Writing options for a living

[cowpok1027]

Hi dottom -

Please elaborate - what's vague & what does it depend on?

If you had to choose @ 4pm Friday when these prices were traded which 1 would have been your trade? cowpok1027

 

[drsteph]

Quote from cowpok1027:

Hi dottom -

Please elaborate - what's vague & what does it depend on?

If you had to choose @ 4pm Friday when these prices were traded which 1 would have been your trade? cowpok1027

I'll bite on this - I apologize since I have read only 10% of this whole thread. If I make an arse of myself, well, just pm me and It'll be a good laugh.

A similar question was posed to me a long time ago, which is the one-day option conundrum. Assume that there is one day left until expiration of GOOG's options.

As theta decays when the option is short date, the gamma becomes very sensitive to the underlying. The call option is close to the underlying and has high gamma. The put option is struck about 10 bucks away from the current price and likely has a corresponding delta further from 50, which the call is almost at (or a little higher).

So, the answer is to buy the one day (or short date) call and trade the hell out of the delta (or whip). Technically, you should be buying the 50 delt strad. You basically are getting near-infinite gamma, and if you don't have to pay too much for it, its not a bad deal. However, because someone's got to sell it, in experience its not cheap unless the seller has a definate agenda.

If you buy the put, your gamma is lower and you may not recoup your investment unless the market moves sharply lower, pumping up your gamma and allowing you to aggressively trade your delta.

If you simply buy the underlying, you are just making a directional play.

That's my answer. If you however were seriously asking about which way to play the market, you're asking the wrong guy.

 

[cowpok1027]

Hello drsteph

That was a very good "technical" response. the only thing you may have missed was that option C) was to SELL 1 put.

Anyway, since I enjoyed your post I'll divulge my motive --> it was designed to be a question of whether you'd rather buy prem, sell prem or just trade directionally. It was intended to see what the ET option traders preferences are.

I was thinking of adding a caveat (or bonus points if your scoring) that your MUST HAVE A POSITIVE RETURN TO WIN.

GOOD TRADING & GOOD HEALTH cowpok1027

PS - I posted my bullish GOOG position on a GOOG thread under trading & will try to retrieve it & post here sometime soon.

 

[drsteph]

Quote from cowpok1027:

Hello drsteph

That was a very good "technical" response. the only thing you may have missed was that option C) was to SELL 1 put.

Anyway, since I enjoyed your post I'll divulge my motive --> it was designed to be a question of whether you'd rather buy prem, sell prem or just trade directionally. It was intended to see what the ET option traders preferences are.

I was thinking of adding a caveat (or bonus points if your scoring) that your MUST HAVE A POSITIVE RETURN TO WIN.

GOOD TRADING & GOOD HEALTH cowpok1027

PS - I posted my bullish GOOG position on a GOOG thread under trading & will try to retrieve it & post here sometime soon.

Well, like I said, I really don't know what I am doing anyway. You'd be wiser to listen to someone else more experienced.

 

[IV_Trader]

Quote from dummy-variable:

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.



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.





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.

I don't think that lottery odds can be compare with option's expectancy. I will try another gambling analogy: Race Track.
Once I wrote a program that takes Win Odds for individual horses and and convert it to Exacta odds. then I looked at the real exacta odds (meaning : how the same PUBLIK that awarded horses "A" and "B" with odds of "X" and "Y" to win the race , calculated the chance of horses "A" and "B" to finish the race in 1-2 order"). This way I got the over or under value in prices. Maybe some successful option's traders came up with the similar ways to ID the over/under value in options. Just my take here.

 

[dummy-variable]

Quote from IV_Trader:

I don't think that lottery odds can be compare with option's expectancy. I will try another gambling analogy: Race Track.
Once I wrote a program that takes Win Odds for individual horses and and convert it to Exacta odds. then I looked at the real exacta odds (meaning : how the same PUBLIK that awarded horses "A" and "B" with odds of "X" and "Y" to win the race , calculated the chance of horses "A" and "B" to finish the race in 1-2 order"). This way I got the over or under value in prices. Maybe some successful option's traders came up with the similar ways to ID the over/under value in options. Just my take here.

parimutual betting like on horse races is a very good analogy to the options market: zero-sum, negative expectancy because of the house take. and the tote odds of a horse winning are about as accurate as option prices are to future value - which is pretty much dead on.

the information flow in most track betting though is archaic by market standards. the lack of instantaneous real time quotes makes doing an arbitrage between the win (or place/show) odds and exotics a possibility. the only problem is that you can't lay off (i.e. short the odds) and you can't lock in odds so all you get is the final, unknown odds that can change drastically seconds before post. it's a lot like the old days of option trading where you could only buy calls. and that house edge - particularly on the exotics is very hard to overcome.

because of the flow of info, ability to short and the locked in odds a trader gets, there is almost no chance for a similar arbitrage (or finding over/under priced puts or calls) in options trading.

but your system sounds intriguing. any success with it?

 

[IV_Trader]

Quote from dummy-variable:

parimutual betting like on horse races is a very good analogy to the options market: zero-sum, negative expectancy because of the house take. and the tote odds of a horse winning are about as accurate as option prices are to future value - which is pretty much dead on.

the information flow in most track betting though is archaic by market standards. the lack of instantaneous real time quotes makes doing an arbitrage between the win (or place/show) odds and exotics a possibility. the only problem is that you can't lay off (i.e. short the odds) and you can't lock in odds so all you get is the final, unknown odds that can change drastically seconds before post. it's a lot like the old days of option trading where you could only buy calls. and that house edge - particularly on the exotics is very hard to overcome.

because of the flow of info, ability to short and the locked in odds a trader gets, there is almost no chance for a similar arbitrage (or finding over/under priced puts or calls) in options trading.

but your system sounds intriguing. any success with it?

agree with you on race track analisys , it is very very accurate like options . Horse with 9:1 odds DOES win every 10th race. My system was(is) very good ;125% , but track is NOT a fair lottery : Track&State take 17% of money from the pool so my return was (83*1.25=104) only 4%.

As for similar strategy in options , between all types of HV and IV and Beta calculations multiply by different time periods , then add Events and so many other variance , retail trader like me can definetly find some price discrepancies and make a good living out of it. And I never took directional trade , so not looking for extra luck here. I have a feeling that you find the way to turn neg exp to positive too , lol.
You have very intrusting posts , D-V.
Read you later.

 

[IV_Trader]

Quote from IV_Trader:

agree with you on race track analisys , it is very very accurate like options . Horse with 9:1 odds DOES win every 10th race. My system was(is) very good ;125% , but track is NOT a fair lottery : Track&State take 17% of money from the pool so my return was (83*1.25=104) only 4%.

As for similar strategy in options , between all types of HV and IV and Beta calculations multiply by different time periods , then add Events and so many other variance , retail trader like me can definetly find some price discrepancies and make a good living out of it. And I never took directional trade , so not looking for extra luck here. I have a feeling that you find the way to turn neg exp to positive too , lol.
You have very intrusting posts , D-V.
Read you later.

I meant "interesting" posts

 

[dummy-variable]

Quote from IV_Trader:

My system was(is) very good ;125% , but track is NOT a fair lottery : Track&State take 17% of money from the pool so my return was (83*1.25=104) only 4%.

that's still incredible. if you can get off bets with any size and keep this performance, screw options trading , you can make a living at the track!

 

[cedarboy]

If you want to want to make supplement income from it, it is good and easy money when you watch them expire worthless most of the time. Even if if the market crashes, by just holding a small position, you would not be completely wiped out anyway.

The essence of option writing lies in making many small but probable gains. However, if you go big time, it takes only one big move to kill you out. To play professional, take covered position like doing a spread. Although this severly reduce your profits, as least you sleep better.

By the way just share something with you. Beware more of naked puts then calls. a sudden market collaspe will leave you little time for actions. Even volatility will turn against you.