I just wish to add something here. The trades that you guys are talking about do not have a positive expectancy, I believe this because people much smarter than you or me would have arbitraged the opportunity away long before we get to it. The beauty of options is that we can construct positions that alter the odds in our favour, taking on naked catestrophic risk is the opposite pole to this. To me this is the true advantage in trading options, otherwise I would be doing something else for a living.
But thank you for the discussion, it helps me to reinforce the lessons I have learned over the years
Perhaps you can help me understand how to structure a trade that generates a positive expectancy while still paying out enough in premium to be "worth your while". I'm always eager to learn and would love your thoughts on it.
I have actually already told you in my posts, I have no doubt that any professional would know exactly what I am saying. I'm coming to the end of my business/trading career so I look thru the lens of a lifetime of business decission making experience. At the end of the day once you understand options dynamics it's simply business in it's purest form. You can't put an old head on young shoulders. Re read my posts carefully whilst considering the alternative ways you could have structured the trade to reflect your market view. Obviously your market view was flat or down, you hadn't even considered a rebound, huge potential mistake considering the parabolic move that had just taken place, the only reliable thing about the markets is that they are unpredictable. That alone should have suggested writing DITM Call spreads, you could have also chucked on some back month put spreads to minimize any potential losses. This would have capped your losses/reduced margin whilst giving you many multiples of upside compared to your actual position. long puts perhaps?, it's about the best RR for the current market conditions. I am simply saying that you need to think outside the square. Currently, you are betting on direction, if you are wrong then you are screwed.
One thing I will say is that the worst outcome for you would be if your trade works out because it will simply reinforce risky behaviour.
Last edited by Johno1; January 27th, 2015 at 10:46 PM.
You should consider switching from OX to a broker that is more friendly with selling options on futures. Carley Garner at DeCarley is the go-to. You can find review threads and an AMA on futures.io (formerly BMT).
She also sends out daily analysis and trades to customers, these analysis are great for someone looking for a little guidance.
Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.
Need help? 1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first. 2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses. 3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make. 4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance. 5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers. 6) Help using the forum? Watch this video to learn general tips on using the site.
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5 years of this thread and many positive feedback from many different posters and you are not convinced that its possible that managing this "naked catastrphic risk" can turn it into positive expectancy ?
You can not simply call a individual trade's expectancy. Unless you can tell the future, you can not conclude whether this trade has positive or negative expectancy.
Options are less than a 50-50 shot due to pricing, brokerage and slippage, I hope that you would agree with this statement, negative expectancy, as you pointed out no one knows the future although the probability of a catestrophic loss increases the more times you place yourself at catestrophic risk, I would hope that you would also agree with this statement. Writing FOTM naked options is picking up nickles in front of a bulldozer, I also think that most people would acknowlege this statement as well. The margin required for his trade tells it's own story about risk/reward $14,000/$950 as per span margining, almost 15 to 1 against, so yes I consider that a crap trade, it doesn't matter how many times you get away with it if the tail risk is always there. Particularly when a smart options trader can put together trades where the risk is 1 to 2-3 reward with a similar probability of success, and no catestrophic tail risk, yes you need to know options and also the markets you are operating in, nothing comes easy in this game. As far as stops go, there are times when it is a huge gamble to believe that there will be a market for you to easily unwind your position in an extreme adverse move, remember in the event of an extreme move in your favour you still only end up with the $950. I say this with the benefit of personal experience. Try coming in to the last couple of days before expiry, the options behave basically the same as futures contracts once they are ATM , you are a reasonable way out of the money at the previous close and then overnight something extreme happens, the market gaps against you,a parabolic move, you are now DITM, there is no market for the options at the open, please explain to me how you are going to get out of that in one piece, it won't be possible. The reason that I know is that it happened to me many years ago, and I had a better plan in place than simply a stop. It certainly got my attention and made me think, it's not much fun losing everything. Making a mistake once is forgivable, you just didn't know, twice is just plain carelessness and three times is outright stupidity. I prefer to learn the first time if I haven't already learnt from someone elses experience which is always the smartest way to learn. The longer you trade these kinds of positions the greater the chance you will be wiped out, that is one of the few certainties in the markets. Who knows, keep rolling the dice, you might be one of the lucky ones. But for me survival trumps everything.
Last edited by Johno1; January 28th, 2015 at 08:00 AM.
You are not understanding the meaning of expectancy, look it up again. There is no expectancy attached with ANY trade. Take a stock of AAPL for example. Buying a share of AAPL has NO expectancy to it. A complete newbie can buy shares of AAPL like George Soros can buy AAPL and they have different expectancies even though AAPL moves the same for both of them. Expectancy is in the trader's management of the trade, not the trade itself so you attaching a negative expectancies to a short option trade is ridiculous.
This leads back to expectancy. An inexperienced, ill-formed option seller is like a cripple picking up nickles in front of a bulldozer. An experienced, well managed option seller like Jim Rogers of the Quantum Fund is like an acrobat riding a dirt bike and picking up nickles in front of the bulldozer. How likely is the bull dozer going to catch the dirt bike ?
Jim Rogers has positive expectancy, the newbie has negative expectancy even though they did the same trades. Jim Roger's quote: "I was short stocks and short calls. I don't buy options. Buying options is another fast way to the poor house." -Market Wizards. It's clear Jim Rogers obviously found positive expectancy in selling options FOR HIM.
You have to be credit spreading ITM to get reward 3x the capped risk, but claiming same probability of success - 95% for a ITM credit spread ? You are either in la-la land or you know a heck of a lot more than almost everyone on this board.
If you trading in a liquid market you can bet that there will be market for options that are in the money. Market makers will be all over them to make the spread. You can also place a order to long or short the underlying futures contract at a price you set to cap further losses in your short options position.
That goes the same for every form trading strategy, your risk of ruin increases the more trades you take. Even if you are in cash the whole time the broker or exchange might go bust taking your account with them. There are more occurances of brokers going bust than Swiss Franc moving 30% in 10 minutes. So are you happy with that tail risk ? The only no risk scenario from the market is not to be in the market - so should you question yourself why you are in the market ?
Apologise if I sounded aggressive in my post, calling it as I see it. If you post a construction of that short options trade of 3x reward to 1x risk, capped, 95% probability of success I will be the first to admit that I have been selling options the wrong way for the past few years.
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