cool post, singaporelink as far as probabilities are concerned.
but every option writer knows that you also have to take probable outcomes into consideration.
if you win 4 times out of 5 and the 1 time out of 5 loss costs you all the gains, you are behind.
just ask an option writer, who sold puts into the 9/11 event..
to be honest, buying or selling options is not only a choice of personal preferrence, you also have to look at each trade and each scenario per se.
I normally spread when I do options, but from time to time, I write naked and daytrade long options
as far as writing naked goes, I look for opportunities in individual stocks which took a beating and IV is highly inflated. if a stock goes from 90$ down to 8$ and the IV´s are at 400% this is an eldorado for writing puts. if you get 1.50$ for the 5$ strike expiring in 30days with the stock at eight, your risk is 3.50$ so even, when the company goes bankrupt, you just risk 3.50 bucks. happens perhaps twice a year but those are the scenarios, I want to be a seller.
my bread and butter trades are usually outright stock or futures with a frequency of 10-20 trades per day, but for swing trades I almost exclusively use long options, or spreads depending on the timeframe and volatility scenario.
Long options are great, if you want leverage and far better for swingtrades then outright stock or futs.
The key here is gamma. when you have a 2:1 reward/risk you will get 2:1 with a future or stock outright. if you trade a long option, you maybe can shift it to 2.2:0.8
Because gamma makes you loose less, when you loose and gives you more, when you win, long options are great for trades between 1-3 days (the shorter the timeframe, the less days to expiration, I also do intraday scalps with options expiring in a week, especially in the Cubes)
for every position I hold longer then three days, I use spreads...but this ain´t the topic of the thread...
Key for selecting the right option for directional play is the gamma per delta ratio.
All of us understand, that the ATM options have the highest gammas, so they look like being the best for directional plays. But if you look at the chain with a different perspective, what would you like more?? a long put wih 50 delta and 10 gamma or a long put with a 12,5 delta and a 8 gamma??
I would favour the second option because I can trade 4 times as many giving me a delta of 50, too, but my gamma is 32 so new deltas are manufactured faster.
depending on IV rising or falling, it´s necessary, that you know, what option is best. shorting a potential top on low IV? use OTM puts, as the curve might be relatively flat. Want to buy a bottom at high IV...well thats bad...I guess the writer wins here
Buying calls here is a sure loss, because IV tends to decline, when markets are rising...I either trade a directional butterfly or short a calendar spread..
OK, lot of text here...I hope that helps to understand, that there is no such thing as just buying calls for a long trade and buying puts for a short. option selection is critical and should be based on the scenario. everything else is just gambling
One last thing:
The Bramble states, that usually pros are the writers...thats right, but writing options as a main strategy is a completely different game. you dont neccessarily make directional plays, you want to play vola, theta, dispersion or term structure. the reason, why banks are better at this, is because you need excessive capital that allows your positions to be large enough. If you ever tried to hedge away delta and gamma using single lot positions, you know what I mean. it´s nearly impossible...at best, you shold be able to trade thousands of options. You simply cannot juggle and adjust your positions with an 25K account.
