Why isn't everybody selling options?

[akivak]

Quote from Free Thinker:

cnbc options action guru just recommended selling july 135 naked puts on gs as a good play. too much event risk imho.

Does someone still take CNBC options “gurus” seriously? Let me give you an example how those guys present their trades.

On Friday March 26, CNBC Option Action suggested the following bullish risk reversal when Oracle (ORCL) was trading at $25.25.

- Sell to open June $23 puts for $0.55
Use the proceeds from above to partially finance:
- Buy to open June $26 calls for $0.80

The whole structure would cost $0.25 net debit. Few days later they claimed that this bullish risk reversal almost tripled because ORCL has rallied 3% since March 26 and the trade will produce $0.53 net credit, while the original cost was $0.25 net debit.

They only “forgot” to mention that bullish reversal involving sale of naked puts, so there will be a margin requirement. In this case, using 33% margin requirement and $23 put strike, the maximum cash at risk for every 1 contract sold is $759.

So you made a whopping $28 on every $759 or about 3.68%. After subtracting commissions, the real return is probably 1-2%. And guess what? The stock is up 3% during this time. You would've been better off just buying the stock.

 

[Free Thinker]

Quote from akivak:

Does someone still take CNBC options “gurus” seriously? Let me give you an example how those guys present their trades.

On Friday March 26, CNBC Option Action suggested the following bullish risk reversal when Oracle (ORCL) was trading at $25.25.

- Sell to open June $23 puts for $0.55
Use the proceeds from above to partially finance:
- Buy to open June $26 calls for $0.80

The whole structure would cost $0.25 net debit. Few days later they claimed that this bullish risk reversal almost tripled because ORCL has rallied 3% since March 26 and the trade will produce $0.53 net credit, while the original cost was $0.25 net debit.

They only “forgot” to mention that bullish reversal involving sale of naked puts, so there will be a margin requirement. In this case, using 33% margin requirement and $23 put strike, the maximum cash at risk for every 1 contract sold is $759.

So you made a whopping $28 on every $759 or about 3.68%. After subtracting commissions, the real return is probably 1-2%. And guess what? The stock is up 3% during this time. You would've been better off just buying the stock.

i think tv gurus all have the same affliction. they are seldom right but never in doubt.

 

[dmo]

Quote from Free Thinker:

cnbc options action guru just recommended selling july 135 naked puts on gs as a good play. too much event risk imho.

That's why he makes his living as an options "guru" as opposed to an options "trader."

 

[dmo]

Quote from Free Thinker:

i think tv gurus all have the same affliction. they are seldom right but never in doubt.

Ha ha - well put.

 

[newguy05]

Quote from akivak:

Does someone still take CNBC options “gurus” seriously? Let me give you an example how those guys present their trades.

On Friday March 26, CNBC Option Action suggested the following bullish risk reversal when Oracle (ORCL) was trading at $25.25.

- Sell to open June $23 puts for $0.55
Use the proceeds from above to partially finance:
- Buy to open June $26 calls for $0.80

The whole structure would cost $0.25 net debit. Few days later they claimed that this bullish risk reversal almost tripled because ORCL has rallied 3% since March 26 and the trade will produce $0.53 net credit, while the original cost was $0.25 net debit.

They only “forgot” to mention that bullish reversal involving sale of naked puts, so there will be a margin requirement. In this case, using 33% margin requirement and $23 put strike, the maximum cash at risk for every 1 contract sold is $759.

So you made a whopping $28 on every $759 or about 3.68%. After subtracting commissions, the real return is probably 1-2%. And guess what? The stock is up 3% during this time. You would've been better off just buying the stock.

most paid subscriptions use this trick to lure in the newbies, for example naked short 1x nflx 100P for $8 premium ($2400 requirement), if cover at $6, profit = (8-6)/8 = 25% (wink wink), nevermind the margin that makes the actual to be 200/2400 = 8%

here's a live one, look how they calculate the short position p&l, it's such a scam. The sad part is the guy dr samir elias actually wrote a pretty good newbie book preaching selling cash covered calls/puts to reduce cost basis with the intention of owning the underlying as value investing. Then he creates this scam website to suck in all the newbies who read his book....so fucked up.

http://generatethousands.com/archieves.php

ps good to see you are still around dmo

 

[MsFutures]

Quote from Devin Brady:

That 80-percent number is misleading because it doesn't take into account the amount of contracts that were offset before expiration. Sure most contracts that are held to expiration are worthless, but the amount that were offset for a profit before expiration is not counted.

Right on the money. For profitable options I would have taken profits before the expiration; only the unprofitable ones I leave it to expiration as it still might have a chance to break even or even make a profit in the last couple of days of expiration.

 

[Angrycat]

Quote from jr07:

If 80% of options expire worthless, as I read somewhere recently, why doesn't everybody sells calls and puts every month and duplicate?

If you are well capitalized and your manage your risks, you can. However, you'll only make about 2% annually.

essentially, this is what insurance companies do, right?

Large options traders like SIG are net sellers of options, but they also buy options when they judge the option to be underpriced. So, it's not just a matter of selling options because most of them expire worthless. If you consistently underprice your options you will still lose even if the vast majority expire worthless because the you will not collect enough premium to offset the options that don't expire worthless or you your hedge will cost more than the premium you collected.

Pricing securities is the hard part of trading.

 

[bone]

Having managed an OTC power and nat gas options book and traded with SIG and many others, I would disagree that big options traders or market makers are by design more 'net sellers' per se. Half of my clients are former options market-makers, and I know their business models well in terms of the regulated exchange space. They want to capture the bid/ask spread differential and stay as delta and gamma-neutral as possible. They will buy straddles or sell futures or buy the cash underlying or whatever in order to balance that book. Now, they may be short all kinds of different strikes on different instruments, but that's because they're getting lifted on offers. I can assure you that they are buying some vol along the way to balance that gamma exposure.