Question for Maverick

Maverick,

The past years, I've been reading your comments and have learned a lot and you have saved my ass many times. I admire your knowledge and experience.

However, it seems that your comments are nuancing that there is no edge in any options strategy. I could be wrong, so I apologize if I am.

Is this what you think?

Torontoman

 

No strategy has an edge as a strategy itself. The edge lies in the trader. Every strategy requires to do one of two things, make a directional prediction or a volatility prediction and don't buy anything from anyone that tells you any different.

 

Thanks for the advice.

 

Market makers have an edge. Do they need to make a directional or volatility prediction in order to profit?

 

If market makers have an edge, then doesn't that immediately imply that the rest of us DON'T?

 

They have an edge but it's a different edge from the successful retail trader. Also, since the MM already has an edge he/she doesn't need to predict direction/volatility.
db

 

Having an edge doesnt mean you are going to zap every other participant and take their money all the time. You may create/find an "edge" that allows you to trade more sucessfully than say, 30% of the other current market participants under current conditions.

... rj

 

db, rcj,

Yes

But it does go back to Mav's point of trading volatility and/ or direction. ie no inherent edge.

 

Options MM's have delta and gamma risk just like everyone else.

Option's MM's extract a deep edge but it's a risky edge.

Stock MM's rarely have a losing day. Options traders frequently are down marks in a random session. I think even CRT would lose money about 1 day a week.

A typical options group on the floor will have positions in virtually every strike and serial month traded.

Being delta neutral today does not mean you're delta neutral Monday on a 35 pt gap lower open.

Same with volatility. How does vol go bid? It happens when so many premium buyers emerge that the risk departments at a bunch of MM firms call their desks and say, "we're short too much gamma, flatten the fuck out."

Big MM's certainly try to muscle vols back in line.

An option edge is truly a casino edge. Enough samples equals big profits. In the short run though any single trade can result in a loss and since size is variable certain losses can eat up many wins and visa versa.

 

Yes. You can delta hedge all you want, but you are still exposed to vols for the duration of the trade. So you better be on the right side of the vol until you unload the position.