Whether an options writer or buyer has better edge? Why?

[donnap]

Let's say that someone does a comprehensive study on this subject, and is able to determine that one side does have the advantage - albeit a small one.

Add a little to cost for slippage and comms -and the advantage is still there!

Well how's that going to help you with your next trade?

It is the skill of the trader (or lack thereof) that will determine the outcome, not an advantage that is arguably miniscule.

 

[xflat2186]

It wont help at all since if there is an advantage one of two things will happen fairly quickly. First the advantage would be arb'd out of existance. Second if that could not be done then no one would take the other side of the trades.

 

[donnap]

Quote from xflat2186:

It wont help at all since if there is an advantage one of two things will happen fairly quickly. First the advantage would be arb'd out of existance. Second if that could not be done then no one would take the other side of the trades.

I agree that any perceived advantage would be arb'd out.

The argument seemed to be about whether there was an inherent advantage to buying or selling options, that is, how well does the market price options with no perception of advantage.

Personally, I think that it's a rather silly argument. Either side may claim advantage at any given time.

Put call ratio analysis supposedly works on the assumption that the public suckers are net buyers of premium. Now, more and more you read about savvy(g) public traders preferring to be the "house' and are net sellers. Neither are right or wrong. It's all about the trade.

 

[dagnyt]

Quote from TraderZones:

Your statement about "options outstanding" is your assessment of the situation...nor do I see you offering any evidence of this.


Whatever the % that are exercised early is hard to know.

You clearly love to argue. Over notbing.

It is NOT my assessment of the situation. It is the truth.

I did not supply 'proof!' You didn't ask for any evidence -, why would any normal person cite a reference for every statement he/she makes?

Who the hell are you to demand proof? You want proof, send me a check for $100 and I'll research the information for you. You are just too lazy yo do it yourself.

You want proof for free, ask the Options Clearing Corporation:

options@the occ.com.

Of course, their reply may not be proof enough for you.

I disagree. The percent is easy to know, if you know where to look for it. I don't know where, but the OCC does.

You really are a twit. Of course 'some options expire ITM.' No one ever suggested that 100% of options expire worthless.

Mark

 

[Martinghoul]

Quote from donnap:

Let's say that someone does a comprehensive study on this subject, and is able to determine that one side does have the advantage - albeit a small one.

Add a little to cost for slippage and comms -and the advantage is still there!

Well how's that going to help you with your next trade?

It is the skill of the trader (or lack thereof) that will determine the outcome, not an advantage that is arguably miniscule.

There have been studies done. There's a very well-known one in the world of interest rate derivatives that shows that the vol mkt systematically overprices option by failing to consider mean reversion. Indirectly, a whole bunch of behavioral finance (most notably, Kahneman and Tversky's prospect theory) is about humans being irrationally risk-averse. This leads us to overpay for insurance and, as a result, vol.

Based on the above, I would still conclude that an option seller has inherent edge, provided they don't have to mark-to-mkt. This edge is very difficult to arb away.

 

[Robert Weinstein]

I am a seller of premium so I by default feel that sellers have an edge. some things that have not come up so far from what I have read include the following thoughts

1. The assumption that option pricing models are CORRECT and will give a true price and therefore there is no edge. What if the pricing models are NOT correct?? (at least the popular ones used by many) For example if the model Black-Scholes does not give enough weight to black swan events to the down side it would have to low of a value for puts.

2. another assumption being made by many here is that options TRADE at any given pricing model(at the correct price). Options trade above and below what pricing models say is the fair price all the time. (generally for the ones I am looking to sell ABOVE the "fair" price). So if your a seller of an option that traded for more than the pricing model or a buyer of an option of that traded for LESS than the model do you have an edge there?? I think you can

When you start to add in the reality of real trades that usually go for higher than "the" pricing model suggests I think are able to find that it can be better to be a seller of options.

FWIW, i generally avoid selling puts as I still remember 1987 and I have read enough about Victor Niederhoffer type of funds to stay away from selling them (perhaps wrongly ). It appears to me that often buyers will mis-calculate the odds of a stock going X amount higher in the next few weeks over what it is trading at today.

Best of trading to you

 

[taowave]

Donnap speaks the truth.It is 100% the skill of the trader

Quote from donnap:

Let's say that someone does a comprehensive study on this subject, and is able to determine that one side does have the advantage - albeit a small one.

Add a little to cost for slippage and comms -and the advantage is still there!

Well how's that going to help you with your next trade?

It is the skill of the trader (or lack thereof) that will determine the outcome, not an advantage that is arguably miniscule.

 

[spindr0]

Quote from donnap:

Let's say that someone does a comprehensive study on this subject, and is able to determine that one side does have the advantage - albeit a small one. Add a little to cost for slippage and comms -and the advantage is still there! Well how's that going to help you with your next trade?

Well silly, once you know that, you consult the Max Pain theorists!

 

[xflat2186]

Skill of the trader has no effect on the inherent edge in the options price.

As far as black scholes goes no one said that their model is correct and in fact I would suggest not using it. Can you sell for edge, meaning can you sell options above fair value? Sure but its not easy and its about as difficult as buying them under value. If there was inherent edge in buying or selling options then you could or would be able to trade risk free as you bought blow fair value and sold above.

 

[taowave]

The point was there is no edge relative to being short vol vs long vol....

Profitability is a function of a traders skill level...

Quote from xflat2186:

Skill of the trader has no effect on the inherent edge in the options price.

As far as black scholes goes no one said that their model is correct and in fact I would suggest not using it. Can you sell for edge, meaning can you sell options above fair value? Sure but its not easy and its about as difficult as buying them under value. If there was inherent edge in buying or selling options then you could or would be able to trade risk free as you bought blow fair value and sold above.