Writing options for a living

[AAAintheBeltway]

Hey Mave, great to see you back here posting. Watching you and riskarb, and others, go back and forth is a better education than any seminar I know of.

You have demonstrated pretty convincingly that the attraction of selling prem is more apparent than real. However, there is an aspect of it that appeals to those who view themselves as "prudent" speculators. That is the fact that losses occur only sporadically. The fact that they resemble lightning strikes gives one some hope that they can be dodged, either through luck or standing down at risky times. I know it is not statistically valid, but someone who has sold premium successfully for a while is not likely to care.

 

[riskarb]

Quote from Walther:

You will be too late on the next day. Premium spike will be gone by then .

Not necessarily; the problem is what that vol-spike indicates about the future. You may be selling the vol in the kiddie-end of the pool.

 

[Maverick74]

Quote from J-Law:

Can this be done? Has anyone tried it? Any comments?


I respect a great many of the people's opinions whom have posted here thus far.
But getting back to the question and keeping it simple, put/call parity greeks, hist vs imp IV aside (All which are important), given any set of market conditions there are only some strikes, put or call that are a better "bet" to sell than buy.

If you were to buy these series there would be a very low probability that they would expire ITM. & it's more appealing if there is a good deal of time decay priced in as well.

Now to that one has to incorporate risk mgmt and watch/guard your acct equity closely. But that is a given no matter what one is trading.

Selling works. It works in many arenas as well. MM's in the pit whether futures or equity make their bread and butter from it as well as heavies sitting up on large bank/institutional desks. & as always the name of the game is managing your risk.

Unlimited risk yes.......but manageable risk at that.

Do you understand probability and option pricing? If you sell a 20 delta option, there is an 80% chance that the option will expire OTM and 20% chance it will expire ITM. If you sold this option 100 different times and added up all the results from doing that, including the times it went out at zero, and the times it went out DITM, and then divide by 100, you will get the current price of the option, or in other words, it's FAIR VALUE.

You can go as far out as you want, hell you can sell a 5 delta option. The bottom line is, there is no edge in doing so. One in twenty times, that 5 delta option will go DITM on you. There is no way around this.

You can hedge it all you want, but then you have to factor in the all the probabilities that your hedges will be wrong. Most people who sell options either can't trade or are afraid of trading, that is why they sell OTM options. They are hoping they don't have to trade. So they don't make the best directional traders when it comes time to start hedging the position. They will always buy the highs, sell the lows, get in too late, too early, you name it.

If you really want to sell premo, I agree with riskarb on this, sell the ATM. This way gamma curvature actually works IN your favor. Much more controllable. When you sell OTM curvature, it's almost impossible to control and manage. Why? Because the curvature is constantly changing.

And BTW, most MM in the pit are not premo sellers, I'm not sure where you got that from. And most institutions are not premo sellers either. They buy as much premo as they sell. You probably got that info from some bogus scam shop like cashflowheaven.com or something.

 

[Maverick74]

Quote from AAAintheBeltway:

Hey mav, great to see you back here posting. Watching you and riskarb, and others, go back and forth is a better education than any seminar I know of.

You have demonstrated pretty convincingly that the attraction of selling prem is more apparent than real. However, there is an aspect of it that appeals to those who view themselves as "prudent" speculators. That is the fact that losses occur only sporadically. The fact that they resemble lightning strikes gives one some hope that they can be dodged, either through luck or standing down at risky times. I know it is not statistically valid, but someone who has sold premium successfully for a while is not likely to care.

Good to see you again AAA. My only point on this thread is not whether or not someone can make money doing it, it's the fact that there is no mathematical edge in selling premium. A lot of retail traders get lured into this fallacy through websites like cashflowheaven and people like Wade Cook and it's simply not true.

They make comments like, well if everyone loses money because they are buying options, then the obvious answer is just to start selling them. Well, here is where that fallacy falls apart. The reason most people lose money buying options is because THEY CAN'T TRADE! It's the same reason everyone else loses money. It's the same reason guys have been trying to pick a top in this market everyday and starting a thread on it. It's the same reason the avg guy blows out his acct in 6 months trading forex. They simply can't trade. Selling options is not going to change that. A bad trader is a bad trader.

It's so easy to take numbers and arrange them in such a way that it makes something easy to sell to the public. But there is no truth behind those numbers.

 

[jficquette]

Quote from Maverick74:

Good to see you again AAA. My only point on this thread is not whether or not someone can make money doing it, it's the fact that there is no mathematical edge in selling premium. A lot of retail traders get lured into this fallacy through websites like cashflowheaven and people like Wade Cook and it's simply not true.

They make comments like, well if everyone loses money because they are buying options, then the obvious answer is just to start selling them. Well, here is where that fallacy falls apart. The reason most people lose money buying options is because THEY CAN'T TRADE! It's the same reason everyone else loses money. It's the same reason guys have been trying to pick a top in this market everyday and starting a thread on it. It's the same reason the avg guy blows out his acct in 6 months trading forex. They simply can't trade. Selling options is not going to change that. A bad trader is a bad trader.

It's so easy to take numbers and arrange them in such a way that it makes something easy to sell to the public. But there is no truth behind those numbers.

Yes but you have to acknowledge that any expired option purchased otm that expires worthless would have been profitable had you sold it rather then bought it.

John

 

[Maverick74]

Quote from jficquette:

Yes but you have to acknowledge that any expired option purchased otm that expires worthless would have been profitable had you sold it rather then bought it.

John

It doesn't matter. Their expected returns are the same!


Sum of probabilities x payoff = fair value

 

[jficquette]

Quote from Maverick74:

It doesn't matter. Their expected returns are the same!

(probability x payoff)/sum [/QUO

Mav74, I enjoy you posts. Let me just add a couple of ideas.

If options was only math it would easy.

Selling otm options derived from a proven, profitable strategy attached to the underlying is the way to go.

The reason buying doesn't work for most is for the same reason that trend trading doesn't work for most. That is because they don't have a method to trend trade.

Buying options requires the underlying to do something. Selling way otm options are profitable if attached to a proven underlying strategy because two things can happen and you can still make money. The underlying can go the other way or it can sit and do nothing. Either way you make money.

I prefer two of three chances over one out of three.

Find a bullet proof strategy where you are consistently making money by mean reversion with a hit rate of at least 75%. Then add selling options with it and you can mint money.

The key is trading the underlying. If you can not find a mean reversion method that works on the underlying then stay away from options period.

My comments are directed toward the options only and not combined with other strategies.


John

 

[murray t turtle]

delayed Quote from Maverick74:

Do you understand probability and option pricing? If you sell a 20 delta option, there is an 80% chance that the option will expire OTM and 20% chance it will expire ITM. If you sold this option 100 different times and added up all the results from doing that, including the times it went out at zero, and the times it went out DITM, and then divide by 100, you will get the current price of the option, or in other words, it's FAIR VALUE.

You can go as far out as you want, you can sell a 5 delta option. The bottom line is, there is no edge in doing so. One in twenty times, that 5 delta option will go DITM on you. There is no way around this.

You can hedge it all you want, but then you have to factor in the all the probabilities that your hedges will be wrong. Most people who sell options either can't trade or are afraid of trading, that is why they sell OTM options. They are hoping they don't have to trade. So they don't make the best directional traders when it comes time to start hedging the position. They will always buy the highs, sell the lows, get in too late, too early, you name it.

If you really want to sell premo, I agree with riskarb on this, sell the ATM. This way gamma curvature actually works IN your favor. Much more controllable. When you sell OTM curvature, it's almost impossible to control and manage. Why? Because the curvature is constantly changing.

And BTW, most MM in the pit are not premo sellers, I'm not sure where you got that from. And most institutions are not premo sellers either. They buy as much premo as they sell.

========================

Maverick74;

Agree with your earlier statement of personality factor;
as well as maverick principle of not branding his cattle, ;
no thanks on buying your OTM 20% probablilties, at this time.

PROBABLY had a good point on Wade Cook, however;
Mark Cook made a good case against selling any options .

Maybe right on ATM,riskarb, but they can turn into ITM quickly ;
have done better buying overall on ITM, so far.Maybe proves your point.

Like Sheldon Natenberg principle =moderately bearish or bullish;
''sell underlying or buy underlying'' [no options]

 

[TruthTeller]

Quote from AAAintheBeltway:



You have demonstrated pretty convincingly that the attraction of selling prem is more apparent than real.

Well said. Short options are extraordinarily difficult to manage when things go sour. And from time to time, they do. The attraction of collecting premies tends to suck in unwary traders to the point where they are heavily leveraged, if not dangerously so. Then the poop hits the fan and life becomes less than pleasant. There are a lot easier ways to make money. I've always said that if somebody is efficient at trading the underying, which they must be to short equity options, then just stick with the trading. It is so much easier to enter and exit, and if you are long the stock and it rallies you aren't capping your gains.

 

[kubilai]

Buying OTM options is like playing the lottery, lots of little losses and rare giant gains. Selling OTM options is like playing Russian Roulette, lots of little gains and the rare giant loss. Most people prefer to play the lottery because they prefer rare giant gains. A few people play Russian Roulette because they prefer lots of little gains.

What Maverick points out very clearly is that the two scenarios are the same if you don't have a positive expectancy. In the long run you'll go broke or die from lottery/Russian Roulette because both have negative expectancy. A good trader doesn't have a preference between the two strategies as long as there's a positive expectancy. His good money management strategy allows him to endure through the inevitable drawdowns and come out alive and rich in the long run.

Another of Maverick's observation that I find interesting is that a lot of OTM options players are bad traders. A good trader with a concrete edge would benefit the most with ITM strategies (long/short underlying, ITM/DITM options, futures). When price changes he immediately gets feedback, good or bad, and he participates in small movements. He's also able to quickly determine his edge in live trading. That's what a good trader wants, because by dealing with the psychological burden of daily price movement, he gains faster feedback so he could discard losing strategies quickly.

OTM options players, in contrast, avoid the psychological cost of dealing with daily price movements and get severely delayed feedback about his live-trading edge. His feedback may come after years of profitable trading in the form of a bankrupcy. So the question is, do I trade in OTM options because I'm a bad trader? If I'm not a bad trader, can I stand to profit more by ITM strategies?