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

[chrismontez]

"easily the writer...the only reason more do not 'write or sell' options is because the 'average Joe' does not have the huge cash needed to write/sell options...especially, naked or 'uncovered' options...probably the best and easiest trading vehicle is writing/selling options...BUT..again, most people do not have near the $$$ capital to do this so...it is unrealistic for most people reading this thread...just being real...

This is it in a nutshell. If you are goinjg to make a good living off options IMO you need to be the writer and you need to enter the business fully capitalized to be able to hedge the positions as needed. You can get rich buying calls or puts if you are lucky in your timing, but you can't set up a business expecting that to happen.

 

[samlecleque]

Quote from atticus:

Yeah, Buffett did a wonderful job with that $8B marked-loss on those SPX short puts [written binary put].

The stuff he did was incredible. For example, he sold 15 and 20 year worst-of cross puts on S&P, nikkei and sx5e (i was on the other side, so I have the very, very gory details). As you can imagine, everything went against him on thouse - FX, rates, spot, vol. But since he does not need to worry about margin calls he is probably going to be ok.

 

[samlecleque]

Quote from chrismontez:

This is it in a nutshell. If you are goinjg to make a good living off options IMO you need to be the writer and you need to enter the business fully capitalized to be able to hedge the positions as needed. You can get rich buying calls or puts if you are lucky in your timing, but you can't set up a business expecting that to happen.

Well, could you prove this to me via historical backtesting? I would be very, very inclined to say that the edge between selling gamma and buying gamma at all times is very slim to none. Maybe if you went and used some sort of smart delta hedging engine that hedges near-continuously and only done it on non-gapping assets...

In any case, how does capitalization work into this?

 

[TheROTrader]

Id much rather sell options and collect money. Now if youre not an idiot then youre not selling naked options, much easier to make money selling options.

 

[Tom1am]

Adjustments. As a seller you may be able to adjust a position. As a buyer, How can you adjust/roll??

 

[ang_99]

I don't trade options, and am not versed in option theory.

Having said that, common sense tells me the SELLER of insurance would always have the advantage, otherwise whats the point?

I'm talking professional institutions with brain power and capital.

 

[spindr0]

Quote from chrismontez:

"easily the writer...the only reason more do not 'write or sell' options is because the 'average Joe' does not have the huge cash needed to write/sell options...especially, naked or 'uncovered' options...probably the best and easiest trading vehicle is writing/selling options...BUT..again, most people do not have near the $$$ capital to do this so...it is unrealistic for most people reading this thread...just being real...

This is it in a nutshell. If you are goinjg to make a good living off options IMO you need to be the writer and you need to enter the business fully capitalized to be able to hedge the positions as needed. You can get rich buying calls or puts if you are lucky in your timing, but you can't set up a business expecting that to happen.

I think the main reason that more do not 'write or sell' options is because the 'average Joe' is unsophisticated and doesn't understand the vehicle. Huge cash isn't needed to write/sell uncovered options because the margin is lower than for buying/shorting stock. If you have enough capital for equities, you only need option level approval (and some understanding of the product) to do the other. Nor do you need huge cash to hedge positions since the hedge is usually much cheaper.

I think you need to be just as lucky with selling naked options as with buying them. You can go round and round with the 2 out of 3 favor the seller and the frequent small wins and occasional big loser argument but there's no edge to either side. It's your timing and selection that makes or breaks you.

 

[spindr0]

Quote from Tom1am:

Adjustments. As a seller you may be able to adjust a position. As a buyer, How can you adjust/roll??

You can turn a long position into various spreads or even the other side of the synthetic. You can roll a profitable long leg up, down, in, out.

 

[nitro]

Quote from ang_99:

I don't trade options, and am not versed in option theory.

Having said that, common sense tells me the SELLER of insurance would always have the advantage, otherwise whats the point?

I'm talking professional institutions with brain power and capital.

Because options were originally traded as an insurance policy their vol was huge and mispriced.

Those days are over, and now they are traded as asset class, where volatility is no longer terribly mispriced, generally.

For example, what do you think the vol is on

a) your car insurance
b) your life insurance
c) your home owners insurance
d) your self storage locker insurance
e) your renters insurance

etc? When you buy those, you are buying an embeded put option, and they have a volatility component. Worse, there is no way to spread that risk.

Why do you think Warren Buffet is a multi multi billionaire? Break down BRK.A earnings and tell me where he makes his money. The guy tries to portray himself as some banjo playing investor. He is selling huge mispriced vol to the masses is his only trick! (That said, GEICO is one of the most pleasant people to do business with)

Want to be a billionaire? Sell insurance and beat all these guys by selling cheaper vol but still with edge (attracting customers). There is plenty of room for competition.

 

[ang_99]

Quote from nitro:

The guy tries to portray himself as some banjo playing investor.

LOL.


I think I get what you're saying. Because the competition in options (insurance) is so fierce the insurance profit margin aspect has been squeezed out of them to almost nothing.

Where as other types of insurance, the barrier to entry is so huge there is still plenty of premium left.