SPI 200 and Futures Options

Pit Trader said:

I always sell as I know my odds are greater than buying.

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ThingyMajiggy said:

How much experience do you have trading futs & options?

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wayneL said:

This is a fallacy. There is no intrinsic advantage of buying over selling.

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Pit Trader said:

A high percentage of options expire with no value.

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Pit Trader said:

A high percentage of options expire with no value.

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cutz said:

There's a little more than meets the eye.

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wayneL said:

That is irrelevant... and a furphy

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Pit Trader said:

...but personally I find
selling out of the money options to be a very profitable excercise.

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Pit Trader said:

selling options has made me a living for many years so while
it may not suit you it does me fine.

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wayneL said:

That may well be the case, for reason of psychology and management style, I also prefer to sell than buy. But that is irrelevant.

Your statement was "I always sell as I know my odds are greater than buying". This statement is not true. There is no intrinsic mathematical advantage of either buying or selling options.

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wayneL said:

LOL

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Pit Trader said:

I am well aware there is more to it-- but personally I find
selling out of the money options to be a very profitable excercise.

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Pit Trader said:

Then why do you prefer to sell if there's no advantage??

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wayneL said:

ffor reasons of psychology and management style, I also prefer to sell than buy.

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In the previous post, the quoted "guru" stated unequivocally that 90% of options expire worthless, with the implication that option sellers have an edge over buyers... actually it's often explicitly stated.

According to the Chicago Board Options Exchange, typically only about 30% of options expire worthless in each monthly cycle. Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration. In fact, over 60% of all options are traded out in the marketplace. This means that buyers sell their options in the market, and writers buy their positions back to close.

So we see that the "90% of options expire worthless myth" is... a myth.

The fact it that there is no inherent edge in buying or selling options at point of inception, if they are correctly priced. It can be determined in retrospect, but the problem is that we cannot see into the future. There is no way of knowing whether the option premium is cheap or expensive, because we don't know what the underlying is going to do.

I like being nett short premium, because I am better at managing those positions for more consistent profit, but it does not mean being nett long premium is wrong. Each has it's own set of management implications.

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Over the last couple of weeks I've been concentrating on option trading myths and nonsense, in particular the myth of 90% of options expiring worthless, but only alluding to the second part of the puzzle. That second part of the puzzle is mathematical expectancy.

As Dean from www.masteroptions.com pointed out in a comment on my previous post:

The debate over what percentage of options expires out of the money misses the point. Even if it were true that 90% of options expired worthless it would mean nothing. There's also the matter of how much you make on your winners vs how much you lose on your losers.​

Never a truer word said. Probability of win is irrelevant on its own.

The expectancy equation has two parts, 1) probability of win and 2) win size vs loss size. One way of expressing this mathematically is with this equation:

Expectancy = ((1 + reward/risk ratio) * win/loss ratio)-1​

One way to have a look at this principle in practice is to wander down to the casino and play a little roulette. It is a wonderful way to understand this principle, because at the roulette wheel, it does not matter one iota with what probability we play, the negative expectancy cannot be overcome. On a 00 wheel the negative expectancy is -5.26%.

We can create a ~90% probability, but that won't help us a jot. A chip placed on 34 numbers gives us a ~89.5% probability of winning paying 36/34, but it's still a losing strategy in the long run. Let's look at the maths:

Expectancy = ((1 + reward/risk ratio) * win/loss ratio)-1

= ((1 +2/34) *34/38)-1

= -0.0526

= -5.26%​

Likewise, an option strategy with a theoretically 90% probability, whether an actual statistical probability, or an erroneous probability, doesn't make the trader profitable in the long run. We are all aware of the snatching pennies from in front of a steam roller analogy.

If you make $1,000 90% of the time and lose $10,000 10% of the time, you're down a hole. In fact, you lose $1,000 every ten trades on average.

F### that!

High probability trades are nice in theory, but a trader still has to develop a positive mathematical edge. So our "90% of options expire worthless so sell options" pseudo-gurus actually make two major misrepresentations; that 90% options expire worthless and that this automatically confers profitability.

Mathematics outs in the end.

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Pit Trader said:

Yes I trade the Spi options on a regular basis.

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cutz said:

Hi Pit Trader,

Are they naked shorts or hedged, if hedged which method ?

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Pit Trader said:

When I trade Spi options I sell 1000 points if not more OOTM puts.

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cutz said:

What are SPI option contracts like to trade, how wide are the spreads ?

They are a bit of a mystery to me as they are not on continuous quote ( or it appears that way ).

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cutz said:

You mean short 1000 OTM put contracts, how do you prevent a flogging being so short gamma/vega when the market is getting creamed.

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Pit Trader said:

I mean 1000 points away from the market usually 20-40 lots.
Wait until the market has had a big correction and panic sets in then sell puts.
Like this week I sold some 3600 puts 1 month until expiry and 16 points.

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Pit Trader said:

You also need to be able to fund the margin calls as that is the most important thing,otherwise you are in trouble.

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