I think we all need to be thinking more of how to prevent you from talking more nonsense, senor...
Why isn't everybody selling options?
- Thread starter jr07
- Start date
It really is a matter of "perspective".
If you, in the context of your portfolio, value your option positions by looking at the notional value of the underlying shares (and manage risk/leverage accordingly)... then intestinal fortitude becomes a little easier to build. I think in that sense, it would be like "being long the underlying".
If you value your positions by looking at premium alone... you're never going to be -200% by being long underlying, that's for sure.
It really doesn't. Sharpe ratio is notoriously useless for any option strategy.
Investing in most financial instruments is (for the sake of argument) a 50/50 thing. You buy GOOG today; 50% chance it'll be up tomorrow, 50% it'll be down tomorrow. It's a coin-flip. If someone comes to me claiming that they've flipped 10 heads in a row with a fair coin (and/or have a high Sharpe ratio), I'm impressed, and I will invest in their coin flipping skill.
Options are completely different. The probability of gain/loss for any option position is determined strictly by the manager, by selecting the strikes they're dealing with. A manager might have flipped 50 heads in a row... but if they're using a coin that's biased to turn up 99% heads, then I'm not at all impressed. That's precisely what MANY option strategies are: flipping a biased coin. You simply can't determine skill by looking at their returns alone.
Well, actually, if a manager came to me and told me they achieved a high Sharpe over time with ATM straddles using strikes half a standard deviation away from the underlying... I personally would invest in them.
If a manager came to me and told me they were selling 1 std dev out, I'd tell them they should be profitable at least 68% of their trading months. They better have at least 5 years of track record with fewer than 10 losing months and low DD, so I can see with some confidence that they have skill.
If they're selling strikes 2 std dev out, then they should be profitable 96% out of the year... in 20 years (240 months), they would be expected to have 10 losing months. So, unless they have 20 years of track record with fewer than 5 losing months, I'm not investing.