Sorry, but I have to disagree. More money is made on every expiration from option sellers. Pro's sell, public and some others, buy. Remember the percentage of options that expire worthless? Go ahead and check your notes. All the best, regardless, sir. Don
Ha! Ha! On the sellers Don. Just to make things a bit more interesting. There is a guy on the internet with a webpage that uses a STRADDLE in a different way. He bets directional with a long option on one side, but the other side of the STRADDLE is a DEBIT spread going out the other direction. I've looked at this method a couple of times, but really haven't figured it out yet, to the nuances of making it work. The idea is you are looking to make money on the long contracts in your directional bet, but you insure with a debit spread on the other side. I"ve thought about it, but never actually worked this, either on paper, or real time. I would presume if you could get OTM debit spread not to far away. This OTM and the fact of a cheaper debit spread would minimize your directional bet effects and would only take place if the market decided to go contrarian to your view. Any comments on anybody using this STRADDLE would be interested to hear about it. It sure sounds like a winner, but the devil is in the details. The tricks and nuances of timing and applying it. He said he was doing so well, his option club group started ignoring him in shame. Which I thought was a cute pitch. Be nice to hear from anybody using this?
LOL on the "option club group" - sorry that my experience doesn't add up to theirs, LOL. For the hundreth time, those with little money are forced to buy options and gamble. Those who have money, ie professional traders sell options. Most options expire worthless, just by design. A basic fact. But, since you're in this for fun, not for profit, I guess you can do whatever you like, sir. All the best, Don
Since realized vol tends to be below implied, yes option sellers have an edge. Is the extra implied vol rational? Well, sellers face jump risks, transaction costs, tail risk etc that isnt accounted for in the BSM assumptions, thus it gets priced into the implied volas. However I believe there's more than that, humans are more fearful than greedy, herd mentality etc...if the market corrects the slightest bit everyone is in the news predicting the end of the world. index puts inflate to the max...and after 1-2 weeks the world goes on, like it always does. And I do believe theres an exploitable edge there. But thats just me.
Credit Debit spreads has been discussed extensively . There is very little material difference betwen them much like a fly is a debit spread but an iron fly is a credit spread . Their pnl is pretty close. As far as OTM/ATM/ITM, again the mkt is very efficient. Kinda like saying which auto insurance is better $100 annual premium with a $500 deductible or $200 premium with a $250 deductible.
We are into the 100 th page and were still discussing long straddles. you guys do realize it could make up a small book ?
It's the fear, like buying insurance, and the lack of risk capital, that forced many to buy options. I do not advocate just selling straddles vs. buying straddles, of course. More money is made from expiring options that will ever be made "placing bets on a less likely outcome, like an OTM coming ITM." Please stop making this so hard, or so serious. Options are just simple thingS, no magic here. You can call a butterfly a "toxic, super duper, thingee" and it is still just a simple, graphable result. Just take the time to map out time and price....NOTHING MORE, NOTHING LESS. Don
Well last week, I squeezed in a short two day trade using the CALENDAR. Though one guy wrote me, that he lost a bundle trying to trade Calendars. We didn't go into detail, so I don't know if it was a weekly trade, or a monthly trade. Perhaps Don Bright would be so kind as to mention those SELLING type strategies that he favors and trades regularly? For the perusal of us novices. The attraction of the STRADDLE is; it is a neutral, no brainer strategy. Either direction works. If it doesn't move enough in one direction, you just sit it out, until it goes enough, in the other direction. Buying 90 day out has worked in the past for me. While I was contemplating doing 5 contracts on a CONDOR this coming week, The predictive possibilities on a weekly trade, say for 3 or 4 days still leaves a lot of RISK potential, that the market will move against you. True, the weekly butterfly is going to take some losses occasionally and we hear on here, from other amateurs. You are selling though and when it clicks it clicks good. I'm not at all sure what the losses would be like, if you were wrong and didn't find the range. The drawback with the STRADDLE, is you only get one or two trades a month, though if you buy 9 month out options, I cannot perceive of any losses. For the conservative trader trying only to beat bank interest rates that is hard to beat. If you factor in, losing trades in the butterfly game, a selling strategy, I am not at all sure how your end result over a year would come out? ATTICUS is the consumate Butterfly trader. Rarely, if ever makes a mistake. I've been looking up my notes and I see that I've noted the Butterfly while a selling strategy is also two Debit spreads, while the Condor is a debit and credit spread? I will have to think about that for a bit. I am not at all sure what the advantage is in doing the Butterfly? The tricks and nuances escape me. Being dumb and beginning at this. Though I like the sound of the two debit spreads. I'm not at all sure how this effects your risk and loss profile if your projection in a weekly was off a strike? Among my many notes on the table top, I note that someone suggested doing a Long Straddle in the weeklies. Put it on Thursday and swallow the cheap loss on Friday. I guess since they both expire the next day, you should show a profit? That would make a weekly trade worthwhile. Haven't tried this yet. Not sure if you would have to close the winning side? Whoever mentioned that one, wonder if they could bring us up to speed with the performance of this? Could you gamma neutral adjust, in a weekly straddle for increased performance? You would get 4 trades a month that way. Wonder if anyone has any information profit and loss wise to share, on this, in the real world? Reading my notes I find the idea that the BUTTERFLY is two debit spreads, whereas the Condor is a credit spread and a debit spread intriguing. One wonders which would lose more in real world practices? As you can see, I am struggling to find out would be my best choices here. Like us all I suppose?
(1) You can make money selling options or you can make money buying options (i mean "net risk premium"). First one is easier, second one is safer. Selling one is perfectly suitable for private investor/trader under assumption that (a) you are not as concerned about short-term fluctuations in your account, (b) you do not over-leverage yourself and (c) understand that you will take losses every once in a while. (2) It's not the strategy that matters, it's how you determine when you want to do it. You can sell straddles, flys or iron condors, but the key question is still - when are they rich so you'd want to sell risk premium and when do you want to stay on the side-lines. Sit down, trying to think of simple statistical analysis that will tell you that some option strategy is overpriced. You can use volatility, you can use break-even ranges, you can use historical simulation - but you can not make it "mechanical daily strategy" as you said originally. It has to be tailored to the environment. I will send you a few things in PM, very simple stuff, but it will get you thinking in the right direction. (3) Trade paper money or back-test before you start trading real cash. You will save yourself a lot of headache for yourself.
falcon, i would be interested to know more about the trader who hedges his straddles with a debit spread on one side, do you have a link?