My point is that +500bp put/call will never trade to parity, so your target is moving. You have to model skew, speed and contamination. There is a lot of 3rd (and worse) 4th moment risk unless you're simply overwriting puts or dynamically-hedging a synthetic straddle. Maybe that's all you're doing, but with luck you took a vacation last week.
Why isn't everybody selling options?
- Thread starter jr07
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My point is that +500bp put/call will never trade to parity, so your target is moving. You have to model skew, speed and contamination. There is a lot of 3rd (and worse) 4th moment risk unless you're simply overwriting puts or dynamically-hedging a synthetic straddle. Maybe that's all you're doing, but with luck you took a vacation last week.
I'm not. Two managers, "always in" the market, short index strangles. The only variable is bet-variation and strikes. There is little alpha there... not much more so than a passive index-replication.
*IMO* these are strategies that should not be employed passively, which relate to the best practice of determining alpha. I would never invest in a manager who sold a passive portfolio of strangles. It's suicide. I am stating that your application of alpha has no application in those scenarios.
This applies to any passive investment strategy.
You must be missing my point, because I have made no position/statement regarding "passive investment strategies" in any context... well except as a footnote on that last post, saying that I believe options are largely fairly priced.
When I talk about strike selection, it has nothing to do with adding alpha. I'm referring strictly to differing standards when looking at their *historical* returns for signs of skill. Surely you agree with the statement that a manager selling straddles close to the market will have many more losing months than a manager who's dealing with strikes OTM?
This is difficult. Unless I describe the exact strategy I don't know how to illustrate my point. And yes, I was trading non-stop during the latest drop the same way as I did in 2008. You are correct, I am using synthetics (not the simple straddles or strangles or butterflies etc.). I use super replicates to make sure that my Delta-Vega balance is not out of whack. It was difficult last week, however, my draw-downs were not too large and I am above my high water mark already.
Most options expire worthless because usually, only worthless options are allowed to expire.
Why would anyone give instructions for an ITM option to expire? Usually, they are sold or exercised.
Some ITM options may expire because of transaction costs or because they are not worth much and the holder would rather not take delivery. And some brokers may have higher auto exercise threshholds.
The 80% or whatever statistic does not mitigate the risk of selling options.
Excellent sense of humor!