Is theta really an edge?

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

  1. newwurldmn

    newwurldmn

    market makers (whether on the floor or an institutional/layoff account) would perfer to be long vol because they cannot afford to go bankrupt. Firms are in the business of quoting options for the long run and cannot afford the -infinity risk. So they would rather pay up for their risk averseness.
    That being said, just because the inefficiency is there doesn't mean a retail account can or should take advantage of it.
    Selling naked vol should not be a high return strategy because you need to keep a lot of capital against it (my belief is .5-1x the notional).
     
    #11     Feb 9, 2012
  2. I would think that if you shorted all options you would come out ahead. They are a decaying asset so how would you not make money?
     
    #12     Feb 9, 2012
  3. +1
     
    #13     Feb 9, 2012
  4. Did you just +1 yourself ? :D
     
    #14     Feb 9, 2012
  5. sle

    sle

    well, nobody else would do it for him :)
     
    #15     Feb 9, 2012
  6. Thanks for the information. I can't say much more without getting into a true edge in options (some things I know, that are not generally known). I appreciate and value your comments.
     
    #16     Feb 9, 2012
  7. TskTsk

    TskTsk

    I always wondered how sharing a "secret" edge would make the edge inefficient. You'd think if more people were buying or selling at a spesific point, it would just be advantageous to the edge, not disadvantageous. Not to mention market participants never have perfect information (how many investors actually read forums like this?), and how many would actually act upon the information etc. etc.
     
    #17     Feb 9, 2012
  8. MTE

    MTE

    This has been discussed many times here so you may wanna use the search to find those discussions.
     
    #18     Feb 10, 2012
  9. newwurldmn

    newwurldmn

    No problem. Good luck with your edge.
     
    #19     Feb 10, 2012
  10. sle

    sle

    First of all, the only people who actually have an "edge" are marketmakers. They are buying low, selling high and are trying to lock that edge in. Everyone else is just trying to extract alpha out of the market.

    Second of all, thinking that you know something that nobody else knows is an extreme flaw. There are so many smart people kicking around the markets, pretty much anything you could have thought of has been thought of before.

    My personal view on this is that selling risk premium does have some alpha, but that alpha is there for a reason. So yes, over a hundreed years of selling premium you would probably make money, but (depending if you are running your own capital or OPM) you would end up bancrupt, with broken kneecaps or fired.
     
    #20     Feb 10, 2012