theta is the edge correct?

Discussion in 'Options' started by noob_trad3r, Sep 17, 2010.

  1. Even though going long SPY options has limited risk for that specific trade, the life of the option is limited and time value always goes to zero.

    So your risk is limited but the losses do add up and are cumulative (like buying lottery tickets, you risk 1 dollar but over 1000 buys you ended up losing 1000 dollars)

    but for the seller if you short 100 puts on spy lets say and you have the cash to take delivery of 10,000 shares fully paid if assigned (which means no margin interest cost, cash collecting short term interest)

    Worst case scenario for long put buyer is position is time limited and might not be able to move fast enough to fight theta erosion and still ends up with a realised loss.

    Worst case scenario for short seller of put, is you are assigned 10,000 shares of SPY. BUT at least with SPY you do end up with an asset that will eventually appreciate over time and does pay a distribution (VS putseller who when he loses, has nothing of value left)

    And if you have the 10K shares of SPY you can hold on and wait (Time on your side) or sell some covered calls and still collect income.

    So over time aint the seller of options the one who will win over time as capital will grow VS the buyer who will see over time an erosion of capital?

    This is why I never really worry when my short puts sometimes go deep in the money because I know even if I lose "ie get SPY stock" At least I got something with value and will just bid my time. But usually lately it goes in the money for a while and just ends up going back OTM anyhow.

    I stick to selling put options that have a max life of 45-50 days. and ATM or slightly OTM

    Anyhow my return is 7.48 VS S&P of .90 right now.
  2. MTE


    Theta is not an edge!

    Just because you beat the S&P in the rising market by shorting puts doesn't mean you have found an edge. Or in other words, don't mistake bull market for brains!
  3. it is still an edge. even in a bear market shorting SPY puts will return better than buying SPY naked at the current spot
  4. MTE


    It's no secret that put writing/covered call writing outperforms the index. You have BXM and PUT indices to prove it, but that's not an edge in a true sense of the word.
  5. Blue suit, brown shoes.
  6. Why not compared to Joe Blow who puts in money on a monthly basis on a vanguard index fund?
  7. Because, you twit, your return is strictly limited. Who did better in CRM this year? The put writer or someone long CRM shares? We can play these hindsight games all day.

    It's a vol-trade, as all options are. As you increase vol you're better off out of the option and in the underlying. It's an "edge" as vol declines, but we don't know that until after the fact.

    The probability of success is inversely proportional to the payout.
  8. I do not gamble on single stock. What if CRM goes to 0?

    My question is regarding the indexes, not gambling on one stock.


    I haven't posted for awhile. This is a question and not an argument. Would an exception be if the VIX is low, purchase 2 year + out leap SPY puts - basically thinking buying vega cheap and all it takes is one good spike in volatility within a six to twelve month period? But, I think this is pretty much consistent with your point. Once the spike of vol hits (if it does) the market, sell the leap puts, because you've made your money on the spike in vol (increase in vegas), because that far out until expiration, you are not going to make money on direction and when vol goes up - it goes down. In other words when and if the spike of vol hits - get rid of the puts. My question is not one of "edge" and have quoted only your point I have a question on. BTW, this is the only time I would buy a long option without doing a combination - buy what I think are relatively cheap vega.
  10. Theta can only be your "edge" if you satisfy all the conditions below:
    A) you have diversified income streams
    B) you have reserves
    C) you don't mark-to-mkt
    D) you know the right price to sell options at

    In this case, your biz model is that of an insurance co, which mostly works.
    #10     Sep 18, 2010