Writing options for a living

[Maverick74]

Quote from Prevail:

I was addressing you but didn't mean to make you feel required to speak for another, many apologies.

In my experience the majority of traders do not enter a trade without at least believing there is a positive expectancy. What you are saying is your are content to enter a trade with no mathematical expectancy, or negative for that matter, and try to adjust it to bring out a profit. That's intriguing, and not for me .

Really much of this thread can be reduced to discretionary trading vs. systematic. Discretionary traders are into adjustments, systematic traders are not. The former believe positive expectancy is built into trades through action, the latter believe positive expectancy is in the next trade before the initial trade is placed.

In my experience, the majority of traders enter trades by the seat of their pants and are in many times just emotional impulse decisions. LOL. Seriously man, they may think they are positive expectancy, but their trades are anything but. Hence the reason maybe 5% of them are even profitable. I mean look, we can all pretend we look like Brad Pitt, have 12" cocks and are the life of the party. The truth is, most of us are not. What we think and the reality of the situation are two completely different things.

In my opinion, a great trader is guy that can admit he is George Constanza. But will use what he has to get what he wants. The best traders I know don't walk around like most of the people on this board trying to pick tops and bottoms and pretend like they know where the Euro is going or where the nasdaq will close, they put on positions that are tradeable. And then they trade. It's that simple. One of the best daytraders I have ever met in my life, and who I worked with in NY, told me that he is wrong about 90% of the time. Yet the guy made money every single day. Maybe he was down 4 days a year. So how did he make money? Well, when he was wrong and he realized what he should do, he changed his position.

I learned my trading style from who I believe to be one of the smartest option guys in the country. He has a hedge fund on the west coast. He, like me, doesn't believe in edge and all that crap, at least not for off floor traders. He simply puts on market neutral positions that are tradeable and then trades them. Yes, I am over simplifying what he does, but I am trying to keep this post under 10k words. LOL.

I knowingly and willingly put on trades that I know at the beginning do not have a positive expectancy, but that are very tradeable in both directions and if trade the positions well, I know I will do very well in them regardless of market direction and or volatility. That's really all a trader can ask for. And btw, when I say I am putting on trades with negative expectancy, it should be noted that these are not zero expectancy trades. LOL. We are talking about maybe 48% or so. Very close to 50/50. So it doesn't take a lot to create a positive expectancy trade out of them.

One of the best attributes I know a trader to have is humility. The best traders I know admit to knowing very little about what the market will do or don't pretend to have any kind of secret method or style or edge that others don't have. They just go in to work everyday like a brick layer. Their goal is to lay bricks. One at a time. And hopefully at the end of their life they have built a solid foundation. That's all a trader can hope for.

But like I said, most traders don't do this. They shoot from the hip, they are arrogant, they can read charts and lunar cycles, they have some kind of special pricing model they created, they think they know something the other guy doesn't, and they trade with way too much emotion. Again, this is why maybe 5% of all traders make a living in this business.

 

[riskarb]

Quote from MajorUrsa:

Your method of buying cheap irons is still looking very attractive, and of course owning an iron fly for less than it should cost gives you a statistical edge, once it is established.

However, and this question is nagging me for some time now, at the moment you decide to buy in the wings (because they got cheaper) you'd also have the possibility of buying back the original center straddle, which will earn you money immediately.

By not buying back the straddle but instead buying the strangle you are in effect re-investing your current (paper) profit to buy a iron fly. Ie., for demo purposes, you could first buy back the straddle (making a profit) and then buy the full iron at once.

So the question is, why do you want to own the fly (instead of the money)?

[snipped]

Ursa..

I wouldn't convert to the iron fly if I didn't expect to earn a multiple of the paper-gain on the straddle. I will typically convert to the iron if my expectation on the iron going forward is at least twice what I could earn from simply offsetting the straddle. I may want to increase scale by removing the unbounded risk in the straddle while remaining short gamma and removing the majority of vega-risk. I may want to duplicate the original, pre-iron straddle position. I may want to trade-against the fly and neutralize some delta. If the vega/gamma edge allows for an arbitrage credit, then I will always convert to the iron.

I guess it can be reduced to the pros outweigh the cons[convert vs. offset]. Can I reduce the argument mathematically? Probably not. If my personal belief, prediction, expectation is that I am better server by converting, then I will do so.

 

[smilingsynic]

Quote from MajorUrsa:

Your method of buying cheap irons is still looking very attractive, and of course owning an iron fly for less than it should cost gives you a statistical edge, once it is established.

However, and this question is nagging me for some time now, at the moment you decide to buy in the wings (because they got cheaper) you'd also have the possibility of buying back the original center straddle, which will earn you money immediately.

By not buying back the straddle but instead buying the strangle you are in effect re-investing your current (paper) profit to buy a iron fly. Ie., for demo purposes, you could first buy back the straddle (making a profit) and then buy the full iron at once.

So the question is, why do you want to own the fly (instead of the money)?

To me this situation is akin to what I learned earlier. Suppose you buy a call for 0,50. After a while the underlyer went up a strike (5) and instead of selling the call for 2,50 you sell one a strike up for 0,50. You now seem to own a 'free' vertical, that may expand to 5 on expiration. But is it free? Not IMO. You payed 2.00 for it, just as a vertical would've cost you. You could've sold the call for 2.50, so why buy the vertical instead?

I think this is very relevant to this discussion. Can a strategy have a positive expectancy if the single steps in it don't? I'm getting inclined to say no.

Of course in the case of your irons there could be other considerations that make the strategy workable, like outward skew and margin properties. But the fact remains that at the moment you complete the fly you decide to buy a fly, using the unrealized gains from a previous position as well.

Is there any such thing like unrealized losses (or gains), btw?

Ursa..

Ursa,

I cannot and won't answer for others, but when I sell straddles and convert to iron flies (or buy calls and then sell stock short if the call appreciates enough that I can lock in a guaranteed profit--a version of the so-called "free trade"), I do so because there might well be a payday. Who knows, the straddle might end up on exp trading for pennies; by buying the wings one can actually sit back and see what happens (the atm options will decay faster than the wings). Plus cash is freed up. Risk is gone; all is left is reward.

When I sell stock short several days after I buy a cheap call (or buy stock some time after buying a cheap put), I do so because, who knows, what if the stock gaps down(up)? If I buy a 40 call for 4, sell stock at 46, and then the stock opens at 36, I get a huge payday (lose 400 on the call, gain 1000 on the short). If I had simply sold the call after the stock appreciated, I'd have close to 200 in the bank.

Minimizing risk; maximinizing potential reward. That's all.

 

[union1411]

Quote from smilingsynic:

My guess is that these guys wrote the book to drum up clients (and to sell books). Reminds me of the way Wade Cook (not that these guys are con-artists like him) wrote books that were infomercials in print. They're brokers, not traders.

Note how they strongly recommend not using discount brokers.

Reminds me of McMillan's book. He has this whole section on buying options with iv in low % and sections on probability calculations. And then he says that, oh by the way, his website offers for a fee a low percentile iv option finder and a probability calculator. It almost worked on me, but in the end I decided not to buy his software.

 

[Prevail]

Quote from dummy-variable:

........i suppose there are traders out there who are unbelievably prescient when it comes to guessing future price trends or IV direction. you may be one of these folks. but in general the rest of us have to live with option prices as though they are what they are which means they are fairly valued.

I'm truly intrigued that you and I have considerably different takes on the market and in fact, it seems, trade in very different manners. Yet I do very well and it appears you do also, perhaps we should be thankful as a unified opinion in all market participants may end all of our trading opportunities.

Thanks for your constructive comments.

 

[smilingsynic]

Quote from union1411:

Reminds me of McMillan's book. He has this whole section on buying options with iv in low % and sections on probability calculations. And then he says that, oh by the way, his website offers for a fee a low percentile iv option finder and a probability calculator. It almost worked on me, but in the end I decided not to buy his software.

Just about EVERYONE does that, unfortunately. Quick--buck artists and self-styled promoters are par for the course in the options industry. I would actually consider Macmillan one of the less unscrupulous promoters out there. Wade C(r)ook--14% a month doing covered calls-- is at the bottom.

 

[GTG]

With regard to people who write books on put-selling:


I've often thought that a great way to make a lot of money, if I were inclined towards dishonesty, would be to start an options newsletter or advisory service, and advise all of my clients to sell puts with a >95% probability of profit using a lot of leverage. Regardless of whether or not there was positive expectancy of the trades, It might take years for my clients to blow up, but in the mean-time I'd collect a lot of fees, and my clients would be happy because almost every trade I put them in would make money. Even if all of my clients blew up, I could still probably find people interested in investing money with me afterwards...I'd just point to my "multi-year winning track-record" , prior to that one "short but unlucky bad period".

Apparently my "money making idea" isn't unique. I think this is basically what the people writing books about the magic of put-selling may basically be doing. They are just collecting book royalties instead of fees.

 

[Anseld]

Quote from Maverick74:

One of the best daytraders I have ever met in my life, and who I worked with in NY, told me that he is wrong about 90% of the time. Yet the guy made money every single day. Maybe he was down 4 days a year.

you're claiming you know a guy who was a full-time trader and he made money every single day and was down only 4 times a year?

HAHA

now you're spreading duck tales. next you're gonna tell us about that football game in high school where you were down by 28 points in the fourth quarter, but you came back with 5 touchdowns in the final minutes to win... lol

 

[riskarb]

Quote from Prevail:

It is pretty obvious we all respect your options abilities. Could you possibly explain how a trader who sells the goog atm combo because they believe in 5 days the trade would be profitable due to what they perceive as positive expectancy and a trader who sells the goog atm combo because they believe in 5 days the trade would be profitable enough to what they perceive is positive expectancy?

Expectancy in this instance is based upon model-vol; whether it be a spot-prediction or solved from market vols. The buyer expects an increase in spot volatility or possibly some exogenous macro or a micro event to drive premiums/option vols above what is lost in decay. He may base his expectancy on judicious gamma trading in the underlying. The seller may believe that either spot vols will be lower and implieds will follow-suit, or that decay > variance, to simplify the case.

As you've stated, it's a matter of perceived edge and expectancy. Neither of which become empirical until the position is off the books or exposure is reduced, nor would it be a statistically-valid determination of +expectancy.

 

[Maverick74]

Quote from Anseld:

you're claiming you know a guy who was a full-time trader and he made money every single day and was down only 4 times a year?

HAHA

now you're spreading duck tales. next you're gonna tell us about that football game in high school where you were down by 28 points in the fourth quarter, but you came back with 5 touchdowns in the final minutes to win... lol

Yeah, his name is Adam Wasserman. Many people on this board know him or know of him. Why don't you ask around jackass. Why don't you call him yourself. PM me and I'll give you his phone number in LA. Ever heard of the Fiedlers? Same story.

Edit: He now works for Assent in LA and Miami. There is actually an interview with him on this site. Do a search in the upper right hand corner for his name and you will find the interview he gave. Good day.