Writing options for a living

[dummy-variable]

Quote from Samson77:

I was asking a question and I will rephrase it for those that care to share !

On a trade like this or any other that I can get the direction correct 70% of the time, do you really think that understanding all the greeks would be of any importance at all and do you think if I shared the exact same set up with one of you "pro's" and we both sell againt the set up, that you will come out better then me????????

I ask this because I believe that it's really just about common sense at the end of the day and all the math is just nonsense imo.

Once again correct me if I'm wrong!

the math absolutely matters. your comment is like saying you don't need to understand the probabilities in craps because, when it's all said and done, if you can throw sevens 70% of the time you'll beat the house everytime you play.

understanding how options work means that if i'm a market maker i don't care if you have some system that picks direction right most of the time. i can sell you calls all day long if you want to be long them and i can still make money off those trades.

 

[Samson77]

Quote from dummy-variable:

the math absolutely matters. your comment is like saying you don't need to understand the probabilities in craps because, when it's all said and done, if you can throw sevens 70% of the time you'll beat the house everytime you play.

understanding how options work means that if i'm a market maker i don't care if you have some system that picks direction right most of the time. i can sell you calls all day long if you want to be long them and i can still make money off those trades.

Dummy - It's funny that you mention craps because I recently looked into Precision Shooting/dice control to overcome the house edge, it turned out to be hoooy in my opinion but one thing that is similiar to options and craps was that EVERYONE has a winning system of hedging etc that beat the house (so the say) it's funny but most of the players I saw lost just as much as slot machines players, it just took a little longer !!!

 

[MajorUrsa]

Quote from dummy-variable:

in my opinion, that is why it is always better to convert a winning trade into another position rather than close it for a profit. example: say riskarb's short straddle could be closed for $2 profit but instead adding the strangle converts into a fly position at a net cost $1 better than the current market. it really doesn't matter if the potential max payoff is better than the current bird in the hand gain. the better-than-market-cost fly position is always better than taking the locked profit.

But that's my point. The net cost is not $1 better, the price in the market is what you pay for it. You are just pretending that the $2 don't count, because it is on paper. But they do count. You pay the actual price, using the gains on the straddle.

Deciding to convert is the same as offsetting the straddle and then buying a complete fly. So if you decide for a conversion you decide that you want to own a fly. The fact that you already had the straddle on makes no difference (IMO).

Please point out my oversights, because I'm learning here, thanks .

Ursa..

 

[thenewguy]

I've been looking around for an example of trades that show inefficiencies for you guys. But first, I have to say, I have no interest in this mud slinging, and I respect and appreciate all of your opinions, even if I think you are wrong sometimes. I am, however, interested in an intelligent debate over this.

I'm nowhere near the level of you guys in the options market, as I'm newish there, but I do understand other markets very well. Here is an example I came up with:

Nokia shares are listed on the Helsinki Exchanges, Stockholm, Frankfurt am Main and New York.

Now, keep in mind I haven't traded this particular trade, but things sorta similar. There is no way that those four exchanges, and their underlying currencies trade in perfect, or even near perfect efficiency. There are arb ops like this, even for retail guys. Yes, you have to look, yes you have to be smart enough to see them and figure them out, but they are there. The flow of information around the world is so distorted and bottlenecked (even with all these great technological advances) that these things still do occur.

I have no evidence yet, but logic suggests that those opportunities are available in the options market too.

A simple example of someone using the technological edge I described earlier is someone who's watching M&A activity on Bloomberg, (or equivalent) and arb stocks that announce share for share mergers.

Ok, so maybe it's not a true edge, because, sure everyone can get it, but people aren't. It takes time for these products to fair up (ie. ineffecient) and you can most certainly take advantage of that.

- The New Guy

 

[Profitaker]

Quote from dummy-variable:

in my opinion, that is why it is always better to convert a winning trade into another position rather than close it for a profit. example: say riskarb's short straddle could be closed for $2 profit but instead adding the strangle converts into a fly position at a net cost $1 better than the current market. it really doesn't matter if the potential max payoff is better than the current bird in the hand gain. the better-than-market-cost fly position is always better than taking the locked profit.

Don't agree. It's either a good time to be selling options or a good time to be buying - it's never both ! Where long term option trading profitability ultimately depends on IV over HV (sold verses bought that is), in your example above you'd be paying a higher vol than you'd sold - a sure losing receipe. long term

 

[inandlong]

Samson, while I find value in understanding the greeks as they relate to option pricing, I agree completely with your premise. In the end, the trader must be right about the movement of the underlying.

Expectancy is about hits and misses and profits and losses as they occur following the application of a finite set of rules. Where there is subjective intervention - as is the case in every options trade I have seen discussed on ET by even our most erudite and seasoned veterans - there is no means to determine the expectancy of a trade; rather, one can only determine the expectancy of the trader.

Options traders like to believe that option theory components, ie., greeks, provide some means to determine expectancy. They also like to believe that the standard deviation of price provides a means to determine expectancy. If the former and the latter did, then we could sell strangles two sigmas above and below the ATM strike and win ~95% of the time without fail.

Anyone doing that?

 

[iceman1]

Quote from Anseld:

once again, mav is revealing his level of knowledge in options volatility, which is he knows very little.

he seems to have this odd philosophy that "hey, if i don't know what's going on, then everybody else can't know neither!"

amusing.

with all due respect.. I don't believe he is the one who "knows very little" ! When it comes to some debates and certain disagreements in life, for those that understand no explanation is needed, and for some (apparently guys like you) no explanation will suffice? SO perhaps it's a waste of time to get any concession out of you on any point made my certain posters on this thread.

Ice

 

[Profitaker]

Quote from inandlong:

Options traders like to believe that option theory components, ie., greeks, provide some means to determine expectancy.

The greeks have nothing to to with expectancy. Expectancy is determined by probabilities derived from the normal distibution curve which is a function of volatility. Greeks assist in managing an option trade, for example by calculating a new option price given changing condition (IV up/Dn, spot up/dn).

Quote from inandlong:

They also like to believe that the standard deviation of price provides a means to determine expectancy. If the former and the latter did, then we could sell strangles two sigmas above and below the ATM strike and win ~95% of the time without fail.

Anyone doing that?

That is a very simple strategy that does work 95% of the time. It's the other 5% of the time that it goes wrong that it takes away your accumulated profits, and sometimes more !

Anyone that thinks they can trade options without understanding probability theory and option greeks are surely heading for wipe out ! Anyway, it isn't rocket science so why not make the effort ?

 

[dummy-variable]

Quote from MajorUrsa:

But that's my point. The net cost is not $1 better, the price in the market is what you pay for it. You are just pretending that the $2 don't count, because it is on paper. But they do count. You pay the actual price, using the gains on the straddle.

Deciding to convert is the same as offsetting the straddle and then buying a complete fly. So if you decide for a conversion you decide that you want to own a fly. The fact that you already had the straddle on makes no difference (IMO).

Please point out my oversights, because I'm learning here, thanks .

Ursa..

well there's the contradiction of this approach. maybe the only way i can explain or justify what i'm calling "converting negative expectancy into positive expectancy" is really a betting scheme. it may be some version of an anti-martingale which pyramids winning bets. the method then appears as a means of leveraging winners while balancing risk.

the negative expectancy limit is inescapable. to me disputing this is like denying that the house has an edge in a casino.

yet in both the markets and in casinos there are indisputably a few long term winners. are they merely on a long term lucky streak (the statistical equivalent of someone who guesses heads 10 times in a row and wins) or are they skilled bettors or is it some other x factor?

 

[MajorUrsa]

Quote from inandlong:


Options traders like to believe that option theory components, ie., greeks, provide some means to determine expectancy. They also like to believe that the standard deviation of price provides a means to determine expectancy. If the former and the latter did, then we could sell strangles two sigmas above and below the ATM strike and win ~95% of the time without fail.

Anyone doing that?

Lots of people do it, I think, and that's what this thread is about.

What we started to agree upon is, Yes, in the long run you will be right 95% of the time and, No, there is no postive expectancy in that, because the premium received reflects exactly this outcome (in the long run).

Probably you're right that all winning option traders have an opinion about the future behavior of the underlyer. But that is not the same as the movement. What attracts a lot of traders is that you can customize your own tools so that fine-tune your own risk/reward and even make money in sideways or panicking markets.

Expectancy is about hits and misses and profits and losses as they occur following the application of a finite set of rules. Where there is subjective intervention - as is the case in every options trade I have seen discussed on ET by even our most erudite and seasoned veterans - there is no means to determine the expectancy of a trade; rather, one can only determine the expectancy of the trader.

I do agree with that statement. Very relevant to this thread too.

Ursa..