Writing options for a living
- Thread starter torontoman
- Start date
Logically self evident? There's evidence right on this board of amateurs finding inefficiencies in the market. The idea that the market is effecient is a fallacy, and an excercise in theory. The market is ineffecient, if made so by no other reason than the dissemination of inforamation is wholly ineffecient.
Again, proof on this board alone that there are systems that work. I know of one in particular that the people are trading almost robotic and making money.
Whoa, what do you think a large number of hedge funds do? BB trading is VERY common. Have you not heard the theories that the 87 crash was partially/mostly due to program trading?
- The New Guy
So...zero expectancy means that there is no edge, and zero sum means that there is nothing of value created; just a transfer of wealth from loser to winner.
The zero expectancy point is true for most trading: true arb opportunities are rare.
But I submit that for investors the zero-sum point is wrong: there is a positive expectation. In equities for example I think one can reasonably expect a high single digit return over the long run. T Rowe Price uses 8% in their models. As an investor, you get paid for taking on risk.
In the case of options, what does it mean to be an investor? As I think about it, it also means taking on risk. The buyer of an option lays off risk on the seller. In exchange, the seller gets paid a premium. So the seller in my simple model is the investor.
In an efficient options market, this exchange is made at fair value, net of transaction costs. No trader has an edge.
And embedded in the premium is compensation for the seller in exchange for bearing risk; otherwise, who would do it? The challenge for the options "investor" is to capture this bit over the days until expiry.
So the options investor does not sell high just to buy low (like a trader) but rather to harvest theta. The one prediction that we can make with a very high degree of confidence is that time will flow on.
The mind-set of an options investor is more of a bondholder than a trader. Indeed, I think of my options accounts as comprising a separate, complementary asset class to equities, bonds and real estate. And diversification is one free lunch that is freely available.
Over time I have found that a theta-harvest program can yield 10-20% with some annual consistency...sorta like high yield bonds. If Gallacher is right and this is the "market return" for such a program, well OK by me: I don't expect to beat the market, just get paid by it.
What about options buyers? I think of them as either speculators who want to leverage themselves greater than the 2.0 allowed in margined equities accounts; or insurance buyers looking to lay off risk. Why else would you buy an option?
i rest my case. (i.e. systems do not work.)
i never said that the market has no inefficiencies or that no one tries to trade robotically. i simply claimed that inefficiencies by their nature are short-lived and self-cancelling. if traded enough and in size, they would eventually move the markets irradicating the basis for the inefficiency. "eventually" in today's trading environment means virtually instantaneously.
finding such inefficiencies are increasingly more expensive to locate and even shorter in duration. a retail trader trying to outwit the markets appears ludicrous while hedge funds and other large firms hire armies of phds and deploy warehouses of data sifting technology are doing the same thing. but if you want to pursue this quixotic dream i won't try to dissuade you.
also why on earth would someone who has found a system to beat the market publicize that system on an anonymous discussion board? further, even if these systems were publicly available why isn't everyone trading them with wild success. how many members of this board are on forbes richest list? or for that matter how many traders with a "system" are on forbes list?
derivatives do not create anything. they are merely ways of breaking up risk and reward properties of assets and monetizing these elements for trading purposes. one side of the transaction exchanges partial returns in exchange for limited risk. the other side embraces the risk in the hopes of capturing any excess returns. its akin to a self-insurance program in which premiums divide the cost of risk relatively equally among all participants while only those that experience an accident are compensated for the loss.
depending on your accepted version of political economy, stocks and indeed the economy as a whole might be considered a zero-sum phenomenon. academics talk of "economic externalities" in which a firm displaces a cost of production (say air pollution) outside the firm (to society at large). marxists would claim that capitalist profits are merely coerced redistribution of wealth created by and taken from labor.
if you really want to stretch the analogy you could look at einstein's e=mc^2. the implication of this physical law/theory is that the universe, no matter how vast, is a finite system in which all matter can be transformed into other matter. but nothing is ever gained or lost. hence the universe is a zero-sum game.
C'mon, just because there are examples of systems that don't work doesn't mean they all don't work. That's completely illogical, and I'm not going to argue that further. I never suggested that all systems work, just that every hedge fund that I've worked at used systems, most of them were quite profitable. Of course they required constant attention, and of course they required constant updates, but that doesn't make it a non-system.
understood. I misunderstood your meaning, but I will say this, you're time frame for 'eventually' is wrong. Also, who says that just because you have a system means that you have to trade size? If you know a system will remove the ineffeciency at some point when it reaches too large of a size why not determine critical mass and wait it out until others catch on to it? There are inefficiences that have been around for years, some for decades. Yes, obviously they have some limitiations as to what you can do with them, but who cares? If they make money, they make money.
I don't care what it "appears" to be. I also don't care whether or not you try to dissuade me from doing something I do daily. There are differences between hedge funds and retail investors, some are disadvantages and some are advantages. Thinking that retail investors ONLY have disadvantages is ridiculous.
If you'd bother to go look them up they tell you right in the first post usually. I can think of two on here right off the top of my head. There are barriers and limitations to each, of course, but that doesn't mean they aren't profitable. Part of the problem here is that you are thinking strictly academically, and I am thinking practically. If a system can only work with very small size (due to liquidity, for example), there isn't much chance of a hedge fund picking it up and destroying it, now is there?
The point about the forbes list is ridiculous too. You seem to suggest that a system has to be exploitable to the nth degree for it to be a profitable system. I personally know a good number of people who have traded their systems for substantial profits, yet they aren't on the forbes list. Should I tell them to give all their earnings back, as their system obviously doesn't work?
To all: Sorry for mucking up this thread, we've drifted OT, my fault.
- The New Guy
okay. where are these systems and traders. please show me one along with audited statements and independent proof that the profits were derived from a system.
people spend their lives in pursuit of some holy grail. they are convinced - mostly by the lies of system sellers - that there must be a system that can unlock the key to wealth. meanwhile, winning traders just slug out day to day doing whatever they need to do to make money.