Writing options for a living
- Thread starter torontoman
- Start date
MajorUrsa,
I think you are beginning to see why guys pay 750k for a seat on the CBOE. And I think you are beginning to see why 95% of all traders fail including option traders.
I will say something though and this might drag this thread on for another 30 pages, but just because you have zero expectancy when you first put on a trade, it does not mean you can't have a positive expectancy after you have made adjustments to it. This can get very complicated in discussing this. I just felt I needed to throw something positive out there before everyone went out and shot themselves. LOL.
I think you are beginning to see why guys pay 750k for a seat on the CBOE. And I think you are beginning to see why 95% of all traders fail including option traders.
I will say something though and this might drag this thread on for another 30 pages, but just because you have zero expectancy when you first put on a trade, it does not mean you can't have a positive expectancy after you have made adjustments to it. This can get very complicated in discussing this. I just felt I needed to throw something positive out there before everyone went out and shot themselves. LOL.
Maverick
We agree completely.
Osho
That's £ 15 per contract, less clearing and comms. I personally wouldn't touch it with a barge poll, but if you're comfortable then fine. Good luck.
We agree completely.
Osho
That's £ 15 per contract, less clearing and comms. I personally wouldn't touch it with a barge poll, but if you're comfortable then fine. Good luck.
Haha, Maverick, now that's an open invitation for us ET vultures to pick your brain! I'll bite
What you said doesn't make sense. If your first trade has zero expectancy, but by adjusting it (with a trade in the underlying or another options trade to form a combo) you gain positive expectancy, it means the subsequent trades added positive expectancy. So then, why put on the first trade at all?
Now, if the first trade was a "testing the waters" type trade and the following trades were in response to market confirmation, isn't it fair to say the first trade had very slim but not negligible expectancy?
Now you have to defend your statement and we can all learn something more hehe...
OK, I put away the gun, if only to read the following 30 pages
. (Didn't know my post sounded so depressing)I now see kubilai was faster in replying.
My question would be along the same lines: any adjustment is itself (equivalent to) another combination of options. Since we just concluded that all of these have a zero expectancy, how can the combination of two zero-exp things have a non-zero expectancy?
So there we are; this is IMO the basic filosophical question behind the term 'strategy'. I think this thread only just started.
Ursa..
Let's look at an example.
The crude oil futures January $85 calls expire on December 16. They are now trading at $550 each, which represents 1,000 barrels.
Maverick is saying that the probabilty of it hitting 85$ by December 16 is the same probabilty as it NOT hitting 85$.
Maverick is making perfect sense to me. But when I look at this transaction, it is very tempting to sell these calls. But Maverick is saying " Hold on. Don't get too excited."
I must be an idiot.
The crude oil futures January $85 calls expire on December 16. They are now trading at $550 each, which represents 1,000 barrels.
Maverick is saying that the probabilty of it hitting 85$ by December 16 is the same probabilty as it NOT hitting 85$.
Maverick is making perfect sense to me. But when I look at this transaction, it is very tempting to sell these calls. But Maverick is saying " Hold on. Don't get too excited."
I must be an idiot.
Not quite.
If the implied volatility in the oil calls is the same as what future volatility in the oil spot is GOING to be, then if you keep selling those calls, again and again, then over the long run, you will neither gain nor lose money - expected outcome = zero.
Maverick - I'm waiting with baited breath to hear how you can turn a zero expectancy into a positive one ! I think I kow what's coming, but I'll wait and see...
That is an interesting proviso you make here. I've seen only a few publications where actual realised vol is in hindsight compared to the previous implied vol, thus comparing the market estimate of a volatility with the actual outcome (Baird in OMM does it on pg 30 by shifting the HV 20 days to overlap an IV curve for cotton).
Maybe someone could produce more examples of this.
Of course realised HV and IV would never be exactly the same. Maybe many assume that IV will mostly be on the 'safe' side of the estimate, and since sellers have unlimited risk, this 'safe' side would tend to be that IV is mostly set a bit to high.
The cumulative area below the IV curve and above the realised HV would then be positive. If this is true it would give sellers the advantage in the long run.
I'm not saying this is true, but it would explain why many intuitively think that being on the sellers side means profiting from the safety margin build in the market estimate.
Ursa..
Finally, I think the above comment puts this whole discussion back in context. Going back to initial question of can you or can't you. By making adjustments to positions (I'll use credit spreads/IC's as an example) I think your odds for success are increased substantially. Using an IC as an example, saying that you are short an IC say 50 points OTM on the SPX, if a week goes by an you are now say only 15-20 points OTM on one side of the trade, it may be prudent to start thinking of a possible adjustment. Effectively, executing that adjustment when it's warranted, now I think the trader has greatly increased this trade for positive expectancy from what it was initially. I think Mav was right on about his explanation, saying that if nothing is done to the trade there is no positive expectancy or edge. Managing the trade (risk) I think is what inherently gives the trader that small edge that he is looking for. I could be off here but I think I am close.
The Options edge by Gallacher did a detailed study of IV / HV look-back in many markets - financial / commodity and others if I remember rightly. His conclusion was that there is no inherent advantage to selling rather than buying.
However, I'm sure there was a piece arguing the statistical advantage of short straddles, but can't be sure. The book is out of print unfortunately, I had it on loan a while ago.