Who buys options?

[Aquarians]

I wonder, who the heck buys ATM options?

If you backtest, it's a massively losing proposition. And yet, traders do sell ATM quite a lot and make money. Which means someone must buy - and lose.

So who's the sucker and why do they do that?

 

[caroy]

I wonder, who the heck buys ATM options?

If you backtest, it's a massively losing proposition. And yet, traders do sell ATM quite a lot and make money. Which means someone must buy - and lose.

So who's the sucker and why do they do that?

I buy the ATM straddle consistently on expiration days. I do this because on this day they are the best way to buy gamma and profit from intraday moves in the underlying. And as it's expiration day I'm flat these positions by the end of the day. Usually I'm flat them in under an hour from putting them on. I prefer doing them in /ES but have had success in individual stocks as well. I would tend to agree that buying an ATM straddle with 30 DTE plus is usually a sucker's bet.

 

[caroy]

I wonder, who the heck buys ATM options?

If you backtest, it's a massively losing proposition. And yet, traders do sell ATM quite a lot and make money. Which means someone must buy - and lose.

So who's the sucker and why do they do that?

Also the MM will always buy them as they just gamma scalp them as they correspond with the rest of their inventory.

 

[guru]

Usually traders do not sell any options to other traders, as they would wait forever to find a match. MMs are there to provide liquidity and let you buy or sell any options you want, while hedging.
Though I buy ATM options as part of combos. I rarely trade single option.

 

[JSOP]

I would tend to agree that buying an ATM straddle with 30 DTE plus is usually a sucker's bet.

Yeah the theta will just kill you unless there is a HUGE armageddon event that happens some time down the line.

 

[caroy]

Yeah the theta will just kill you unless there is a HUGE armageddon event that happens some time down the line.

True. I mean if you buy them long term you can gamma scalp as the underlying goes above the strike buy selling and then buying when it goes below. These can add up to wipe out the theta losses over time. But this isn't the usual retail trader's plan with the straddle.

 

[CharlesS]

Implicit volatility has up and down cycles, just like realized volatility.

An options trader who can identify up cycles of implicit volatility can make money buying options.

 

[.sigma]

@guru gave you your answer.

@CharlesS what is implicit vol? You mean implied?

to OP, nothing wrong with buying ATM, it’s prolly your best bet if you choose to buy a single option.

 

[cesfx]

I buy the ATM straddle consistently on expiration days. I do this because on this day they are the best way to buy gamma and profit from intraday moves in the underlying. And as it's expiration day I'm flat these positions by the end of the day. Usually I'm flat them in under an hour from putting them on. I prefer doing them in /ES but have had success in individual stocks as well. I would tend to agree that buying an ATM straddle with 30 DTE plus is usually a sucker's bet.

I like this method, any particular reason for choosing ES, vs SPX and others? Is it size and settlement, or something else to do with the straddle structure?

 

[newwurldmn]

Respect the long vol or you will blow up in a most spectacular fashion.

I’m a short vol biased trader but invariably get into trouble is when I stop respecting why someone would own gamma.