Writing options for a living

Maverick74 · Jul 29, 2005

Quote from union1411:

Do you mean literally mean "function?" As in f(delta)=price; f(theta)=volatility?

Correctomundo. Sorry if I spelled that incorrectly.

Maverick74 · Jul 29, 2005

Quote from MAESTRO:

Says who? Since when a sell necessarily results in a credit and buy = debit?

When you are on the floor or talking to a broker, you always pay for debits and sell for credits. If you pay and get a credit you have a risk free position!!!!! Hallelujah!!!!!!!

riskarb · Jul 29, 2005

Quote from Maverick74:

Correctomundo. Sorry if I spelled that incorrectly.

Bro; I believe he's questioning the validity of the usage of "function"

Maverick74 · Jul 29, 2005

Quote from riskarb:

Bro; I believe he's questioning the validity of the usage of "function"

Yes, and delta is a function of volatility. Delta is also a function of time. Price is a function of volatility. Don't ask me for the exact mathematical connotation, I'll leave that for the math geeks. But yes, all the greeks are functions of another greek. Hence the term derivatives.

MAESTRO · Jul 29, 2005

Quote from Maverick74:

When you are on the floor or talking to a broker, you always pay for debits and sell for credits. If you pay and get a credit you have a risk free position!!!!! Hallelujah!!!!!!!

If you short a stock is your account getting debited or credited?

Do you have more cash on your account after such a transaction? Credit in trading options only refers to a side that receives premium not to actual debit or credit of your account.

sle · Jul 29, 2005

Quote from joecgoodman:
Had I sold otm puts on enron at the worst possible time, I would have lost 5% of my account.

Interesting - at what deltas do you write 'em? 1 delta?

Let's do a back-of-envelope calculation. Say you sell them at like 5 delta (2 stdevs). S&P dropped some 120 from 1090 in the course of two weeks (10bd), 11% move. Vols at time time were like 20%, so if you have sold puts for october, strike would be 1091 - (0.20 * sqrt(15/252) * 1090*2) ~= 980. So, for practical purposes, a week later you short a put 20 bucks ITM , with at 44%, so each option would be worth about 966 * .4 * .44 * sqrt(1/12) + 10 ~= $60. You sure you'd be able to handle the margin call next day? Cause you sold them for two-three bucks a pop, so if you want to generate a reasonable return, you'd need to sell a few of them every expiry cycle.

Maverick74 · Jul 29, 2005

Quote from MAESTRO:

If you short a stock is your account getting debited or credited? Do you have more cash on your account after such a transaction? Credit in trading options only refers to a side that receives premium not to actual debit or credit of your account.

If you short a stock in your account, you receive cashflow from the stock and earn interest. It's a credit transaction. If you sell options and receive a credit, you also earn interest on that cash flow. You can't sell debits and buy credits!!!!!

If I walk into the IBM pit at the CBOE and give them a spread and tell them I want to buy it, they already know I am paying a debit. You can't buy a credit. MAESTRO you should really know this stuff. Don't you operate a website and a fund?

kalashnicac · Jul 29, 2005

OK terminology left apart, is my theory about having an edge when playing volatility mean-reversion via any type of fixed loss-fixed payoff (short or long vega) combination valid?

kalashnicac · Jul 29, 2005

Quote from smilingsynic:

Quote from kalashnicac:

Yes in theory expectancy should be the same for any kind of strategy, assuming the options are priced correctly.

The expectancy would be zero minus spread minus commissions. For both selling and buying, over the long run, taking into consideration all buyers and sellers.

I am not correcting you--I am just pointing out the obvious to some who think that selling options is a way to tap into a cash cow. The only way one can make money writing options for a living in the long term is to be able (or to be LUCKY enough) to figure out a way to avoid the inevitable yet unforeseen disaster, or simply to cash out the chips while one is still up.

Luck is a much bigger part of the puzzle than one might think, at least in my opinion.

On average writing works most of the time, but when it loses, it can lose big. On average buying does not work most of the time, but when it wins, it can win big. Expenctancy on average for all remains zero minus expenses.

More...

Actually I thought options were priced with an expectancy worth the risk-free rate, not zero...?

I agree with the luck factor but only on a short-term basis. When you see traders that have been around and successfull for YEARS, it can't only be luck...

riskarb · Jul 29, 2005

Quote from kalashnicac:

OK terminology left apart, is my theory about having an edge when playing volatility mean-reversion via any type of fixed loss-fixed payoff (short or long vega) combination valid?

Edge is determined in hinsight. You have edge if you bought cheap vol on Thursday and the vol-line increases on Friday and you cover. (1) An exception would be the magical long butterfly for a credit, long time spread for a credit, discount arbitrage, etc...

Any of the following arbitrages; boxes+rolls, conversions+reversals are long edge, but they carry rate-risk[rho]. So technically, there are no spreads with initial edge with the exception of #1 above. IOW, the edge isn't realized until they are off the books. Although the edge from an arbitrage usually overwhelms the risk from rho.

The vols may revert to mean, but they may also trend against you. Not to quibble, but it's not a matter of edge.