IF I had a TON of money I would absolutely agree with Mav and put my money to work buying calls/puts. BUT ...I DON't and am so much more comfortable being a seller than a buyer of premium.
So you're saying: ..1) a debit spread and a credit spread are equivalent, the bank's loaning you the money up front in the case of a credit spread ..2) this game's expectancy is zero (negative actually, given spreads and commissions) ..3) it's a zero sum game So my question is: ..1) why play this game at all? ..2) how do you build a position that is net long contracts but short premium? By buying lots of far OTM lotteries? I'm sceptical about your analysis. It's simply another take on the random walk theory which Buffet and your street corner hedgie has proved incorrect many times over by now...
Mav, This type of insight is priceless! Whether you're a buyer or a seller, or even know much about options. This premise exposes a whole other layer. Anyone who doesn't appreciate, or fails to see the the point being made here, should STOP IMMEDIATELY what they're doing until they do, imho. Thanks again for the insight. I don't even trade options in any form, anymore. However, I do appreciate the contributions here, especially those of a select few, Mav being one. Good Day and Good Trading! Kelly
That painfully reminds me of my first year of options trading where i thought selling premium and collecting on theta was the holly grail. It wasnt until later that i learned to make money with options not only do you have to buy cheap(below fair value), and sell expensive but ALSO you have to be right on the direction or lack of direction in the underlying. Simply put, the credit we all receive when we sell a spread isnt really our credit until the options expire. Thinking that it belongs to us is a misconception that many traders have albeit their preference over using debit spreads. I dont know if i would agree that being long premium is better than being short premium over the long haul. If the risk management approach is EXACTLY the same, if the strategies used imply EXACTLY the same outlook on the underlying and that's the only time we can even compare the two approaches, that is when those two shouldnt be much different from one another. While the short seller may go bankrupt in those few rare cases. The premium buyer may not survive enough to see the lottery ticket payoff because of drawdowns.
Mav: You make some good points and, speaking for myself, your comments are welcome on this thread. I happen to be a believer that one should always examine why they are doing something so that the full implications of what they are doing stay fresh. To examine something, IMO, you have to look at the other side, which is what you are asking us to do. Even though many of us may not take your advice, it does not go unnoticed. I do think that at the very least your posts make us stop and think and that in and of itself is valuable. I've actually been considering placing debit spreads using a portion of the SPX credit spread premiums I collect. But I'm not sure that the SPX would be the right instrument for purchasing debit spreads. Coach pointed to the SPY and the XSP because the b/a is somewhat tighter. As he noted earlier, SPX b/a tends to be wider. Thanks for the posts.
Donna: While I was drafting my previous post on Mav's post, I was thinking of a strategy that you often use. Namely, don't you often buy the long leg and then wait to put on the short leg. When you do that, don't you have a directional bias, at least for that moment. Then at some point in time, which you seem to be quite successful at determining, you either let it ride or convert to a credit spread. So, in effect, aren't you playing both sides of the street and simply adjusting to roll with the punches? My version of "kind of doing the same thing" is to not put all my positions on at once. It allows me to roll more "with the punches" but I'm not playing both sides. Can I ask what your success rate has been on those trades and what's your overall impression of how successful they are?
Not saying i am smarter but let me say what i think. It all translates to what YOU think the underlying WILL BE at expiration. The decision to enter a credit spread over a debit should not be based on collecting premium vs buying premium it should be based on where you think the underlying will end up. It sounds simple but many traders i know can't grasp it fully. You are right about being more precise with debits. The reason i prefer credit spreads on the SPX is because when i chose the right strike the underlying can end up at the strike or below it for calls and over it for puts and still make money at expiration whereas with debit spreads the underlying has to go through your long strike. But my spreads aren't as wide so, i am probably not the right person to answer this.
Donna, the odds are the same. Think about it. Perform this exercise. Try to go one month where you make a directional trade every day with the intention of being right. Then the following month make a trade every day for a month with the intention of being wrong. You will discover that it's just as hard to be consistently wrong about the market as it is to be consistently right. The same holds true with your notion that you are betting where the market will not go. It's really infantile. That's not meant as an insult btw. I would always get a kick out of my buddies who would bet on pro football and say it's easier to bet on the over/under then the line. I would laugh because both are the same thing. Betting on what you think the score will not be is just as hard as betting on what it will be. And to answer your last question, no, when you buy premium you need not be any more precise then if you sell premium. Folks, why is the assumption being made here that you are holding these positions till expiration? Is this communist China? You have no such handcuffs. Are you telling me that if you were long call spreads in the NDX and the Russell 2000 the last week you would not be selling them for a windfall profit? Most long premium traders I know are always buying and selling different combinations of options. They are not buying and waiting. P.S Donna, stay away from Vegas. They build grand hotels from the money they make off of people that have your mentality. Most of those games in the casinos (the feel good games) are the real sucker bets.
I'm not responding to any particular post... but when comparing option's odds/fair value to gambling... Look at the football spread and especially at the opening line. Here the house (MM) have relatively easy task : only two teams, only one number to post , spread like 3 , 7 and 10 are different that any other numbers and some few other nuances. How many times they were wrong ? How many times they needed to move the line because public unevenly placed the bets ? And by the end they making money because of build in edge of 4.5% (bid/ask?) 21/22 . So now... its very difficult for me to belive that MM can perfectly place a fair value for 2500 stocks times tens of strakes times different months ...and keep this perfection for EVERY minute with ANY change in stock price.