Writing options for a living

[sle]

Quote from lkh:
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.

Nobody is dusputing it - just a page ago I was making a comment about using short puts vs purchase and covered calls instead of limit orders. You can augment you investment returns rather nicely like this, but you will be severy limited by the size of capital. riskarb is talking about selling stuff naked, that's where you can make a killing or get killed.

 

[dummy-variable]

Quote from Samson77:

... I play the PROBABILTY, based on my filters and tools as initiation of the trade.

what has a chart got to do with probability? when i'm discussing probability i'm talking about the price of an option. at fair value, every possible outcome is priced into that option.

you seem to use options as a directional bet on stocks. that's fine, i do it myself. but the disconnect i mentioned on your earlier post still applies. how do you know where the stock will go? if there were a verifiable way to determine that at some point "x" a stock is 80% likely to go up, then the option prices would build this skew into the price anyway. you are saying that you have the ability to "see" probabilities that the market does not. some people can do that (i had an old kentucky grandpa that only needed to look at a horse to tell if it was a winner and he consistently won at the track), if that is your gift, i congratulate you.

 

[science_trader]

Quote from dummy-variable:

if there were a verifiable way to determine that at some point "x" a stock is 80% likely to go up, then the option prices would build this skew into the price anyway.

Wrong. This is the risk-neutral valuation theory : option price is independent of probabilities everyone is giving the underlying to go up or down. The only important parameter is by how much it would go up or down.

 

[Samson77]

Quote from dummy-variable:

what has a chart got to do with probability? when i'm discussing probability i'm talking about the price of an option. at fair value, every possible outcome is priced into that option.

you seem to use options as a directional bet on stocks. that's fine, i do it myself. but the disconnect i mentioned on your earlier post still applies. how do you know where the stock will go? if there were a verifiable way to determine that at some point "x" a stock is 80% likely to go up, then the option prices would build this skew into the price anyway. you are saying that you have the ability to "see" probabilities that the market does not. some people can do that (i had an old kentucky grandpa that only needed to look at a horse to tell if it was a winner and he consistently won at the track), if that is your gift, i congratulate you.

LOL

So are you saying that only options market makers know the future because they will have built in the probability and the underlying price action is just a by product?

The probablitity of a trade going in my direction is based upon my actual experience with every trade I make.

If I place 100 trades and 80 of them hit targets and beyond and 20 of them get stopped, that's an 80% probability in my books.

I'm not saying that I can do this but with a 2:1 R:R all a trader needs is a 50% success rate to make money, now apply options to this with all the leverage they can provide and you make a nice living.

Don't ask me my current probability level but I try and do it once a month.

 

[murray t turtle]

Quote from Profitaker:

Unbelieveable !

The dollar cost of an option is almost irrelevant; it’s the implied volatility value that is the only true cost measure. In the “edge” debate on this thread IV has been dismissed many times just because the future volatility cannot be known in advance. While obviously this is true, you still need a view on volatility even when attempting to trade directionally. For example, you may be bullish on a stock – would you sell the Put or buy the Call ? Well, my decision would depend on whether I thought IV was expensive or cheap; if I thought expensive I’d sell the Put, cheap and I’d buy the call.

Long or short an option, the underlying has to move by more than the time value to generate a profit or loss respectively. The time value element of an option IS implied volatility.

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Would agree with most of that and dont know if you meant this ,
like it appears ''Unbelievable!
The dollar cost of an option is almost irrevelant.''

If you bought options priced around $1 plus maybe true, however ;
0.05 or 0.10[=$5 or $10 option] bid ask spread kills first 100% of profit.

 

[Profitaker]

murray

I couldn't (still can't) believe that an option trader isn't "concerned with IV at all". How the fcuk does he manage ?

Quote from Walther:

One does not to be concerned with IV at all . Just look at the action of the underlying and place a credit spread( to determine your risk ) when you think that reversal is eminent .

Murray

I take your point regarding option spreads.

 

[LoosenUp]

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.

Hi riskarb,

Is there any difference if you sold atm puts compared with otm puts? Don't understand why you said "you are selling a stop-loss when selling premium ESPECIALLY otm premium."

So, what is the preferred way to sell premium? Credit spreads?

Thanks

 

[dummy-variable]

Quote from science_trader:

Wrong. This is the risk-neutral valuation theory : option price is independent of probabilities everyone is giving the underlying to go up or down. The only important parameter is by how much it would go up or down.

ever hear of skew? if the market perceives/believes that the underlying has a greater risk of moving in one direction or the other the directional strikes will reflect that bias.

 

[science_trader]

Quote from dummy-variable:

ever hear of skew? if the market perceives/believes that the underlying has a greater risk of moving in one direction or the other the directional strikes will reflect that bias.

It's a skew in the vol curve...and it has nothing to do with a change in probability but with a perceived greater risk on one side rather than the other.

 

[sle]

Quote from science_trader:
and it has nothing to do with a change in probability but with a perceived greater risk on one side rather than the other.

Well, there is such a thing as implied probability distribution, based exactly on the structure of implied volatilities. While the expectation is the same, the distribution changes based on percieved risks.