Best Thread The Options edge (Writing Vs Buying)

[Robertral]

Surely this all boils down to the stratagey one wishes to employ. Volatility trading, dispersion etc......One could argue all day about going short is better than going long...it all depends on what you are using the options to acheive

 

[Profitaker]

Surely this all boils down to the stratagey one wishes to employ......

I think that’s probably more clear-cut, i.e. if you had a view on volatility or direction (or both) then “which is the best strategy to employ” is much more clear-cut.

This debate is whether or not there is any inherent advantage in writing rather than buying options. By that I mean writing or buying options indiscriminately over a long period of time – does one side have an “edge” and if so why ?

 

[Anonymous]

Neither has the edge. It is the Exchange which has the edge by charging both sides a commission or fee for matching.

If an option is studied from the point of view of 3 ways: out-the-money, at-the-money and in-the-money:

For the writer:
- an in-the-money has no time advantage,
- an out-the-money has little time advantage, if the underlying does reach or crosses the strike the writer still loses,
- an at-the-money appears to have an advantage, but the writer will have to spend more time and effort to monitor and adjust the position.
The time and effort used by the writer ends up eroding the value, the writer does more work for no significant benefit.

For the buyer:
- an at-the-money is too expensive, he is disadvantaged by the time value, the premium,
- an out-the-money has little chance of reaching,
- an in-the-money loses out on leverage.

Although I think it is better to be buyer when the opportunity arises with minimum time value and high probability of win.

 

[Windlesham1]

Options can be deliciously complicated, as a great many strategies can be employed-it's not just as simple as buying or selling. I'm sure you all know that. trying to find mispriced options is a pretty pointless task as you never get filled,because if you've seen the trade, you can bet your life 50 others have seen it,and a programme trader will follow you in. options allow you to profit in all market conditions- unlike anything else.

 

[Profitaker]

Anonymous - I normally write ATM and buy OTM, though not necessarily at the same time (as combos). It's just a principle I have, mainly because of leverage / margin considerations.

trying to find mispriced options is a pretty pointless task....

Mispriced in what way ? If you mean a synthetic arb (where Put-Call parity fails) then I agree, more chance of finding a needle in a haystack. But what if options are mispriced in terms of a distribution / option valuation model ?

 

[Profitaker]

General consensus seems to be no inherent edge either way (Writer Vs Buyer), would that be a good summary for this thread ?

 

[MasoMinos]

"option sellers still come out ahead even when the seller is going against the trend."

I don't know many trading strategies where this can be said.

source: http://www.investopedia.com/articles/optioninvestor/03/100103.asp

 

[Pitscum]

General consensus seems to be no inherent edge either way (Writer Vs Buyer), would that be a good summary for this thread ?

disagree profit.. its very obvious you know your beenz with options trading so you and i both know its possible to construct a book whereby you're net long options in the wings but short lumpy straddles so you collect time decay.

id go as far to say options trading can be simplied into either being long the fly or short it and if you're particularly minded, long or short the condor as an alternative, sometimes loading up on more wings, other times shorting them.

 

[Profitaker]

......its possible to construct a book whereby you're net long options in the wings but short lumpy straddles so you collect time decay.

Sure, there are thousands of combinations / spreads / trading techniques, etc. But some people argue that there is some sort of "inherent" edge to writing rather than buying options. For example, take an ATM option which is trading at 0.50 delta - whether you buy it or sell it makes no difference, in the long run. The odds are 50/50 if the option is correctly priced.

However, if the option is expensive (IV more than future vol) the sellers will profit in the long run and if the option is cheap (IV less than future vol) the buyers will profit in the long run. The problem is that nobody knows the future vol until it you look back (when it becomes historic vol) so any "edge" or advantage won't be known untill the options expire.

MasoMinos

"option sellers still come out ahead even when the seller is going against the trend."

Depends on the speed of the trend and 1001 other factors. Stupid blanket statement IHMO. Options expiring OTM is half only half the story, the other half is what gets closed before expiry. It's like trying to determine who has won a game of chess when you can only see half the pieces - impossible.

 

[MasoMinos]

MasoMinos

Stupid blanket statement IHMO.

It may well be stupid as I have no better data myself upon which to draw other than my own personal experience of almost 10 years trading options. But John Summa's article that I quoted and provided a reference for seems to provide such a basis in the form of an analysis of 3 years options data from CME. Mr. Summa also alludes to those points you raise (only half the story etc) and still feels able to conclude "While not the entire story, the data suggests overall that option sellers have an advantage in the form of a bias towards options expiring out of the money (worthless). We show that if the option seller is trading with the trend of the underlying, this advantage increases substantially. Yet if the seller is wrong about the trend, this does not dramatically change the probability of success. On the whole, the buyer, therefore, appears to face a decided disadvantage relative to the seller.

Even though we suggest that the data understates the case for selling because it does not tell us how many of the options that expired in the money were winning rather than losing trades, the data should say enough to encourage you to think of developing selling strategies as your primary approach to trading options."

Perhaps you'd care to take up Mr. Summa's 'stupidity' with him directly as 'speed of the trend' is quite meaningless. Perhaps you'd care to define? And as '1001 other factors' - non-specificity I can get free just about anywhere. What other factors precisely?

I responded to your post

General consensus seems to be no inherent edge either way (Writer Vs Buyer), would that be a good summary for this thread ?

in an attempt to head you off from making what I felt to be a wrong conclusion. You then come back to 'defend' a previously undeclared bias.

Either you're looking for discussion and empirical support for any specific view on the question raised - or you're not.

 

[Profitaker]

It may well be stupid as I have no better data myself upon which to draw other than my own personal experience of almost 10 years trading options.

This is an excellent read. The study focuses on options purely as an instrument, rather than options in any specific market;

http://www.amazon.co.uk/exec/obidos...12/ref=sr_8_xs_ap_i12_xgl/026-4007754-2953261

In the meantime, have a look at these statistics direct from the horses mouth (the CBOE no less).

Myth #1

http://options2.registeredrep.com/ar/finance_19/

Whilst on the subject of myths, another common myth is open interest. The theory goes that since the writers mostly “win” they drive the underlying toward the point of max profit for the writers, max pain for the buyers. I’ve monitored the OI in the FTSE100 options for over a year can tell you the OI bears no resemblance to the expiry price, not even close sometimes.

If anyone else wants to do the same, explanation of how to calculate here;

http://www.ez-pnf.com/maxpain.htm

Mr. Summa writes;

"While not the entire story, the data suggests overall that option sellers have an advantage in the form of a bias towards options expiring out of the money (worthless).

This I agree with, the key words being “bias towards options expiring out of the money (worthless)”. The reason being that most options are either closed or exercised prior to expiry, with most being closed. This "bias towards....worthless" means nothing and is very misleading.

What is the point in writing half an article ?

Perhaps you'd care to take up Mr. Summa's 'stupidity' with him directly as 'speed of the trend' is quite meaningless. Perhaps you'd care to define? And as '1001 other factors' - non-specificity I can get free just about anywhere. What other factors precisely?

With all due respect Mr. Summa didn’t make it a one line blanket statement – you did.

I thought speed of the trend was self explanatory. Anyway, company ABC rises at 1% per week, company XZY rises at 5% per week, both trends are up. Which company would you rather be long Call options in ? And which company would you rather be short Calls options in ?

For an option buyer to profit not only does he need to get the direction right, but the gain must also overcome the time premium paid, either wholly or in daily theta losses. Reverse that statement for an option seller. But this means diddly squat with regards to “edge”.

Other factors include time to expiry & option IV (join those two up and look at option gamma), distance of underlying from the strike (moneyness), Vol skew (changing IV as underlying moves across Vol surface), Margin requirements (if you’re short), offset positions / hedging (i.e. long equity options / short index options), what's generating the profits / losses is it Delta Theta or maybe vega. That's 7 factors, you need the other 994 ?

in an attempt to head you off from making what I felt to be a wrong conclusion. You then come back to 'defend' a previously undeclared bias.

Either you're looking for discussion and empirical support for any specific view on the question raised - or you're not.

My humble opinion, for what it’s worth, is that there is no advantage in buying options rather than selling them. Neither side has any inherent edge. Of course, I would dearly love to be persuaded otherwise…. with reasoned argument…..

 

[Pitscum]

totally without any type of scientic study but,,,,i know lots of dead, broke short premium players and lots of alive, rich happy long premium players.....

 

[witjimnh]

Write all you can!!

totally without any type of scientic study but,,,,i know lots of dead, broke short premium players and lots of alive, rich happy long premium players.....

Diagonals, Calendars, and Verticals

You've probably heard it said that most
options expire worthless.
The CBOE estimates over 80% of all options expire worthless. With this in mind, shouldn't you be selling some of them?

http://www.personalhedgefunds.com/

Hedge the way the Hedge Fund managers do!!!

 

[Danger Field]

It is interesting this debate on which is better - to sell or to buy premium - continues.

It is similar to the debate on whether spreadbet companies predominantly hedge - or take the other side of the majority of their clients bets.

And whether broking houses and banks make most of their trading profits from commissions or from trading activities.

These are fundamental issues on which as a trader you should be completely comfortable with the reality and why that reality is so. Until you understand this and have inculcated the basic mechanics which make such debates pointless and relatively indicative of levels of understanding of the markets in others, you will not be fully equipped to trade as a pro.

Selling options premium has a higher probability of long-term profit than does buying.

The majority of spreadbet clients have their bets taken - not hedged.

Broking houses and banks make the vast majority of their profits from commissions - not trading activities.

My telling you this will be of no benefit at all. You need to understand why this is the case. Or it will just become another debate. One sided in this instance I can assure you.

 

[Profitaker]

Selling options premium has a higher probability of long-term profit than does buying.

Why ?

p.s. The "80% of options expire worthless" argument has been done to death.

 

[Danger Field]

Why?

Find out for yourself.

My debating it with you is pointless. You need to do your own research carefully rather than just focus on the same stale statistics as all the others who feel it's something that can be debated.

Until you have, you will I am assuming, be one of the many who give to the few. And there is a reason this is so. If it were obvious, it wouldn't be this way, would it.

 

[Profitaker]

For a moment then I thought you might come back with some interesting points. Silly me.

 

[Danger Field]

Profitaker, you have jumped into this and seem to be taking it personally. Your choice. Your response underlines precisely my point. You expect to be spoon fed the 'interesting points' so that you can debate them and qualify them and weigh them, one against the other. As if there is an intellectual basis for establishing reality or the 'truth' of matters. There isn't. It isn't in The Books. It isn't on These Boards. Anything that's been well trodden, apart from the absolute basics, isn't worth the time or trouble. That's where the majority are. And the majority aren't profitable.

I said I wont debate this and I wont - my reasons for responding are to state again - do your own research. And do some original research if you want to be in the top 3%. If you're still asking these same questions and taking this same line and approach, and my basic research of you on these boards shows you are, then I suspect you are possibly destined never to learn. I personally don't care as I don't take anything personally myself.

You on the other hand may choose to take this personally which it isn't. You're really just a focal point or representation of the vast hordes and never-ending stream of newbies who are desperate for guidance, advice and guru-speak and haven't realised, and probably never will, that isn't where you need to be.

It's basic research. Original research. And basic intelligence. And experience. And effort. And Time.

Would you have taken the minor trouble to research my posts on this site if our positions had been reversed? I'm not convinced you would have. Too much trouble. Too busy with more important things. That's the sort of basic intelligence I'm talking about.

I'm going to let this one go now as my initiating point wasn't about buying/selling premium alone - more of a global or general lack of willingness to understand the basic mechanics that drive all markets - and all market participants.

 

[Profitaker]

You used 335 words to say “I won’t debate this”.

This is my piece of original research for today. My conclusion is that you’re an empty vessel.

 

[Danger Field]

The more astute reader will realize I took 335 words to explain WHY I wont debate this - which is far more valuable than simply stating I wont. In your eagerness to be cute rather than inteliigent - you missed the point.

I'm sorry you feel stung. It wasn't personal. Unless you felt it was. In which case that's usually because the one stung feels there was some basis for it.

And note how flexible I can be in whether I do actually let things go or not.

When you really don't care, nothing which you previously thought matters, matters. And you can then focus on what does.

Last attempt. Forget what you thought was important. Unless you're really pulling the profits and making the trades at 95% or better. Start looking for what only a very few look for - and even fewer find. I wish I could be more specific, but I've already gone so far as to become banal.