Yes. It's possible to have positive expected value trading options that can beat a buy and hold on a pre-tax basis. there are many who do it. Like all markets majority don't.
If it's possible, then that means the market in aggregate makes "mistakes", like there are growth stocks (lower expected returns) and value stocks (higher expected returns). I'll keep studying, I think it's worth it. Could you recommend me something to keep learning? I feel like it's very hard to find valuable information about options, while there's plenty of useful information about value investing expected returns.
Options are a form of insurance and are reliably overpriced. This does not mean the price of an option cannot rise on a day-to-day basis, nor that an option cannot finish sufficiently in the money to more than cover the premium. But the inherent pricing is overpriced, with risk-averse investors willingly overpaying at the margin to acquire the peace of mind. The reliably profitable business to be in is to sell insurance, not to buy it.
Could you prove that what you are saying is true, that selling options is intrinsically superior to buying them for the reason you mention? I "feel" you are right, but I have never seen any study that convinced me, as they usually ignore events like 1987's Black Monday, or returns aren't noticeably higher than just buying and holding (specially after considering taxes).
At its basic level, you already know the answer to your question. If you understand expected return you know that you can get any level of expected return you want, you just have to take on the required added risk to obtain that return. Getting 20% per year expected return when the risk free rate is near 0 requires a substantial amount of added risk. Now the exceptions: I think it might help to clarify your thoughts into two lines. On the one hand you want to replicate the poker strategy of tiny edge repeated many many times. In options, the main analog to that is playing the market maker, putting orders in just inside the spread and unloading on the other side as soon as you're hit. Like some poker strategies this has a positive expected return but you'll lose money on a decent number of transactions as well if the market moves against you. Best strategy here is to find a sleepy options chain and stay out when there is anything you know about coming up that will move the underlying or the volatility. There are a couple more esoteric strategies that don't involve market making but have a positive expected return, I'll let you search to find those as they're lightly covered in the literature. Again they require a 5+ year outlook with a large number of transactions, or which many will lose and some will lose big. Most investors can't handle this, which is the only reason they're still there after being published. You may be able to handle it, as you said some of the right things in your original post, although I think a 20% return is a tad ambitious. The other option you mention is very different from your poker strategy, and I think it would help if you realize and articulate that. I believe that strategy is to be a value investor but use options instead of the underlying stock. That's a very hard route to success, because as you know from your value investing experience it can take a long time for the value to be realized. Options, on the other hand, are always decaying at a rate that is generally far greater than the realization of value. This is also a pretty squishy field with almost no way to separate random luck from skill except over a 20 year plus horizon. There's nothing wrong with it at all, in fact its a great way to invest, but it seems at odds with everything else you revealed about your preferences so you may want to think about if you're being honest with yourself on really wanting to go this route. I think like you, so my entire retirement account is value investing while my trading account is all small edges with positive expected values repeated multiple times. I'll also second the idea posted previously that it's going to be pretty tough find an option itself that is "value mispriced", i.e. the market view of volatility is off because the underlying is unloved, unexciting.... like you can with value stocks.
You're a poker player? Great. Then imagine sitting at the table where the house has a big edge, there's a huge vig you'll pay on every bet, and there's a stop watch running on every hand that turns out the lights when the time is up. Welcome to the options market.
My approach is different from most in that I don't seek options that are under/over valued. I use spreads on broad based indexes and take advantage of the "typical" brownian motion of the markets, with the standard caveats about upside and downside movement. Knowing that sustained upside moves - from relatively high areas - like where we are now are largely done by "grinding" and downside moves can be sudden and dramatic. It's not unlike poker in that there are times to push the pot and times to fold and watch the button go by. If the market is just churning in a range, it's like I've drawn a pair of jacks but haven't seen the flop yet. I like it, but things can change quickly. With options in the stock market, you are essentially acting like an insurance company buying or selling insurance policies to benefit or protect yourself from a move or non-move. Insurance companies can make decent and reliable money provided that solid mathematical choices are made and risks are addressed.
I fear you are one of those being fooled by randomness. The market is not like an insurance company, in so many ways that matter but I'll mention just one. An insurance company is a one way street, you want insurance and someone else has gone through all the legal, regulatory, and operational hurdles to be able to offer it to you. They are getting a market return on that, not the insurance itself. In the options market anyone can play both sides of the market, making it at the very least weak form efficient as has been shown in countless studies. For those not familiar with this, that means that you can't reliably make money over a period of many years by using past market movement to predict future levels, on any time scale. BTW, since brownian motion is by definition random, "typical brownian motion" is an oxymoron. Semantics aside, you're actually talking about mean reversion or something similar if you're looking for micropatterns, and it's been shown over and over that there's no long-term abnormal returns there. The OP is talking about real statistical edges over thousands of iterations with his poker references, and nearly everything discussed on the thread so far including this is not that type of real statistical edge.
Forgive the excessive length. I only post here once in a blue moon these days so there's a lot of thoughts to get out when the mood strikes. If I were to give someone advice who is just starting out studying the market, regardless of the instrument or type of security, it would be to begin studying and developing an understanding of underlying market behavior and movement, however, that's just me. There are a variety of ways to succeed in this industry. I'm sure there are some individuals who grind out a large volume of razor thin +EV trades using statistics, or are capitalizing on intelligently captured premium, or boost their returns with superior hedging techniques, etc. I've seemed to come across four types of mindsets about the market in environments like this. Sometimes they overlap slightly; 1. Participants using a bland yet tried and true strategy; like buy and hold with a diversified portfolio. The market interests them and they like to talk about it or study, but they don't do anything more complicated than that for a myriad of reasons. 2. Participants who develop an intelligent understanding of the conventional market practices like above, and seek to optimize them to enhance their returns. Seems like you've done or started to do this with value investing vs. just holding an index, for example. Other low-hanging fruit to enhance returns without much complexity or advanced study is the strategic use of very slight leverage to increase returns over time while still keeping a near 0% risk of ruin using basic past market statistics, or basic hedging techniques using long-term options in certain ways to slightly elevate the r:r over time of a portfolio. 3. Traders and individuals that design and also have the mental capacity to execute much more precise systems that tightly control risk and exploit environments that provide very favorable returns to those controlled risks. The more precision a system has, and the more consistency a user of such is able to operate with, higher leverage can be used as well to greatly enhance returns. 3b. A mass of individuals who think this is possible, and are either slowly building the skills needed to operate this way, or far more likely are just spinning their wheels trying to attain something they don't have one or many of the tools required to do so (mental organization, emotional control, free from delusions, etc.) 4. Cynics at varying levels of pessimism. Either due to their personal experiences or set of beliefs about the market, they usually heavily doubt, flat-out disbelieve, and are even hostile toward the idea of #3, even though there is plenty of evidence lying around that a small group of people are able to do things like this consistently. May even doubt any optimization over the broad-based market is possible or something [which is absurd to me]. You've got to decide which bucket you want to put yourself into before you go any further. How much of your time and vitality are you willing to pour into the market. Are you going to be able to stay optimistic and motivated despite set-backs? Can you approach this in an intellectual manner or are you going to be driven by your emotions? Are you patient enough to properly equip yourself with everything you need to interact successfully with the market at a given level before you attempt to do so? --- Anyway, to try to get back to the topic at hand, I think you've started in the right place. Investigating whether something is possible before commiting yourself to it. The answer to your question is yes, 20% per year can easily be achieved over a long period of time, and even blown out of the water significantly. If you need convincing of that fact, just think back to your experiences at poker. You should have a massive amount of experience with the fact that humans fail very often at being rational. A man, even who knows how to play poker quite well, might play a sub-par hand in a poor position simply because he lost control of his emotions. Others might content themselves with learning just enough about the game to be entertained and bleed slow losses over time, but they don't care. Good players with a good game might get impatient for money and take excessive risks because of it. They might even make perfect decisions and still get blown out by playing far above responsible stakes for their bankroll. The market is no different. People don't always buy and sell where reason dictates. The greater amount of emotion there is in the market; the greater opportunity there is for those who can capitalize on it. There are some killer strategies that can be designed that will take a position a couple times a month with huge r:r based off certain context. Sometimes there are price insensitive positions being taken or closed by large entities that also represent great opportunities for smaller participants to quickly disseminate. Even in present day, the market is a huge source of opportunity for individuals who are capable of utilizing it. You're going to hear a lot of conflicting opinions, pessimism, discouragement, bits of wisdom, vague platitudes, and more around these environments. No one can decide for you whether 20% returns per year are possible or not. If you continue to directly study and learn for yourself with an open mind I think the answer becomes clear quite quickly. But that's just my own belief; your mileage may vary.
I thought maybe I had mis-typed a few things, so I read it again. Perhaps you read through my post too quickly. In my example, the market is not the insurance company. The individual selling or buying the options is the insurance company. He can choose to take either side of any event and assume or mitigate as much risk as he chooses. I agree with you that it is a one way street once the contract is purchased/sold. I'm not looking for reversionary behavior, although the market will often follow this pattern as basic human fear and greed push the averages around at times. Nor am I seeking to discern micropatterns. You will note that "typical" as it refers to Brownian motion in my post - was in quotes, which should leave me free of the oxymoronic charge. Brownian motion is random but within an environment and bounds, as is the market. As the particle follows a path, so too does the broad based average. The S&P cannot close today at 2080 and open tomorrow at negative 400 or 9500...there are bounds - and they are certainly much tighter than those numbers. Have I been fooled by randomness? Perhaps. But I've made a great deal of money with a high degree of success over a lengthy period. I am in the markets to extract funds on a regular and systemic basis, not to attempt to improve upon Mandelbrot's work or discredit any method imposed by other traders. Do I have an edge? I believe I do, but perhaps I don't. I think the vast majority of traders here are attempting to make money. An edge is simply a means to do that and I was sharing my view of the options world with the OP in hopes of diversifying his approach and view.