Nobody is dusputing it - just a page ago I was making a comment about using short puts vs purchase and covered calls instead of limit orders. You can augment you investment returns rather nicely like this, but you will be severy limited by the size of capital. riskarb is talking about selling stuff naked, that's where you can make a killing or get killed.
what has a chart got to do with probability? when i'm discussing probability i'm talking about the price of an option. at fair value, every possible outcome is priced into that option. you seem to use options as a directional bet on stocks. that's fine, i do it myself. but the disconnect i mentioned on your earlier post still applies. how do you know where the stock will go? if there were a verifiable way to determine that at some point "x" a stock is 80% likely to go up, then the option prices would build this skew into the price anyway. you are saying that you have the ability to "see" probabilities that the market does not. some people can do that (i had an old kentucky grandpa that only needed to look at a horse to tell if it was a winner and he consistently won at the track), if that is your gift, i congratulate you.
Wrong. This is the risk-neutral valuation theory : option price is independent of probabilities everyone is giving the underlying to go up or down. The only important parameter is by how much it would go up or down.
LOL So are you saying that only options market makers know the future because they will have built in the probability and the underlying price action is just a by product? The probablitity of a trade going in my direction is based upon my actual experience with every trade I make. If I place 100 trades and 80 of them hit targets and beyond and 20 of them get stopped, that's an 80% probability in my books. I'm not saying that I can do this but with a 2:1 R:R all a trader needs is a 50% success rate to make money, now apply options to this with all the leverage they can provide and you make a nice living. Don't ask me my current probability level but I try and do it once a month.
======================== Would agree with most of that and dont know if you meant this , like it appears ''Unbelievable! The dollar cost of an option is almost irrevelant.'' If you bought options priced around $1 plus maybe true, however ; 0.05 or 0.10[=$5 or $10 option] bid ask spread kills first 100% of profit.
murray I couldn't (still can't) believe that an option trader isn't "concerned with IV at all". How the fcuk does he manage ? Murray I take your point regarding option spreads.
Hi riskarb, Is there any difference if you sold atm puts compared with otm puts? Don't understand why you said "you are selling a stop-loss when selling premium ESPECIALLY otm premium." So, what is the preferred way to sell premium? Credit spreads? Thanks
ever hear of skew? if the market perceives/believes that the underlying has a greater risk of moving in one direction or the other the directional strikes will reflect that bias.
It's a skew in the vol curve...and it has nothing to do with a change in probability but with a perceived greater risk on one side rather than the other.
Well, there is such a thing as implied probability distribution, based exactly on the structure of implied volatilities. While the expectation is the same, the distribution changes based on percieved risks.