anyone here actually do this successfully consistently? I feel like most people who trade these regularly are doing it primarily through a quant based strategy and they have an expert knowledge of the Greeks. However, the smartest statistician I know is an FSA (actuary) and says it is a hedging strategy only, and statistically improbable to use them as a tool to make money consistently. I’m a huge options fan but haven’t been able to personally trade them for employment reasons. I want to disagree with him, but it’s true that most people are terrible with trading them. Thoughts?
I don’t play the options game anymore. For a while, I was making money on every trade, 50-100+% trading generally earnings releases. I then started losing money on the trades, holding on too long and letting the time value go to zero, etc. The last one I did, my call on the direction was right, but when I went to get out, the volume was so low the bid-ask spread ate up my gain. All transactions together… I probably wound up being up a bit of money, but I just don’t play it anymore. I’d agree with your friend.
People trade options using a lot of different strategies, they don’t necessarily have to be quant based. Often times they gravitate towards that because of the nature of the product and the pricing implications of options.
To your friend’s point, options are generally priced faily at inception, so any strategy be it quant or otherwise should have an equal chance of success. He’s right it’s improbable there would be any consistent edge in options simply because of the nature of the product. The argument can be made it’s a more complex and less liquid product than the underlying so there should be some basis for trading that - I’m not sure this is true, and if it were the impact wouldn’t be material imo.
Like anything else there are dislocations and reasons why you can be compensated for taking certain risks (liquidity, tail risk, earnings, etc.). Options can often times seem like ways to make money simply because they offer different risks so it’s possible to get compensated for risk you’re unaware of, or unaware of the true impact of.
Practically, there’s a few reasons to trade them. They offer the ability to structure a view in ways delta1 cannot, they offer convexity, and if you’re into that sort of thing they offer mad leverage yo.
Deep in the money options are definitely a way to add leverage. Up here in the Arctic, we can’t lever up tax deferred accounts, but we can buy options. So its one way to add some juice to your portfolio. So yes, I do trade options. Deep in the money calls, covered calls is about the extent of it now. The OTM option game is a mugs game that really only someone purely dedicated to it 24 hours a day can make any money with. You’ll lose 80%+ of your trades, so you need to make winners huge wins.
i did it when i was in college. i had a good handle on the greeks at that time due to one of my classes and i was a big fan of options actions. but for the most part what everyone says is true. options is a zero sum game with return average at 0. I’ve checked the premiums last year and they were about 8%, which is typical of stock price annualized appreciation when annualizing returns of all spy data. The premium is always ridiculous it does get cheaper when you get further in the money, but IMO its not worth it. the volatility is priced in already. Also Bid ask spreads get wider as you in the money and when you buy options expiring further in time. OTM is essentially more leverage but odds are as geo pointed out it will go to 0. When you go at the money, your delta gets ridiculous when theta is low so prepare yourself for some volaitlity . Basically everyone who plays it knows the stats. I feel that only two types of people will benefit from this: people who conduct arbitrage, and people who have insider info.
I am in the insurance business. I sold OTM puts on GPRO. The stock IS overpriced, WILL correct, but not as fast as the market expects. In the meantime, I am pocketting a 130++% implied vol. premium. Awesome!
Follow at your own risk.
As a professional derivatives trader, my opinion is that options are useful for customers who want to reflect their unique risk profiles, but betting on the market using options rather than just delta is unlikely to increase your returns per risk, since you really are not a vol expert and you have no information advantage at all in doing this. The people who make money on options are:
The people who see all the flow, and so they can collect spread premiums and offload the risk easily. To a certain extent, they are also in touch with market supply/demand, and can determine which direction the market will push.
People who have captive or systemic customer base that biases the market or gives good spreads.
You also do not have a good pricing model, especially because market dividend and funding is now known to you. So, your breakdown of gamma/vega etc. is not correct. 10 bp of you being incorrect is 10bp of being more correct for someone else.
So again, trade options if it suits your return profile (for instance, you can carry 100% delta until 10% loss, at which point you cannot make rent). But, think carefully about the risks that you do not understand and that other parties are much more invested in.
I’m curious, do you quantify the fact that it is overpriced, will correct but not as fast? Gut feeling based on sentiment?
The puts were overpriced because of the borrow - no idea on the delta view.