I am trying not to be ignorant and you guys are probably right; I certainly do see the obstacles. Since I cannot backtest it I will write a small system to test a selling strategy on a lot basket of stocks and evaluate the results. Again, I do appreciate all your feedback. Certainly I will read the books suggested. Kind regards, Steffan
Well, of course selling options is a viable strategy. There wouldn't be a market in any instrument if there werent both buyers and sellers at any given price. It's ridiculous to attempt to convince everyone they should only be long vol. The key for vol sellers is to avoid over-estimating the value of the premium you're receiving. It's far too easy to see it as free money. The market is giving it to you because it expects you to, eventually, cough it up. Your edge exists in how you can do it better than the rest of the market.
If you're bearish on vol and turn out to be right, then of course, that is a viable strategy. By "selling options", I am referring to the notion that systematically selling options over time is profitable simply by offsetting delta risk through hedging with the underlying - this is not a viable strategy, because for it to work would imply that options are more or less always overpriced.
Well, it's a fair statement that some implied volatilities are systematically rich and some are systematically cheap. The real question is what volatility of P&L you will see over time.
the problem for most people to understand why this doesn't work is that things can go right for a pretty long time only to come back with a vengance. Either you do this on such a small scale it's really not worth it, or eihter it's only a matter of time before you blow up if you do this consistantly. You don't think a lot of option market makers didn't (in their green periods) think allready of something like this, the ones that didn't learn quickly or all blew up spectacularly.
Off the top of my head, S&P vol is systematically rich. A lot of single stock vols are systematically cheap, especially the ones that have a lot of revcon activity. By the nature of the beast, there are significantly fewer systematically cheap vols, but plenty of systematically rich ones. That is not to say that it is rich or cheap at ANY given moment in time, it just means that in general it is so. You do believe in risk premium, don't you?
Who is consistently buying and losing money on S&P options? It's odd, when you think that the most obvious thing to do with options is sell them, and thus "collect" the premium. When you say "risk premium", do you mean that implied vol is consistently higher than realised turns out to be? What makes you think this is the case?
You buy 100 shares of AAPL at $351 and then AAPL drops to $340. In your mind stocks only go in one direction so if it hits $351, you buy the stock and ride it as it runs to $360. Imagine you buy it at $351 and it drops to $349. You sell for $2.00 loss and short the stock at $349. Stock pops to $351 and you cover the short and go long the stock at $351 for another $2.00 loss. Wash Rinse Repeat. You will spend your time paying commission moving in and out of a losing stock position with the possibility vols could move higher leading to loss. You also fail to understand delta hedging such that a $1.00 move higher in the stock price might not require 100 shares to hedge. Also you are not hedging, you are simply returning the position to delta neutral.