I only write on futures. Fundamentals/technicals doesn't matter in the long runâ¦trade management makes all the difference. Well, that was the difference for me anyway.
Writing options for a living
- Thread starter torontoman
- Start date
I only write on futures. Fundamentals/technicals doesn't matter in the long runâ¦trade management makes all the difference. Well, that was the difference for me anyway.
I know this is from way back there, I'm pretty new so I'm just trying to get a feel for what knowledge I'm lacking.
Basically what you're saying is, if you sold and bought a 20 delta option, over the course of a billion or so occurrences, chances are the profits would be the same, that is, you'd have instances where buying the 20 delta would sky rocket and make up for your losses, and you'd have a consistent stream of premium from selling the 20 delta with the odd spike that wipes those gains out?
Correct, the math says that and it can be proven. Now beyond the math there is the concept of optionality. That is, when the shit hits the fan, regardless of whether you are long the 10 delta strike or short it, which position is easier to manage? Which position gives you more "options" hence the term optionality. No one goes broke in one day being long the 20 delta or 10 delta option. But many go broke being short it. If you are long the option, you have an infinite amount of moves you can make to manipulate your position. If you are short, the only thing you can really do is get out without adding on to the risk you already have. So when you factor that in, ceteris paribus, the buyer has a slight advantage because the optionality has some intangible value outside the math. But on math alone, it should make no difference if you choose heads or tails or buy heads or sell heads. And again, we are speaking here strictly ceteris paribus. Once you add another variable to the argument like your volatility modelling skills, the argument changes.
Ah, so here is a hedging "idea"
Let's say I sell an OTM call and leave a stop order to cover the stock at the stock price if the stock ever gets there. Once the stock is over the price and I am long the stock plus short a call, I'd leave an order to sell it stop at the strike price. And so on and so fourth...Ah, so here is a hedging "idea"
HMM that is actually really smart. So instead of dishing out part of your premium to cover your naked call, you're just putting a limit order on the underlying to protect from the upside..? Is this essentially breaking even?
For example, you sell an OTM call with strike of 5.00 for $1. You put in an order to buy the underlying at 5.00.@5.01 the $5.00 contract gets executed, you make a profit of $99 - commissions? basically converting it into a covered call.
Man I'm so glad I read this! I never even though of that.
Unless there's been a lot of decay in the option price (time decay or decrease in volatility), more than likely the option you sold will have an unrealized loss at the time you put on the hedge in the underlying. You'll have to 'dynamically' manage your position in the underlying stock/index/whatever, if that's how you plan to hedge your sold options.
so it will be an unrealized loss, but profit at expiration assuming things went your way?
and dynamically managing would just mean buying and selling/shorting? That being said, isnt this a guarantee profit or break even?
It will be profitable at expiration if the stock stayed flat or kept going higher from the time you bought the underlying, yes. But, more than likely its going to test your entry price, maybe it will make a full u-turn and dive lower so you'll have to take off the underlying position totally, etc. Hence, 'dynamically'.
I'm not sure where the idea guaranteed profit/break even comes from?
I'm not sure where the idea guaranteed profit/break even comes from?
Clearly not. Otherwise everyone else would be doing it.
Well, lets imagine you always hold to expiration - if you could never lose, it's not a problem, right?
