Writing options for a living

[dummy-variable]

Quote from Samson77:

Let me clear something up!

No one knows where any stock will go or what the market will do for certain .... no one!

The best you can do is understand the dynamics of the current market condition and know when and where the current market condition has changed.

If you can do this you can make a living selling or buy options or stocks or futures.

This to me is first and foremost and all you MATH guys are just trying to figure out the same thing but we use a different model to make this decision but it seems to me a chart is a heck of a lot easier to figure this out on but that's just me and I never had a strong mathematical mind for numbers crunching.

So at the end of the day the answer to the original poster is YES ... once you have the ability to use probability to your advantage either through a chart or a mathematical equation you can make a living from trading.

Would everyone agree with this?

no i would not agree with this.

i do not use the numbers to figure out where things are going. i use them to manage risk. at best, i make a bet and if i am right i devise a strategy to lock or leverage that good fortune.

also there seems to be a disconnect in what your wrote. first you say that "No one knows where any stock will go ." then you suggest that "you can [...] understand the dynamics of the current market condition and know when and where the current market condition has changed." how can you know when something has changed but still not know where it is going? if you can somehow predict a change in the underlying isn't that the same thing as saying you can predict where it is heading?

 

[sle]

Quote from riskarb:
The unlikely but constant threat of going debit isn't normally associated with earning a living.

You can't disagree, though that short options are a much better proxy for doing limit orders then limit orders themselfs, for a retail investor (sic! not trader). For example, if you want to own DIA at 104 (like I do for my PA), you can sell puts at 104 vs purchase. If after that I am planning to take profit at 108, I sell calls at 108. Assuming equivalent tax treatment (which is not, actually), it is not any different to placing a limit buy at 104 and a limit sell at 108.

 

[dummy-variable]

Quote from Choad:

Interesting how Taleb seems to now be a victim of his own theories!

I suspect the last few years bled his fund. He needed the volatility and 3+ sigma moves...and didn't get them. He got nailed by the reverse Niederhoffer.

For Taleb to think he could survive by waiting patiently for huge moves, was as wrong as VN thinking he could avoid them.

i suspect that taleb uses money management and a variety of interest bearing vehicles to size and pay for his options portfolio. still, if his method is as described in the article (i.e. he never sells premium) then for all his brain power, he still knows nothing about options. when he eventually wins he gets to say he's a genius just like naked put sellers have seemed over the last couple years. until then he's a mere mortal. he should read this thread.

 

[sle]

Quote from dummy-variable:
if you can somehow predict a change in the underlying isn't that the same thing as saying you can predict where it is heading?

I see a lot of smart people on daily basis doing various options trades to take directional bets on the underlying. However, the directional bets they are taking are more of a relative value style bets - various conditional spreads. These people do not really understand volatility, but I would not call them bad traders by any means.

 

[riskarb]

Quote from sle:

You can't disagree, though that short options are a much better proxy for doing limit orders then limit orders themselfs, for a retail investor (sic! not trader). For example, if you want to own DIA at 104 (like I do for my PA), you can sell puts at 104 vs purchase. If after that I am planning to take profit at 108, I sell calls at 108. Assuming equivalent tax treatment (which is not, actually), it is not any different to placing a limit buy at 104 and a limit sell at 108.

Absolutely... I was making issue with those who would attempt to replicate the atm credit with an otm credit.

 

[Samson77]

Quote from dummy-variable:

no i would not agree with this.

i do not use the numbers to figure out where things are going. i use them to manage risk. at best, i make a bet and if i am right i devise a strategy to lock or leverage that good fortune.

also there seems to be a disconnect in what your wrote. first you say that "No one knows where any stock will go ." then you suggest that "you can [...] understand the dynamics of the current market condition and know when and where the current market condition has changed." how can you know when something has changed but still not know where it is going? if you can somehow predict a change in the underlying isn't that the same thing as saying you can predict where it is heading?

No ... I play the PROBABILTY, based on my filters and tools as initiation of the trade BUT more importantly as feedback for confirmation of the correct entry so if I do not get the right feedback or the market proves me wrong by breaching a certain level or stop, then I was simply wrong and no harm no foul just go on to the next trade.

So let's take an actual trade that I did not place but concidered, I will choose one that didn't work to be fair.

 

[riskarb]

Quote from Choad:

Interesting how Taleb seems to now be a victim of his own theories!

I suspect the last few years bled his fund. He needed the volatility and 3+ sigma moves...and didn't get them. He got nailed by the reverse Niederhoffer.

For Taleb to think he could survive by waiting patiently for huge moves, was as wrong as VN thinking he could avoid them.

Taleb knows a lot about derivatives, but he's myopic w.r.t. risk-reward. It's analogous to a wirehouse head of trading refusing to take a short due to the unbounded, asym risk-reward.

I heard that he likes otm, deep vega bets. That would involve taking positions in the back month puts. You'd think he would've made a killing since 1999.

 

[Samson77]

Quote from riskarb:

No, I received a signal to go massively-long on 9/10/01... how do you think that would've turned out if I'd sold otm puts as a long proxy?

You're selling a stop-loss when selling premium, especially otm premium. Your system may be the SHIZNIT, but it only takes one macro event per decade to wipe you out, regardless of how robust the methodology. The hit rate of the directional + options system is immaterial. The unlikely but constant threat of going debit isn't normally associated with earning a living.

I thought that, that was the whole point of writing ... to play it safe and have the ability to adjust when wrong !

In my chart example I could have easily sold the 50 call where I knew I was wrong and bought the underling and held or any other adjustment.

 

[riskarb]

Quote from Samson77:

I thought that, that was the whole point of writing ... to play it safe and have the ability to adjust when wrong !

The point is simply that it's impossible to play it safe with naked, unbounded vega. The good news is that your gamma is bounded, when your deltas go to 100!

How do you adjust into a dirty nuke in NYC? The best advice I can give it to limit naked gamma to a notional contract size = your average notional stock position.

 

[lkh]

Quote from riskarb:

The point is simply that it's impossible to play it safe with naked, unbounded vega. The good news is that your gamma is bounded, when your deltas go to 100!

How do you adjust into a dirty nuke in NYC? The best advice I can give it to limit naked gamma to a notional contract size </= your average notional stock position.

You guys make it too complicated. the fact remains that selling naked puts on an index without using leverage is no more risky on the downside than being long that index and collecting dividends. Your premiums are your dividends in this case. You can make a case that it is a poor idea because you give away possible upside but you cant make a case that it is more dangerous than owning the index.