Isn't using VN as an example of why selling options is bad a pretty inappropriate example? VN lost because he WAY overleveraged and then held on without any rsik parameter. He said himself that he basically ignored every rule of good trading: over leveraged, married to position, held out for a reversal that never came etc. Using this as an example is pointless to any premium seller that religiously never overleverages, always puts in exit points and does assume the worst can happen in planning a trade. Using VN as a poster child for buying options only is like telling a hunter that they are taking a huge risk of blowing their head off with their gun because they heard about somebody who did so playing Russian roulette. Bad analogy.
True, but in liquid markets (not individual stocks) with good use of leverage (not commiting to much of acccount to any one trade) and diversification, wouldn't these still be events one could weather? Some futures option markets don't even have lock limits even when the underlying does. Sure a gap may occasionally come along and create a larger loss than I was counting on but if I left a big enough margin of error on my risk parameters then no sweat. 1987, 9/11 where all fine if you weren't going nuts with the premium. I guess what I'm really saying is that people always frame option selling as "lots of small gains/one huge killer loss". I just think it doesn't have to be this way. Can't one just size lower and take it SLOW (by controlling greed) so that it is better described as "lots of REALLY small gains/one relatively large but totally manageable loss"? Isn't it really greed and thinking that the gaps can't happen really the culprit and not the gaps themselves? Sure, you are asking for it if you commit 50% of your bankroll to writing but what if you commit only 5-10%? I think like most trading failures you hear about, it isn't the strategy used when you really get the whole story, but underfunding and oversizing.
You are correct. Taken as a whole, there are no "bad" option strategies. Option pricing parity (two sides to every coin) and various arb strats make sure that no one side has too big of an advantage. Or at least, not for long. So it is leverage that kills, long or short. It's just that it's so darn easy to over-lever on the short side. And I was mostly just commenting that it seemed ironic that Taleb had problems with his strategy and quit his fund, as a counterpoint to VN's spectacular wipeout. I may be way off base, tho, if it is true that Taleb simply went on sabatical because of health problems or whatever, instead of losing money. But to hear VN and his "Tribe" comment about Taleb, you'd think Empirica lost a ton of money. Who's right? I don't know.
Oddly enough, the whole topic of sabatical came up in my discussion with him recently. Apparently, another book is on the way.
Have you guys read Cohen's book on selling puts? http://www.amazon.com/exec/obidos/t...104-4177895-5138354?v=glance&s=books&n=507846 It basically outlines a strategy for selling puts below support based on TA for large, liquid mkt leaders and then turning around and buying puts on an index (strike price based on prem. and delta of puts sold) to insure against a crash. Interesting strategy. The thing is, as with all covered call or short put strategies, you need two things, an uptrending market and healthy volatility. I think because there are billions putting some sort of this strategy into practice right now volatility has been pushed down so much that it just doesn't make sense. Cohen's book came out in 2002 so the examples that he gives are very attractive (it didn't hurt that the mkts also launched their most recent bull move then) with very juicy returns. To his credit even he admits that this is the case and says its abnormal. The difference between a mkt newbie and a survivor is that while one gets excited over something like this when they first hear it, the latter examines the strategy inside out to see what makes it tick. There's a time and place for everything, right now is definitely not the time for this strategy
It's not wise to sell puts into a flat vol surface. Stick to selling index vol into the -skew[put skew]/selling street vol. The only exception should be stocks in which you're looking to lower your cost-basis on an investment.
Yeah I recently read that book and came to the same conclusions. The prems you can get for selling ops on what most would call "decent stocks" are darn small nowadays. The way iv is dropping down further and further, probably dampened by massive writing, you'd think all risk is gone from the market. I suspect, soon enough, option sellers will re-discover risk in a very big way. The markets just weren't designed to give and give...
I know what you mean. I have the same sense of foreboding. There's a lot of people leaning one way (short volatility) and their wake up call is coming. When, I don't know. But it is coming. Its like our own version of '87 when everyone was selling puts and making out like bandits...until October. Also, the fact that someone like Taleb was sidelined is a clear tell. Wouldn't it be ironic if after years of draining assets through dripping away long volatility positons he misses his beloved black swan? On a related note that's why I wrote about a subset of this play in another thread (MRK option play). In this environment, I think the only way to take advantage of a short vol. strategy is to step in when its abnormally large (like when MRK spiked down or when CBM did likewise). It takes guts but if you sell puts on those below/at support, you may get a nice return.