Oh no... not this comment again.... Maverick are you there? Google "equivalent debit credit spread" and also "expectancy". With a credit spread, the bank loans you the moola up front... they're the same.
The expectancy is not zero, but it is close to it. There is a slightly positive expectancy for a seller of put options because of the skew.
Yip, I might agree with you, still thinking..... The underlying can only have one realized (ex post) volatility. It is unknown in advance. But skew exists, there are different IV's at each strike. Only one can be proven 'correct' after the fact. Is that the logic that underpins your statement? If so, does it follow that the sale of call verticals and the purchase of put verticals also yields positive expectancy (before commissions/slippage)?
Trendsailor, I have my best wishes at heart when i say this. Please burn all Optionetics seminar materials and pick up a real options book. Your knowledge on options is deeply flawed. No offense.
This is 100% false. Options are empirically undervalued, especially the fat tails, which means the seller actually has a negative expectancy. Over a small series of data points, the expectancy is relatively flat. However, over a large series of data points, options become more and more undervalued. How is this possible. Because it's not possible to price a put on 9/11. It's not possible to price a put on Enron. It's not possible to price a put for the crash of 87. These puts are substantially undervalued. What this means is, if you sell enough puts over a long enough period of time, your expectancy will go from zero to more and more negative. There have been numerous amounts of academic papers written in the difficulties of pricing fat tail options, particularly by Nasim Taleb.
Do you say this because you get better premiums on the puts vs the calls for the same OTM distance? It may be so, but the put buyer will benefit from the corresponding increase on volatility on a down move.
While I find these credit v. debit discussion academically fascinating I will repeat my usual mantra... The strategy is meaningless. If you have good risk management and portoflio management and a reasonable analytical approach to selecting underlyings, strikes and debits/credits then you have a great shot at making money whether you choose OTM spreads, CTM spreads, Double diagonals, Iron Condors, Ratio spreads or straddles or what have you. Let the academics who mostly do not trade argue the finer points of zero sum game, expectancy and randomness, that is all they are good for. Trade and make money, that is all you need to focus on . For example, I am often told that the OTM credit spreads I do have a negative expectancy or negative expected return (I forget which is the right term since I care not ). When they show their calculations they often ASSUME the losses are with the credit spreads at maximum loss value. Now who in the world would ever trade far OTM spreads and let them reach maximum value consistently. Such "theories" ignore risk management which do not result in maximum loss, significant loss on a swan but not maximum. Just an example for illustrative purposes. I think credits are better than debits for mebecause it fits my trading style, period. Not an objective statement just a personal one. Just my opinion, if theories worked as is in the real world, they would not need so many irrational assumptions or pre-conditions
Coach, actually any adjustment you make to your credit spread only adds to the negative expectancy as the new trade carries it's own negative expectancy with it as well. Sorry, didn't mean to interrupt you.
I think mav has an alarm go off in his office every time someone on ET says there is an edge in selling vs buying options.