My point is simply that sometimes it's possible to do a better analysis than what is reflected in the price of an option at a given point in time. The final outcome for the MM is irrelevant.
His point is that it's completely circular to say that the price is correct based on implied volatility, when implied volatility is determined by what the current price is.
The first place to start is to really understand how the underlying trades, what the historical volatility is, it's correlation to the market, and upcoming catalysts (positive or negative). Once you have a base of knowledge you are going to want to define your strategy. For example, if you suspect a company's margins have eroded and will show up during earnings, you may only want to be in the trade for earnings. Set a goal and stick to this (only adjust if the chart is really breaking out either way after the announcement. When implied volatility has spiked significantly above its historical average it may present a unique opportunity if it has accompanied an overblown bout of selling. I recently sold $7.50 covered 2013 calls on a stock that dropped from $15 to $8 in August. When the stock was $4.11 I was able to get a few blocks at $4.00. So I was able to give myself an expiration date breakeven of $4.00 with a max gain of $3.50. Once you have found this type of play put it on your play list and keep an eye out for future opportunities of this nature.
Used to be an option buyer now I am an option seller, here is how I am doing it, and I am not smart so anyone can do it as long as 1-2-3 are covered. 1) You must have a capitali$ed account: If after trading one entire year you do not make any money it's OK 2) You must have a reasonable goal, mine is 10% -15% on my capital. 3) You must learn how to manage risk and you must have patience because it will take time. A Harvard study states that it takes 10 years to become an expert at anything. Do not buy the "hope" and remember: 98% of what is published and advertised on how to make money in the market whatever with stocks or option is worthless(Seminars, books, newslatters and market gurus) With VERY few exceptions...if one can make money trading one trades, period. It takes a lot of money to make little money consistently. All successful traders are aware of this reality. Everyone who is looking to "double" his account must take risks big enough to blow it, aka Daytrading is a pipedream: http://www.elitetrader.com/vb/showthread.php?s=&threadid=194342&perpage=6&pagenumber=1 Good Luck.
Well, implied volatility is largely driven by the event-adjusted recent realized volatility, while recent price performance has very little to do with the future performance of the stock. So, it seems that it's that the expecttion volatility determines the price of the option as opposed to the opposite (price of the option as a directional instrument).
My advice for SLE is to stop trading options until you understand what two people tried to tell you. You are making it worse in my opinion. Yes I go long and short, buy and sell using index options mostly. The op asked for the particular strategy that works. All of them work under the correct market conditions assuming you know what you are doing. All of them fail in other market conditions. Options are a tool, like stocks, bonds, cash, futures etc. A tool is not an edge. Knowing how and when to use a tool is. One fellow already gave you the answer you seek but it doesn't appear to have satisfied you. Options trading is harder than say stocks because there more degrees of freedom. Those extra degrees of freedom allow many retail traders to blow their accounts out. One "secret" is to buy at the right time and then to sell at the right time. Experience will eventually teach you the right time.