Plain Vanilla Options Trades.

[Profitaker]

Most changes in the FTSE are small, but extreme outlier events occur far more often than a normal distribution would suggest.

Exhibit 1

Graphed above are the daily % changes observed in the FTSE since 1984. As you can see there are a significant number of daily price changes touching 4% or more, up as well as down.

There's more -

Exhibit 2

Graphed above are the 5-day % changes observed in the FTSE since 1984. Anyone care to explain how they would have coped with some of those changes if they were short options ?

They say a picture paints a thousand words but what the above graphs cannot illustrate is the massive (and I mean MASSIVE) spike in IV as writers scramble to BTC short option positions and the fundies BTO as portfolio insurance. It is the massive IV spikes as much as the underlying fall that would blow all but the most conservative naked Put writers sky high.

 

[dc2000]

Priceman
Are you asking for an explanation of options? an explanation of how Soc has made money so far? or how Soc could lose his shirt ?

 

[dc2000]

A basic desciption can be found here
http://www.trade2win.com/knowledge/articles/general_articles/option-pricing-basic-factors/?r

In the simplest form an option is rather like an insurance policy you buy a policy for a premium from the policy writer if nothing happens within the term the policy expires and the writer keeps the premium, if the policy is cancelled mid term then this is usually also to the benefit of the writer as there is a charge for the amount of time on risk, the danger of course is that there could be a claim far in excess of the initial premium.

 

[grantx]

If "professionals" only sell options, counter-parties must buy them. And the majority of these counter-parties will be professionals, ie market-makers (of course, it could be countered that the mm's will sell these as quicky as possible). Or is this buying reluctant, an exception, being nothing more than a reflection of their requirements in maintaining a market?

Grant.

 

[jhaughey]

Surely there must be a profesional (please, no need to expand on what constitutes a professional) options trader registered that we can call on who does this day in day out to either agree or disagree with Socrates? If not can someone find one and ask them to come and comment!

there was a great thread over on elitetrader that discussed this very topic:
http://elitetrader.com/vb/showthread.php?s=&threadid=53037&highlight=writing+options+for+a+living
there are quite a few professionals (ie. market makers and quants) who contributed to the fray

 

[charliechan]

in order to address the question of who is professional and who is not, i can assure you that those paid a million odd pounds a year in bonus consider themselves professional, and whoever here has ever had the experience of meeting and working with such people would also consider them professional - in merit, ability AND conduct! if they were anything else, i can assure you that some of the smartest money around wouldnt be giving them billions to 'play' with whilst on the 'treadmill'.

or am i wrong? are these folk who are manipulating the market to their own ends WITH other peeps money (i.e. no risk to themselves, other than their own money they have also decided to invest in THEIR OWN management) really a bunch of plums?

i can assure you all, these guys wouldnt really consider someone tinkering round on a message board with a handful of contracts from their 'home office' a professional, but very much a retail amateur.

i guess were going back to the merit, ability and conduct argument.

 

[A Dashing Blade]

i can assure you all, these guys wouldnt really consider someone tinkering round on a message board with a handful of contracts from their 'home office' a professional, but very much a retail amateur.

Very true
(having shown this thread to a major IB's FTSE option market makers)

 

[grantx]

I know professionals whom I wouldn't trust with a long call.

I was visited one day by our financial controller. He wanted to know why I was trading short options. Actually, they were one leg of vertical spreads but he didn't see the distinction. He was a professional but knew jack. I also had "amateur" clients who knew more than the brokers.

Smart money will attract money until it goes pear-shaped, eg hedge funds.

Grant.

 

[SOCRATES]

Socrates,

A simple question if I may. Not dealing with options my ignorance shines through I'm sure but to me, my risk or margin requirements, are of great importance to me. I like to keep things to a minimum but from reading this thread, I get the impression this is not considered. The downside is unlimited until the positions come back into profit is it not? Whilst I consider which has the edge, this is an important factor IMO.

Thanks

First of all I am going to be here for not very long this evening as tomorrow...the games..you know..

Sure, but you are viewing this from a buyer's viewpoint and not from the viewpoint of a provider.
If every provider thought in that way, there would be no market. Then at the appearance of a black swan the whole capitalist system would collapse. This can never be allowed to happen, because it is an integrqal part of the foundations on which democracy and freedom of choice are built,

I thank you for your concern, but I assure you there is no need. You are viewing this from your side of the glass, which is not mine. I assure you there is no cause for concern. Thanks once again.

 

[SOCRATES]

Saludos Socrates,

Being completely ignorant about options, this explanation makes me vote W, as it is explained with logic (discarding any disaster events that would obviously kill the writer, and statistically named an outlier )

My only experience with options has been as a policy maker and the equivalent is the Put that Banking Regulators write to depositors regarding deposit insurance (the grannys that keep their money in the bank, to make it clear).

1) Yep, they keep the premium
2) They have an insider advantage, since they supervise and regulate the "agents" (banks), in order to avoid the loss.

The example is not supposed to apply 100% to market traded options, but the concept appears to be the same.

saludos

Jacinto

Acqui hay que saber hacer un poquito de todo...

Hay que jugar al cricket...y si no...se torea...:cheesy:

Saludos.

 

[SOCRATES]

My sentiments exactly.

New Trader, I sincerely recommend you preserve the posture you have and maintain it at all costs and not become contaminated with the ideas of the naysayers.

Just be patient and you will see how all of this pans out.. ...this goes for Jacinto as well..

 

[SOCRATES]

Thanks for taking time to respond, its appreciated. However, in order to argue your case, you have to compare like with like.

Let me rephrase the question. In the case of a professional buyer compared to a professional writer. Who has the edge ? and WHY ?


regards
zupcon

I simply cannot afford the time, so my reply will be clear but brief.

The professional buyer will buy because he believes...I will expand on this but only very briefly.

You saw what I explained above about professionals and employees, yes ?

OK...well people who are responsible for huge sums of money have to guard their decisions in case they are seriously the wrong ones, as a consequence of having to follow orders, and also as a consequence of being prisoners to a widely generated belief structure that serves to imprison their thinkng.

The true professional is not an employee, he is a free thinker unhampered by these nuisances. Additionally the true professional knows whereas the others by comparison are just guessing.

TAdditionally this is the reason why pension funds and investment trusts and other so called "professionally managed" investments habitually return miserable performances.

 

[SOCRATES]

This is very true. Could not agree more and I say that still being an employee myself!! At least I give myself credit for being aware of the belief structure and working towards ridding myself of it.


Sorry to say but for all the times you have pointed out that this thread is about and only about and not about and such and such and so on and so, you have just as often discussed many another topic in the thread. Seems this thread is really about whatever you want it to be about at the time. I guess that is fair enough as it is "your thread".

Cheers,
PKFFW

Yes exactly.

 

[rols]

I
TAdditionally this is the reason why pension funds and investment trusts and other so called "professionally managed" investments habitually return miserable performances.

Absolutely correct.

There is even a law pertaining to this...

http://en.wikipedia.org/wiki/Sturgeon's_law

 

[SOCRATES]

Your analogy is fundamentally flawed.

When one buys an option it has the potential for profit. When one buys a peach there is no potential for it to be anything but a peach. In case you are going to say "but it has the potential to be a peach tree" you must remember the reasons for buying a peach in the first place. One does not buy a peach from the supermarket if one wishes to grow a peach tree. One buys it to eat.

Having said that I will work with your analogy.......

The buyer of the peach goes to the supermarket to buy a peach. He knows exactly how much it is going to cost and hence his risk is predefined and limited. He assumes none of the risk of growning the peaches in the first place. There is a chance it will be off or rotten, a chance that it will be nice and fresh and juicy and a chance it will be something amazing.

The grower on the other hand has unlimited risk from drought, business overheads, lack of demand for peaches once grown, unfair pricing from the buyers and the list goes on. He knows there is much that can go wrong and he could be bankrupt at the end of the season as many other farmers have been before him. If he has hedged his price in the markets his profit is limited. If he has not hedged then he still has a limited potential for profit as he will only have a finite amount of peaches to sell once they are grown.

Now the farmer may go 100 seasons or more making a nice tidy profit. Then in the 101st season things go wrong and he is bankrupt. While the peach buyer happily goes along to the super market and buys his peach.

So I'm wondering how this analogy proves the farmer has an intrinsic edge over the buyer.

Finally, I grew up on a farm so I do have an intimate understanding of the problems and risks of the business. Let me assure you that no amount of knowledge will stop a drought from happening as is evidenced by the worst drought in recorded history occuring in Australia now.

Cheers,
PKFFW

You have a lot to say. I wish I had not mentioned fruit and chosen somethng else.:cheesy:

I used it as a model to illustrate a point and not for it to be taken literally line for line and word for word.

What I suggest to you, is that you follow the progress of the instruments that I write and sooner or later the penny will drop that I am not only right, but right consistently, and that none of it can be chance.

I am also considering, but have not yet decided because of time constraints, to do a thread on other derivatives, to frighten the living daylights out of everybody as well.:cheesy:

 

[Profitaker]

Wasn't Nick Leeson a "professional" ?

Wasn't he also a seasoned premium seller ?

 

[SOCRATES]

I disagree that all buyers of options are consumers. The one taking delivery at the end of the line is a consumer. In your argument, all traders who buy are consumers. Not so. A tanker loaded in the Gulf will have its cargo traded many times before she gets to Europe. The orders used to say "LEFO" Lands End for orders".

Split

What are you talking about now, Sptlink ?

Why do you wander off the topic altogether, eh ?

Explain how it is that the one taking delivery at the end of a finacial based option is a consumer and takes delivery...delivery of what exactly ?

Please engage brain before you post, there's a good gentleman...thank you.

 

[SOCRATES]

Just trying to get my head round this one (bear in mind I'm hung over as it is saturday morning)

OK so the the farmers are like naked writers? - they take on a sizeable risk but for the most part they will generally profit form their activities.

The buyers are the consumers? they pay a premium for their product.

I reckon we're still missing someone here - the market makers - how about the supermarkets are the market makers - they get to screw over both the farmers and the consumers. They can drive prices to an extent that only the farmers with deep enough pockets can survive. They can allow certain products to trade a huge premium that the general public get screwed while allowing other products to make a loss or barely cover costs.

I'll hold my hand up and say that I don't know enough about options & I'm still trying to keep an open mind but I still don't see anything that would suggest to me that writers have any sort of general edge. Analogies and a few winning trades aren't conclusive proof of anything IMHO.

ENO'S Fruit Salts is what you want... ..standard Royal Navy solution for hangovers.

Too busy tonight, first recover, then come back, cheers big ears.

 

[SOCRATES]

Priceman
Are you asking for an explanation of options? an explanation of how Soc has made money so far? or how Soc could lose his shirt ?

I am not going to lose my shirt because there are no black swans or black scholes or black holes, so thank you for your concern but you really ought not to worry.

Just follow this thread and you will see how I conclusively prove trade after trade after trade correct that someone is wrong, but it is not me.

 

[SOCRATES]

W

(given sufficient funding)

rog1111

E....Exactly !