Writing options for a living
- Thread starter torontoman
- Start date
That doesn't change expectancy. Expectancy is at the point in time the trade is made.
If I can use an example you recently quoted with the dice. If you buy the bet for $4 you'd have a negative expectancy. If it landed a 6 and you then "locked" the profit does that then make it a positive expectancy ? - Most certainly not !
Even though you have a negative expectancy still means you can profit from the trade. But profit you will LESS than you make a loss, and the fact will always remain that the trade had a negative expectancy.
I imagine not difficult to add your monthly trades per profit or loss %, divided by your total capital at risk.
In the system I am developing I am looking for a 4 to 6% positive result expectancy per trade on average based on capital at risk..
Maybe not: there are many cases where both the buyer and the seller are happy with the outcome at expiration. E.g., say a large institution buys OTM SPX puts for downside protection, "insurance" as it were. The institution and the options writer will both be happy for those puts to expire OTM. An economist might call this "positive gains from trade."
I tend to agree with that. Any follow-up trade in itself involves a decision-making process. That means making an assumption about the future. Completing a condor after some weeks have passed can be the right decision only in hindsight. In other cases it would have been better to leave the outer strangle alone.
Comparing the outcomes of 1000's of left-alone outer strangles and 1000's of completed condors would result in the expectancy number of the inner (sold) strangle.
So, it seems to me that any 'strategy', either simple selling or buying or any accurately timed series of adjustments has non-positive expectancy.
We're left with gambling and predicting the future, meaning that we're all either gamblers or charlatans.
What now?
Ursa..
Not quite: there is no advantage if both buyer and seller hold until expiration.
Of course in the real world position adjustments or interventions are possible but -- and this is his key point -- they are not available symmetrically to buyer and seller. Specifically, due to time decay the seller has more possibilities than the buyer.
He goes on to guestimate that an options selling strategy might expect a return on investment in the 15-20% p.a. range.
Yes it does. Not for the 2nd trade, but if you are looking at the entire trade from the standpoint of one position, then yes it does. And that is what I was referring to. Yes, every trade you make, including the 2nd, 3rd, 4th and so on all have negative expectancy on their own, but as a position they can have a positive expectancy. Ever heard of a conversion or reversal? LOL.
What do you think that is if you leg into it for a risk free profit? LOL. I call that a positive expectancy trade.
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Iam not advocating buying OTM as a strategy either;
fun reads on JS/TS 7 million.
Mr moderator;
If you dont mind saying briefly how you blew up your account selling; options
takeover, or to big a position,or not having /executing a stop loss?????
True, but does that change the zero sum fact ?
The net wealth of the option buyer and seller won't change when an option trade is complete. One will gain, the other will lose, and this principle holds good no matter how many times the option changes hands. The fact that one party is "happy" to lose (for whatever reason) doesn't alter the zero sum fact. But I take your point that a portfolio insurer has benefited from his loss.
It was a while ago since I read the book, but the above does ring a bell. I was interested in his findings, since it was the only piece of scientific research carried out on buying Vs selling options. I think half the book actually contained the data he used during his research, so if anyone doubts the conclusions....
I agree that a trade initially entered with a negative expectancy can be turned into a profitable trade. But that wasn't my point, and it shouldn't be yours. A conversion or reversal, where all three legs are executed simutaneously would have a positive expectation, where the purpose is to lock a riskless profit. But that positive expectancy was known at the time of entering the trade, where all 3 leg were executed simultaneously.
That is a contradiction.... If you leg into a trade you cannot, by definition, be risk free since the leg to be added can move against you. I think we're talking cross purposes and anymore debate might boil down to semantics. Agree to disagree ?