing the things you think Taleb invented.
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When Did I say buying options was the answer? LOL. Come on man, you are running from one extreme to the other here. Stop trying to put words in my mouth now.

And you want me to find you 5 funds out of 20k or 30k that have done well buying options? That would be statistically significant? Oh lord. LOL.

And I never said Taleb coined that phrase, I simply quoted it out of his book. More conclusions on your end. LOL.

BTW, that LJM hero of yours, didn't he take an 80% hit a few years back?
 
Heated thread on an age-old argument.

Regarding the assumption that Taleb buys way OTM options as his strategy, much less his sole strategy, has not been substantiated that i know of. FA, do you have any refs on this?

FA, maybe you could give an example of selling options incl. prob analysis, projected PnL and trading plan including defensive action/hedges.
 
Quote from Maverick74:

When Did I say buying options was the answer? LOL. Come on man, you are running from one extreme to the other here.
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I'm just trying to understand here. If you believe there is no edge in selling options, do you believe there's an edge in buying options? Or do you believe there's no edge at all?

If there's no edge at all, it makes no difference whether you buy or sell an option from a probability perspective.

If buying has an edge, you should be a strong buyer of options.

If selling has an edge, you should be a strong seller of options.

I believe the seller has an edge in many, but not all cases. I believe the pack wants to buy limited risk options more than they want to sell them which causes options to become more expensive than they should be in some cases.

You mentioned more options are sold on the S&P than purchased--do you have statistics to back this up? The typical S&P play is to sell calls and buy puts (hence the reason the S&P vol smile is so skewed). That being the case, why has the open interest of puts exceeded calls on the S&P for pretty much as far back as I can get stats?

Vol: You asked where I got information that Taleb mostly buys options.
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm

"He never sells options, then. He only buys them."
"So Taleb buys out-of-the-money options by the truckload."
"The day before that, it had made back eighty-five per cent of its money; the day before that, forty-eight per cent; the day before that, sixty-five per cent; and the day before that also sixty-five per cent; and, in fact-with a few notable exceptions, like the few days when the market reopened after September 11th -- Empirica has done nothing but lose money since last April."

Vol also asked "FA, maybe you could give an example of selling options incl. prob analysis, projected PnL and trading plan including defensive action/hedges."

I'm not sticking my neck out there in this environment. I've already given enough hints as to my play--I have a statistical model that I believe in. I look for over and underpriced options. Finding overpriced options is relatively easy. I position myself in a way that a series of improbable events won't hurt me.

This year, I've won 85% of my short-only options plays (which I do hedge when necessary). For this particular strategy, my average winner is 80% of my average loser. My worst loser of the year was selling volatility on wheat in September. My best winner of the year is selling volatility on the Euro. My worst loser took about 3% of my account equity. My winners have returned pretty well.

So, call me names if you'd like, but it works for me, and has for years. The secret is being able to survive worst-case events. Wheat's IV spiked from 30% to 60% and the price rallied 40% in just a few days.

To each his own. Why my approach to trading should illicit name calling is beyond me.
 
Quote from FullyArticulate:

I'm just trying to understand here. If you believe there is no edge in selling options, do you believe there's an edge in buying options? Or do you believe there's no edge at all?

No, over the short term, there is no edge to the buyer or seller. Over the long term, there is an edge to the buyer as options cannot price in catastrophic moves (10 sigma events if you will).

If there's no edge at all, it makes no difference whether you buy or sell an option from a probability perspective.

Not true. Every option has a delta. The only way there is insignificance is if the trade is done delta neutral. Selling calls when the SPX was at 1320 was not the same as selling puts, purely from a delta standpoint.

If buying has an edge, you should be a strong buyer of options.

If selling has an edge, you should be a strong seller of options.

Again, this is not true. Edge is meaningless if you cannot isolate all other variables. Selling puts in Enron could have carried a significant edge, but at what cost? If you are merely selling options because they are over priced or under priced, then you need to lock in that vol!!!!!!! How many times do I need to explain this. Your option trade carries deltas!!!!

If you are truly a vol trader then you cannot carry other risks on top of your vol trade or the edge is meaningless.

I believe the seller has an edge in many, but not all cases. I believe the pack wants to buy limited risk options more than they want to sell them which causes options to become more expensive than they should be in some cases.

The fact that you believe this does not make it true.

You mentioned more options are sold on the S&P than purchased--do you have statistics to back this up? The typical S&P play is to sell calls and buy puts (hence the reason the S&P vol smile is so skewed). That being the case, why has the open interest of puts exceeded calls on the S&P for pretty much as far back as I can get stats?

First of all, the call and put skew exist for a different reason then the one you just mentioned. Call skews are negative because statistically as mkts rise, the actual spot vol decreases ceteris paribus. And when mkts sell off, spot vol expands ceteris paribus. And the typical SP play is to buy synthetic calls (long futures/long puts).

And fwiw, the typical trading play to capture the vol skew in the SP is the risk reversal (long call/short put/short fut 'different strikes').

Where the open interest is and whether it's greater in calls or puts is meaningless due to synthetics. If I buy a call and short a future, I am long a put synthetically. The calls and puts are meaningless if you don't know what the synthetic transaction is.

Vol: You asked where I got information that Taleb mostly buys options.
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm

"He never sells options, then. He only buys them."
"So Taleb buys out-of-the-money options by the truckload."
"The day before that, it had made back eighty-five per cent of its money; the day before that, forty-eight per cent; the day before that, sixty-five per cent; and the day before that also sixty-five per cent; and, in fact-with a few notable exceptions, like the few days when the market reopened after September 11th -- Empirica has done nothing but lose money since last April."

Taleb has publicly stated that NY Times article is inaccurate. Maybe he is lying, who knows. But he has publicly stated that he has done very well with his fund. He did not blow out. I also have personally read where he stated he sells ATM options and buys wings. He has been doing this for years. That statement that he only buys options is not correct. I guess it would help if you actually used more then one source to make a claim.
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Quote from Maverick74:
That statement that he only buys options is not correct. I guess it would help if you actually used more then one source to make a claim.
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Just because you believe this does not make it true. Perhaps you have another source, otherwise why am I doing your homework for you?

If you are merely selling options because they are over priced or under priced, then you need to lock in that vol!!!!!!! How many times do I need to explain this. Your option trade carries deltas!!!!
Oh my god! Deltas! Will the fear never end!

Of course it has deltas. Please, say it again! I'm an idiot who needs to be told the blatently obvious and irrelevant over and over!.

I never said my positions didn't have delta. I never said my positions weren't hedged. Good grief you assume a lot.
 
Quote from FullyArticulate:

Just because you believe this does not make it true. Perhaps you have another source, otherwise why am I doing your homework for you?
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Sure, he stated this both in Trader Monthly and Active trader. You can google it.
 
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