Very interesting thread going on here. The messages that I am getting from this thread is that the probability of profiting from OPTION SELLING is the same as OPTION BUYING. Is that right? Am I understanding this right?
There are people who make a living selling options and others who make it buying them. There is no rule and you can successful or not in both of them. The idea is for you to trade what you like and feel comfortable with. There is literally a million ways of how to be successful in this business and a billion ways on how not to be....
not if you have a trading system that takes advantage of option writing. the word 'edge' has been thrown around a few times in this thread. i don't really like the word because it's misused so often. but when a trading system creates this so called edge by taking advantage of options writing, is the edge from the system itself or the process of options writing? it's probably the former. but i don't think about it, and i don't really care because that issue is so trivial to me. all i know is that if i know of no other strategies, i would employ a trading system that primarily involved option writing, and i'd do pretty well. i'm only answering for myself.
I agree that edge is wildly-misused. There are only a few instances in which edge is clearly evident; such as lock, discount and credit-arbs in classic-positions, flys/condors, time spreads, etc. I disagree that you trading system implies edge... again it's being misused. Edge is synonomous with arbitrage. It's great if your system stays robust for years, but sh*t works until it doesn't. Ppl sell otm gamma because of the probability, but nobody knows when the sh*t is going to hit the proverbial fan. Your directional system may have edge, however.
you're right. that word often gives me an empty feeling, and i didn't really want to use it. the only edge i have is shaving cream.
Take a single die and roll it. You have six numbers that can come up. Let's say you could buy a bet and sell a bet on that die. In other words if I bet $3 and the die came up 6, I would earn $3. If I sold a bet for $4 and a 2 came up, I would make $2. Well, if you calculate the fair value of this bet, you would know that the fair value, or expected return is 3.5. Now obviously you can't roll a 3.5, but that is the number you should bet to breakeven over a large number of rolls. If I was to buy a bet, I would want to bet less then 3.5 and if I were to sell a bet, I would want to sell it for more then 3.5. Doing so over a large number of rolls, would guarantee me a profit. However, if I bet 3.5, no matter if I am the buyer or the seller, I can expect to only breakeven over the long run minus any commissions. BTW, this is the first thing they ask you in an interview if you ever apply to work for a market making firm trading options. Very basic probability theory. So what I am saying about a 20 delta option is that over any single event, it's possible for the buyer to make a large return and the seller could suffer a large loss. However, over a large number of turns, eventually the buy and seller of that 20 delta option will have equal returns, which are zero, minus commissions. This of course is assuming neither the buyer or the seller made any further adjustments to the trades. I hope I have made this more clear. BTW, the expected value of the dice role is (6+5+4+3+2+1)/6=3.5
Fact, is, most everyone who trades THINKS that they have an edge, that they can outsmart the market, that they are NOT going to be one of those losers who spends years treading water, in the end going nowhere. Whether it be from their "superior intelligence," money-making trading system, "inside information," or connected broker, speculators think that they are going to "beat" the market. Some do, and some don't; some are spectacular successes, and some are spectacular failures. But no one knows this at the time they start trading. The edge one trader, or one algorithm, has over another is not apparent until further down the road.