Profitaker
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You're on the wrong thread, you're talents are wasted here.
Best Thread The Options edge (Writing Vs Buying)
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I think you missed the point. You cover the derivative with a derivative getting rid of the interest part of the carry cost of the equation. You hedge by selling a short term High Premium call and covering with a long term relatively low premium call and roll out for a few months and make 25-35% more than covered calls, by hedging the way hedge fund managers do.
http://www.personalhedgefunds.com
http://www.personalhedgefunds.com
irishpaddypc
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Maso, DF,
Writing vs Buying.
My mentor is Bulldozer, I'm 16 and have been learning options for 2 years [paper trading]. I'm hoping to open an account when i turn 18 and trade with real money.
One of the first lessons Bulldozer taught me is that the WRITERS have 2 to 1 advantage over the buyers and the buyers are at a BIG disadvantage. Below are some points i learned:
1. Put writers WIN if underline goes sideways or Upwards. [2 TO 1 IN FAVOUR]
1B. Put buyers LOSE if underline goes sideways or Upwards [2 to 1 disadvange]
2. Call buyers LOSE if underline goes sideways or downwards. [ 2 TO 1 DISADVANTAGE]
2b. Call writers WIN if underline goes sideways or downwards ! [2to 1 in favour]
2c. And call buyers sometimes LOSE if underline goes Upwards too! so infact its 3 to 1 advantage to the WRITER and 3 to 1 disadvange to the buyers. :cheesy:
3. The call buyers need the underline to move in ONE direction [up] and it has to move ABOVE the purchased strike PLUS go past the premium level too before they see any profit.
4. If the underline goes up [ITM] in favour of the call buyer he can still lose because the premium were heavy from when trade was opened and altho positions may be ITM the premiums would still be showing LOWER than the value of PREMIUMS PAID! = LOSS + COMMISSIONS LOSS TOO.
Based on this knowledge alone i believe strongly that the writer has the edge over the buyer every time! be it short term or long term.
just my 0000.5
happy trading and good luck to the buyers cause their going to need it.
Paddy
ps, BTW, My mentor sends his regards to all especially to Profitaker.
Writing vs Buying.
My mentor is Bulldozer, I'm 16 and have been learning options for 2 years [paper trading]. I'm hoping to open an account when i turn 18 and trade with real money.
One of the first lessons Bulldozer taught me is that the WRITERS have 2 to 1 advantage over the buyers and the buyers are at a BIG disadvantage. Below are some points i learned:
1. Put writers WIN if underline goes sideways or Upwards. [2 TO 1 IN FAVOUR]
1B. Put buyers LOSE if underline goes sideways or Upwards [2 to 1 disadvange]
2. Call buyers LOSE if underline goes sideways or downwards. [ 2 TO 1 DISADVANTAGE]
2b. Call writers WIN if underline goes sideways or downwards ! [2to 1 in favour]
2c. And call buyers sometimes LOSE if underline goes Upwards too! so infact its 3 to 1 advantage to the WRITER and 3 to 1 disadvange to the buyers. :cheesy:
3. The call buyers need the underline to move in ONE direction [up] and it has to move ABOVE the purchased strike PLUS go past the premium level too before they see any profit.
4. If the underline goes up [ITM] in favour of the call buyer he can still lose because the premium were heavy from when trade was opened and altho positions may be ITM the premiums would still be showing LOWER than the value of PREMIUMS PAID! = LOSS + COMMISSIONS LOSS TOO.
Based on this knowledge alone i believe strongly that the writer has the edge over the buyer every time! be it short term or long term.
just my 0000.5
happy trading and good luck to the buyers cause their going to need it.
Paddy
ps, BTW, My mentor sends his regards to all especially to Profitaker.
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I'm with Profittaker on this one about there is no edge in selling vs buying. Selling argument is that you win on 2 of 3 directions. I look at it from a different POV. Anything you enter a trade you are in negative expectancy because of the bid/ask and commissions. And since if you bought/sold an option, the other (MM) must have sold/bought from you. That's a 50/50 chance. That 66% chance of winning on 2 out of 3 directions must first require the underlying going with you. If the second you enter a trade and it moves away from you, you are losing. Forget holding to expiration, as I doubt many actually do that because of the high gamma in the last week.
We must also calculate risk to reward. Sure you can make the argument that selling options brings in a little here and there, and position sizing will eliminate the statistical outlier that wipes out net short premium. Problem is no one knows when and by how much loss the outlier event will occur and take away. It may be after 10 years of 500k profits and you lose 100k, or it may be the very first trade blowing out your account and then some, even after 10 years of 500k accumulated profit.
As for the points in the guys post in blue,
1) Correct
1b)Correct
2)Correct
2b)Correct
2c)Half Correct. True while a rise usually means falling IV in a long vega position, there are ways around it, and one must consider the size of the move. Too many variables here.
3)Correct same as puts.
4)This argument only holds at expiry. If I bought a 75 strike call for $2, my breakeven at expiry is 77. If the underlying was at 76, I am $1 ITM, and lost a dollar to decay of time value. This is assuming one holds to expiry. Why anyone would do that is beyond me as one is losing value if long only. As long as time value + intrinsic value > premium paid, you don't ever need to cross breakeven point to profit.
We must also calculate risk to reward. Sure you can make the argument that selling options brings in a little here and there, and position sizing will eliminate the statistical outlier that wipes out net short premium. Problem is no one knows when and by how much loss the outlier event will occur and take away. It may be after 10 years of 500k profits and you lose 100k, or it may be the very first trade blowing out your account and then some, even after 10 years of 500k accumulated profit.
As for the points in the guys post in blue,
1) Correct
1b)Correct
2)Correct
2b)Correct
2c)Half Correct. True while a rise usually means falling IV in a long vega position, there are ways around it, and one must consider the size of the move. Too many variables here.
3)Correct same as puts.
4)This argument only holds at expiry. If I bought a 75 strike call for $2, my breakeven at expiry is 77. If the underlying was at 76, I am $1 ITM, and lost a dollar to decay of time value. This is assuming one holds to expiry. Why anyone would do that is beyond me as one is losing value if long only. As long as time value + intrinsic value > premium paid, you don't ever need to cross breakeven point to profit.
Silent.Trader
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irishpaddypc said:
Crap! The odds are 4 to 1
Seller wins if price moves right big time, if price goes right only a little, if price stays the same and if prices moves in the wrong direction only a little. Seller only looses if the prices moves against him 'big' time.
Study of option theory might help in figuring out the 'truth'! But of course it's theory and not practice so we can continue the discussion
grtnx
Wilco
Profitaker
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IrishPaddy / Silent trader
You are confusing the frequency of profit with the magnitude of loss and not looking at the big picture. Let me spell it out in schoolboy talk;
9 small wins and 1 big loss is not necessarily more profitable than 9 small losses and 1 big win.
Now let me spell it out in Option Trader talk;
Selling a DOTM 0.10 delta option 10 times will see you win 9 times and lose once. The 1 time you lose need only be a 2 sigma event to wipe out all your profits and then some.
jj90
Very refreshing, thanks.
You are confusing the frequency of profit with the magnitude of loss and not looking at the big picture. Let me spell it out in schoolboy talk;
9 small wins and 1 big loss is not necessarily more profitable than 9 small losses and 1 big win.
Now let me spell it out in Option Trader talk;
Selling a DOTM 0.10 delta option 10 times will see you win 9 times and lose once. The 1 time you lose need only be a 2 sigma event to wipe out all your profits and then some.
jj90
Very refreshing, thanks.
irishpaddypc
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Profitaker said:
Profitaker,
Let me spell it to u also please!? :cheesy: Bulldozer also taught me how to HEDGE agaisnt the ONE losing trade that threatens to wipe out account and i will suffer NO LOSS!
But, please dont think for one moment i'm going to teach u something for free!! Plus i would also need Bulldozers permission to share/sell the info on hedge!
Silent T,
Thanks for your back-up to my post that the writers have the advantage over buyers by 4 to 1! To me 2 to 1 is a huge advantage anyway! Not all traders are allowed to write puts or calls as they dont have much knowledge how to handle the situation when mrkts go against them and their account has not got enough cash to carry positions and as a result the liability falls on the broker as well.
rgrds
Paddy
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irishpaddypc
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Sorry for the deletion, i have good reasons for my actions.
Paddy
Paddy
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Silent.Trader
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Profitaker/Paddy
I'm very sorry that you did note the sarcastic tone I intended to put in my message. It's probably my poor English and/or lack of communication skills so I won't blame you. Please note that my real message was in the last sentences of my message:
"Study of option theory might help in figuring out the 'truth'! But of course it's theory and not practice so we can continue the discussion"
grtnx
Wilco
I'm very sorry that you did note the sarcastic tone I intended to put in my message. It's probably my poor English and/or lack of communication skills so I won't blame you. Please note that my real message was in the last sentences of my message:
"Study of option theory might help in figuring out the 'truth'! But of course it's theory and not practice so we can continue the discussion
"grtnx
Wilco
Profitaker
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ST
My sarcasm radar was switched off. Yep, you had me there !
Switching to guns....
My sarcasm radar was switched off. Yep, you had me there !
Switching to guns....
irishpaddypc
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quote from profitaker "9 small wins and 1 big loss is not necessarily more profitable than 9 small losses and 1 big win. "
Sorry for the deletion, i have good reasons for my actions.
Paddy
Sorry for the deletion, i have good reasons for my actions.
Paddy
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irishpaddypc
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irishpaddypc said:
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irishpaddypc
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Profitaker,
your quote "Selling a DOTM 0.10 delta option 10 times will see you win 9 times and lose once. The 1 time you lose need only be a 2 sigma event to wipe out all your profits and then some."
How do you arrive at these conclutions?? can you back it up with facts?
.
Many thanks
Paddy blue boy
your quote "Selling a DOTM 0.10 delta option 10 times will see you win 9 times and lose once. The 1 time you lose need only be a 2 sigma event to wipe out all your profits and then some."
How do you arrive at these conclutions?? can you back it up with facts?
.
Many thanks
Paddy blue boy
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TheBramble
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While I have previously declared a bias toward premium selling than premium buying as a more profitable long term basis for options trading - I maybe need to clarify my position.
It changes over time.
I still have a bias to selling on principle. There are far more unpleasant things can happen to you when you buy premium and sit on it than when you sell it - in general. And there are more things that have to go your way when you're sitting on bought premium for you to make a profit than not. But when it does go your way - your leverage makes it worthwhile and your profit untrammelled.
But..
You need also to be considering two other factors.
What is your purpose - your strategy - in using options in the first place. It's not that options are so much complex as that they lend them selves to a multitude of work-a-day possibilities. Manifold rather than complex.
The second thing is - where is option volatility placed in relation to historical volatility, general volatility and underlying stock volatility?
When you're trading a market which has high option volatility in relation to the underlying, you're going to need to take a potentially different view to when premium is cheap.
So I guess my 2p-th is: There is no inherent edge that meets all market conditions and investment criteria. The edge is precisely that of determining what your profile for options exposure R:R ius and what level the premium uis trading relative to historical and underlying volatility.
Does this make sense?
It changes over time.
I still have a bias to selling on principle. There are far more unpleasant things can happen to you when you buy premium and sit on it than when you sell it - in general. And there are more things that have to go your way when you're sitting on bought premium for you to make a profit than not. But when it does go your way - your leverage makes it worthwhile and your profit untrammelled.
But..
You need also to be considering two other factors.
What is your purpose - your strategy - in using options in the first place. It's not that options are so much complex as that they lend them selves to a multitude of work-a-day possibilities. Manifold rather than complex.
The second thing is - where is option volatility placed in relation to historical volatility, general volatility and underlying stock volatility?
When you're trading a market which has high option volatility in relation to the underlying, you're going to need to take a potentially different view to when premium is cheap.
So I guess my 2p-th is: There is no inherent edge that meets all market conditions and investment criteria. The edge is precisely that of determining what your profile for options exposure R:R ius and what level the premium uis trading relative to historical and underlying volatility.
Does this make sense?
irishpaddypc said:jj90,
Thanks also for agreeing with most of my points!
Your lack of knowledge on hedges is very obvious too!
Keep learning before you decide to trade for real money! :idea: [ just friendly polite free advice]
Paddy
Please explain my lack of knowledge on hedges.
1 thing that has not been brought up and needs to be clarified before further discussion is whether or not we are selling naked premium or hedged premium. If it is hedged premium, that is the mainstay of my trading. One can lose big 1 time with 9 small winners and still stay in the game. But naked premium is a different thing. OSIP US stock 04/20/04. Look at the next couple of weeks. Try selling calls on that date.
I will say that selling naked premium can be done profitably and long term-wise, I'm sure there are people who trade like that, but with every consecutive trade you enter you risk hitting that 1 statistical outlier with 6+ std dev that will wipe you out. I would never sell naked premium, but I would venture a guess that those who sell naked premium and are still in the game do so on non volatile issues, hence selection of underlying is key.
Profitaker
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Bramble
Absolutely.
Following on from that, and possibly a key point in the debate, is that one cannot know in advance whether the premium was cheap or expensive.
Only after the options expire can we look back and compare the option implied volatility with historic volatility. Then, and only then, can we say categorically that the premium was cheap or expensive.
Sometimes the premium was cheap, sometimes it was expensive. Buying cheap premium and selling expensive is what we all aspire to do.
For writers to say they have the edge is to say that premium is always expensive. A ludicrous delusion of the misguided few, IMHO.
Absolutely.
Following on from that, and possibly a key point in the debate, is that one cannot know in advance whether the premium was cheap or expensive.
Only after the options expire can we look back and compare the option implied volatility with historic volatility. Then, and only then, can we say categorically that the premium was cheap or expensive.
Sometimes the premium was cheap, sometimes it was expensive. Buying cheap premium and selling expensive is what we all aspire to do.
For writers to say they have the edge is to say that premium is always expensive. A ludicrous delusion of the misguided few, IMHO.
Profitaker
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jj90
Does hedged or naked make any difference to edge ? Surely you are either net long or net short premium, hedge or no hedge ?
If you compare a naked put seller to a put seller who covers at (say) 1 StDev the expectancy is the same, at least in theory. In practice however, the guy running the vertical has to pay a higher IV for the cover, as well as an additional spread and commissions. In the long run the naked seller will be more profitable, not withstanding 6 sigma events of course.
Does hedged or naked make any difference to edge ? Surely you are either net long or net short premium, hedge or no hedge ?
If you compare a naked put seller to a put seller who covers at (say) 1 StDev the expectancy is the same, at least in theory. In practice however, the guy running the vertical has to pay a higher IV for the cover, as well as an additional spread and commissions. In the long run the naked seller will be more profitable, not withstanding 6 sigma events of course.
TheBramble
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I'm not sure I understand you.Profitaker said:
Premium is a living entity, just like the underlying. Just as is volatility. We can compare current prices, volatility etc., against a whole slew of previous data. Volatility, like price, changes on a dynamic basis. Comparison of today's against yeterday's - or current against 5 mins back is always possible.
If we had to wait until after expiration they wouldn't be tradeable at all.
I'm sure I've missed the point.
Profitaker
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Bramble
If we look at a stock's option which is trading at an implied volatility of (say) 20%, how do we know if it’s cheap or expensive premium ? We don’t, unless someone knows how to calculate future volatility. So if we sold that premium trading at 20% we wouldn’t know whether it was expensive or cheap until the option expired. At the point (expiry) we could then calculate the stocks historical volatility since we sold the option and determine whether the premium was cheap or expensive. If the HV was 18% the premium was indeed expensive, HV 22% and the premium was cheap. But this cannot be known in advance, only when the options expire.
So in the context of this debate, for the writer to have an edge, he would need to indiscriminately and consistently sell expensive premium.
If we look at a stock's option which is trading at an implied volatility of (say) 20%, how do we know if it’s cheap or expensive premium ? We don’t, unless someone knows how to calculate future volatility. So if we sold that premium trading at 20% we wouldn’t know whether it was expensive or cheap until the option expired. At the point (expiry) we could then calculate the stocks historical volatility since we sold the option and determine whether the premium was cheap or expensive. If the HV was 18% the premium was indeed expensive, HV 22% and the premium was cheap. But this cannot be known in advance, only when the options expire.
So in the context of this debate, for the writer to have an edge, he would need to indiscriminately and consistently sell expensive premium.
TheBramble
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Profitaker - are you an active options trader? My reason for asking is that you seem to have a limited view of the data that is available to active options traders.
One of the most basic requirements of using options as part of any trading (or investment) strategy is the ability to assess relative worth (value) and relative volatility. Current and historical and in the context of the current market's 'action'.
If you're unable to do that then you can't trade them successfully.
McMillan's "Options as a Strategic Investment" is an excellent place to start if you haven't read it.
And there's oodles of stuff on the Internet covering everything from basic options plays to stuff that makes me want to cry it's so elaborate.
My position is that it's only worthwhile using options to the extent that you understand them. Which is true of any trading or investment strategy or instrument.
One of the most basic requirements of using options as part of any trading (or investment) strategy is the ability to assess relative worth (value) and relative volatility. Current and historical and in the context of the current market's 'action'.
If you're unable to do that then you can't trade them successfully.
McMillan's "Options as a Strategic Investment" is an excellent place to start if you haven't read it.
And there's oodles of stuff on the Internet covering everything from basic options plays to stuff that makes me want to cry it's so elaborate.
My position is that it's only worthwhile using options to the extent that you understand them. Which is true of any trading or investment strategy or instrument.
