Well as I have said there are no arsenal of adjustments to deep OTM credit spreads. You either get out of the way, or roll down if expiration is approaching and you need a cushion. Bottom line if market stays above short you make cheddar . The problem most people have with credit spreads is that they feel they have to be in it ALL the time. This forces them to trade premium at strikes they might not have considered originally. I have no NOV positions and do not mind at all since I could not get any fills at the strikes I wanted. To me, negative expectancy is what describes the scenario of me walking up to a good looking woman at a bar and asking for her name and number or whatever. negative outcome over all
Interesting discussion. As someone stated before this industry has everything: professionals, politicians, scientists, entertainers, folklore wizards and whoever else you might think of. Some of them are traders, some of them only pretend they are. I have never met someone with newbie`s knowledge making consistently nice money in trading , and never heard about superstar of media and trader`s chat places with long term proven brilliant performance. This might bring the conclusion that truth is somewhere in the middle. Just my humble 2 cents.
OK so you are now telling me its all like a casino and only the MM and brokers ever win because they are the house and get a piece on every roll? TS
You sound surprised!? Selling options is no better nor worse than buying options, when taken at face value. The edge (postive expectancy) is created by the trader's strategy/approach, which includes money management, trade management and etc.
No real offense taken. I am here to learn. Honestly, I appreciate your sentiments and insight. I am definitely not an expert options trader - I'll admit that right up front. But I am not sure such a term has relevance since if what a lot of people here are saying is true then an expert would not be doing options at all since there is so much negative expectation and everyone is eventually going to go bust in the long run. But let's step back to the insurance model. Are you telling me that in spite of record profits for many insurance companies that in the long run its impossible for insurance companies to make money? Or are you telling me that the insurance model is fine but its impossible to get a properly valued price for options given the real risk when writing them because the market has an a-priori unfairness built into the pricing structure to get more trading volume? If the latter is what you are telling me then clearly the market makers and brokers have structured the system as a casino and gamed the system so only they win in the long run. I am comfortable with the fat tail concept of the probability distribution. But if one can assume a reasonably normal shaped price distribution in a random market theory then statistically one can fairly consistently make money by selling options at the 1 - 2 sigma price swing expectation. This is from the 68-95-99.7 rule for normally distributed data. This means that about 68% of the values are within 1 standard deviation of the mean, about 95% of the values are within two standard deviations and about 99.7% lie within 3 standard deviations( ref http://en.wikipedia.org/wiki/Standard_deviation). The confidence intervals are as follows: Let S mean "sigma" (standard deviation) since this system apparently does not like greek. S 68.26894921371% 2S 95.44997361036% 3S 99.73002039367% 4S 99.99366575163% 5S 99.99994266969% 6S 99.99999980268% 78 99.99999999974% I understand that historical volatility are imperfect predictors of future volatility just as much as insurance actuary tables are imperfect predictors of life expectancy but the practical results both in predictive power and in pricing in the insurance industry are good enough to insure net wins. There will of course be a similar single event "fat tail" wipe out event in the insurance model but I think insurance companies hedge this by pegging total liability in the contract policy and with cheap hedging and with risk reselling (and maybe with political favors, an occasional bailout and good lawyers). The advantage options writers have is that they can buy out "the policy" as real perceived risk starts trending against projected risk. This should make it possible in theory for writers to do even better than insurance companies. Also, given the momentum effects of underlying price trend and the time it takes to change direction within a relatively small window of an option's active period and the directionality uncertainty it just "intuitively" looks like buyers of options are at a severe disadvantage to sellers. The bottom line is that I have imperfect knowledge of options. But the arguments that are presented to say option writers have a net negative expectation must all assume a grossly undervalued option premium for the given risk and this unfairness must be germane to the market mechanism itself. If that is the case then EVERYONE trading options (buyer or seller) is essentially gambling with no net positive expectation and all this "expert" discussion is mute and delusional or a matter of religious belief. Pity us all in that event. When writing options the model I am operating to is salesman of "security or value insurance". If I can not get what I consider to be a fair price in a a period of normal risk or I think a financial storm is brewing (VIX, earnings reports, political change etc. ?) I don't sell a policy. If you are telling me its impossible to get a fair price because the markets are intrinsically not fair then I need to reevaluate options completely or view them in the same manner I do casino gambling - as entertainment. Thanks for your comments, TS
TS, As I said above, taken at face value, selling is no better than buying (i.e. blind selling or buying), but as you have mentioned you can create positive expectancy by closing out the "policy" when the conditions are not right (trade management) or not taking it out at all (entry strategy).
coach, when putting on spx credit spreads you have discussed the buying of other options as a hedge. i am interested in your comments regarding buying a 10point wide spx debit spread just above(or below) your credit spread in a specific ratio to the credit. as in all hedges i clearly understand that it reduces the credit received; but as you have talked about before, it can also make you money if managed correctly. also, i am interested if anyone has done analysis (since i do not have the software) to the p/l of a hedge/credit as described above.
The only way to hedge a credit spread effectively is to get long deltas or short deltas depending on whether you are in a put or call spread. Remember you can only really partially hedge since a full hedge would most likely cost more than the credit received or create way more risk than the original position. I put on partial hedges using SPYs or SPXs mainly through the purchase (let's use call credit spreads as the underlying example) of OTM puts at lower strikes than my short strikes or bull call spreads. For example, in my October SPX call spread, if I remember correctly, I had the 1380/1385 call spread and I purchased $137 calls on SPY. The point of the partial hedge is more like a cash back credit card. If the market starts moving against me and I have to adjust up or close out, the partial hedge is there to provide income/premium to partially offset the losses or hopefully cover the cost of the adjustment. It is not meant to fully hedge. Moreover, I do not believe in placing hedges with every position. This is where the individual skill comes in and it is hard to explain this since it is more by feel. I only place partial hedges initially or sometime after the position is open if I feel the short strike has a chance of being threatened or, the 15 point zone might be touched. It is a proactive position when I anticiapate some potential trouble. I do not believe in hedging every single time since most times I feel good about the strikes and cushion and do not want to give away premium. The partial hedges can add to overall profits only in certain situations. that is if the market crawls near your short strike as expiration approaches and you decide to lock in a profit in the hedge and you also take one on the credit spread. In only one month did I make money solely from credit spreads. that was because as expiration got close I closed my spread for a small loss due to concerns and my partial hedges had increased in value considerably and I closed them as well for a net profit. This is rare and is not to be counted on, just consider it a bonus if it happens. I commit a small portion of the credit to partial hedges when I put them on. I have no fixed formula really I just look at the total credit and determine how much I would be willing to spend of it and still be happy with the net premium remaining. That is why this strategy is deceptively easy but the real skill comes in how you manage it and apply these different factors. It comes with experience. As many here can attest I am 100% when it comes to placing partial hedges. everytime I put one on the market reverses and my short strike is safe. The market knows what I am doing and reacts LOL