How do you figure that? I think there's a few things that you're missing about how options work. Do you want to think about what happens with your GOOG trade under various scenarios?
Sure, but let's take your specific AAPL trade (sorry, for some reason, I thought it was GOOG). Let's say you have sold 1 AAPL $350 straddle at time 0 and AAPL is at $351 at time 1. How much AAPL stock are you intending to buy to hedge?
In that case I would but 1 long stock (x 100) to hedge the call sold. No need to hedge the put. kr, Steffan
And pitch such easy ones for you and MG? :eek: Hardly! Groundhog Day is not one of my favorite movies.
He's not the only one making that argument. That argument is, in fact, the core of how the Black-Scholes formula is derived/proven. The number of expected whipsaws/hedging costs is what the BS formula is calculating for given strike, expiration, and volatility.
The major differences between you and an insurance company are 1. they have a vast number of positions, thereby achieving a (mostly) balanced portfolio effect 2. they sell insurance at a decent clip above the offer price - this is their built-in profit margin
You're selling vol without realizing your selling vol. If you want to short vol, why not hedge with the deltas and manage your risk. The way you propse, you're one gamma spike away from blowing up.
It is now my firm belief that if anyone decides that selling options is a viable strategy, they cannot be convinced otherwise. Thus this thread is fairly pointless... Steffan, go off and sell options and see what you think.