Writing options for a living

[Profitaker]

Quote from Maverick74:

I can't believe this thread is still going. I don't understand what is left to be discussed here.

For as long as it’s argued that negative can be turned positive you’ll be asked for explanations. For as long as the word “free” is used, you can expect an audience.


Quote from Maverick74:
Yes, you can have two separate trades that on their own are both negative expectation trades. However, when combined, produce a positive expectation.

But that cannot be done from the outset, only after the underlying has moved favourably can an adjustment to lock profit (or reduce loss) be made. If that is what you mean by taking a negative and turning it into positive then I agree with you, it’s do-able.

But the statement is misleading to say the least ! If the original trade had a negative expectancy then even if it moves into profit it still had a negative expectancy, period ! Negative expectancy trades generate profits all the time and by merely locking profits (or reducing risk) doesn’t give the trade(s) a positive expectancy – it’s gives 2 negative expectancy trades a profit, which happens all the time.

Quote from Maverick74:
I don't understand why this concept is lost on so many people.

The “concept” is well understood, it’s your interpretation of it that is “lost”.

Cheers.

 

[fengshui-123]

Your "positive expectation" you gained actually is from your guessing ability, the particular type of adjustment you do is according to your guess of what the market is likely to do at that moment(though you don't use charts and TA). Am I right?

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http://www.fengshui-123.com

 

[Prevail]

And of course you never see these people who think they can turn a neg expec into pos expec by first buying an option. They always start by selling the option...coincidence?

 

[Maverick74]

Quote from fengshui-123:

Mav,

Put it simply, when you have the "free-trade", you forgot about the losing trade, that is why you think you have positive expectation, you only count the winning trade of course it must be positive expectation.

No, I didn't forget about it because that trade is still on the table. It's not a FREE trade either. The trade was put on for the intention of allowing me to make the second trade. I am not only counting the winning trade. Do you guys understand what I mean by trading a position? These are not separate trades. They are all pieces of one large trade. Nothing is free and we are not forgetting about anything. Must be my poor communication skills why this is so hard to understand.

 

[riskarb]

As an example; suppose you have a random futures entry, selling ES at 1230 and some moments later ES is trading 1227. You could securitize the marked P&L by buying[selling] two atm calls[puts] to replicate the atm straddle. Does this replication infer a positive expectancy to the original random futures entry? No, and you may be better suited in taking the futures gain. Does this random entry imply edge or a +expectancy to the trade in aggregate?

 

[Maverick74]

Quote from Profitaker:



For as long as it’s argued that negative can be turned positive you’ll be asked for explanations. For as long as the word “free” is used, you can expect an audience.

There is no free trade.

But that cannot be done from the outset, only after the underlying has moved favorably can an adjustment to lock profit (or reduce loss) be made. If that is what you mean by taking a negative and turning it into positive then I agree with you, it’s do-able.

Never said it could be done from the outset. I simply said that two neg expectation trades couldn't be combined to for a positive expectation trade at the time the 2nd one is put on.

But the statement is misleading to say the least ! If the original trade had a negative expectancy then even if it moves into profit it still had a negative expectancy, period ! Negative expectancy trades generate profits all the time and by merely locking profits (or reducing risk) doesn't’t give the trade(s) a positive expectancy – it’s gives 2 negative expectancy trades a profit, which happens all the time.

I never said the first trade ever had a positive expectancy nor the 2nd or 3rd or 4th or 5th trade! All of them have negative expectancies regardless of where the underlying moves! Maybe we should word it this way. The individual trades themselves have a negative expectancy but the position as a whole has a positive expectancy.


The “concept” is well understood, it’s your interpretation of it that is “lost”.

I think I have made myself as clear as I can at this point.

 

[Maverick74]

Quote from fengshui-123:

Your "positive expectation" you gained actually is from your guessing ability, the particular type of adjustment you do is according to your guess of what the market is likely to do at that moment(though you don't use charts and TA). Am I right?

----------------------------------------------------
http://www.fengshui-123.com

Wrong. Has nothing to do with guessing. Has everything to do with adding positive expectancy to the position as a whole. For example, buying back short options trading at a nickel has nothing to do with guessing.

 

[Maverick74]

Quote from Prevail:

And of course you never see these people who think they can turn a neg expec into pos expec by first buying an option. They always start by selling the option...coincidence?

Also wrong. I always start my positions by buying options. I also sell options. But I'm always long curvature when I initiate a position.

 

[Profitaker]

Quote from Maverick74:

Maybe we should word it this way. The individual trades themselves have a negative expectancy but the position as a whole has a positive expectancy.

Yeah, I agree with that, after you've taken the risk associated with legging in.

Here's an example. OptionWiz always legs into a long B/fly by first going long the strangle, then if / when the underlying moves up 1% shorts the straddle. If it doesn't move up 1% he remains long the strangle. Does this strategy have a negative or positive expectancy (assume all 4 legs are neg exp) ?

Of course it's negative. However, on the occasions that it does go right, would you then describe the position as having a positive expectancy ? Maybe you would, and I think it's here most disagree.

 

[Maverick74]

Quote from Profitaker:

Yeah, I agree with that, after you've taken the risk associated with legging in.

Here's an example. OptionWiz always legs into a long B/fly by first going long the strangle, then if / when the underlying moves up 1% shorts the straddle. If it doesn't move up 1% he remains long the strangle. Does this strategy have a negative or positive expectancy (assume all 4 legs are neg exp) ?

Of course it's negative. However, on the occasions that it does go right, would you then describe the position as having a positive expectancy ? Maybe you would, and I think it's here most disagree.

The risk? Every trade has risk. LOL. Come on man. We can't initiate trades with no risk, that's called arbitrage. We are not talking about arbitrage here.

In your butterfly example, if you bought the strangle, what is your initial risk? Time decay right? You don't need a 1% move, it could be any size move. If you can sell the straddle for a better price then what you lost in decay, then you legged into that fly at better prices.

Whether or not that trade as a whole has a positive expectancy depends on what prices you got. In this example, we don't need the stock to go up, but simply move. If the stock sat there and didn't move, then you would be eating the decay everyday. But I think we both agree that this trade alone, like all trades, has a negative expecactancy.