Any studies on who normally wins - option writer versus purchaser?

Discussion in 'Options' started by Saltynuts, Feb 25, 2018.

  1. ironchef

    ironchef

    This came with the table:

    upload_2018-2-26_12-59-48.png
    Would this help clarify things?
     
    #61     Feb 26, 2018
  2. Not really... What are the drawdown characteristics of all these strategies?
     
    #62     Feb 26, 2018
  3. ironchef

    ironchef

    Good question. I don't know sir.
     
    #63     Feb 26, 2018
  4. #64     Feb 27, 2018
  5. Sig

    Sig

    No. Without some indication of standard deviation it's rather pointless. If I offered you an instrument with an average return of 9% but a single standard deviation was 50% or an instrument with an average return of 8.9% but a single standard deviation was .5%, you'd consider those completely different returns despite having nearly identical average returns.
     
    #65     Feb 27, 2018
  6. Sig

    Sig

    Inherent in your question is the assumption that all options are bought and sold by those who's sole goal is to make money by the appreciation or depreciation of the option's value. There are a number of buyers and sellers who have other goals, from hedging a risk to changing their correlation with other assets in their portfolio.

    The traders who actually reliably make money in options are the market makers, and they're doing all this work to make a few pennies off the spread in every transaction while remaining as neutral as possible on the actual direction of the underlying. That's generally a positive NPV activity, although competition means the margins have been squeezed out of it a good deal. The rest of the "traders" either think they've found a mispricing or have actually found one and are exploiting it, the "think" crowd is a whole lot bigger than the "actual" crowd based on what one reads here.
     
    #66     Feb 27, 2018
    tommcginnis likes this.
  7. ironchef

    ironchef

    I appreciate your post.

    The buyers and sellers that have other goals than making a profit on the trades must be professional traders. I trade options to make money not to hedge or change correlation because there is no correlations to change. We are what you call mom and pop retails.:(

    And you are right, from reading lots of posts, with a few exceptions, most retails are on the "think" side. But we all believe we are on the "actual' side. Hope springs eternal. :D

    Regards,
     
    #67     Feb 27, 2018
  8. ironchef

    ironchef

    I think you were one of those who tried to explain to me about risk adjusted returns and CAPM a while back.

    I got it, but still, I just cannot get over the fact that for a long time horizon (20-30 yrs), small cap seemed to beat large cap most of the time even when major bear markets are included in the period. So, does time changes risk adjusted returns?
     
    #68     Feb 27, 2018
  9. ironchef

    ironchef

    #69     Feb 27, 2018
  10. Sig

    Sig

    Well for one who hasn't formally studied finance you're thinking at a pretty advanced level. Fama and French are a couple famous guys in the world of finance academia and essentially had the same question you did. They came up with the 3 factor model to account for it, instead of just using Beta like CAPM does it adds company size and value/growth factors. So congrats, you independently started down the same road as Fama and French, great minds think alike! You'll definitely want to do a little google time on 3 factor, I'm certain you'll find it interesting. And if you haven't taken a finance MOOC yet I gotta think you'd love it. My experience was that I'd personally derived about 25-50% of most concepts and when I saw the whole concept laid out it was like a never ending series of "ah ha!" moments. You'd definitely get more out of it than the vast majority of MBA students.
     
    #70     Feb 27, 2018