As stated, you do not even realize that you cannot structure long gamma with (only) short premium. You are a clown.
Hmm. good to know, thx. Does it mean, that a loss can altho be prevented, but not at the same time a profit be made? (I think I can live with that as long as these cases just make up the minority on average) Would the use of mixed short and long possibly be better here? What would you suggest or recommend?
Thx for your constructive critism, your manners are exceptional! ;-) But are you also able to contribute something positive to the discussion, ie. towards a better solution? .
If PNL gets critical? Like your PEP puts doubling? If so, all of the available puts (to buy) and calls (to short) will also have moved against you in terms of opportunity loss. You know less than my 12yo yet you're somehow smugly confident in your ignorance.
I guess you, and everybody else, were in the same situation when learning options selling the first time, isn't it? So, you are unfair... And: of course it is true that with time or with any change of the price of the underlying that then also all puts and calls change their price. I don't think anybody would expect differnt. So your assumption is simply wrong, Herr General! OMFG, a poor 12yo kid with such a father... ;-) I guess he is, ie. has to be, a boy-scout... ;-)
This is my first post, and I've read all the posts in this thread. I'll try to give botpro a explanation why the strategy is zero risk without using "greeks". First of all, you should understand that option-prices does not have a linear correlation to the stock price. I'll use SPY in my example: SPDR S&P 500 (today): 200.43 Jul16 SPY with 180 strike (20% below current price): 3.54 (mid price) Just to be clear: Jul16 means July 2016. The date is implicitly given by the expiration calendar. If the SPDR S&P 500 moves to 210 on monday (big move) and back to 200.43 on Thuesday, the Jul16 SPY with 180 strike will probably be more than 3.54 becuase of the increased volatility. If the SPDR S&P 500 stays unchanged at 200.43 until Thuesday, the Jul16 SPY with 180 strike will probably be a bit less than 3.54 becuase of time decay. These examples are just to explain that (Option price) != K*(Stock Price). When we look at the "zero-risk strategy of selling naked puts", the problem is that if the SP moves only sligly down, the price of the put option is increasing quite fast. If the stock price slowly drifts linearly lower towards the put strike price in sutch a way that the strike is hit on expiration day, the price of the short put option will stay almost the same until a few days before expiration. I'll give an example using an Option calulator (again using SPY): SPDR S&P 500 (today): 200.00 (close to todays price) Jul16 SPY PUT option with 180 strike price. Today, 132 days to exp.: Stock value: 200.00 Option value 3.1 (calculated value) 65 days to exp. (half-way): Stock value: 190.00 Option value: 3.12 (calculated value) 10 days to exp.: Stock value: 181.52 Option value: 2.04 (calculated value) This example shows that botpros strategy would fail about half-way until expiration, but if the put is held to expiration, the strategy will still be profitable. One can easily see that using an end-price of 176.9 (Strike - Put premium) the strategy can impossible be exited without a loss. The argument against this might be that SPY would never drop from 200 to 176.9 in 132 days. Well, it can!
Well there is no bimodal gamma position in any combination of short (only) premium. So much for theoretical. You ask and then tell us to, "F-OFF with the greeks." Then you come back later to murder the greeks. Then you revisit the crime scene to shoot them in the head to be certain. Your "riskless" short put nonsense is exactly what I'd expect from someone this new to the field. The problem is that you're indignant. "Greeks are worthless" yet you demand an explanation as to why you're wrong. When one is given you apply the "greeks are worthless" retort. Then the greeks aren't worthless, yet you have no idea what they are or how they are used. All of your short-premium hedges will be marked down just as your puts will be marked against you. You act as if you're this abstract thinker in a field that isn't crowded with quants since 1977 (and before with bucket-shop replication of puts). So you sell PEP puts at 1.50. AT THAT TIME the 90C is trading at 10.30 (implying 98.80 on shares, absent carry/divs). SO, the stock falls to say, 95 and your short puts are trading 2.15... where is that 90C? Has it gone up or down in value? How about all of the other puts (to buy) and calls (to short)? The 90C will be trading at 7.15 with the 90P trading at 2.15. It was 10.30 at the inception of your put-short. $3 in opportunity loss on your hedge. Programming-skill doesn't abrogate P/C parity. Why not look at SPY options? Those Jan 2017 SPY 160 puts are pretty fat!
That's called making progress, advancing to new heights or so... Making errors is part of the learning progress. What counts is the net result at the end... Yes, delta is the most important one, and it helps to find the right ratio... and that is important for hedging... I need to do some example calculations to understand the consequences fully. I have now added the greeks to my BSM code, and verified that it gives the same result compared to other options calculators on the web. Meaning: I now can use the greeks programmatically in the system, much like any other value of the option and of the underlying. These values are uptodate instantly, ie. just calling upd() updates them.