If short, it is from the realization of less volatility than implied. If long, it is from the realization of more volatility than implied. Most beginners don't know that this is the cause of the P&L of a option. Most beginners don't put an emphasis on price. They look at one-dimension of an option, such as time, and go by that, when options are multi-dimensional. Not saying you are or aren't, just putting it out there for your information. Go to Chapter 10; http://docs.finance.free.fr/Options/Dynamic_Hedging-Taleb.pdf
Not if the realized volatility is in your direction. Say that the premium you capture is 1/3 of the current 20 day SD.
Hi @robertSt , and others, I was reading your thread - "Selling premium - Strategy never discussed" - and was not sure how you roll your sold put for further credit if the stock goes lower. not sure how you would make a credit using this strategy - so wanted to clarify with some numbers / example: Example: Step 1 - If you sold a put on Stock "A" at strike = 99 when stock is at 100, and collect premium of ~ $1.05 Step 2- Stock goes to $95 Now your sold put is ~ $4:40 which means your trade is at P/L = -$3.35 Step 3 - You roll by closing this sold put at P/L = -$3.35 and then sell another put at strike 94 at premium = ~ $1.15 - this means your net position is -$2.20 So how can you make a credit in this scenario ? Please let me know if I understood your method accurately / this example above matches what you describe ? or if you could you please give an example with numbers on your position that would help to understand the trade you do when selling premium
Robert, kindly, you have a lot more learning to do. You need to soon realize that nothing in markets is Gaussian. It would seem that it is, given its pervasive usage that trading platforms such as ThinkorSwim or Tastyworks incorporate, & 90% of financial literature, and you’d be led to believe that it’s true, but it’s not. Those odds are not the real odds. Those probability computations are not really the probabilities. I know I sound crazy right now but remember that Galileo sounded crazy when he told his people that Earth was not flat(which was a belief held by the masses at the time).
That means the distribution is never really normal. True, these are all approximations based on past behavior.
Bad traders use them literally. Good traders put up with them because they developed heuristics to deal with them and would rather not change things now. To those who wonder when they get dealt with by good traders: they deal with them daily because the price of the option is derived from the assumption that market is Gaussian. This is why it’s not thrown out(yet?)
How long did it take to move from 100 to 95 and what were you doing during that time? What if you adjust when the stock reaches 98.25, a strike and a half in the money? Roll to 98.5 with the same expiration, which still has substantial time value. You give up part of the original premium, but still have a credit, depending on how much time has elapsed. You are now closer to the deteriorated actual stock price and you still have the ability to roll further out as needed. If the stock goes down too much, you may have to take a loss when weighed against the opportunity cost of having to roll too far out to recover.
Here is the essence of it - those who have ears let them hear: trade time value for intrinsic value, if your time frame is long enough, you will not lose. Just like the casino, just like the insurance company. If you want an edge, that is it.