Writing options for a living

Quote from kalashnicac:

Ok got your point.




I am aware dynamic hedging comes at a cost, sometimes to the extent that it wipes out the whole profit potential of an option trade. But "partial" delta hedging can reduce risk. You could for instance leave the position breathe a bit instead of adjusting delta every second. Just making sure the position doesn't get too directional (one could try to keep delta under a particular number, say 30) seems a reasonable way to avoid the big losses.

With "loose" (as opposed to tight) delta hedging, you limit your risk and who knows you can even make money hedging.
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You are ignoring price gaps. When volty is high, its' telling you there is a substantial risk for a price gap which CANNOT be hedged. Letting a position breathe is not the answer either. This is in response to you thinking there is EDGE in selling high volty. In order to capture that premo, you have to lock in deltas otherwise you are not making a volty bet, but rather a delta bet.

I guess what I am trying to say, is that it's incredibly difficult. Price gaps blow guys out and sometimes the entire firm they are with. Do a little bit of research and you will find that even such masters as Charles Cottle not only blew himself out several times, but actually almost blew out not only his firm but almost the entire exchange. He was letting his position breathe. LOL.
 
Isn't it a good idea to sell volatility after a volatile day? For example if crude oil rises by a couple of dollars in one day, isn't it a good idea to sell OTM calls at that time?
 
Quote from torontoman:

Isn't it a good idea to sell volatility after a volatile day? For example if crude oil rises by a couple of dollars in one day, isn't it a good idea to sell OTM calls at that time?
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Well, one, you are making the assumption that volty increases with stat vol. This is not true most of the time. In fact, particularly with stocks, volty tends to come in hard after strong up days.

Generally speaking, high volatility begets low volatility and vice versa. However, the timing of that becomes another issue. Generally when volty starts to expand, it's not a one day thing. It usually expands for weeks and sometimes months. So trying to pick the top in volty is really not much different then trying to pick the tops/bottoms in the underlying. Very few people succeed at that.

BTW, I'm not trying to be a pessimist here and tell anyone they can't make money selling juice or trading options in general, I'm just saying that you need to be a damn good trader, just like trading anything else. It's not as simple as well, I'll just sell options. Or, I'll just buy them. Or, I'll do mean reversion trades. It's much harder then that.

Trading options successfully really will be the hardest thing you ever attempt to do in your life. And to say all you have to do is "this" whatever that is, is really undermining how tough this business is.
 
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.
 
Quote from Maverick74:

Well, one, you are making the assumption that volty increases with stat vol. This is not true most of the time. In fact, particularly with stocks, volty tends to come in hard after strong up days.

Generally speaking, high volatility begets low volatility and vice versa. However, the timing of that becomes another issue. Generally when volty starts to expand, it's not a one day thing. It usually expands for weeks and sometimes months. So trying to pick the top in volty is really not much different then trying to pick the tops/bottoms in the underlying. Very few people succeed at that.

BTW, I'm not trying to be a pessimist here and tell anyone they can't make money selling juice or trading options in general, I'm just saying that you need to be a damn good trader, just like trading anything else. It's not as simple as well, I'll just sell options. Or, I'll just buy them. Or, I'll do mean reversion trades. It's much harder then that.

Trading options successfully really will be the hardest thing you ever attempt to do in your life. And to say all you have to do is "this" what that is, is really undermining how tough this business is.
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Awesome. Very well said Maverick47. The best and most truthful explanation I have read in the entire thread. Trading options short or long is truly a very HARD endeavor. What this gentleman is saying must be taken very seriously for anyone who thinks that they can just waltz right in to this business and syphon money out of the option market. It takes a lot of hard work, shallow understanding of how the constant dynamic changes in volatility(static and IV) has a direct impact on your bottom line, and excellent timing skills of the behavior and future movement of the underlying from the moment the trade is initiated. I've been at it for 5 years ,thousands of hours of research in modelling and predicting future volatility and price movement, pretty much the equivalence of getting a 4 year degree. 3 of the last 5 years of real money trading were failures. My success finally came ONLY after I was able to truthfully answer(without justification) the following questions before a trade is ever put on:

1. How much will the stock move in the next 10 - 30 trading days (the time frame that I operate on)and what percentage of that future movement will be ABOVE or BELOW from todays close ?

2. You cannot answer the 1st part of question 1 unless you can truthfully answer the following question; WILL the volatility of the underlying expand or contract AND by how much within the duration of holding your position?

3. Where's I.V.'s % range for the year and how much will I.V. change (+/- )within your trading time frame and why do you think so?

4. Will the underlying chop or trend within your trading time frame?

5. Will the answers to question 1-4 over compensate for the Bid/Ask spread and commissions?

6. Once you have ALL the answers to the above questions, you will be able to derive the answer to the mother of all questions; Are the options I'm about to buy/sell WORTH my money, time and stress??

Last year I earned 132% return on my money(audited and documented) and this year I'm up 61% YTD. Luck had very little to do with it. HARD WORK, passion and perseverance like the poster said is what it takes to make it in this business.
 
Quote from kalashnicac:

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



Kalashnicac, Carrying charges aside (sellers are lenders, buyers are borrowers), I was speaking about the so-called advantages of writing over buying that keep coming up again and again in magazines geared toward a popular trading audience (FUTURES, TA of S and C). As part of the trading public, I find it insulting to the intel of traders (much like I resent these ubiquitous Forex/trading seminars that pop up in major cities that make it seem that trading currencies is easy money, as if central banks and professional traders are like giving it away). Writing options is easy money, until you lose it all (and more, or if you get out in time, either through superior trading ability, quick hedging, or dumb luck). Buying options is money down the drain, drip by drip, until you hit it big (or not, if you are out of the game).

Unless the options are mispriced (i.e. buying an option with an IV of 20 for the price of an option with an IV of, say, 18), there is no real advantage (again, other than carrying costs) of selling over buying. MM are not selling what is worth a dollar for ninety cents (though they will be glad to sell you what is worth 90 cents for a buck!). The successful traders may buy low IV and sell at a higher IV, or buy an option at 4 and sell at 6, but that is apparent only AFTER the trade is complete.

If MM ABSOLUTELY, POSITIVELY KNEW that a stock (option) would be trading higher in a day, why would they sell it for less now?

They wouldn't , because they can't.



The successful long-term traders may be successful not entirely to luck, but when they enter a position there is



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...
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Quote from torontoman:

Isn't it a good idea to sell volatility after a volatile day? For example if crude oil rises by a couple of dollars in one day, isn't it a good idea to sell OTM calls at that time?
More...

You will be too late on the next day. Premium spike will be gone by then .
 
Does anybody know a good money management strategy for writing options? Like what do you do if underlying price moves closer to the strike price of your sold puts?
 
read the options trader handbook, by optioncoach. the book outlines escape strategies for various options strategies.
 
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