James, are you actually trading options and making money or you are one of the ET "experts"? It is a HIGHLY manipulated market! Of course I am serious. Further, if you read up or study any serious options pricing book or manual it will state what I am saying here. The reason is Volatity is always overblown and measured extra generously. You see, the present volatility is never known, only yesterday's so options pricing mechanism compensated to this by artificially pricing these beast to the advantage of the seller. ALWAYS!!! If for example one day the market is skewed and options holders i.e. the sucker public wants to sell, all of the sudden prices wil copllapse and the spreads get real wide. Because of the pricing skew and bid and ask sperads you must be a real sucker to dabble into options unless you can trade them professionaly.
Shouldn't you be a seller of skew and a buyer of atm if you're convinced vol is overpriced? Spreads on AAPL options are often tighter than the underlying. Obviously that's an exception, but boxes on AAPL trade 20 cents wide. I'd like to see one of these "serious pricing books" that state that vol exhibits a persistence, one way or the other. Could you cite a reference here? Thanks.
Really? Show me a pricing model or a volatility model that accounts for this so called "overprice" factor?
No, but if I were you I would google "Option pricing skew".... I have read a masters paper on it ,so what books it may be in I don' know. When I took the class for the CBOT options badge I had nathan's book as referece (he taught the class, BTW) material and as far as I remember he too have mentioned the pricing skew for the seller. I am not sure however how his book states it. He talked our ear of the mystical natiure of volatility even ATM, it is simply now known...buyers pay some serious premium for the writer's risk, who by default should ALWAYS lay this risk off....
Since it's a wasting asset it's overpriced? Wow, that's awesome news. Directional spreads are a sucker's game? You're backpeddling to include skew on index (not your initial contention), but then up and out strikes trade under atm, so aren't they under-priced? Index components don't exhibit a persistent skew on 20-40 delta strikes, and will only show a smile due to microstructure.
Buying options short term are fine if you have a valid reason for the position. Let's say you buy the SPY June PUT like I posted in real time on another forum. Holding it for 1 - 3 days, you should not have to worry about time decay with 3 weeks left till expiration. The 1st benefit vs buying a future contract, is you have a hard stop that can't be run called the cost of the option. This means, you can not lose more than that. With much time premium left, even if you are wrong in the direction of the market, you can still get out of the position without taking the full loss. Also, lets say, during the day, the market looks likes it going to move up, you kill the option (say the 109) for a small cost, and wait till the market gets overvalued again, and then buy the (110) which means you are now in a better position for the next trading day, allowing you to hold over night which becomes a problem with a standard futures contract as you can't watch the market overnight and margin to hold over night is much more expensive. Also, lets look at pair trading assuming both stocks are optional. In pair trading, you are not investing, you are looking for a short term movement of one of the stocks which has become overvalued or undervalued to historical values. Normally, to do this trade, you will need to hold a large short in 1 company and a large long position in another company. If you are wrong in your timing or just plain wrong, you can either increase your bet, for example averaging into the position or just holding and hoping the position will finally revert to a profit. However, you could instead do this with puts in one position and calls in the other position. Again since you are planning on not holding long term, time decay is not as much of a problem.and the cost of this trade does not take up as much of your total portfolio as holding tons of stock.
While I don't know of any rigorous definition of what makes an option trade an "income trade", in practice they tend to be theta positive trades where the money is made primarily on the time decay. So calendar spreads are long the long dated option, short the short dated option. Iron condors consist of a bull put spread and a bear call spread. Adjustments are made as necessary. I never said it was easy. The traders I know who can consistently make money with income trades worked at it for years. With me it's still hit or miss.
You don't have the slightest idea what you are talking about. Yes, ignorant option traders are likely to lose all their money. that's you. If there are far more ways to lose than to win, then choose one of the ways that wins. What's the big deal? The educated, disciplined trader, survives and prospers. Mark