I was wondering do most writers hedge their bets or do they just sell the contract? I know alot of the professionals and market makers, hedge their writes by buying the underlying or shorting the underlying but in cases of hard to borrow stock, how do they hedge. Do they just write a big premium, and hope that its large enought to cover any swing, or is it a bet?
Guy, why hedge your bets? 85% of all options expire worthless! How you gonna beat them odds? Just rake in that premie and then take your woman out for nice steak dinner at Red Lobster or something...
You can sell 100 short via the synthetic: Short 1 100 call Long 1 100 put Of course it will involve some edge loss.
Are you talking about naked write? I think the pros write options at really far out "fantasy" strikes and the odds are on their side.
I think pros who trade for a living and rely on their own PNL will hedge. Hedging increases buying power. This can be a very significant reason to hedge. 85% of options expire worthless, but you can get closed out of a position just from bad marks if you dont have the funds to sustain a drawdown.
Maybe 85% of all options expire worthless but once 15% are in the money the loss compensates fully for those collected premiums on 85% of them. What do you think all those pricing models for?
Don't forget than any naked option write can also be hedged (without trading the underlying stock), by putting on additional options positions.
Most of the options are covered before expiration date, and so you got 85%. This data is not so useful because most options might be covered at a loss. I wonder if there is any statistics regarding % of options covered at a loss.
I'm curious if you would concider this trade to be superior a Collar ? Just a far as profit potential is concerned.
It's identical to selling 100 shares. Collars have convergence risk, but smaller deltas. You'll do better on the synthetic short if correct on direction.