Looking at Options.

[kimo'sabby]

Nah, it's a fundamental flaw in the theory... The underlying can always gap and mkts can always go bidless and/or offerless. There isn't a theory out there (that I know of) that is capable of pricing the liquidity element. That's the secret sauce that makes all the difference.

I mentioned in my post, didn't I?

You said, "so many". Slippery when wet....or wot!?

 

[DashRiprock]

well nobody asked but heres my 2p on trading options from OUR* side;

1. they are always fairly priced, so even its dead obvious that XYZ is going up the calls will be expensive enough to eliminate any obvious trades.

2. all of the time you have to consider not only the exposure you want (delta, volatility, whatever) but also the exposures that come with the trade you do. Without doing clever stuff it's all of 'em or nothing, you cant buy deltas without having gammas etc

2i. some of the exposures can be discounted by choosing the right option structures at the right time - e.g. ATM straddles

2ii. some of the exposures are easier to hedge against than others (e.g. its easy to delta hedge, but not so easy to hedge against volatility)

3. commissions are very important if you are going to be doing any adjusting (bascically delta's because vol swaps and things are all OTC)

4. Even if you can do all that, there is someone cleverer link MartinGhoul that has done it all already.

So, i think, unless you can make an analysis on more than one of the price factors (and so you've got a two-factor trading strategy), trading options is generally a bad idea. No edge and expensive comms + spreads.



EDIT: Originally I said "the buy side" which was a slip on my part. What I mean is from the retail / own account local / prop shop traders perspective. There are buy side hedge funds that do very very well buying options, but the things I've listed here aren't really an issue for them, they have the financial, intellectual, technological capital (and the infrastructure) to do it profitably I'm sure.

 

[DashRiprock]

Nah, it's a fundamental flaw in the theory... The underlying can always gap and mkts can always go bidless and/or offerless. There isn't a theory out there (that I know of) that is capable of pricing the liquidity element. That's the secret sauce that makes all the difference.

I mentioned in my post, didn't I?

the mark-to-mkt bit? So when the market (for whatever reason) is marking prices that are dislocated from the fundamental risks of the position?

 

[kimo'sabby]

the mark-to-mkt bit? So when the market (for whatever reason) is marking prices that are dislocated from the fundamental risks of the position?

Is there ever a permanent options edge which prevails in any market condishions?

 

[kimo'sabby]

Wots moar important:

1) Beein able to loose muni?

2) Beein aibel to win muni?

 

[Martinghoul]

But I thought if you are a writer, the stock value at expiry covers the option payoff at expiry.

Im only a couple of chapters in....

"At expiry" is precisely the point. The whole issue is what happens to a leveraged instrument like an option before expiry.

You said, "so many". Slippery when wet....or wot!?

I gave you one reason. Another example is people selling outstrikes, because they believe certain events can "never" happen. Is this enough?

the mark-to-mkt bit? So when the market (for whatever reason) is marking prices that are dislocated from the fundamental risks of the position?

Nah, I mean if you're the type of investor that doesn't look at your mark-to-mkt losses and just cares about the fundamental value of your assets, you have edge selling options. It works exactly like the insurance biz. That can be a permanent edge.

 

[kimo'sabby]

"At expiry" is precisely the point. The whole issue is what happens to a leveraged instrument like an option before expiry.

Ya can get it right and still lose muni!

 

[Scotty2Cues]

"At expiry" is precisely the point. The whole issue is what happens to a leveraged instrument like an option before expiry.

ah, so you mean something like in extreme cases before expiry, margin calls (something similar) are made closing positions

 

[DashRiprock]

"At expiry" is precisely the point. The whole issue is what happens to a leveraged instrument like an option before expiry.

I gave you one reason. Another example is people selling outstrikes, because they believe certain events can "never" happen. Is this enough?

Nah, I mean if you're the type of investor that doesn't look at you mark-to-mkt losses and just cares about the fundamental value of your assets, you have edge selling options. It works exactly like the insurance biz. That can be a permanent edge.

I've got you.