I am now on trade 130-http://optionsinvesting.co.uk I have been trading options since the last century-only morons sell naked options- Robin hood platform is where they hang out until their mum has to top up their account for the final time
This could be a thesis topic. And while you can reduce on a percentage basis the obstacles your trade faces if you're an option buyer, your play needs to overcome.... 1. Commission 2. Strike price 3. Spread. Option sellers are betting the market won't move enough in the direction of the buyers within the time before expiration. Option buyers are betting they will. Of course this doesn't obviate the "price moved a couple of tics in my favor, so I'll take profits now". So... have you figured out "where" in the chart would be the best place for your option "buy play" to overcome all of the obstacles?? As you have suspicioned, the buyer's obstacles fail to be overcome more often than not.
@TheBigShort gave the best answer to your question. To make money, your opinion of the underlying and the option price has to be more correct than your counter party. I am full time and I do both buy and write. In general I found the market on popular index options very efficient - for example it was difficult for me to make money mechanically buying or writing SPY single leg options. I also backtested several years of SPY data. On the theoretical front, efficient market and no arbitrage essentially dictate that neither buy or write has any edge.
I don't know, that is what I read from books on option pricing. I read the B-S equation is derived from no arbitrage? If I am wrong, correct me please.
Thanks, it is helpful. So, if I buy (or sell) a single leg, with the same strike, same expiration, it is priced with no edge? You are then saying no arbitrage does not apply across different strikes. But for an underlying, shouldn't the series of strikes be linked too? A higher strike call option cannot be higher price than a lower strike, if so I can make a risk free profit?
I am thinking aloud so may not make sense. 1. If there is no skew, and I use B-S, the stock price distribution is lognormal. So, skew, to me, represents non lognormal distribution of stock price. I could, from a skew vol, assumed constant T, rate, dividend, create a stock distribution that has fat tails on both tails if skew is a smile around ATM. It then represent the market's best estimate of what the real world should behave? What do you mean could not be arbitraged? 2.) Yes, but they are correlated so must behave according to a set of relationships? If the market priced it different from that, can it be arbitraged? By the way, what exactly is your definition of arbitrage? I don't know exactly what it is, I pick the word out of books deriving B-S.