I think pitching pennies is risky if you are uneducated, the dumb lose money. I started learning much more about Options two years ago to help a friend of mine cause he tried of being a doctor. Well, I have used options for years to hedge long term futures initial positions, so using them wasn't to make money. Past two years been strange, I am good chartist and I have taken more of a directional approach, well options don't always take the same approach, LOL Sometimes they make absolutely no reason to be valued as they do, but you better be keen on the whys they are under/over valued. You have to have an exit in mind when things go wrong first, cause price will often go wrong, I been fortunate as I always have rules set in my mind of the list of what requires before a trade taken. Options are a very good market to make Money, but too often advertised of how much you making on what was used for that one trade and not on entire account. Heck, anyone can get lucky buying 20 cent option and making 1000% but it still doesn't add up much if it a $25k account. I often see this like day trading but keeping them weeks/months. I see outright selling options as unlimited risk, Credit spreads limited risk and whether you buy/sell short stocks, lose on the stocks, there is always risk. But again, if you have well back tested Trading Plan, you should be able to know exactly what you can expect. Risk comes down to education, yes, there be times where markets go insane, but it you have rules of know the answer before the questions, you have no questions. And there are two kinds of risk that I see, risk on money and risk on being losing position, so working on the losing position to me makes more sense than concentrating too much on other factors. How to get losing trades to very low percentages to me floats my boat. Good trading all.
I stand by every word I have said about the dangers of options. People can mock me if they want. Let me know when you publish your audited returns.
" Do Option Sellers Have a Trading Edge? " http://www.elitetrader.com/et/index.php?threads/do-option-sellers-have-a-trading-edge.283946/
I am new to options trading and I joined EliteTrader because I am trying to learn from all the experienced traders that posted here and I indeed learned a lot already thanks to some of you. I generally agree that one of the risks of trading options is we all tend to sometimes forget to limit our exposure and let the $ amount creeps up to a dangerous level. I have only done options trading for three years and this happened to me on many occasions. However, to made a blanket statement that options are more risky is not helpful either. In a different thread, oldnemesis was kind enough to share the Goldman study of a 10 year put selling analysis, which studied put selling from ATM to 15% OTM. The standard deviations of put selling were consistently lower than the underlying index and the Sharpe ratios were consistently higher. S&P had a SD of 18% and Sharpe of .49 whereas ATM put selling had a SD of 12% and Sharpe of .65, so one method of put selling is actually less risky than buying the index.
I don't know the details of the study but it compared selling puts to holding a long position in an index? I'm not sure that's a comparison that justifies the use of options. Sitting long in an index is one of the riskiest trades you can take.
Appreciate your advice on this: I was a buy and hold guy prior, so I always compared my trades to "what if I buy and hold xxx". Over the period tested by Goldman, buy and hold SPY the index returned 7.3% with a SD of 18% and selling the SPY puts ATM returned the same but a SD of 12% meaning less volatility. Is it worth it replacing buy and hold with selling ATM puts? Or are there better strategies? For example, if I traded using the highest 20% in IV during the same period, the returns would be about 11% but the SD increased to 20% so would that be a better strategy? Regards,
I think they are both dangerous. You might want to read one of the Hedge Fund Market Wizards books to see what the real rock stars of trading do. You can buy them on audiobook now. I am a fan of automated trend following, automated swing trading, and automated momentum trading using either futures or equity index ETFs. With these systems you do not have to guess any of the three D's (direction, distance, or duration). These systems react to changes in price. They do not attempt to predict price. No matter how a person trades options, he is still attempting to predict the future and if he is too heavy while being very wrong on one of the D's he's going to destroy his account. Humans are terrible at predicting the future. But that's what options traders try to do, no matter how vehemently they claim this is not the case. Most options traders are very angry people. Why? Because nearly all of them are in the hole, still struggling to make back big losses from prior years. Just when they think they have it licked, along comes a tremendous move they couldn't predict that wipes out years of profits. Options traders like to imagine they are smarter and more sophisticated than other traders. But that is simply not true. They are caught in the clutches of gambling and they will never escape until they learn to be honest with themselves and admit that they are gambling. My intention is not to bash options traders. I feel sorry for them. My intention is only to help.
Thanks for your comments. A lot of foods for thought for me to think about. So far I am committing ~20% capitals and was quite profitable for the past three years. I am trying to scale back to ~10% capital or less as after reading many of the posts here, I attributed my success to beginner's luck.
As an avid Tastytrader I'd like to chime in. There are many ways to skin this cat called the market. Overall, there is no "right way". We see traders (like Xenomorph in this forum, Covey or the Turtle Traders of the 1980s) trading the trend. We see the Karens selling way OTM options making money. The list can go on and on. What separates the long term "successful" traders is risk management. I sell premium for a living and sleep very well at night. Matter of fact, buy & hold scares me since there's no cost basis reduction. As a premium seller, is my way the right way? No, but I sure like it. I'm up 13% YTD on my entire portfolio with only 30% ever invested; the rest stays in cash. That pays the bills. I love this game. I think we all do. Find your style and stick to it.