say a stock is trading at 100. and you sell the 85 put and buy the 84 put ( month or two out) the difference between the purchase and the sale of the contracts should be about 0.04-0.06 while your risk is fixed to 1$ max. so you are insuring a stock against a 15% drop, however if its a catastrophe, your liability is maxed out to 1$ per share. so 0.04/1 means you are booking a 4% premium per contract with a predefined risk of 100 ( or $1 per share)
Yeah, I get it, but we need to choose our words carefully. "Selling options" implies net-short contracts rather than "short premium."
Actually a lot of option traders do bet on direction If you look at collective2.com the best option system for the past 2 years have basically been naked put sellers. http://www.collective2.com/system79741354 runner up is VIX put sellers. http://www.collective2.com/system65806998 So no complicated theory needed just STO Puts
bah.. it will be the same for the rest of eternity. And that aside selling naked puts in just about everything is a totally risk free strategy (tongue in cheek).
risk free...haha. I used to think the market was an investment, now I just look at it as a way to gamble my money with better odds. Earlier this year, I actually found a theoretically risk free investment in arbitrage with loan interest rates and savings/gic interest rates. ING was offering 3% on their savings accounts, up to a maximum of $250,000 for one year. The lowest loan rate I've seen was 2.35%.
Great points, can you speak to option spreads, I find these fut's options are best way to "trade" or have opinion on direction assuming no "real" edge like information or order flow etc; on a desk I know option traders get all wound up about Vol. trading, however I keep expiry and strikes fairly tight so as to eliminate that risk best I can or isolate it anyway best I can, not taking a volatility bet, I sell the options as a spread and have stops on fut's in case a run so I am just bit OTM I have been trying various T/A stuff including ACD thread, however what I found best is I buy sell based on larger picture studying/reading on various news services in conjunction with taking a quick look at chart for some sort of best guess to a "trend" the option spread allows me to hang on to be right and certainly keep a stop that allows me to get out with reasonanle loss so I can trade again For example if market reverses against me hard or quick, the options become wide and if you have conditional order in to sell it gets a bad fill, I will just buy the Fut's and wait to settle down, however there is whipsaw risk as always