There clearly are systems which work during specific environments. Back to the options question, if we conclude the options market: has a zero expectancy if options positions are entered randomly and held to expiration, is a zero sum game, is priced efficiently: Can an option seller build positive expectancy by having predetermined exits? Does an option seller maintain positive expectancy if options are actually inefficiently priced and the options are inherently over priced?
Because he trades within his limits with a +expectancy and a horrid risk/reward. He pulls a couple of % out with the occasional 25% DD. I don't think the 10:1 risk reward is appealing to most. Does anyone here have any money with Ansbacher? With his returns you'd think he'd be managing 2B instead of 200M. Obviously there's more to it than absolute returns.
Unless we are talking about automated trading (buy JPY in London, sell JPY in New York), arbitrage is a strategy while exploiting something what is presumed to be an arbitrage opportunity is a tactical decision. I do not see how it would be deemed to be "a system". If I was engaging in convertible arb, for example, it's an arb all right, but it is not a system by any means.
Say you have a system that determines what is presumed to be an arbitrage opportunity - wouldn't you say that strategy is a system in itself? Afterall, a system is bascially a base of preset strategies, criteria of your tactical decision making, and mechanical procedures. So if you pre-program all the decision making into the system, then then how is that not a system? When you're making a tactical decision, you're really guessimating the probabilities of profit before you do something. You're saying that process can't be programmed? Of course, not every little single thing can be written in the program because some events are just extraordinary and unexpected, but most of it should still be able to be programmed if the circumstances are not too unusual. You're pretty much teaching the program to think and behave like how you do in most scenarios that come up. Surely, it would be one really complex trading system with an endless list of criteria and what-if's...
Of course, but this is ET. We don't like to make simple arguments. I think I proved my point. Actually, I was expecting someone to ask me why I wouldn't just sell the call in which I was to respond that the cost of carry on the short stock was greater then what I would have received on the sale of the call. Obviously the only reason to do a synthetic is because it's priced better then the actual. But I guess, nothing is obvious on this board. That's what makes ET so much fun!
No, actually you can make money in options consistently. Unfortunately it just requires you to be a great trader. There are no secret strategies or systems. Just good old fashioned trading. The bad news for most here on ET, most of these guys just don't have the emotional or the psychological makeup to ever make this work. But for the few that do, there is a lot of money to be made.
BTW, welcome to the board Mike (dummy-variable). It's good to see another member of our Chicago Option group on the board.
The Joy of Naked Puts By KOPIN TAN OVER THE YEARS, this column has consulted strategists, money managers and professional traders. But it rarely taps an important constituency: the individual investors who populate the option market. Now meet Tony Elenbaas, an Annapolis, Md., resident who wrings annual returns of more than 25% from his option trades. A 63-year-old software engineer by day, Elenbaas is an avid tennis player, occasional beer drinker, father of three and grandfather of seven. And when he ventures into the option market, he is a naked-put seller. Each month, Elenbaas sells out-of-the-money puts on about a dozen stocks -- in effect setting below-market prices at which he'd be willing to buy shares and, for that commitment, getting paid option premiums. "I look for solid balance sheets and companies I wouldn't mind owning," he says. For example, he recently sold August 60 puts in Altria (ticker: MO) with shares trading above 65. Those puts were trading at about 20 cents, and since each put gives the right to sell 100 shares of stock, Elenbaas collected $400 for selling 20 puts. (This excludes trading costs, which he keeps to a minimum with Interactive Brokers, a no-frills online brokerage firm that charges cheap commissions of $1 per option). He also puts his Barron's subscription to good use, selling August puts on Motorola (MOT), for example, after our bullish cover story last week1 on the cell-phone maker and as shares rallied. With three weeks to go before August options expire, he has already collected $2,890 for selling between 10 and 30 puts on 14 stocks from General Electric (GE) to Intel (INTC). Because put-selling carries the obligation to buy stock in a declining market, Interactive Brokers requires him to cough up margin totaling $127,730. (This produces return-on-equity of 2.3% for August, or 27% annualized, but it is accomplished on 20% margin). Meanwhile, the brokerage firm also pays him 3% interest for keeping that money in the account. Selling naked puts isn't for everyone. The put seller must be disciplined enough to be guided by the number of shares he is prepared to buy (and not tempted by the premiums he can collect). Nor is it for those hell-bent on owning shares. But its reputation as the pariah of option strategies also is unwarranted, since the risk profile is similar to that for buying stock; in fact, the premiums collected help offset the cost of buying stock. "People with good-till-canceled orders" -- essentially orders to buy shares on a pullback -- "are perfect candidates to consider put-selling," says Michael Schwartz, Oppenheimer Co.'s chief option strategist. Put-selling acquired a bum rap after the 1987 crash, when traders had sold puts zealously with their eye on the premiums -- but not on the attendant risk. "People acted as if they were giving money away on the trading floor," Schwartz recalls. "And before you knew it, you get into situations where retired old ladies were short 500 puts when they weren't prepared to buy 50,000 shares. And then the market tanked and volatility soared." These days, brokers require put-sellers to meet minimum criteria in net worth and trading experience. Elenbaas, who attended seminars to learn about options and is largely a self-taught trader, often sells far out-of-the-money puts; these fetch smaller dollar premiums but require a sharper drop before he has to buy shares. Of his 14 short-put positions now, eight have strikes more than 11.6% below the stock price, and only two are within 5% of the stock price. With the market largely range-bound, he was put stock a total of seven times this year, and six times in 2004. Selling options makes money nine times out of 10, as traders are wont to say, but one misstep can wipe you out. Elenbaas monitors his holdings on a spreadsheet -- sometimes buying back puts to close out positions -- and is vigilant about the risk of selling options on margins. One of his rockiest spells came right after the Sept. 11 attacks, when he lost "a couple of thousands" as the Standard & Poor's 500 skidded 11.6%. Should the market drop 11.6% today, he estimates his loss at about $14,000 if he had to buy back puts and close out positions -- no worse, by his reckoning, than having $127,730 in mutual funds through a similar decline. These days, worryingly low option premiums have tilted the risk-reward calculus, and buying back puts can prove costly should volatility spike. But Elenbaas says put selling has worked very well for him over some 15 years. Nor is he deterred by the margins required. "If you had $127,730 and wanted to make 27% return a year," he asks, "how would you do it?" URL for this article: http://online.barrons.com/article/SB112267871058800364.html Hyperlinks in this Article: (1) http://online.barrons.com/article/SB112207353968893803.html (2) mailto: kopin.tan@barrons.com
I do this for my private account already, substituting short puts for limit orders is a no-brainer - it's dollar averaging and you get paid for it in the process.
i'm probably the last guy here who would tell anyone that writing options is an absolute no-no, but writing stuff for 20 CENTS on a $65 stock? that's not very prudent. only time i would sell (not short) them for 20 cents is if i already owned a lot of them and they were worth a dime.