Writing options for a living

[zman7854]

Quote from joecgoodman:

Mav is right, and my prior posting regarding it being easier to lose your account buying options is technically and mathematically just flat wrong. The way people tend to approach trading options is more conservative on the selling side, in my opinion. In my system, a critical factor is only selling puts on companies that are good buys exactly where they sit. Yes, I could do the same with covered calls (I now know, thanks to mav and riskarb). But either way, I'm selling premium, not buying it.

At the risk of being disected by some of the more veteran players on this thread, I'll add my two cents worth.

I think it is possible to sell puts and do alright, although I would vary on your strategy above. Rather than selling puts naked I would sell verticals or bull put spreads (check out the thread by optioncoach). Also, rather than selling puts on companies I would choose some lower volatility indicies like the OEX/SPX. Adding to that I would leg into the call side of the spread to make it a bear call spread when the market seems right, not always. That being said there is no free lunch, some market direction bias, albeit slight, I think has to be taken. Also with this strategy it's not something where you just sit on your hands and hope it expires by expiration. I would be looking to do adjustments throughout the month when the trade needs to be adjusted. Also, taking profits when the bulk of the max profit has been captured. With this strategy you have more opportunity to monitor adjust then with an outright naked selling of puts. Also with indexes it's unlikely (although totally possible) for a huge gap either way, with individual stocks it is more probable and less controllable (adjustable). Even so I believe it's possible if you are actively monitoring/adjusting the account to minimize losses. It seems this thread has gone to the extreme of 'will I blow out my account or not' and not looked at any type of proactive adjustments to help reposition for a profit/breakeven/small loss. Although I guess with naked puts if it's ITM the writer is SOL, lol. That's one reason why I for one would not write naked.

Also, I think one has to put the selling of puts into perspective. If you are selling puts in your entire portfolio on only a few issues, IMHO your account is a ticking timebomb. On the other hand if you have a porfolio which has only a portion set aside for selling puts (or verticals) on a large number of different stocks (or indicies) in different industries you would help deter the risk somewhat.

 

[smallfil]

It is probably the riskiest thing to do with options. While, still a newbie, I have figured out that buying puts (if you expect a stock to go down) and buying calls (if you expect the stock to go up) is the more sensible and less risky approach to trading options.
Timing is another thing because if you are off----you can experience atleast, short term loss of your capital.
Let us see just what happens to GOOG. I just looked at the chart and it seems poised to go down in the near term. Looking at a Jan 290 put (GGD MR). Not an endorsement but, I am curious myself if I am right that this stock will go down. Have been paper trading for the past 2 months and doing okay. I will add this to my paper trades just for the heck of it!!!

 

[smallfil]

>>>Unlimited risk yes.......but manageable risk at that.<<<

If one insists on writing naked puts and calls----one is asking to go bankrupt. Thinking of my last option trade on UAIKH (ANSI stock) Nov 40 Call----if it were to have skyrocketed say 20 points----the writer of the Call would have been killled!!! I bought the call when ANSI was trading at around $39.00 (the call was at $3.70). Sold the call as the profit was larger. $1700.00 versus $1000.00 if I bought the stock at $40.00 then, sold it at $50.00.
This stock can still go to $60.00 as it is in an uptrend. The writer of calls on ANSI is probably sweating bullets with good reason.
Why take unnecessary risks where the profit is limited and the risk unlimited? A better approach is to go for limited risk and unlimited profits which call buyers have. Put buyers have limited risk and limited profits but, again the risks are limited to what you put in!!!

 

[union1411]

More people should read Fooled by Randomness.

A person writing nakeds may have a high winning %, but what does it matter if it only take a few bad trades to wipe a person out.

I'd rather be right on trades 40% of the time and have + 50% p/l than be right 90% of the time and have - 80% p/l. Writing nakeds is gambling not trading imho.

 

[Maverick74]

Quote from Anseld:

if i knew of no other profitable strategies, i'd be trading only frontspreads on some instruments and would confidently say i'd be making money just about every year if vix remains below 35. to tell you how is beyond the scope of this thread. i think picking the right thing to short premium is also pretty important. some instruments have a very stable history and rarely experience any gaps. and even when they do, they are not that extreme. those are the ones you want to pick out and play with if you ever do decide to do this for a living.

and there's a huge misconception that once you put on a frontspread, you don't do anything else. well, that's probably the best way to lose money because risk management is the key to your survival. you have to constantly monitor your risk levels and play some defense when you have to. you can't just sit there, be stoned, and fold your arms the whole time unless the thing doesn't move an inch at all. to protect your premium, you're supposed to be constantly fixing your position and adjusting it to not let things get out of hand. that's why you want to choose some instrument that doesn't act like it's on 10 hits of acid but has a more stable character to make it easier to manage.

OK, I'll just pick this post to air out some comments here. Let me start off by saying how silly this statement is.

I think picking the right thing to short premium is also pretty important

The reason I am pointing out this statement is because it's not valid on it's own merit. Or at least this statement is not uniquely valid to selling premium. Can't somebody say the same thing on the inverse? That if you are a long premium trader, picking the right stock is very important? Of course they can.

Somebody on another post made the comment that if you pick the right time to sell premium, the odds are in your favor. This of course is completely preposterous. Again, I'm saying this in the context that it is unique to premium selling. Again, can't one say the same thing about buying premium, that one has to pick the right times to do this? I mean, what about the guy that bought calls on GOOG and CME when those stocks broke out to new highs. Certainly they would have been handsomely rewarded for doing so correct?

See, here's the deal. If you make extraneous arguments to your original thesis that selling premium has some edge and you qualify that remark buy saying things like...well you have to do it at the right time, or you have to pick your spots and be disciplined....then how is that different from say a stock index futures trader who says the same thing? I mean one could make trillions of dollars trading NQ futures if they pick their spots well and get in at the right time. Or if they cut their losses and let their winners run. This says nothing about the original post on this thread which was, is there edge in selling options. Once you add qualifiers to that statement, the original statement is no longer valid.

I will say this again, there is no difference between buying a 20 delta option and selling a 20 delta option. Yes, I understand selling the 20 delta options makes you feel safe because it's OTM. But if you run a simple monte carlo simulation on random moves thousands of times over, you will see that your results will be completely identical. You can try this experiment yourself by flipping a coin and running the results on a spreadsheet. Wether you buy heads or sell tails, at the end, the results will be the same over an infinite time period.

Now if someone on here claims they have a great technical system or they have secret indicators that pick tops or bottoms, then fine, that I can live with. But that has nothing to do with options or the probability of an option closing ITM or whether or not it's better to sell premium over buying premium.

Let me repeat, none of my statements are saying one can't sell premium profitably, only that there is no advantage to selling premium over buying it. The odds are exactly the same. There is no way around this. A 20 delta option is a 20 delta option is a 20 delta option. LOL.

 

[Anseld]

Let us see just what happens to GOOG.

this is the thing. most people are so obsessed with selling juicy premium that they are only attracted to things like goog or some high flying biotech baby. those are the bullies that are actually gonna kill you. those things have a giant gap just about every other week, if not every other day. all the successful option writers don't touch those things. if i'm trading google, i'd probably want to LONG options.

it's been said in this thread that when you sell high volatility, you're also going to most likely experience high volatility in the underlying, and that's usually pretty true. most of the time, it's just not worth it because that premium comes with a high cost, and that is dealing with so much unpredictability..

it's also a misconception that good money can't be made when you sell low volatility instruments. i would actually say it's a lot easier to make money from selling cheap premium than expensive premium because cheap premium is so much easier to manage. the premium may not be as high to beging with, but you get to retain most of it because the thing just ain't gonna move that much.

if the vix is like 50, and premium is juicy as hell, i'd probably more be hesitant to sell that premium because that thing is just gonna move and gap everywhere every other day.

 

[Anseld]

just because you haven't been sucessful in writing options and don't know how to trade it and make money, it doesn't mean it's hard for everyone else.

Quote from Maverick74:

OK, I'll just pick this post to air out some comments here. Let me start off by saying how silly this statement is.

I think picking the right thing to short premium is also pretty important

The reason I am pointing out this statement is because it's not valid on it's own merit. Or at least this statement is not uniquely valid to selling premium. Can't somebody say the same thing on the inverse? That if you are a long premium trader, picking the right stock is very important? Of course they can.

Somebody on another post made the comment that if you pick the right time to sell premium, the odds are in your favor. This of course is completely preposterous. Again, I'm saying this in the context that it is unique to premium selling. Again, can't one say the same thing about buying premium, that one has to pick the right times to do this? I mean, what about the guy that bought calls on GOOG and CME when those stocks broke out to new highs. Certainly they would have been handsomely rewarded for doing so correct?

See, here's the deal. If you make extraneous arguments to your original thesis that selling premium has some edge and you qualify that remark buy saying things like...well you have to do it at the right time, or you have to pick your spots and be disciplined....then how is that different from say a stock index futures trader who says the same thing? I mean one could make trillions of dollars trading NQ futures if they pick their spots well and get in at the right time. Or if they cut their losses and let their winners run. This says nothing about the original post on this thread which was, is there edge in selling options. Once you add qualifiers to that statement, the original statement is no longer valid.

I will say this again, there is no difference between buying a 20 delta option and selling a 20 delta option. Yes, I understand selling the 20 delta options makes you feel safe because it's OTM. But if you run a simple monte carlo simulation on random moves thousands of times over, you will see that your results will be completely identical. You can try this experiment yourself by flipping a coin and running the results on a spreadsheet. Wether you buy heads or sell tails, at the end, the results will be the same over an infinite time period.

Now if someone on here claims they have a great technical system or they have secret indicators that pick tops or bottoms, then fine, that I can live with. But that has nothing to do with options or the probability of an option closing ITM or whether or not it's better to sell premium over buying premium.

Let me repeat, none of my statements are saying one can't sell premium profitably, only that there is no advantage to selling premium over buying it. The odds are exactly the same. There is no way around this. A 20 delta option is a 20 delta option is a 20 delta option. LOL.

 

[Maverick74]

Quote from Anseld:

this is the thing. most people are so obsessed with selling juicy premium that they are only attracted to things like goog or some high flying biotech baby. those are the bullies that are actually gonna kill you. those things have a giant gap just about every other week, if not every other day. all the successful option writers don't touch those things. if i'm trading google, i'd probably want to LONG options.

it's been said in this thread that when you sell high volatility, you're also going to most likely experience high volatility in the underlying, and that's true. most of the time, it's just not worth it because that premium comes with a high cost, and that is dealing with so much unpredictability..

it's also a misconception that good money can't be made when you sell low volatility instruments. i would actually say it's a lot easier to make money from selling cheap premium than expensive premium because cheap premium is so much easier to manage. the premium may not be as high to beging with, but you get to retain most of it because the thing just ain't gonna move that much.

if the vix is like 50, and premium is juicy as hell, i'd probably more be hesitant to sell that premium because that thing is just gonna move and gap everywhere.

I'm sorry, I cannot agree with this. Sorry Anseld, I'm not trying to pick on you here. Just responding to your points. When you sell low premium options, you are not getting shit in return. Your margin for error is zero! Again, those options, just like the options on GOOG, are priced very efficiently leaving the MM with an edge, not you.

To be honest with you, if someone put a gun to my head and made me sell naked premium, I would feel much better about selling juice in GOOG over let's say GE.

Right now the ATM sept straddle in GOOG is going for about 23 1/2 pts. Going into earnings the straddle would be worth about 30 to 35 pts. I would much rather take my chances with that then say getting 1.30 for the ATM sept GE straddle. LOL. Sure GE doesn't move that much. But 1.30? Do you know what your margin for error is there? I'll take the 25 to 30 pts in GOOG. Again, I didn't not change my position here. I'm not saying to sell juice in GOOG, just if I had to pick stocks, I would always, always, always go with the more volatile ones. Why? Just because a stock is crazy, doesn't it mean it will always be crazy. Right now post earnings, GOOG has a very tight and quiet range. On a percentage basis, it's actually more quiet then GE. But a quiet stock like GE can explode at any time. The only problem is, there will never be enough juice in it to compensate you for that.

Anyway, I digress. I just wanted to jump in here and dispel the myth about selling premo on quiet stocks. LOL.

 

[Maverick74]

Quote from Anseld:

just because you haven't been successful in writing options and don't know how to trade it and make money, it doesn't mean it's hard for everyone else.

Anseld, if you can't attack my argument with logic, then leave it alone. Ad hominem attacks are reserved for CC.

I have been very successful at BOTH buying and SELLING options my friend. What I am saying is that there is NO edge in SELLING options vs BUYING them. Do you not understand my argument?

I thought I have been very clear on my points here. You keep coming back with "well, you have to do it at the right time". LOL. Shit, and how does that not apply to trading forex or bond futures. Is there any financial instrument that can be traded well if you pick the wrong spots with bad timing and then follow up with terrible discipline? Show me the way to those markets! LOL.

 

[Anseld]

Quote from Maverick74:

Again, those options, just like the options on GOOG, are priced very efficiently

that's something you should look more into because there are definitely a lot of options that are not priced efficiently.

the margin of error for goog is not as wide as you think because a 23.5 point move for goog can easily be done in a day and a half. you think you're going to eat a lot of premium, but most of it won't be retained.

for other options that have low premium, it's easier to manage and most of premium could be retained with proper hedging as long as there are no giant gaps. with stuff like goog, you don't have that luxury.