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In today's really efficient markets there is no such thing as mispriced options. The options are all priced at the "correct" price based on implied volatility. If any so-called "mispriseing" took place it would be arbed out in milliseconds and would not be anything a retail trader could trade. Years ago when options first started to be traded there were such opportunities but with the advent of fast computers, better data and more option volume it no longer exists.
Turning 100k into 1m is not that difficult with experience. Unfortunately things get hairy in the very low seven figure range. So yes, it is very possible to make a living, if not a very good living, but somehow, many (most?) find a way to lose money. The Dow went from a few points to over a thousand points over the course of the 20th Century, and that was just for investors. How can you (day trader) NOT make money?
Btw, if anyone is interested in working on a trading floor, a winning portfolio, especially in futures (high demand) is by far the biggest ticket. Good traders are always in demand.
I know a retail options trader whose premise is to arb mis-priced options. Although I have not seen him for several months, that was his method of making his living. I watched him do it for an hour or so using a standard options quote chains on several stocks with limit orders and a mouse. I didn't think it was sustainable, but I know from good sources that he has been using this method since at least 2000. I don't know if he uses other methods as well. I don't use this method since I doubt its long term viability for the same reason as MACD states.
Hi John. Am surprised RMBS has that high of IV (110%), the HV is in 40s. Yes combined with some research RMBS does look like a candidate for same strategy, does the IV really stay that big or is it earnings soon or some pending news? On LNG it is 103% IV and 97% HV. My thought on it is it has lost money forever and I do not want to own it. but it is the leader in natgas transport tech, hence why it is still around and goes up big whenever oil does. The concept being somone will buy out for tech or invest to keep it going and who knows may they can do a profit. AND its a up and downer, not a downer downer like some Chinese stocks with hyper IV are. So my purpose with it is to make $ on preminum not the stock. Since my post it has gyrated like crazy up and down, BUT ends up about $6 close day after day. The Nov options even look juicer now and my profits have improved on it. Cheers
Another thought on this. Beyond making a living, there is another aspect. Can you do with options something you want to do with stock, better? JMHO yes, most of the time. Example a few months ago decided that INTC has a bright future. Did not want to tie up a lot of capital and during a potential additional mkt crash take a big hit if bot lets say 200 shares or about $4,600 at the time. Instead bot 27 Jan2013 30Calls for .62 and sold 22 Jan2013 35Calls for .26, that cost me $1100 or one fourth the risk. If it crashes, better than 200 long. if it goes up is comparable, if it sits still not as good, but close. So since then bot 4 Jan2013 25 calls for$1.10, and sold 3 roughtly ATM nearbys Calls againist it. Right now short two Nov 24calls .93 and one 23 nov call 1.64. Right now I have a $1,030 gain on all the options together, and a gain on every option except 22 2013 35 Calls, which are at .27 or -$22 loss. The bottom line normally you can find a better way with options to play a stock, than the stock. Sometimes when IV is high the stock is better. One reason I did this trade was in July or whenever put the vertical sprd on, IV was IMHO very cheap on INTC. Cheers
Do you really think that a $3 option that was $1 last week was priced correctly? $1 might have been the value spit out by a model given the IV at the time, but IV is hardly an infallible oracle.
That depends. Did the underlying move steadily up or down, without a lot of large swings? Then the realized volatility was low, and the market maker should have had little trouble buying or selling shares of the underlying to keep the delta at 0. In that case he probably made money on the option sale, even if it is now worth 3x what he sold it for. So, no, the option wasn't necessarily under priced a week ago. Of course sometimes the market makers get the volatility wrong and lose money. But you can't just look at the change in an option price to decide if they made or lost money, they aren't playing the same game as the retail traders.