Is theta really an edge?

Discussion in 'Options' started by TskTsk, Feb 9, 2012.

  1. TskTsk


    I hear this constantly, how people claim shorting options are better than going long because theta gives you an extra edge, and that most options expire worthless etc, so you're better off being short than long. Any truth to this? Considering some efficiency, you'd think the markets would counteract this edge making sure no advantages are had by going short. Or am I wrong in this?
  2. cfelicio


    most of the time you will make small profits, and then you will have a big loss. if you are underleveraged, and shorting puts for stocks you want to own (for the long run), then it's not a problem (but you might have long periods of underperformance).

    If you are doing it just to "collect" the premium, using a lot of leverage, eventually you might blow up :)
  3. MTE


    There is no edge in selling options vs buying them.
  4. TskTsk


    I am usually naked short, haven't blown up yet. Everytime I pray to god it wont blow up and it seems to be working so far.

    Yes thats what I'm thinking too, but I just cant ignore all the people claiming there is. Would love some more in depth response if anyone has
  5. 1) "It" can work better when the VIX is downtrending.
    2) "It" can work better with shorter-dated options instead of longer-dateds.
    3) To use a sports metaphor, you'll move the ball slowly but get knocked back a lot on a QB sack.
    4) The decay can be slower than expected during the week when the market is open but enormous over the weekend when markets are closed with the possibility of a market-moving event occuring, i.e. war, credit downgrades, rioting et al.
    5) Try "it" during expiration week with Google's pending earnings announcements. :cool:
  6. It's edge, if you know what you're doing and you don't mark-to-mkt (insurance co's are profitable for a reason). Otherwise, it ain't. I think I have said this a few times before.
  7. Perhaps God is short options as well. And he has more capital and more theta than us.

    Statements like "I haven't blown up yet" are not good trading or investing comments. There is an element of luck and an element of skill in every trade. We don't know which is being used.

    The market quickly takes out inefficiencies once they become well known to the people trading the market. I agree that there is no edge either way - long or short. Options are just a vehicle, not an edge.
  8. Interview question:
    If an option were fairly priced should you buy it or sell it?

    Buy it because you have an E() of zero but the possibility of infinite gain.

    That's why options are overpriced. But like an insurance company you have to be well capitalized.
  9. TskTsk


    Lots of good points. Indeed it is much like selling insurance, which gives you lots of small gains with the risk of the occasional big loss. Its true what they say, there's no free lunch...

    Mmm, I agree except for the middle part. Remember luck is a skill too :D
  10. Ahhh, but haven't the market makers taken the same test and have already priced in this tiny inefficiency? (Sounds like an angels on pin heads question or a zeno's race question.)

    I would have answered Mu (Zen and the art of motorcycle maintenance) - neither yes or no.
    #10     Feb 9, 2012