Best Thread The Options edge (Writing Vs Buying)

[penrithem]

CYOF,

Happy to engage in dialogue.

Not sure what the difference is between science and art? Perhaps the same difference between an idiot and a genius? Or do you belive in God or the Universe? Maybe its the same thing. Thats what I believe; there is no differnce; science and art strive to achieve the same goal!

All I'd like to know is, which scientific methods do you use to qualify if buying or writing has the edge?

 

[Profitaker]

but have you accepted this to be fact or have you proven it to yourself?
not long ago you said the markets are random and thre are many so called expert that will agree with you (most dont trade lol)
but what about those that say the markets are predictable are they looneys or they dont fit your way of thinking?

I have proven it to myself, at least in the market I trade.

Options are priced on the basis that markets are random. That is why no matter how far a stock or index has tanked (or rallied) the price of a call will be exactly the same as a put of the same strike. In other words, the options market prices in a move in either direction as 50/50.

I didn't say that anyone that claims to be able to accurately predict direction was a looney. What I did say is that it is very easy to be fooled by randomness.

 

[CYOF]

But if you really can't be bothered or don't know how, then read about a study one such person did.

http://www.amazon.com/Options-Edge-Winning-Volatility-Futures/dp/0070382964

He didn't just look at equity and index options, but commodity / forex / swaps / and a few other markets that I can't remember. No edge, he said, to either buyer or seller.

This would be logical, since if there really was an edge either way, then it would quickly be discovered and milked to death, thereby removing any edge and bringing prices back into equilibrium.

There you go again - I think we will have to call you Mister Volatility

Please do read my "thinking" post - and stop trying to PUSH YOUR IDEAS into the heads of others, especially when you have absolutely NO FACTS what so ever, to back up anything you say :idea:

FACTS> FACTS>FACTS - how many times do I have to say it

Now, I think that the author is related to William Arthur Gallaher (1818-1900)

http://www.rootsweb.com/~ohwarren/Beers/V/tct/0739_gallaher-william.htm

For, they do seem to have a lot in common.

 

[penrithem]

"Options are priced on the basis that markets are random. That is why no matter how far a stock or index has tanked (or rallied) the price of a call will be exactly the same as a put of the same strike. In other words, the options market prices in a move in either direction as 50/50"

Profitaker, from the above statement I believe that if options are priced based on a 50/50 directional move, then anyone long will have the edge, as all underlying securities have performed bullish over the last 100 years. Sure they have a 50/50 chance of moving up or down but historically they move up; so go long to gain an edge! Excuse me if I sound ignorant, but this appears obvious to me.

Still not sure if the buyer or the writer has the edge.

 

[Profitaker]

Profitaker, from the above statement I believe that if options are priced based on a 50/50 directional move, then anyone long will have the edge, as all underlying securities have performed bullish over the last 100 years. Sure they have a 50/50 chance of moving up or down but historically they move up; so go long to gain an edge! Excuse me if I sound ignorant, but this appears obvious to me.

Still not sure if the buyer or the writer has the edge.

If you're not sure then have a look at historic data from the market you're interested in.

CYOF - you can call me Mr.Volatility, it is after all what I trade.

May I call you Mr.Plonker ?

 

[penrithem]

Profitaker!

Hungry for an answer, if there is one!

Having had a good look at all historical data, it's all bullish. Sure there are some bear markets along the way, but the trend line since 1900 says "bull". Isn't this the edge?

 

[Profitaker]

but the trend line since 1900 says "bull". Isn't this the edge?

Erm, no.

 

[penrithem]

CYOF,

Thanks for you enlightenment,

A novice trader!

 

[zupcon]

But if you really can't be bothered or don't know how, then read about a study one such person did.

http://www.amazon.com/Options-Edge-Winning-Volatility-Futures/dp/0070382964

He didn't just look at equity and index options, but commodity / forex / swaps / and a few other markets that I can't remember. No edge, he said, to either buyer or seller.

This would be logical, since if there really was an edge either way, then it would quickly be discovered and milked to death, thereby removing any edge and bringing prices back into equilibrium.

Hi PT, thanks for the link.

It seams to me that the debate is still firmly polarised into 2 camps. PT, ADB etc state that from a theoretical perspective there is no edge. Im not really sure what CYOF actually believes in this regard as he lost the plot late last year, and refuses to enter into a sensible debate. He does at least provide amusing entertainment, and offers at least a glimse into the sad and lonely world of the mentally ill from a safe distance.

For me the mathematical aspects of this debate are cut and dried. Those who are mathamatically challenged are unlikely to ever understand the arguments, and thats probably why we are where we are with respect to CYOF who is perhaps best ignored in light of his behaviour.

To be honest Im not really sure we are arguing about the same thing any more. CYOF and co are probably looking at this from a far more practical perspective. The writer may have "an edge" (although not what we would quantify as an edge in the true mathematical sense) due to the psychological benefits of high win rates, Bulldozer often implies the writer has more flexibility with respect to rolling contracts, and this provides an edge (Im still trying to understand the responsibilities of buyer and seller with respect to option contracts so Im not 100% on what he means here). Is Bullzoder making this argument in respect to European style options, or American style too ?, does he believe one provides more or less of an edge than the other. Id be interested to find out, but unfortunatley, he wont engage.

Are CYOF and co actually making their argument that the writer has a slight edge in this practical sense, or are they arguing from a pure mathematical perspective ?

When you start thinking about this stuff from a mathematical perspective, versus what happens from a practical perspective things sometimes get a bit hazy, for example I initially assume that the probability of a put or call in the money being exercised would be equal, but from a practical perspective, it would appear that a put which goes in-the-money is probably more likely to be exercised than a call which goes in-the-money.

Andycan brings up a good point, and one that always puzzled me slightly, If options are a market in their own right, then as such, it should be possible to trade them, in the same way that one would trade any other market. Is this a view thats actually held by options traders, are are they all basically trying to gain an edge through better pricing models ?

regards
zup

 

[CYOF]

Jon,

Why are you deleting my posts - the last post had some good facts in it - and all I done was call Profitaker by Profitloser - and they are calling me other names in case you have not noticed.

If you continue to delete my posts - I will leave this site and not come back.

Now, some will no doubt say "yes, please do", but they would, would they not.

For, it is no doubt the same FEW who are reporting me to you all the time.

This is not democratic, to say the least, it is outrageous, and should not be allowed.

If you do not own T2W, can you please PM me with the person, or persons, who do own T2W.

For, before I continue posting here, I wan't to clear up a few things, and see what the is the real purpose of T2W - for I am beginning to doubt that it is an OPEN PUBLIC FORUM.

Thank You.

 

[CYOF]

Originally Posted by CYOF

Now, can you please explain to us what you mean in 3 a)???

a) Being able to buy back a short option position and then simultaneously sell another (roll) has no bearing on edge. An option buyer has the ability to roll too.

Thank You


Which part don't you understand ?

1. The writer can KEEP the initial CREDIT and ROLL position to another month and take MORE CREDIT when position goes against him!!

2. Your 3a says: "The buyer can do the same"! Now, could you be so kind to explain how you do it WITHOUT incurring MORE LOSES/COSTS and without making further payments in rolling position to another month when position has gone against you - Making further payments on the initial trade?

I think Socrates asked the same question to you a few days ago and you have not replied to it, also.!!!!

 

[zupcon]

Why are you deleting my posts - This is not democratic, to say the least, it is outrageous, and should not be allowed.QUOTE]

It might just be that you are probably in breach of the following site guidelines and therefore the moderator, is simply moderating.

4.3 Advertising includes, but is not limited to: posting the URL of your commercial web site; offering for sale (or a free trial of) your product and/or service; posting references to, excerpts from, or details of your product and/or service; submitting a post with minimal content that, even in the absence of explicit references towards your product and/or service, is clearly designed to act as a lure towards it; posting your Email address or asking members to contact you for details of your product and/or service.
("Your" in the instances above includes any commercial connection between the vendor ("you") and the product and/or service in question).

4.7 Members found infringing these guidelines will receive a warning and a subsequent ban if they continue to do so.

5.1 Vendors - anyone who has a commercial interest in selling/marketing their product or service to T2W members must declare this interest in their personal user profile. If a member found to have an undeclared commercial interest has also clearly been deceiving the community in this respect for the purpose of, or with a view to, his/her commercial gain, he/she may receive an immediate ban at the discretion of the moderators.

7.1 Each forum has a different topic, so what is appropriate in one forum or thread may not be appropriate in another. Take some time to find a forum and topic which best fits the subject matter of your new message.

7.4 Do not make a post for the sole use of increasing your post count - also known as "post padding." An example is a reply simply stating "Yes" or "No", unless you have been specifically asked to respond in this way.

7.6 Please don't pretend to be an expert if you aren't one. Humility is better than arrogance. It is fine to not know something or to be a beginner. Beginners masquerading as experts or who repeatedly give advice to others hurt the forum as learning traders may not yet be able to tell who is actually an expert, and who merely thinks he is one.

7.7 Posts or threads which knowingly lead to overly strong negative and emotional responses (‘trolling’) are not allowed.

7.8 Avoid spamming. This is defined as posting forum messages that offer no significant value to the topic. Most of these kinds of posts are just single-word posts that have no meaning or value whatsoever.

7.9 Keep your posts related to the topic of the thread. Irrelevant posts, particularly those which are intended to take the thread completely off topic will be moved to a new thread, or may be removed altogether.

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7.12 Do not post the same message more than once, in different forums.

7.13 Do not "shout" online (using all CAPITAL LETTERS). It's considered bad net etiquette, makes other members uncomfortable, and is difficult to read.

7.15 Do not post for the purpose of linking through to another page on an external website eg. 'for more information'.

9.1 It is fine to mention, link to, or discuss other Web sites that are of interest to our users, as long as they don't violate our other guidelines. But please don't use our community to generate traffic for another trading community. This goes against basic "etiquette." We'll delete posts that, in our judgment, mention or link to our competitors for the sole purpose of encouraging our users to participate elsewhere.

11.2 Please remember the moderators are volunteers. Try not to make their tasks even more time consuming by seeking to draw them into debate on the implementation of the rules in any particular case. Any thread which appears to be going down this route will be closed and/or removed by the site administrators.

13.1 Any breach of the above rules will result in the member being suspended for 7 days, although depending on the circumstances and at the moderators’ discretion, any action may be preceded by a warning.

 

[penrithem]

Profitaker,

If you are selling call options from day dot, (1900) and I am buying them from you since day dot; and let 's assume there is no market maker in the middle taking a piece of the action; then I believe I would have the edge because the market has been progressively bullish since 1900. Am I misinformed?

 

[barjon]

Jon,

Why are you deleting my posts - the last post had some good facts in it - and all I done was call Profitaker by Profitloser - and they are calling me other names in case you have not noticed.

If you continue to delete my posts - I will leave this site and not come back.

Now, some will no doubt say "yes, please do", but they would, would they not.

For, it is no doubt the same FEW who are reporting me to you all the time.

This is not democratic, to say the least, it is outrageous, and should not be allowed.

If you do not own T2W, can you please PM me with the person, or persons, who do own T2W.

For, before I continue posting here, I wan't to clear up a few things, and see what the is the real purpose of T2W - for I am beginning to doubt that it is an OPEN PUBLIC FORUM.

Thank You.

zupcon

thanks

cyof

Yes, you might find it outrageous, but I've warned repeatedly that the thread is about options and not the expertise of bulldozer. I also warned that I would just delete such posts should you continue in the same vein. I suppose I could have just edited out the continual references to bulldozer, but I don't have the time so i'm sorry if some wheat went out with the chaff.

jon

 

[SOCRATES]

Why are you deleting my posts - This is not democratic, to say the least, it is outrageous, and should not be allowed.QUOTE]

It might just be that you are probably in breach of the following site guidelines and therefore the moderator, is simply moderating.

4.3 Advertising includes, but is not limited to: posting the URL of your commercial web site; offering for sale (or a free trial of) your product and/or service; posting references to, excerpts from, or details of your product and/or service; submitting a post with minimal content that, even in the absence of explicit references towards your product and/or service, is clearly designed to act as a lure towards it; posting your Email address or asking members to contact you for details of your product and/or service.
("Your" in the instances above includes any commercial connection between the vendor ("you") and the product and/or service in question).

4.7 Members found infringing these guidelines will receive a warning and a subsequent ban if they continue to do so.

5.1 Vendors - anyone who has a commercial interest in selling/marketing their product or service to T2W members must declare this interest in their personal user profile. If a member found to have an undeclared commercial interest has also clearly been deceiving the community in this respect for the purpose of, or with a view to, his/her commercial gain, he/she may receive an immediate ban at the discretion of the moderators.

7.1 Each forum has a different topic, so what is appropriate in one forum or thread may not be appropriate in another. Take some time to find a forum and topic which best fits the subject matter of your new message.

7.4 Do not make a post for the sole use of increasing your post count - also known as "post padding." An example is a reply simply stating "Yes" or "No", unless you have been specifically asked to respond in this way.

7.6 Please don't pretend to be an expert if you aren't one. Humility is better than arrogance. It is fine to not know something or to be a beginner. Beginners masquerading as experts or who repeatedly give advice to others hurt the forum as learning traders may not yet be able to tell who is actually an expert, and who merely thinks he is one.

7.7 Posts or threads which knowingly lead to overly strong negative and emotional responses (‘trolling’) are not allowed.

7.8 Avoid spamming. This is defined as posting forum messages that offer no significant value to the topic. Most of these kinds of posts are just single-word posts that have no meaning or value whatsoever.

7.9 Keep your posts related to the topic of the thread. Irrelevant posts, particularly those which are intended to take the thread completely off topic will be moved to a new thread, or may be removed altogether.

7.10 Please keep your posts as constructive as possible and avoid making a post that adds little or no value to the discussion, for example "That's so cool." Poor grammar, spelling and misleading titles, make it harder to read the forums.

7.11 Please do not double post (two posts in a row). If you do need to amend a post, please do so by using the edit button next to your original post.

7.12 Do not post the same message more than once, in different forums.

7.13 Do not "shout" online (using all CAPITAL LETTERS). It's considered bad net etiquette, makes other members uncomfortable, and is difficult to read.

7.15 Do not post for the purpose of linking through to another page on an external website eg. 'for more information'.

9.1 It is fine to mention, link to, or discuss other Web sites that are of interest to our users, as long as they don't violate our other guidelines. But please don't use our community to generate traffic for another trading community. This goes against basic "etiquette." We'll delete posts that, in our judgment, mention or link to our competitors for the sole purpose of encouraging our users to participate elsewhere.

11.2 Please remember the moderators are volunteers. Try not to make their tasks even more time consuming by seeking to draw them into debate on the implementation of the rules in any particular case. Any thread which appears to be going down this route will be closed and/or removed by the site administrators.

13.1 Any breach of the above rules will result in the member being suspended for 7 days, although depending on the circumstances and at the moderators’ discretion, any action may be preceded by a warning.

hehe...I particularly like clausse nomber seven....hehe...that CAPITAL LETTERS .......hehe.....are more difficult to reed....hehe...funny....now see waht I say below....hehe

 

[CYOF]

Why are you deleting my posts - This is not democratic, to say the least, it is outrageous, and should not be allowed.QUOTE]

It might just be that you are probably in breach of the following site guidelines and therefore the moderator, is simply moderating.

4.3 Advertising includes, but is not limited to: posting the URL of your commercial web site; offering for sale (or a free trial of) your product and/or service; posting references to, excerpts from, or details of your product and/or service; submitting a post with minimal content that, even in the absence of explicit references towards your product and/or service, is clearly designed to act as a lure towards it; posting your Email address or asking members to contact you for details of your product and/or service.
("Your" in the instances above includes any commercial connection between the vendor ("you") and the product and/or service in question).

4.7 Members found infringing these guidelines will receive a warning and a subsequent ban if they continue to do so.

5.1 Vendors - anyone who has a commercial interest in selling/marketing their product or service to T2W members must declare this interest in their personal user profile. If a member found to have an undeclared commercial interest has also clearly been deceiving the community in this respect for the purpose of, or with a view to, his/her commercial gain, he/she may receive an immediate ban at the discretion of the moderators.

7.1 Each forum has a different topic, so what is appropriate in one forum or thread may not be appropriate in another. Take some time to find a forum and topic which best fits the subject matter of your new message.

7.4 Do not make a post for the sole use of increasing your post count - also known as "post padding." An example is a reply simply stating "Yes" or "No", unless you have been specifically asked to respond in this way.

7.6 Please don't pretend to be an expert if you aren't one. Humility is better than arrogance. It is fine to not know something or to be a beginner. Beginners masquerading as experts or who repeatedly give advice to others hurt the forum as learning traders may not yet be able to tell who is actually an expert, and who merely thinks he is one.

7.7 Posts or threads which knowingly lead to overly strong negative and emotional responses (‘trolling’) are not allowed.

7.8 Avoid spamming. This is defined as posting forum messages that offer no significant value to the topic. Most of these kinds of posts are just single-word posts that have no meaning or value whatsoever.

7.9 Keep your posts related to the topic of the thread. Irrelevant posts, particularly those which are intended to take the thread completely off topic will be moved to a new thread, or may be removed altogether.

7.10 Please keep your posts as constructive as possible and avoid making a post that adds little or no value to the discussion, for example "That's so cool." Poor grammar, spelling and misleading titles, make it harder to read the forums.

7.11 Please do not double post (two posts in a row). If you do need to amend a post, please do so by using the edit button next to your original post.

7.12 Do not post the same message more than once, in different forums.

7.13 Do not "shout" online (using all CAPITAL LETTERS). It's considered bad net etiquette, makes other members uncomfortable, and is difficult to read.

7.15 Do not post for the purpose of linking through to another page on an external website eg. 'for more information'.

9.1 It is fine to mention, link to, or discuss other Web sites that are of interest to our users, as long as they don't violate our other guidelines. But please don't use our community to generate traffic for another trading community. This goes against basic "etiquette." We'll delete posts that, in our judgment, mention or link to our competitors for the sole purpose of encouraging our users to participate elsewhere.

11.2 Please remember the moderators are volunteers. Try not to make their tasks even more time consuming by seeking to draw them into debate on the implementation of the rules in any particular case. Any thread which appears to be going down this route will be closed and/or removed by the site administrators.

13.1 Any breach of the above rules will result in the member being suspended for 7 days, although depending on the circumstances and at the moderators’ discretion, any action may be preceded by a warning.

Firstly, I do not have any part in the website that is owned by JC BULLDOZER - I am but a HAPPY CUSTOMER.

Secondly, and what do call the link to the Amazon book that Pt posted - a banana?

Lets get real here, this is about putting forward our opinions based on our experiences, and if we are not allowed to reference certain websites, while we can reference other website, due to "RULES" that are imposed, then that is something which needs to be looked at very closely indeed, for it may well not be in the best interest of the members at T2W:idea:

Again Zu, thank you for your help, and you really do surprise me at times.

 

[dbphoenix]

zupcon

thanks

cyof

Yes, you might find it outrageous, but I've warned repeatedly that the thread is about options and not the expertise of bulldozer. I also warned that I would just delete such posts should you continue in the same vein. I suppose I could have just edited out the continual references to bulldozer, but I don't have the time so i'm sorry if some wheat went out with the chaff.

jon

Or just invoke 4.7 and give everybody an interlude of peace and quiet and genuine discussion.

 

[CYOF]

zupcon

thanks

cyof

Yes, you might find it outrageous, but I've warned repeatedly that the thread is about options and not the expertise of bulldozer. I also warned that I would just delete such posts should you continue in the same vein. I suppose I could have just edited out the continual references to bulldozer, but I don't have the time so i'm sorry if some wheat went out with the chaff.

jon

Ok Jon,

Can you please send me the names of the owner, as requested, or all owners, of T2W, as I do really wan't to talk with them.

And if this information is not readily available, can I please know why, as if this is the case, I will have to obtain it by other means, which I do not think I should have to do?

And in relation to the rules, are they applicable to all, which does not seem to be the case, or are they only applicable to BULLDOZER and his site, for if so, this is indeed discrimination.

Thank You.

 

[CYOF]

Or just invoke 4.7 and give everybody an interlude of peace and quiet and genuine discussion.

As usual, nothing to offer of any interest - make sure your lace is tied, or it may fall off

 

[Profitaker]

Hi Zuppo

It probably wouldn’t hurt to re-state what is meant by an “edge”. To my mind it is a small but tangible advantage which, when played many, many times, will result in near certain profits. More specifically in the context of options, we are talking about the real probabilities of an event being different with the probabilities offered. Casino’s have an edge in roulette by offering any number at a payout of 35/1 when the real odds are 36/1. Bookmakers have an edge by offering odds that are different to the real probabilities, for example averaging odds of 4/1 in a 5 horse race (known as the overround).

So what exactly are the odds in the context of options ? In essence it is the volatility implied in the price of the option (IV). If you observe an option trading at an implied volatility of (say) 20% then with a few other inputs (strike / time to expiry / and interest rates) you can then determine the probability of the option expiring ITM (or of being touched). Lets say you determine that the market odds of the option expiring ITM are 10% (or 1-in-10), but you also believe / think / know that the future volatility will be (say) 25%. Using your own prediction of future volatility (25%) the option now has a chance of expiring ITM of 20% (or 1-in-5). In that example you could buy a 10% probability when the real probability is actually 20% and you would milk it till the pips squeeked. Even if you didn’t have a directional bias and bought put and calls (straddle) you would make money over the long run because you have an edge in that the real probabilities are higher than the probabilities for which you paid.

Now, and this is the crux of the matter – nobody knows what future volatility will be, nobody, at least not with any certainty. So when you observe option prices in the market place and their implied volatilities you have no idea whether the odds are over-priced, under-priced, or fairly-priced. Only when the options expire can you then look-back and see what the actual volatility was and only at that point can you categorically say how the odds were priced and therefore who had the edge (writer or buyer).

Undoubtedly some months option buyers have the edge (actual vol turns out to be higher than impled) and other months option writers have the edge (actual vol turns out to be lower than implied), but this cannot be known in advance and over the long run it balances it self out so that neither camp has an edge.

To disagree and say the writers have the edge is the same as saying “implied vol is always more than actual vol”. I say, if it is, show me…

Andycan brings up a good point, and one that always puzzled me slightly, If options are a market in their own right, then as such, it should be possible to trade them, in the same way that one would trade any other market. Is this a view thats actually held by options traders, are are they all basically trying to gain an edge through better pricing models ?

Not sure what you mean by that ?

CYOF – you can call me the Wizard of odds !