Option Premiums Effected by More Traders?

[tommog]

Hi,

It seems the once secretive world of options trading is becoming more open to the general public.

Have any of you long term options traders (by this i mean u have been trading a long time, not take long term views) seen this having much influence on the price of options? After people first move on from buying puts and calls they tend to venture into some simple covered call writing and there seem to be a lot of holygrail.com type websites touting this as THE definitive options strategy.

Have you seen any deterioration of extrinsic value as all these new traders fancy their chances at options writing over the past 6-7 years (taking into account the fact volatility has increased which would generally keep them high)? More option sellers than buyers would suggest to me cheaper option prices and option selling less profitable. But then again i would only class myself as an intermediate options trader so understand there are a lot of other factors in the pricing model.

Thanks
Tom

 

[HowardCohodas]

I can only speak for index options. I back tested with 5 years worth of data, paper traded for 5 months and have been trading with money for 4 months. I have not detected any systemic changes that could not be accounted for by volatility level changes.

The longer options have been around, the more uses both commercial and retail investors and traders have found for them. That's a good thing. It means that there is a natural tension between the different uses, which tends to prevent any one use from dominating and forcing prices in their direction. Everybody wins. That does not mean that there will not come a time when one use dominates and ruins it for everyone else. I just haven't seen any evidence of it yet.

I trade index options credit spreads with the intent of forming Iron Condors when possible. The yield for this is unusually generous. What makes it possible is that most everyone else is using these options for other purposes and this keeps the time value to my advantage. Will this last forever. Hard to say. While it does, I'm a happy camper.

 

[Martinghoul]

These things are not a function of what retail traders like to do... It's generally true that vols (and hence option prices) are influenced by the general levels of risk premia in the various mkts. For example, in bull mkt years of 2006-07 options were "cheap", given the widespread belief in a bright, steady future.

So the answer to your question is, ironically, sorta yes, given that the general levels of risk premia in the mkts do get depressed by a whole bunch of option writers with lots and lots of money. Except, of course, they often don't comprehend that they're selling options.

 

[tommog]

thanks guys. I suppose a decrease in the price of extrinsic value and everyone will start touting long volatility trades as the next big thing.