Itâs an interesting debate â who has the edge, writer or buyer. Mathematically itâs very easy to see, itâs simply a case of looking at volatility, implied and historic. If implied is higher than historic then the writer had the edge. For example, if you sold a one month option at IV 10% and then looked back at option expiry to see that the underlying historic volatility turned out to be 8%, then the writer had the edge. Sell 8% vol and historic turns out to be 10% then the buyer had the edge. Agreed ?
Couple of points hereâ¦
Most importantly it isnât possible to know in advance who will have the edge, since nobody knows future volatility (if they do Iâd like to hear from them). Secondly, having an edge doesnât translate into guaranteed profits, it is just that â an edge / an advantage. In the same way that a casino can lose money despite their having an edge, so you can lose even when selling higher IV than HV, even though you have an edge.
I used to be of the opinion that writers had the edge, but now with more experience and a better understanding of the game, itâs my opinion that <b>over the long run</b> there is no significant advantage in writing, as opposed to buying options.
If option writers really did have an advantage, then traders would pile in and sell options in an attempt to make the so called excess returns. The effect of so many option sellers would be to force option prices down and implied volatility with it. Option prices would then be driven down to the point where sellers would no longer have an advantage over buyers and selling options wouldnât be attractive any more. At that point, the market would be in a state of equilibrium, in other words an efficient market. You can see this taking place on an hour by hour basis, as IV moves up and down throughout the day.
Incidentally, being long 20 deltaâs is very different to being short 20 deltaâs, but thatâs got nothing to do with âedgeâ.
Cheers.
Couple of points hereâ¦
Most importantly it isnât possible to know in advance who will have the edge, since nobody knows future volatility (if they do Iâd like to hear from them). Secondly, having an edge doesnât translate into guaranteed profits, it is just that â an edge / an advantage. In the same way that a casino can lose money despite their having an edge, so you can lose even when selling higher IV than HV, even though you have an edge.
I used to be of the opinion that writers had the edge, but now with more experience and a better understanding of the game, itâs my opinion that <b>over the long run</b> there is no significant advantage in writing, as opposed to buying options.
If option writers really did have an advantage, then traders would pile in and sell options in an attempt to make the so called excess returns. The effect of so many option sellers would be to force option prices down and implied volatility with it. Option prices would then be driven down to the point where sellers would no longer have an advantage over buyers and selling options wouldnât be attractive any more. At that point, the market would be in a state of equilibrium, in other words an efficient market. You can see this taking place on an hour by hour basis, as IV moves up and down throughout the day.
Incidentally, being long 20 deltaâs is very different to being short 20 deltaâs, but thatâs got nothing to do with âedgeâ.
Cheers.
