Discussion in 'Stocks' started by stock777, Aug 8, 2011.
you may be eligible for disability. mental.
lol this drop is nothing
I heard from my contacts that there was a record amount of put premium sellers during this last downdraft who have now as of this morning been completely wiped out. Even if there is a powerful countertrend rally, their positions are sitting at maximum loss, so there will no more more deltas to pick up on the long side. Price action in the past two weeks does bring myself back to painful times, so I can completely commiserate with those premium sellers who are now in a fetal position or sitting in a rocking chair. I tend to agree that although my friends are keen to believe I am an optimist, I am well aware of the behavior of premium sellers. Nearly all are in a max loss position because as they build their positions, their short strikes often sit at a .05 to .10 delta at the point furthest out because there is not any meaningful premium to be received past this point (you are already looking at a 20 to 1 risk reward ratio!). And in every time interval, it is a near certainty that those who were short gamma were completely and utterly annihilated in the past few days. Most premium sellers are not unlike those who behave in other situations where group dynamics prevail... in other words, as a herd, they likely leveraged up on their losses by employing a variation of the Martingale Strategy. Thus, the likely situation is far worse than a "max loss" scenario. Rather, what is more likely is that they picked up deltas in desperation as they felt they have "Crossed the Rubicon".
As readers are familiar, the Rubicon is a shallow river in northeastern Italy, about 80 kilometres long, running from the Apennine Mountains to the Adriatic Sea through the southern Emilia-Romagna region. Why I am bringing this to attention is regarding Julius Caesar's army's crossing of the river in 49 BC. Essentially, this action refers to going past the point of no return. In English vernacular, gamblers often refer to this stage when they have so much invested, they double down, or worse, put their wife's wedding ring onto the poker table as they mumble "Call" at the end of the line. They have lost so much that the pain of such a loss is so unbearable it demands a final loud thunderous nail in the coffin. The gambler in all likelihood will go "all in" and far more in order to chase the dream that if Destiny will extend her hand. As we have seen, it did not happen on a day like today.
Even should the markets rally magnificently tomorrow... and they will someday, the premium seller of today has been completely annihilated. His capital with which to sell premium is lost. There will be a new crop of premium sellers to emerge who will play this dance yet again... until the next tidal wave crashes ashore.
I wish that events such as that which unfolded in the past two weeks would not repeat, but they are as certain as Sylvester Stallone's best movie ever will remain Rocky I.
I have been contacted by many friends both here and elsewhere who said, "Thoreau, you were right. Thanks because I listened to you and did not lose the farm in the past two weeks." I am deeply humbled by those complements, because I endeavored to ameliorate some of the labors that new traders would strain against. Since I have decades of experience selling premium, I wished to point to a statistical truth that keeping your money within the parameters of this strategy is as difficult as dating a Hollywood platinum blond B-actress and hoping she will stay faithful to you, respect you, and do the household chores delicately. I hope that the lessons of the past two weeks will be ingrained that while it seems easy to make money selling premium, in the long run, it is da*m near impossible to keep it.
(As an aside, I am not implying that trader who are short gamma will become lifelong losers in trading. I am not making that exhortation. I am stating though that a simple formula where you sell premium without your being skilled at predicting volatility or predicting direction will sooner or later vaporize your capital.)
(Finally, I have still many contacts with some of the big option houses at the CBOE and the CME, and they confirmed to me my suspicions that almost all of the premium sellers went "all in" before today's price action 8/4/2011, and are sitting at max loss on their spreads. What one of my contacts told me was that because the customers' accounts are down 99%, they barely had enough to sell any more premium spreads, so they reverted to buying up DOTM weekly calls on the indexes outright! Even if we have a 400 point rally in the Dow tomorrow, they will be lucky if those calls even end up in the money by one penny. And even if such a scenario were to unfold, the gain would make up only about 5% of their equity losses)
"this strategy is as difficult as dating a Hollywood platinum blond B-actress and hoping she will stay faithful to you"
I should go short dating a Hollywood platinum blond B-actress?
there is nothing more loathsome , dumber, more vile, than a put seller
oh yeah, maybe a dividend humper
Have dated a blond for long time,
and she has never been surpassed in pleasure.
BTW, your post with the Rubicon story was a very good read.
Didn't mean to offend you with a silly comment. Sorry.
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