+1000. when will folks realise.. if there is a dollar to be made, it will be grabbed.. time decay is NOT an edge.. u will pay... how many times have u heard this phrase - ( I have a millions times on ET) OPTION SELLING (particularly far OTM)is like picking up pennies in front on a STEAM ROLLER... u wlll win consistently but the steam roller has to win only ONCE... there is no apparent edge anywhere.. only edge is the damn CBOE/ CME and brokers running this casino and pulling in all the comissions.. ha ha.. trade away to glory and make them RICH...
Picking up pennies in front of a steamroller is a very appropriate metaphor. There's only edge in that strategy if you're driving a tank. Options sellers have a trading edge, in certain circumstances. In others, they don't.
Martin, would it be fair to say that option sellers are not in control of their own destiny? Could we apply this notion to speculation in general?
if picking up pennies in front of a steam roller is stupid, is it smart to drive the steamroller instead? that is the question one must ask. and all data points towards the fact that OTM lottery tickets pay out far less than what their price implies. so you're better off in front of the steam roller than in it. hasn't this been discussed to death already?
Or said another way, option selling/buying risk can be looked at as gamma vs theta. (Perhaps most trading methods can be looked at that way.) However the BS formulas contain some questionable assumptions - early exercise, the ability to hedge, normal distribution etc. but it is better than nothing. One improtant consideration is: does the other side of your option trade believe in BS? I am not sure it is an edge so much as an expression of the penny-picking and steam roller analogy. For most traders, everything they do IMO is penny picking and steam rollers. Sadly, some find out too late that the steam rollers have more than one gear ratio! It is the nature of option trading wizard evolution.
Not sure about about the trade secret part, but volatility is really really interesting. There are things that I have never read on ET about options. Does volatility prediction set the option price or value? And interpreting what MG said, under what conditions does it set either of those two? Academics don't tend to be the best traders so it is interesting that people immediately quote papers as if they were the 10 commandments on option trading. It reminds me of the "structure of scientific revolutions" book. Reading how options were priced before the BS model shows the blind leading the blind. I'm told the volatility smile appeared after 1987. So how is it that we are so certain that we have the right answer today?
Time decay isn't the reward for bearing the risk of a sharp move against you. IV is the reward for taking that risk.
There isn't anyone in the mkt who is fully in control of their own destiny, whether they be speculators or otherwise. A statement of that sort is really neither here nor there.
There seems to be an incredible amount of misunderstanding and counter argument within the field of options. Would this be a natural occurrence due to the arbitrary nature of options?
As others have said, selling OTM options naked is like picking up pennies in front of a freight train. You can win 99% of the time and make pennys for every dollar people may take home betting directly on the underyling instead, but once in a while, one bad trade can take back all those and more. Selling options naked OTM limits your gains, but you potentially have significant losses. So it is asymmetric P&L profile. That said, selling naked options has its advantages too. You can pick price levels that are further out, allowing a margin of error and still make money. E.g. you are originally bullish on AAPL anyway. You can either buy 100 shares outright, or you can sell a put naked 3% away from underlying at the time. If AAPL stays flat or goes up your gains are limited, no harm no foul. If AAPL drops 2% by expiration, thats great because you just made money anyway even though AAPL fell a bit. But, if AAPL tanks 20%, you will be down massively. However, had you purchased the 100 shares instead, you would also have been down massively like everyone else, and you wouldn't have collected a premium or be at a lower price of entry. So selling that OTM put was still beneficial, so long as it fits with your original thesis of that investment. In this case, it means you lost less overall than had you just purchased 100 shares. While the statistics of options sellers winning percentage wise may be correct, it does not address the payout. If you factor in payout, its possible primarily options sellers don't actually gain that much over the long term, if at all, because it only takes one or two bad trades for the market to take back everything. That said, its basically insurance. The insurance industry makes a lot of money every day of every year selling insurance premiums to everyone else who buys it. Rarely do people do claims so overall its been profitable for them.