Writing options for a living

[MAESTRO]

Quote from Anseld:

writing options is an process that requires a lot of patience and discipline.

you're basically building a wall one brick at a time. some weeks go by, and things could go very smoothly. there are some 3-day weekends that you don't even have to put in any work, and the wall still builds itself. but sometimes there might be some strong winds that come out of nowhere and knock a few bricks down. when that happens, you can't stand there, fold your arms, and be lazy. you have to rework your wall and repair the holes to prevent any further damage. that's why you should be keen as to where to build your wall in the first place. some environments have chaotic weather that could come often to ruin your wall. but some places are pretty stable and are less unpredictable. it might take you a little longer to build your wall in the more stable environments, but you should have an easier time because you won't have to deal with that many surprises throughout the year, or even the decade, so your wall could very well end up pretty strong and grand by the end of that time if you've been disciplined with your work every morning.

This is good! I enjoyed that! I always compare option trading with the game of chess: - a very well defined set of rules that enables virtually unlimited amount of winning strategies with dynamically adjusted positions.

 

[riskarb]

Quote from kalashnicac:

But I've always wondered : doesn't using the mean-reversing tendancy of implied voltility give an edge though? Say you trade condors, buying them when IV is low and selling them when IV is high.

Not to nitpick, but a long condor or butterfly is cheaper under high vol as they're short vega/gamma.

 

[kalashnicac]

Quote from riskarb:

Not to nitpick, but a long condor or butterfly is cheaper under high vol as they're short vega/gamma.

Ooops sorry I got it the wrong way round. Well you got the idea though?

 

[MAESTRO]

Quote from riskarb:

Not to nitpick, but a long condor or butterfly is cheaper under high vol as they're short vega/gamma.

Well, you can not "Buy" or "Sell" condors as they involve buying and selling simultaneously. Entering a long condor would be a more appropriate expression IMO.

 

[joecgoodman]

Quote from sle:

Simple. You sold puts far OTM puts on September 10, 2001. You sold puts on Enron two days before the restatement announcement. You have heard of "gap risk", right? I have seen desks that posted tens of millions of losses on days like these.

sle,
Had I sold otm puts on enron at the worst possible time, I would have lost 5% of my account.
Had I sold puts on 9/10/01, I would have been restored in 6 months.
One can overleverage themselves with options, long or short, equities, futures, you name it. It isn't the selling of puts that causes traders to lose their account "in a big bang". It's money-management that presumes the worst WON'T happen. Reality is, the worst WILL happen, and that has to be part of your plan.
Nevertheless, I certainly wish I had BOUGHT puts on Enron.
Thanks for your post!

 

[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.

 

[riskarb]

Quote from MAESTRO:

Well, you can not "Buy" or "Sell" condors as they involve buying and selling simultaneously. Entering a long condor would be a more appropriate expression IMO.

A long [spread] condor or butterfly nets to a debit, otherwise it would result in an arbitrage. So yes, you can buy or sell a condor. The buy or sell refers to the net debit or credit. We're referring to the position, not the components thereof.

 

[riskarb]

Quote from kalashnicac:

Ooops sorry I got it the wrong way round. Well you got the idea though?

Yup, yup... just making sure you don't enter in a sell when you want to buy!

 

[MAESTRO]

Quote from riskarb:

... The buy or sell refers to the net debit or credit ...

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

 

[riskarb]

Quote from MAESTRO:

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

Basic arbitrage conventions...

If you go "long" an XYZ condor:

Buy 1 XYZ 1000 call
Sell 2 XYZ 1100 calls
Buy 1 XYZ 1200 call

You pay a debit on the position. If you were to receive a credit on the aforementioned position it would result in an arbitrage gain.

On this planet you incur a debit when purchasing stock/options/bananas... When selling, you receive a credit.