there's a difference between "zero-sum" and "zero-expectancy". zero-sum indicates a finite system. every withdrawal entails an equal deposit. how those withdrawals and deposits are split doesn't matter. the fact is there is a limited pie and when someone takes a piece, someone else goes hungry. zero-expectancy has more to do with efficiency and probability. it implies that market forces have converged so that at any given moment the current price offers no economic advantage to either the seller or the buyer. both concepts are fundamental to trading. zero-sum implies that for every winner there is a loser. it also means that while there will likely be some winners, not everyone can be a winner. with trading, if there are a few big winners, it stands to reason that there are many losers. retail traders enter every trade with a less than zero-expectancy (i.e. negative expectancy) because of slippage (the likelihood of an order being filled at worse than the mid-point of the bid/ask spread) and commissions. if every option trade is a negative expectancy wager and the net outcome is zero-sum, it also stands to reason that a trader can only win this kind of game through chance ("luck") or skill. there is no "strategy" that bestows either luck or skill. strategy is mostly a form of trade selection and set of entry signals. but negative expectancy tells us that no matter how simple or complex the entry strategy might be, it is certain to deliver losses if followed over the long run. yet i'd guess 99% of what is sold as market expertise and advice falls under this category. if purveyors of market expertise were honest, the first thing they'd tell their clients is, "my strategy is as good or bad as any other, if you follow it, you will likely lose money. in fact, since you are paying my for my advice, you are further aggravating your negative expectancy." whether you are buying or selling an option doesn't matter. in fact you are better off randomly entering any trade. if you enter randomly, you have no bias and will thus react to the market more objectively. the only way i know to develop skill at trading is to make these random trades and somehow, consistently find a way to make them profitable.
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242 Replies and 13892 Views. This has to be the longest thread at the "Options Forum". Anyone cares to break this record by starting a thread called: Buying options for a living
I was not talking about legging into a conversion or reversal simultaneously, but separately. My point was, I could buy the calls today (neg expectancy trade), then two days from now, after the stock rallies, I could sell the same strike put and short stock to complete the reversal. Now all three of these trades alone were negative expectancy. However, the reversal I know have is risk free and therefore, not just a positive expectancy trade, but almost 100%. This is an easy example. I wanted to use the conversion/reversal/box/jellyroll example to minimize the back and forth. There are many trades that you can put on that are much more grey, they will give you positive expectancy, but only slightly so. And I never said legging into the trade was risk free. How do you know that I just didn't want to be bullish when I bought the calls. Then 2 days later I had the opportunity to complete the reversal. The point was not that I'm trying to put on risk free trades, but that I made an adjustment that changed my expectancy.
OK, that was very interesing. This discussion certainly aligned some of the basic assumptions about options trading and exposed a few doubts I already had. Conclusion: there is no inherent expectancy in any option position, no matter how simple or complicated. In hindsight this is so obvious; any position can, by synthetic transformation be linked back to the underlyers price-curve. It would be strange when a random entry in any option positions would have a postive expectancy and a random trade in the underlyer itself wouldn't. We could set up an expectancy arbitrage . A series of options positions after another I would call a strategy. A strategy can have a postive expectancy, but the individual trades can not. Ursa..
I think a follow up would better be called: Options Trading Strategies for a living: how to turn a negative expectancy into a positive one (and take zillions from the market) Ursa..
okay we're working from different definitions and terminology. i assuming that "strategy" involves not just "a series of option positions" but specific rules guiding that selection. because of the specificity of the rules the strategy can thus be backtested. if it can be backtested it can be shown to be either a net winner or loser based on past data. but here's the fallacy: if it is shown to be a winner in the past and is implemented going forward, even if it continues to be a winner short term, it will eventually cancel itself out as a winning system because the market will adjust prices to eliminate what it recognizes as an ineffciency. from a practical standpoint a retail trader finding such an inefficiency is about as likely as a high school biology student finding a cure for cancer. it's a waste of time trying to devise a strategy to beat the markets. and it's even more non-sensical following someone else's system. winning traders have no system. they are rigorous risk managers of course. but they trade not on any predetermined set of rules. they improvise and adapt to circumstances in an effort to make money.
the claim about the impossibility of an amateur finding an inefficiency is logically self-evident. the claim about winning traders not having a cookie cutter system that they follow to consistent profits is based on over twenty years experience in the markets (quite a few of those resulting in profit) and personal acquaintance with many successful traders. there is also a logical self-evidence to this claim. if any trader had a system for winning he/she would eventually just program the system into a black box that did the work for them. they could then go sit on a beach somewhere and never think about the markets again.