Writing options for a living

[MajorUrsa]

Quote from Profitaker:

D-V, this is and has been the crux of the argument. We all know how do do it, and everyone agrees it can be done AFTER a favourable move in the underlying, but NOT before.

Well put. Of course a cheap or free butterfly has positive expectancy once you own it. But the path to obtaining one has -exp in it in the amount to negate that effect. In the end the total exp is just the same as if you bought the fly outright.

DV, thanks for your input. I see the middle-ground you try to clear for us. IMO the only way to get +exp is to include a external descision maker, be it a backtested rule-system or a back-tested (experienced) discretionary trader. The decision to adjust the position can only add +exp when it is based on something external 'method' that has +exp.

Ursa..

PS. I'm off for a week to the Italian mountains. So it's not approving silence you hear

 

[dummy-variable]

Quote from fengshui-123:
market is not like lottery system which has fixed probability model, nondynamic.

no but the statistical correlation between current option prices and value at expiration is highly correlated and the distribution of future values around current values is such that the probabilities act like they are close to a non-random, fixed model. so close that it's fruitless to assume that prices are other than accurate.

maybe I should say efficency is just one state of the market, and the model have to make this assumption in order to proceed its explaination of market.

but the point is that we have no way of knowing when the market is inefficient. so the prudent course is to assume efficiency and then have to find ways to make that profitable.

 

[Profitaker]

Quote from MajorUrsa:

IMO the only way to get +exp is to include a external descision maker, be it a backtested rule-system or a back-tested (experienced) discretionary trader. The decision to adjust the position can only add +exp when it is based on something external 'method' that has +exp.

Maybe, but this expectancy debate is in the context of markets being random, future prices that cannot be predicted, and options being priced on that basis.

At least that's my angle for argument. Any "system" that the trader may use to enter or exit trades is subjective (just like TA), and probably worthy of another thread (please NO !).

Quote from MajorUrsa:

PS. I'm off for a week to the Italian mountains. So it's not approving silence you hear

Have a good one ! Surely not snowing already ?

 

[dummy-variable]

Quote from gbos:

[altering the odds] is not possible. Either the trades had positive expectancy from the beginning or else you can't make a positive expectancy position with negative expectancy trades.

zero expectancy incorporates all currently known information. once you are in a trade, information changes in an unpredictable way. on any single leg of a trade the zero/neg expectancy is operating at the moment. but in relation to existing (prior) trade(s) you can make adjustments that improve the net overall expectancy of the combined position.

i know this is difficult to conceive so i'll try yet another analogy. imagine a fair lottery where you have to get 3 numbers in a row correct to win a prize. when you play you either lose $1 or win $1000. but assume that you can place new fair value bets after each number is drawn. say you have the number 666. the first number is drawn and it is a 6. you can now place a second $1 bet on the remaining two numbers where you will either win $100 or lose $1. further you can sell your first ticket at fair odds (it would now be valued at $10). what do you do? if all you do is sell your partially winning ticket you have not improved your overall expectancy in the game. but if you buy a second ticket you now have a combined "lottery position" that is worth $11 but costs you only $2. that is a positive expectancy result derived from two zero expectancy bets.

a lot of the comments on this thread imply that winning traders somehow are better at predicting the future. the lottery example is meant to show how this is not the case. the "excellent predictor" hypothesis would require that a lottery trader have an uncanny ability to guess that first digit correctly more frequently than chance (e.g. he's used technical analysis and sees that the first digit has recently been "going up" so he places a bunch of bets on the first number being greater than 5). when he hits a winner he instantly sells the ticket to lock in the $10 first digit winnings. if after a thousand or so similar plays he finds that he is way ahead of the pack with net winnings then either he does have some uncanny prediction skills or he is extremely lucky. but by no means has he traded into positive expectancy.

These facts [the random up and down price movement after trade entry] are already priced when you bought the call.

randomness is priced in. but the exact path is unknown. a smart trader reacts to the random post-entry path by making adjustments relative to the initial position. these adjustments combine to either reduce risk of loss or improve potential gains. either way the adjusted position results in net positive expectancy.

[a positive expectancy adjustment] is possible but involves prediction and pricing skills. In other words the trader will execute trades only when he has positive expectancy.

the trader can only make adjustments to effect +exp. but this has nothing to do with "prediction" or "pricing skills." it has everything to do with reacting to circumstances and making good decisions. the skill is therefore knowing when and how to reduce risk or improve reward potential.

 

[Profitaker]

Quote from dummy-variable:

i know this is difficult to conceive so i'll try yet another analogy.

Much appreciated.

Quote from dummy-variable:

i know this is difficult to conceive so i'll try yet another analogy. imagine a fair lottery where you have to get 3 numbers in a row correct to win a prize. when you play you either lose $1 or win $1000. but assume that you can place new fair value bets after each number is drawn. say you have the number 666. the first number is drawn and it is a 6. you can now place a second $1 bet on the remaining two numbers where you will either win $100 or lose $1. further you can sell your first ticket at fair odds (it would now be valued at $10). what do you do? if all you do is sell your partially winning ticket you have not improved your overall expectancy in the game. but if you buy a second ticket you now have a combined "lottery position" that is worth $11 but costs you only $2. that is a positive expectancy result derived from two zero expectancy bets.

And in particular......

Quote from dummy-variable:

say you have the number 666. the first number is drawn and it is a 6.

The expectancy is longer zero - it's just gone positive !

Quote from dummy-variable:

but if you buy a second ticket you now have a combined "lottery position" that is worth $11 but costs you only $2. that is a positive expectancy result derived from two zero expectancy bets.

Agreed, but not as a result of your actions ! It went from negative to positive because you were dealt a "6", not because you bought a second bet.

 

[dummy-variable]

Quote from Profitaker:The expectancy is longer zero - it's just gone positive !

[...]but not as a result of your actions ! It went from negative to positive because you were dealt a "6", not because you bought a second bet.

actually, mathematically the expectancies have not changed. with this zero exp lottery over a large number of plays you should hit the first number correctly about 10% of the time. similarly doubling or rolling to the two-digit bet is still a net zero expectancy game.

as a metaphor i tried to use this as an illustration of the thinking a successful trader does. they push their positions to extract more gains or rein in the position to remove risk. the DECISIONS are where the ultimate +exp resides.

if i carried the lottery game further i could imagine and show any number of variations: the trader sells some number combinations against his new position, the trader closes the first winner and rolls some of the profits into the two-digit game, etc. yet each of the individual bets is still zero expectancy.

again, it comes down to the decisions the trader makes. at the end of a long series of runs there will be a small handful of lottery players that emerge as net winners. some would be winners simply due to luck. but the longer the play continues the more that luck is factored out. and something that can only be attributable to skill remains.

 

[Profitaker]

Quote from dummy-variable:

actually, mathematically the expectancies have not changed. with this zero exp lottery over a large number of plays you should hit the first number correctly about 10% of the time. similarly doubling or rolling to the two-digit bet is still a net zero expectancy game.

Yes, I know it is. I think most of us here know it is. I understood your argument (+ 1 or 2 other posters) to be the contrary.... namely that one can change a negative expectancy (or zero expectancy) into a positive expectancy by adding neg (or zero exp) exp trades - can't be done, period.

Quote from dummy-variable:

as a metaphor i tried to use this as an illustration of the thinking a successful trader does. they push their positions to extract more gains or rein in the position to remove risk. the DECISIONS are where the ultimate +exp resides.

Totally agree with that. HOWEVER, you've deviated from the original discussion...namely that a trader can somehow change a -exp into a +exp by adding -exp trades.

Finally, I'm done here. Thanks very much for your input, I look forward to your constructive debate again in the future.

 

[cowpok1027]

From what I've read so far (1st 30 pages + skim of last few for Maverick's last post) this is quite a thread. Before I can read the rest, which will probably be similar debates, A few observations & a ? --

NOTE: I have almost 40 years experience trading stock & options on stocks including on an options floor so I understand the GREEKS, etc. ( not a claim to fame just a reality check)

#1 The original ? was "Can you trade options 4 a living --> ANSWER: obviously YES

#2 Maverick introduced (or @ least heated up) a discussion of whether there's an advantage to buying vs. selling premium (he said: NO). I believe, with certain caveats, there is some advantage to selling & reference just21's excellent post on page 31 of this thread.

I'm not going to argue this point from a "technical, ie, GREEK" point of view as I respect those who have posted based on this & certainly relize how a options market maker lays off the risk he MUST assume by using DELTA & GAMMA analysis.

From the perspective of the non-market maker (voluntary entry into positions), however, managing risk within sound money management princples by selling premium makes sense to me (& has been successful).

This doesn't necessarily maximize profits (usually doesn't - eg, I'm currently short QSII Sept/50 puts entered on 6/27 & 7/8 & 7/25 - check its chart & you'll understand these trades - which will, barring a huge collapse, yield a very nice profit but could have been MUCH larger if I had been willing to buy premium, ie, calls instead). It can be used in conjunction with a sound strategy, however, to increase the probability of profits over time given your fundamental & technical analysis of the overall market - segments thereof - individual underlying security (MOST IMPORTANT) works well.

Before I close with my ? I think its important to note that those who have expertise, or porport to, share it in a straight forward way
40 years of experience doesn't mean I know it all nor that I don't need to constantly refresh my thinking so I joined ET to share ideas - learn -& for the refresh. My point: MAVERICK said ( 1 of the early pages of this thread) that DELTA is a function of volatility. Well, here's the def of DELTA --> DELTA = The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative.
Is volatility = DELTA? NO, so if you read this MAV please explain for all of us what you meant (thanks in advance for your reply).

NOW FOR MY ? -

Going into this week (based on friday 9/9 prices) GOOG was @ 299.09 & its nearest put & call options, therefore would be the Sept300 call (@ 3.60) / put (@ 4.70) respectively.

So which would you rather enter (if you MUST chose 1 & only 1 strategy @ closing Friday prices as stated above) ?
A) Buy 100 shares of GOOG stock
B) Buy 1 GOOG Sept 300 call
C) Sell 1 GOOG Sept 300 put

Hoping to hear your coice before the Monday 9:30am EST bell - I'd sell the put !

Good Trading & Good Health to you all !! cowpok1027

 

[dottom]

Quote from dummy-variable:

i know this is difficult to conceive so i'll try yet another analogy. imagine a fair lottery where you have to get 3 numbers in a row correct to win a prize. when you play you either lose $1 or win $1000. but assume that you can place new fair value bets after each number is drawn. say you have the number 666. the first number is drawn and it is a 6. you can now place a second $1 bet on the remaining two numbers where you will either win $100 or lose $1. further you can sell your first ticket at fair odds (it would now be valued at $10). what do you do? if all you do is sell your partially winning ticket you have not improved your overall expectancy in the game. but if you buy a second ticket you now have a combined "lottery position" that is worth $11 but costs you only $2. that is a positive expectancy result derived from two zero expectancy bets.

Ah, but you forget to mention that you only have a 10% chance of hitting that first 6, so on average it would cost you $10 (10 attempts) before you even get the chance to place that second bet, in effect, costing you $11 for fair value of $11.

 

[dottom]

Quote from cowpok1027:

So which would you rather enter (if you MUST chose 1 & only 1 strategy @ closing Friday prices as stated above) ?
A) Buy 100 shares of GOOG stock
B) Buy 1 GOOG Sept 300 call
C) Sell 1 GOOG Sept 300 put

Hoping to hear your coice before the Monday 9:30am EST bell - I'd sell the put !

It depends.

Hate to give a vague answer, but it was a vague question.