Don't trade them blindly. There are situations when they are fantastic trades. And there are situations where they are not. It's not a consistent "salary" strategy.
Mav is a pretty smart dude and I am pretty much a rookie. If he says to ignore my post you would be wise to do so.
Sorry, I wasn't trying to be a dick. Options are priced the same whether they are bought or sold. So there is no edge to selling them over buying them. Think of it this way, a Las Vegas sports book puts out a line on the Pats/Giants game. They set the line at Pats -3. Let's say it's widely accepted that the Pats are a better team. The premium seller wants the easy trade to bet on the Pats to win. But Vegas is going to make him give up 3 pts to get the win. The line is Vegas's way of creating a fair value for this bet. The market will move the line up and down accordingly. But the line is going to try to price in an outcome in which the odds of winning are equal for both betters. Same with an option. If everyone is selling options, the options will become mis-priced and advantageous for the buyer. Just as if everyone bets on the Pats, the line will keep moving higher to -4....-5......-6, etc. At some point it presents no value to bet on the Pats and easy money to take the Giants and the points. What traders, and sports betters alike, try to do is look for that mis-pricing or that value. They don't arbitrarily make the same bet over and over again.
"Summa and Lubow present what they call a net selling approach to trading options. The authors persuasively make the case that option buyers (typically inexperienced traders) remain at the mercy of time-value decay, while option sellers have a built-in trading edge because they can profit from the decay of time value and the sale of overvalued options. Option sellers do not totally depend on a market's direction in order to profit, a key advantage to selling options often overlooked by novice traders. The authors compile historical data from the Chicago Mercantile Exchange, which supports their claim that option sellers (also known as option writers) do better than buyers. The data presented by the authors show that the majority of options-most notably over 80% of all S&P futures options-expire worthless. It is the sellers, argue the authors, who are laughing all the way to the bank." Suma and Lubow Options on Futures New Trading Stategies
I wonder how much you lose on commissions and bid/ask spread on a run of the mill option strategy, versus an average spot trading strategy?
ok, that's another thing to consider then as a possible disadvantage vis a vis sticking to underlyings
Oh man, see articles like this is why you should not allow academics to write articles about things they don't actually trade themselves. Let me offer a "trader's" perspective why it can appear on paper that premium sellers do better in statistical studies. As I stated before, the mathematics of it are very straightforward and easy to prove. What's not so easy to quantify in these studies is the behavioral science of it and I'll go into that briefly. A skilled poker player will tell you that playing poker against bad poker players is not easy. The reason is because they are actually bad players and don't have a clue about odds and how to properly bet, it's actually hard to predict what they are going to do. So, let me move back over to options. Because most people are lousy traders, selling options fits perfectly with the do nothing mindset of most traders. If I sell an OTM option or spread, there really is not much discipline required to sit and let it expire worthless. The problem with being long premium for a bad trader is that it DOES require the trader to make decisions. You can't just sit and do nothing, you have to actually do something. So for a lot of guys, being long juice is hard to manage. Has nothing to with odds or probability, but the fact that they should not be allowed to be alone in a room with a computer and a brokerage account. LOL. Meanwhile the premium seller who has no skills to speak of either, but he can actually be rewarded for a while for being a bad trader with lousy habits. His inability to tie his shoes works in his favor as his ineptitude will bring short term profits. So when academics do studies, they fail to take into account behavioral science. As for most options expiring out of the money. There is a "mathematical" explanation for this. Under the assumption that most stocks drift higher over the long term, strikes get written as stocks move up. The problem is, there is a skew to the downside since stocks usually start low and moved higher. So there are far more put strikes open on avg then call strikes on any given name including an index. Don't believe me, open a chain and check it out. And since stocks generally speaking trend up over time, those puts will expire out of the money. The misleading aspect to this is that a large majority of those puts are NOT tradeable. They were created when the underlying was at much lower prices. If one where to do a study that only looked at the ATM options as well as the first 2 or 3 strikes OTM in both directions, you would see that about 50% off all options expire ITM and 50% OTM. This is beyond most academics comprehension though. Furthermore, most these articles don't even address the synthetic nature of options. That is, that a large majority of long put holders are really long synthetic calls. For example, say I'm long shares of AAPL and I buy puts to hedge my stock position because I don't want to sell my shares. These academics have me down as a long put buyer. And when my put expires worthless, they have me recorded as a net loser. The problem is I'm actually a huge net winner. If I bought stock at 400 and bought the 390 puts for 10 pts then I'm really long the synthetic calls at the 390 strike. And if AAPL goes to 450, I'm a huge net winner as I can now sell those calls for 60 pts that I bought for 20. Yet according to them, I'm just another stupid option buyer who lost money. As with anything in trading, there is a lot of math involved and a lot of variables. If you do not understand the math forward and backward, you will be vulnerable to all these silly myths that get pushed into the market place.
To be honest that text didn't look a lot like an abstract - more like marketing BS. But it 's true almost in every science a lot of the academic papers are FOS which is expected if you think that academics have to publish in order to justify their salary, their research group expenses, the conferences etc. But even if these results hold it doesn't mean you can trade this method. For example take today's SPY quotes and imagine there will be a "black Tuesday" tomorrow (knock wood lol) with 20% down for the SP500. Just do the simple maths to calculate the possible loss. The monthly income you "earn" is just the compensation for taking a risk - of huge unrecoverable losses. @Maverick: bad poker players can be unpredictable which is a plus but it is overweighted by far by the fact that on average they will make suboptimal decisions and lose money.