SPX Credit Spread Trader

yip1997 · Nov 8, 2006

Quote from andysmith:

Wrong. Both debit and credit spreads have negative expectancy.
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I didn't mean spreads. I meant naked put writing.

El OchoCinco · Nov 8, 2006

To come at what Mav is saying another way, credit spreads are not 100% of my portfolio or 100% of my strategies I use with options. It would be nice if that is all I needed to do but market conditions are not always perfect for it.

Quote from Maverick74:

The insurance company is a terrible example for claiming the selling of options has positive expectancy. The reason is because it's not the product itself that offers edge but rather the price at which the insurance company sells the policy for. They only make money because they can sell their policies for substantial premiums to their fair value.

Sooner or later you guys are just going to have to come to terms with the fact that all of you are trading with negative edge and the only ones on this thread that are going to be profitable are the ones that can actually TRADE. Selling 1 to 2 sigma options is not a ticket to the promised land.
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yip1997 · Nov 8, 2006

Quote from tplast:

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.
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The expectancy is determined by the actual "future" volatility. On average, IV is higher than HV. Without knowing the future, and assuming a pure random event, the best guess for "future" volatility is to use current volatility. With higher IV at lower strikes for spx, the naked put writing gives you a slightly edge. I don't mean you have a positive expectancy for a put vertical because you are actually buying at a higher IV and selling at a lower IV.

All these arguments are meaningless to trading profit. Profit is earned via proper risk management, position sizing, timing and/or prediction of future market conditions.

yip1997 · Nov 8, 2006

Quote from Eric99:

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)?
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Eric,

The best guess for "future" volatility is to use the current volatility assuming a random event.

For verticals, You don't see positive expectancy that often when you consider slippage (the b/a spread).

Expectancy is determined by the IV of the short, IV of the long, and "future" volatility.

yip1997 · Nov 8, 2006

Quote from Maverick74:

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.
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Mav,

The best strategy is to short ATM and to long a lot of FOTM options. Right?

Maverick74 · Nov 8, 2006

Quote from yip1997:

Mav,

The best strategy is to short ATM and to long a lot of FOTM options. Right?
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I never sell ATM options. And "best" is a very subjective term. There is no true "best" strategy. There is only good traders, not good strategies.

yip1997 · Nov 8, 2006

Quote from rallymode:

You cannot create positive expectancy once a position has run against you. Offseting a bad spread isnt creating positive expectancy. Some like to call this risk management but it does nothing to add expectancy.

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Agreed! In fact dynamic hedging can be implemented and replaced by static hedging or exotic. Spread is one kind of static hedging. Can you change the expectancy by using a complex combo? Not in my book.

yip1997 · Nov 8, 2006

Quote from Maverick74:

I never sell ATM options. And "best" is a very subjective term. There is no true "best" strategy. There is only good traders, not good strategies.
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If fat tail events happened more often than theoretical, it means the probability of other sections in the prob curve will be lower. Isn't it make sense to buy a "positve" edge lottery with FOTM options? BTW, where is Taleb now? He can't survive long neither. Slow bleeding for a long time can kill a trader too. LOL.

rallymode · Nov 8, 2006

Quote from yip1997:

I didn't mean spreads. I meant naked put writing.
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yip,

supply product skew is not an edge and doesn't add any expectancy much less create a positive one. The sooner you realize that "edge" doesn't come from the choice of strike/duration/product/strategy the better off you will be. sigh

spreadn00b · Nov 8, 2006

I hate to bring this down a few notches (but I have to) ... is the argument here that trading options regardless of buying, selling, strike selection, strategy, etc is a losers game always? In other words, is the argument that you're better off trading stock over the long haul? I've never considered options an "edge", but I'm reading that its just a downright disadvantage (according to some). What did I miss?