Thanks, with you now. Certainly agree that option trading is a zero sum game. On the subject of delta probability..... I wouldn't use an option delta to determine a probability of ITM at expiry for 2 reasons.... Firstly, delta changes as a function of implied volatility and since each strike will have a different IV, you'd need to determine a single future volatility to input into the model. GIGO ? Obviously no great shakes, but my point here is that I wouldn't blindly accept an option delta as a probability - it needs fine tuning. Secondly, the delta, or N(d1) from the normal distribution curve isn't the probability of ITM. The real probability of ITM is the "probability to be called" or N(d2) taken from the curve. N(d1) and N(d2) values widen as volatility and time to expiry increase. Small points I know.
When I read this thread I feel I am totally ignorant. There are many things discussed here which I cannot understand. I donot know anything about greeks. I go on selling naked put options month after month, have done it for several years. By experience I have learnt that it is better to sell put options on indices and futures indices. I try to go as much out of the money and remain to near months. On average I make 2-3% a month. Am I going to fail sometimes and wipe out my account. I only use about 50% of my funds.? I am getting scared.
Hopefully not ! But surely you must appreciate that near time DOTM options are highly leveraged monsters ? I'd be a buyer of those, not a seller. It might seem like money for old rope until the sh*t hits the fan. As an example, a mate of mine bought some FTSE puts, about 100 points OTM and with a week to expiry, I remember thinking he may as well throw his money down a drain, though I didn't say it. Then on the day London was bombed, I watched option IV literally double, and the option value multiply by a factor of 12 ! He made a lot of money, the seller lost a fortune ! Watch the leverage Osho - you can't sell many of those ! A simple leverage calc (ignores gamma)... <font color=#ffffff>.......................</font color>Underlying Price Option Delta x ---------------------- = Leverage multiple <font color=#ffffff>.......................</font color>Option Price
I'll have to go back and actually read it, instead of just skimming it, but this seems to be a very interesting thread... even if it is over my head. I have some experience trading options (primarily vertical credits based on a directional opinion), but my knowledge base is probably just enough to get me into trouble. Basically, I'm trying to figure out the best way to really get a thorough understanding of options and what it takes to trade them profitably. So far, I find it to be fascinating, but I'm unsure about the best way to keep learning. I suspect there's just so far I can get on my own as a private "trader." If anyone has any insight, I'd definitely appreciate it. Hopefully, this is somewhat sensical. It's late and I'm tired, but I wanted to toss this up before I forgot about it. Thanks, Steve
Thanks Profitaker for your kind response. How do I find option delta which you have used in your formulae. ?I have an IB account but I donot get delta for Z (FTSE100) I have sold put today for August strike 4875. Z today is 5275. I am 400 points away and 3 weeks to go for expiry. Your thoughts much appreciated. Thanks
Some free software here; http://www.hoadley.net/options/options.htm Using a 9% spot vol, the chances of them expiring ITM is less than 1 in 10,000. However, if the index dropped 400 points and IV doubled to 18% those Puts would suddenly be worth 78p. How would you cope with that ?
Thanks again Profitaker I will go to hoadley.com and be familiar with the software. I got 1.5 for my trade so paying out in worst case 78p will be okay. Am I missing something here? osho Z is european style option so exercise is at the end of period.
Profitaker, I'm not using the delta to calculate probability. You can use whatever implied you want. The point being is, whatever implied you use, it's the same if you buy it or sell it, i.e it doesn't change just because you decided to sell the option other then the bid-ask spread. The only reason I continue to use the example of the 20 delta option is for continuity. And yes, I understand the relationships between delta and time and delta and volty, thanks. The bottom line is, as long as you are comparing apples to apples, the expectancy is the same whether you are buying the 20 delta option or selling it.
OK, going back to the seller/buyer equivalence, a very interesting discussion that makes these fore worthwhile. Basically the reasoning is that, since the statistically expected expiring value of an option is priced-in as the time-premium, there is no advantage in buying options vs. selling them. In the end they both end up empty handed. This observation is blatantly absent in almost if not all options books I've seen. Only Natenberg, in explaining how the BS model is reasoned, indirectly points to this fact. It is understandable that many optiontraders, newbies and veterans alike, are not aware of this point. An evident, but maybe even harder to swallow corollary is IMO, that any combination of option positions, like verticals, butterflies, even timespreads, and of course straddles and strangles have all a longterm expectancy of zero (0). Eg. a fly that costs 0.50 that could expand to 5 has a probability of 1 in 10 to do so (simplified). Buying or selling 1000's of these flies over the years will statistically mean no profit (and thus a loss due to commish). Randomly selling or buying any speculative contract, be it stocks, futures, and also options or any combinations thereof will in itself not make you any money in the long run. So, also in options trading you can only make money by predicting the future (of either actual or implied volatility) and choosing a strategy which fits this prediction. Even choosing an optimal Risk/Reward amongst the different possible combinations is almost moot, since determining the actual Risk (or Reward) is in the end the same as determining the expectancy of the combi, which is zero, as we know. This means that if you can't predict the future you won't make money, whatever strategy you use. Also, reversely, if you can predict the future, any strategy is ok, you get what you pay for. An conclusion often made is: predicting the future is impossible, so what the hell, I'll just sell straddles Is this a good summary of what option trading is all about? Ursa..
I predict on the third friday of every month that equity and index options will cease to exist so it is better to be short out of the money options when this happens.