Crap Buddist
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Why bother with options?
Now, skant as my knowledge is, and perhaps im answering my own Q.(lack of knowledge means you know that you dont know so you think why bother
) Why bother with options.?
Now if some super computer can snap up extremes of volatility or detect any mis pricing via some sort of maths equation, I could understand the machines doing it.
Also see a use as hedging vehicle for outrights in the money for some. But to trade options as their own vehicle I keep going to "Must be a greater challenge" .
so heres a Q. to outright option traders why do you do it and not trade outrights?
Now, skant as my knowledge is, and perhaps im answering my own Q.(lack of knowledge means you know that you dont know so you think why bother
) Why bother with options.?Now if some super computer can snap up extremes of volatility or detect any mis pricing via some sort of maths equation, I could understand the machines doing it.
Also see a use as hedging vehicle for outrights in the money for some. But to trade options as their own vehicle I keep going to "Must be a greater challenge" .
so heres a Q. to outright option traders why do you do it and not trade outrights?
I suggest that most buyers of options do so because it has been hyped up as an easy and, practically, sure way to make money. The idea of limitless profits against a risk of limited loss attracts the immense amount of capital, which is in the hands of impatient investors and unskilled speculators . When this is found to be a difficult task, because of time decay, the speculator then turns to articles explaining how writing them takes the time risk out of options. Therefore, he does so and, if he writes naked ones successfully will, almost certainly, keep repeating the process of making, what he believes, are good, steady, profits until he gets hit very hard, if not completely wiped out.
Most brokers of options have used the press to expound the virtues of option trading with great success.. They make the whole process so attractive because the trading of shares by buying/selling futures seems dull by comparison.
I hope that the long thread, mentioned by Grant, will serve to dispell that idea. I, too, was attracted to the idea of writing naked options---I admit it.. That's as far as it went, though, because the fatal consequences came about sooner, rather than later. If the Black Swan had not arrived after, say several months of successful trading, then I could well have been lured into trying it. Once tried and found to be successful, it is so easy to persuade oneself that one would have to be very unlucky to meet the Black Swan this time. So it goes on. Human nature at work.
What else to try, in the options field? Hedged options are the only way to to limit losses, but profits are likely to be severely curtailed because, one is buying and selling two sets of options, instead of one. Covered options are linked to the shares one has in a portfolio and will be boring, no? But, that was the original purpose of options, though, surely?
Split.
Most brokers of options have used the press to expound the virtues of option trading with great success.. They make the whole process so attractive because the trading of shares by buying/selling futures seems dull by comparison.
I hope that the long thread, mentioned by Grant, will serve to dispell that idea. I, too, was attracted to the idea of writing naked options---I admit it.. That's as far as it went, though, because the fatal consequences came about sooner, rather than later. If the Black Swan had not arrived after, say several months of successful trading, then I could well have been lured into trying it. Once tried and found to be successful, it is so easy to persuade oneself that one would have to be very unlucky to meet the Black Swan this time. So it goes on. Human nature at work.
What else to try, in the options field? Hedged options are the only way to to limit losses, but profits are likely to be severely curtailed because, one is buying and selling two sets of options, instead of one. Covered options are linked to the shares one has in a portfolio and will be boring, no? But, that was the original purpose of options, though, surely?
Split.
Profitaker
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So that I can trade volatility, as well as direction. So that I can profit if a stock goes sideways, and profit if a stock goes ballistic. So that I can morph a losing trade into a winning one, and lock profits, rather than liquidate. So that I can manage risk and use use risk itself to profit.Crap Buddist said:
Why would anybody want to just trade outrights ? (Up / Down)
Profitaker said:
It's surprising how many do. They are never heard of, of course. They don't last long enough and no one wants to read too much about losers, it makes them feel uncomfortable---- "There, but for the grace of God, go I" You are, obviously, well practised in this field and well able to take care of yourself I am sure that, if Socrates had been given a free rein, there would have been a lot of potential put writers willing to believe his posts.
Split
Profitaker
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Of that I have no doubt !Splitlink said:
CB,
“why...not trade outrights?”
The price of a share or option can range from zero to (theoretically) infinity. Trading direction and being on the wrong side – holding shares or short puts in a sell-off; short shares or short calls in a rally assumes (in my opinion) too much risk, ie open-ended.
By contrast, trading implied volatility, eg delta-neutral vertical spreads, straddles or strangles, is a more conservative proposition. Theoretically, there is no upper limit to the iv level, but in practise it’s constrained.
Why is this? I think it’s simply supply and demand. The excess of intrinsic value (time value or iv) reflects perceived risk. If iv is low there will be buyers but the sellers will eventually raise prices to maximise returns. Buyers will be willing to pay higher premiums but only to a point. If iv is high there will be fewer buyers, and sellers will emerge. As there will be fewer buyers at the higher levels, the sellers will need to accept lower and lower prices.
There is constant readjustment to find the optimum level – the maximum buyers will pay, the minimum sellers will accept. So while high iv may reflect perceived risk, I think it also reflects testing of the market. Therefore, while the underlying of an option is unlimited on the upside, the excess of intrinsic value is limited. Of course, where perceived risk is realistic – economic deterioration, terrorist threats, etc – then premiums may then reflect a degree of reality.
See attached chart. This is the longest run I have of FTSE daily iv (334 days) from 19999 – 2000. Apologies for the quality.
Split,
“Most brokers...expound the virtues of option trading.”
Perhaps more importantly, there is a good economic case for the broker, ie not the client.
Assume a client is 25 years old and has £10,000 to invest. He could buy 10,000 shares at £1.00 and he’ll be charged a commission, say £25. He could hold these shares forever and on death (say 85 years) pass them on to his heirs. So, £25 commission to the broker over this time-period is not conducive to a decadent life-style.
As an alternative, the broker persuades the client of the virtue of options. The client buys 10 option contracts and is charged commissions of £25 per contract. Total commissions = £250. Nine months later at expiry, and through very safe strategies, the client makes a small profit. Repeat until death at 85 years =
80 (nine-month periods in 60 years) x £250 = £20,000 comm’s.
If the client traded three-month contracts, the comm’s will be £60,000. Vertical spreads = £120,000, butterflies = £240,000, etc.
Ok, an extreme example but the economic case is sound.
I’ve got a note on my screen, “No short puts – 1 bad event and wipe out” .
Grant.
“why...not trade outrights?”
The price of a share or option can range from zero to (theoretically) infinity. Trading direction and being on the wrong side – holding shares or short puts in a sell-off; short shares or short calls in a rally assumes (in my opinion) too much risk, ie open-ended.
By contrast, trading implied volatility, eg delta-neutral vertical spreads, straddles or strangles, is a more conservative proposition. Theoretically, there is no upper limit to the iv level, but in practise it’s constrained.
Why is this? I think it’s simply supply and demand. The excess of intrinsic value (time value or iv) reflects perceived risk. If iv is low there will be buyers but the sellers will eventually raise prices to maximise returns. Buyers will be willing to pay higher premiums but only to a point. If iv is high there will be fewer buyers, and sellers will emerge. As there will be fewer buyers at the higher levels, the sellers will need to accept lower and lower prices.
There is constant readjustment to find the optimum level – the maximum buyers will pay, the minimum sellers will accept. So while high iv may reflect perceived risk, I think it also reflects testing of the market. Therefore, while the underlying of an option is unlimited on the upside, the excess of intrinsic value is limited. Of course, where perceived risk is realistic – economic deterioration, terrorist threats, etc – then premiums may then reflect a degree of reality.
See attached chart. This is the longest run I have of FTSE daily iv (334 days) from 19999 – 2000. Apologies for the quality.
Split,
“Most brokers...expound the virtues of option trading.”
Perhaps more importantly, there is a good economic case for the broker, ie not the client.
Assume a client is 25 years old and has £10,000 to invest. He could buy 10,000 shares at £1.00 and he’ll be charged a commission, say £25. He could hold these shares forever and on death (say 85 years) pass them on to his heirs. So, £25 commission to the broker over this time-period is not conducive to a decadent life-style.
As an alternative, the broker persuades the client of the virtue of options. The client buys 10 option contracts and is charged commissions of £25 per contract. Total commissions = £250. Nine months later at expiry, and through very safe strategies, the client makes a small profit. Repeat until death at 85 years =
80 (nine-month periods in 60 years) x £250 = £20,000 comm’s.
If the client traded three-month contracts, the comm’s will be £60,000. Vertical spreads = £120,000, butterflies = £240,000, etc.
Ok, an extreme example but the economic case is sound.
I’ve got a note on my screen, “No short puts – 1 bad event and wipe out” .
Grant.
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