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

[spindr0]

Quote from OddTrader:

Do you think whether an options writer or buyer has better edge in the market?

What are the main reasons or conditions, and why?

I think that the one who has the edge is (C), the one with good timing and selection.

 

[dozu888]

I have an approach more from an asset allocation angle.

say I want 50% of my portfolio in stocks, and at the moment they happen to weight 50%

so I know if the market drops 10%, I should add to stocks to rebalance.... therefore, I can sell enough puts to anticipate a 10% drop, e.g.

In otherwords, I am getting paid to 'wait' for a better price.

Statistically there is a proven edge in enhancing portfolio performance by allocation in this manner, that forces you to buy low and sell high.

So I am not necessarily selling puts to look for an edge in the option itself, but using this as a tool to help my overall portfolio edge.

Of course certain level of technicals can be used, such as selling puts at a strike that is coincidental to a congestion level etc... no rocket science here.

 

[gkishot]

Quote from Martinghoul:

My answer is that it's obvious that the seller of the option has an edge provided he/she is allowed to not mark to market. It's obvious because that's precisely the business model of insurance companies and insurance companies are, generally, profitable.

Fundamentally, people who mentally do mark-to-market tend to overprice risk premium (generally, people are irrationally risk-averse), which means options, i.e. insurance policies, are structurally expensive. So the seller has an edge.

On a side note, above reasoning is also why I think Taleb is full of sh1t...

We are talking about stock options, right? Not bonds, gold etc.

 

[hidge]

Although it is an ancient discussion and for the experienced trader it is pretty much clear that from pure mathematical aspect there is no edge to neither sides of the option contract,

I think that there are some points to be considered as an advantages to the option writer:

From a mathematical point of view I would like to make a reference for two sources:

1. Compare the BXM (covered call benchmark index) to the S&P500 you'll find that the BXM did at least as good
as the S&P500 over the years with 2/3 of the standard deviation - if options are priced fairly then a covered call seller should pay with a reduced return for the reduced risk that he's taking but the reality tells us that it isn't the truth (at least between 1988 - 2006).

2. Sheldon Natenberg on his classic book "options volatility and pricing" show a 20 year research that prove that there is no normal distribution like the pricing models assume and that the truth is that near the money options are over priced while far out the money options are under priced.

Good night all

 

[xflat2186]

Quote from dozu888:

I have an approach more from an asset allocation angle.

say I want 50% of my portfolio in stocks, and at the moment they happen to weight 50%

so I know if the market drops 10%, I should add to stocks to rebalance.... therefore, I can sell enough puts to anticipate a 10% drop, e.g.

In otherwords, I am getting paid to 'wait' for a better price.

Statistically there is a proven edge in enhancing portfolio performance by allocation in this manner, that forces you to buy low and sell high.

So I am not necessarily selling puts to look for an edge in the option itself, but using this as a tool to help my overall portfolio edge.

Of course certain level of technicals can be used, such as selling puts at a strike that is coincidental to a congestion level etc... no rocket science here.

You're talking about money management and portfolio management not really anything to do with options.

"Paid to wait" is a perception not a reality, the reality is you've received a premium to take on risk and probably didn’t receive enough, thus no or negative edge in the options.

If you knew the market would drop 10% you would have been a fool to sell the puts before the drop.

 

[gkishot]

Quote from hidge:


2. Sheldon Natenberg on his classic book "options volatility and pricing" show a 20 year research that prove that there is no normal distribution like the pricing models assume and that the truth is that near the money options are over priced while far out the money options are under priced.

Good night all

So if he buys far out of the money options he would be consistently making money. I wonder if he actually tried it?

 

[Pekelo]

Quote from short&naked:

... Established in 1995.

What about 20 years didn't you understand?

Irrelevant, because your response was offtopic. The issue isn't option hedgies vs. the market, but option writers vs. sellers.

 

[Martinghoul]

Quote from gkishot:

We are talking about stock options, right? Not bonds, gold etc.

Doesn't matter, the dynamics are the same, regardless of the asset class.

 

[Martinghoul]

Quote from hidge:


2. Sheldon Natenberg on his classic book "options volatility and pricing" show a 20 year research that prove that there is no normal distribution like the pricing models assume and that the truth is that near the money options are over priced while far out the money options are under priced.

It's a pretty old book. Hasn't there been a fair bit of research since then that casts significant doubt on his conclusions?

 

[gkishot]

Quote from Martinghoul:

Doesn't matter, the dynamics are the same, regardless of the asset class.

The dynamics is different because there is no need to pay premium for the insurance. Those asset classes are themselves insurance.