Pros seldom buy options?

Discussion in 'Options' started by crgarcia, Jul 31, 2008.

  1. Unless it's to hedge short options, or futures trades?
  2. I don't think so. There is no inherent advantage to selling over buying so I wouldn't think they'd care.
  3. Selling options profits from time decay, so it's a somewhat neutral strategy.

    Buying options is a strongly directional strategy.
    Why they are so convinced about the direction, why would they giveaway time decay and the larger bid-ask spread than with futures.
  4. Selling options does not have to be about time decay, nor does it have to be anywhere near a neutral strategy just as buying options does not have to be about direction.

    I agree with beatingthe to a degree. Mostly it depends on what your needs are and your strategy is.
  5. Hi Crgarcia,

    Just want to share the way I see the problem.

    First, stop to think about time decay as you talk about selling options.
    Time decay is a result of interest rate and potential gamma increase. You received time decay only because gamma risk increase. There is no free lunch over there. So think about selling options as selling long term options. It's easier to understand what option selling is, and the real risk you take then.

    As you have big maturity, you have big vega (for plain vanilla) so you have no thêta (little). The impact that you've got is just about implicit volatility changes. That means, we don't know where we are going so let's bet on it.

    As time goes on, vega vanishes, implicit volatility tends to be less important than realized one so gamma comes on. We have a more accurate idea range within the asset is able to move so a big change has a very big impact. Vol of vol tends to increase and finance becomes a sport: short term option managing.

    Second thing I want you to be aware is, you don't know if MM are buying or selling options. Let's get straight. There are lot of arbitrage combinations that make a MM buy or sell options. You see one buying plain vanilla options, but you don't know that it's for hedging a knock in and a knock out portofolio. You see one selling option but you don't know if he's still hedging some of his exotics. So don't think that pros always sell options. It used to be, but products evolved. Customers too.

    So in your example, you don't quite know if there is theta due to time decay or a decrease of implicit volatility or both of them.

    Buying option is a strongly directional bet if you do it with short term options. Take a look at some leaps and you will see that implicit volatility manage a great part of the business.

    Long term options are more sensible to a change of implicit volatility but the change occurs less than for short term ones. That' s a reason why VegaS can't be sum.