Already up 15%. Gee, options are fun. Just goofing around as these things move pretty wildly and I could be down 15% by the time I hit submit, but I am having a lot of fun (and banking a bit of coin) with a vehicle I've ignored for a decade.
I don't think options have anything special that is not available in the underlying. If you buy options or take a leveraged bet on the underlying you might have essentially the same trade with the exception that you are protected against/profit from tails in one and exposed in another. With the VIX as high as it is maybe you are overpaying to be that privilege
Well, that's the whole point. I'm able to take larger positions because I can define the downside. I made a lot of money short GBP in 2008. Looking back, I think I would have made a ton more if I was involved with puts on GBP or FXB. This year, as part of my AUD short, I bought puts on FXA as well (not nearly enough as I still focus too much on the underlying). I've been pleased with the results though. Yes, premium is high right now, but I don't think that alone makes things a bad bet any more than something is a bad bet just because it has negative carry. If the banks move higher like I think they might, if BAC challenges $7 over the next few weeks, my options will go through the roof, doesn't matter what VIX does. If markets continue to flounder, VIX will likely rise even higher, but I'll lose money on the options.
Options are great for several things: i) staying power. With an underlying, you either risk a big loss if there's a big move against you, or risk getting stopped out prematurely on a false move before the real move you anticipated finally occurs. If you buy some long-dated options, you avoid both the major loss risk, and the risk of being faked out prematurely - often that is well worth the premium you pay. ii) maximising risk/reward when you are confident that a significant move is going to happen imminently. It's hard to make trades in an underlying where you can make 10 times your risk in a few days or weeks. This is eminently possible in options. If you have good timing, options are a great vehicle. iii) capping tail risk. Options are good insurance against grey swans, and allow you to take bigger positions accordingly. iv) trading volatility. Not my thing, but this is something it's hard to do with the underlying.
BAC up 9%. What a joke. 25% gain on those options in a session. Sold a chunk of them into the close. Free roll on the rest. Easy game.
As far as the fakeout goes, yes you are exposed to that but my point was that there wasn't anything innate in options that are great, what if I charged 95% of your profits to protect you against a fakeout? Its all about the price you pay for that protection, not the fact that you are protected
This I agree, IF you believe the tails are cheap then it makes sense to be exposed to them but what if you don't?Then levering the underlying is the way to go I'm not sure betting on tails is cheap right now
The reason I'm a bit skeptical of options is because they are nothing but a PRODUCT based off the underlying, usually with a middle man that wants to make money If they just lose money they would leave the business. Furthermore usually they hedge their exposure trading the underlying thus affecting its price So changes in the options usually will affect the price of the underlying(even if a little bit). So they are very similar(with the exception of the additional middle man that wants to profit) Does that mean I don't think they worth anything?Not at all, sometimes they are cheap, sometimes they are expensive But all these great 'benefits' you get from them needs to be weighted against the fact that you trading against firms that make their living off this I remember someone posting up this year that they wanted their own black swan fund by buying options in the S&P500. Then someone posted a study showing that if you shorted then historically you would have made quit a bit of money even though you would face some nasty drawdowns. I dont remember if the data includes 1987 but I think it does
I found the thread and study http://www.elitetrader.com/vb/showthread.php?s=&threadid=220371&highlight=black+AND+swan http://www.cxoadvisory.com/1415/equity-options/is-40-per-month-shorting-index-puts-a-fair-return/ "For buyers of at-the-money puts to break even, October 1987-like crashes would have to occur 1.3 times per year." This isn't such thing as a free lunch
One could object and say the sample period was during a stock market bubble, ok, but if an 87 crash had to happen 1.3 times a year during a bubble, imagine now that everyone is afraid of crashes and the VIX is above 30