Best Thread The Options edge (Writing Vs Buying)

[Profitaker]

Now I don’t understand you.

I’m a very active options trader. If there is any “data” available that will forecast future volatility then please enlighten me ?

Even (G)ARCH doesn’t come close.

 

[TheBramble]

Not Future. Current and historical.

GARCH isn't a predictor of Volatility - it is a user of Volatility as a variable. Better than B-S, but as you say, flawed in its own way.

As an aside, I think it's now fully recognised, we need models for models. Almost a model for each and every scenario.

 

[irishpaddypc]

" will say that selling naked premium can be done profitably and long term-wise, I'm sure there are people who trade like that, but with every consecutive trade you enter you risk hitting that 1 statistical outlier with 6+ std dev that will wipe you out. I would never sell naked premium, but I would venture a guess that those who sell naked premium and are still in the game do so on non volatile issues, hence selection of underlying is key."

Your comments that you would NEVER sell naked positions tells me you have very limited knowledge on writing OTM put positions.

Also your comments on getting wiped out with one losing trade, tells me you have very little knowledge of hedging too and when to hedge.
[nothing personal but keep learning thats the only way to succeed in Option trading]

The title of this thread is about writing vs buying and my views are the writers will ALWAYS have the advantage. :cheesy:
Paddy

 

[Profitaker]

The Bramble

The BS assumption of constant volatility may not be realistic, but in 30 years nobody has come up with a better model. Models using stochastic volatility inputs such as (G)ARCH and Heston fair no better BS.

So just to get the debate back on track…..

The Options edge (Writing Vs Buying)

Who, if any has it, and why ?

 

[irishpaddypc]

Paddy[/COLOR]

 

[irishpaddypc]

Profesor Profitaker,

Would you please tell us all if you agree with the replies of jj90 post 47? below. After all this is your topic and thread. :cheesy:


jj90 post 47
As for the points in the guys post in blue,
1) Correct
1b)Correct
2)Correct
2b)Correct
2c)Half Correct. True while a rise usually means falling IV in a long vega position, there are ways around it, and one must consider the size of the move. Too many variables here.
3)Correct same as puts.
4)This argument only holds at expiry. If I bought a 75 strike call for $2, my breakeven at expiry is 77. If the underlying was at 76, I am $1 ITM, and lost a dollar to decay of time value. This is assuming one holds to expiry. Why anyone would do that is beyond me as one is losing value if long only. As long as time value + intrinsic value > premium paid, you don't ever need to cross breakeven point to profit.

 

[TheBramble]

You very wrong in changing your views on writing options. Are you saying that DOTM, OTM, ATM positions are NOT in favour of the PUT writer?

I haven't changed my position - I've clarified it. As I said, my bias is still in favour of the writer, not the buyer of premium - in general.

However, there are situations within changing market dynamics and within the context of specific trading setups involving options on specific underlyings that the buyer would be in a better position.

If it were so obviously cut-and-dried 'better' to sell than buy - there'd be no buyers. Clearly that isn't the case and not all buyers are mugs. Having been both mug and 'not mug' on the buying side I can testify to this.

My sell-to-buy ratio since I started using options sensibly ( ) is 97:3. As I said, a bit of a bias...

 

[irishpaddypc]

Bramble

If we look at a stock's option which is trading at an implied volatility of (say) 20%, how do we know if it’s cheap or expensive premium ? We don’t, unless someone knows how to calculate future volatility. So if we sold that premium trading at 20% we wouldn’t know whether it was expensive or cheap until the option expired. At the point (expiry) we could then calculate the stocks historical volatility since we sold the option and determine whether the premium was cheap or expensive. If the HV was 18% the premium was indeed expensive, HV 22% and the premium was cheap. But this cannot be known in advance, only when the options expire.

So in the context of this debate, for the writer to have an edge, he would need to indiscriminately and consistently sell expensive premium.

Profesor,

You are WRONG again!! The writer sells options regardless. He is after the money from your account!! [bit by bit is OK or small bit at a time is also OK] The MM makes up the prices and the writers try to get what best they can!
Waiting for higher prices is a waist of time/opportunity for the writer!! Playing the waitng game is NOT an Option!! Again i dont expect you to understand my logic! cause we are light years from each other profesor! :cheesy:

Paddy blue boy

 

[Profitaker]

The bramble

For the record, I have a bias towards writing too. But that’s because I’ve found more of what I thought was expensive premium more often than I’ve found what I thought was cheap premium. That doesn’t mean that premium is expensive more often than it’s cheap, only my perception of it.

An option trader leaning towards long premium would have the opposite experience.

 

[irishpaddypc]

I haven't changed my position - I've clarified it. As I said, my bias is still in favour of the writer, not the buyer of premium - in general.

However, there are situations within changing market dynamics and within the context of specific trading setups involving options on specific underlyings that the buyer would be in a better position.

If it were so obviously cut-and-dried 'better' to sell than buy - there'd be no buyers. Clearly that isn't the case and not all buyers are mugs. Having been both mug and 'not mug' on the buying side I can testify to this.

My sell-to-buy ratio since I started using options sensibly ( ) is 97:3. As I said, a bit of a bias...

Bramble,

Not all option traders are approved for writing options and for this reason/reasons they have NO choice but to buy! Reasons why below:

1. They dont have enough capital to cover margin.

2. They dont have additional capital to cover margin -calls

3. They dont have enough knowledge how to hedge positions when the naked positions goes against him.

4. They have to qualify the conditions set out by the FSA.

5. They dont know much about the Greeks and how to best use them.

6. They dont know how to adjust positions or convert to reduce margin or to wipe out margin-calls.

7. They dont have the right broker to allow them to convert out of margin'margin-calls.

Thats just a few reasons.

Lastly, what percentage do you give on the Dec 5625 put that the writer wins? is it 50/50 chance ? or has the buyer got the edge?

Paddy blue boy

 

[Silent.Trader]

Profitaker,
You argued on some other peoples facts ie John summa says that more than 80% of options expire worthless and you asked for proof of the facts! however,I can back up these facts [in practice too]
[/COLOR]

If indeed 80% of the options expire worthless..... No reason to blame the options for that. Listed options come in pairs a call and a put. So ignoring the occasional exactly atm expiration it's exactly 50% of the options that expire worthless!

If 80% expires worthless it's the traders to blame, not the options!

grtnx
Wilco

 

[irishpaddypc]

If indeed 80% of the options expire worthless..... No reason to blame the options for that. Listed options come in pairs a call and a put. So ignoring the occasional exactly atm expiration it's exactly 50% of the options that expire worthless!

If 80% expires worthless it's the traders to blame, not the options!

grtnx
Wilco

ST,
I never said i blame the options or the brokers or anybody else. If you look at the amount of contracts done on OTM puts its NOT the SAME amount of contracts done on the Calls is it my friend. :cheesy:
My uncle bulldozer did over 1,000 contracts on Decs 5625 PUTS last week. He did NOT do the same amount on CALLS! infact he did'nt do a single one in calls.
So here it is just for you my friend! do you think that equates to 50/50 percentage on expiry? Ask the profesor, he can clarify the point i'm making better than me. i hope?

Do you really believe that all strikes puts/calls on every month has the same number of contracts on each side? If your answer is yes?! than i really feel sorry for you my friend. i would ask you politely to stop trading options until you have a better understanding on the stuff! [polite advice]

Ps: read your post No 48 page 5 [below] it seems your changing your tune?

"Seller wins if price moves right big time, if price goes right only a little, if price stays the same and if prices moves in the wrong direction only a little. Seller only looses if the prices moves against him 'big' time."


Paddy blue boy

 

[jj90]

jj90

Does hedged or naked make any difference to edge ? Surely you are either net long or net short premium, hedge or no hedge ?

If you compare a naked put seller to a put seller who covers at (say) 1 StDev the expectancy is the same, at least in theory. In practice however, the guy running the vertical has to pay a higher IV for the cover, as well as an additional spread and commissions. In the long run the naked seller will be more profitable, not withstanding 6 sigma events of course.

True, so to each his own. I'd rather sell with a hedge 1 std dev out and get lower returns because I don't know when the 6 sigma event is coming. But if Joe Blow down the street wants to sell naked premium and risk it, more power to him.

 

[jj90]

Your comments that you would NEVER sell naked positions tells me you have very limited knowledge on writing OTM put positions.

Also your comments on getting wiped out with one losing trade, tells me you have very little knowledge of hedging too and when to hedge.
[nothing personal but keep learning thats the only way to succeed in Option trading]

The title of this thread is about writing vs buying and my views are the writers will ALWAYS have the advantage. :cheesy:
Paddy

You still haven't addressed where I lack knowledge on hedging. BTW, why don't you share that crystal ball that tells you exactly when to hedge and that tells your 'uncle' the FTSE doesn't end below 5625 + what he got for the puts? Views and opinions are like crap, there's a lot of it and none of it is worth a pence.

 

[Silent.Trader]

True, so to each his own. I'd rather sell with a hedge 1 std dev out and get lower returns because I don't know when the 6 sigma event is coming. But if Joe Blow down the street wants to sell naked premium and risk it, more power to him.

To be honest I don't see how a hedge may protect you in case of a 6 sigma event. You sell a atm call, hedge by buying 50 stock to deltaneutral. The 6 Sigma event happens, prices collaps and you loose the value of your 50 stock. Gamma kills you! The alternative is a gamma hedge, this means buying premium. The edge you might have is lost on the buying of premium and the additional costs of spread and transaction costs.

As I wrote before, to decide whether there's an edge it maybe handy to turn to theory. Theory says that the chances of buyers and sellers are exactly the same. If one pleads that some-one has an intrinsic edge then I want a motivation why theory doesn't hold. And if this intrinsic edge does exist, is it sufficient to justify the transaction costs, spread, risk etc?

grtnx
Wilco

 

[irishpaddypc]

If indeed 80% of the options expire worthless..... No reason to blame the options for that. Listed options come in pairs a call and a put. So ignoring the occasional exactly atm expiration it's exactly 50% of the options that expire worthless!

If 80% expires worthless it's the traders to blame, not the options!

grtnx
Wilco

ST,
Here are some of todays facts below:

May 5825 strike OPTIONS holding positions recorded:- CALLS 204 contracts. PUTS over 13,000 :cheesy: And theres more than 80 % chance [puts] that they'll finish WORTHLESS and the writer pockets all the premiums! Would anybody like to bet me on this! AND RAISE SOME SERIOUS CASH FOR CHARITY! i'LL THROW IN JUNES 5625, 5725, PUT STRIKES TOO!! COME ON YOU GUYS SHOW ME YOUR BALLS!! all to finish worthless.

HERE IS MORE FACTS FROM TODAY RECORDS:-
Dec 6225 strike, CALLS almost 50,000 CONTRACTS OTM! and PUTS UNDER 1,000

Is this enough evidence to put your views/arguements to bed! If you dont believe the figures just ring your broker! So you have to admit yhat your knowledge is poor! that its equal on each side! :cheesy: :cheesy: The facs show its NOT equal on contracts on both sides of calls and puts.

Paddy blue boy

 

[Profitaker]

ST

You’d need to hedge against 6 sigma events with further out options, as you say a gamma hedge. That way you’d be protected against the massive IV spike. But you’re quite right that edge is lost in doing so – the spreads on options with a delta <0.20 are significant, sometimes huge depending on which market we’re talking about. Then there is the higher IV you’d have to pay in going so far OTM due to the IV skew.

Statistically the chances of a 6 sigma event is less than 1in a 1000,000,000 (billion). But black swans do exist, the question is whether we will see one in our career.

 

[jj90]

To be honest I don't see how a hedge may protect you in case of a 6 sigma event. You sell a atm call, hedge by buying 50 stock to deltaneutral. The 6 Sigma event happens, prices collaps and you loose the value of your 50 stock. Gamma kills you! The alternative is a gamma hedge, this means buying premium. The edge you might have is lost on the buying of premium and the additional costs of spread and transaction costs.

As I wrote before, to decide whether there's an edge it maybe handy to turn to theory. Theory says that the chances of buyers and sellers are exactly the same. If one pleads that some-one has an intrinsic edge then I want a motivation why theory doesn't hold. And if this intrinsic edge does exist, is it sufficient to justify the transaction costs, spread, risk etc?

grtnx
Wilco

Thus I refer to back to selling hedged premium vs naked premium. If it was so clear cut between naked long and short, verticals would have no use. There is a time for everything, in 99' you could have gotten away selling naked puts, in 01' it would have killed you. While selling gamma hedged premium would have kept you in the game. Risk to reward tradeoff. I still maintain there is no edge between buying or selling in any shape or form, hedged or naked.

 

[irishpaddypc]

Frugi 's quote "But what happens when a 6 sigma occurs overnight? e.g a 400 point FTSE fall caused by a massive geopolitical event in Tokyo at 4 am GMT. It's too late to offset it in the morning, surely? By that time futures will be down huge & volatility will be spiking on the open, adding to the pain of the now suddenly ITM puts. This is what scares me about writing. How do you cope with this scenario? It may not happen often, but it would be surprising if it never happened. You win on 9 postiions but lose on 1 that wipes out the profit of, say, 8 of them. Does your Uncle always have some very cheap offsetting positions (e.g long puts with lower strikes) as insurance? Or does he write so far OTM that even a 500 point fall (or rise, for calls) won't cause a problem? If so, then surely the premium gained is minuscule and better opportunities lie elsewhere? This is a genuine question, I'm not having a go."

Frugi,

He {Bulldozer] was holding naked short puts on the Madrid bombing and on London 7/7. All the short puts when opened were above 50 pts = £500 per contract premiums! not exactly peanuts prems is it.

I guess The Profesor has brain washed you too about the 9 good trades and ONE bad one that wipes account. If you believe the Profesor on this cr.p i am prepared to prove you wrong by doing 18 [thats 100 % on 9] consecutive trades on the SPIN and NOT one single trade will be a loser! This will cost you £1,000 and if I'm wrong I'll match your £1,000. And always remember what my uncle always says: A losing trade is only a loser if closed at at loss!

Paddy boy blue

 

[frugi]

As this thread started off as a useful discussion I have pruned it severely (to remove slanging matches, pointless wagers, insults, posts with very little content ... etc.) and re-opened it in the hope that it will stay on track. I have deleted a lot more off-topic posts (by a number of people) than I would usually. Although most of these were not strictly against site guidelines I hope members can understand my intention is simply to keep the thread in sharp focus, free from distractions that can cause sound arguments to become lost in a deluge of snipy banter.