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Buying Deep ITM vs Synthetic Long trade.....
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Buying Deep ITM vs Synthetic Long trade.....

  #11 (permalink)
Trading Apprentice
TPE, TW
 
Futures Experience: Beginner
Platform: ib tws
Favorite Futures: gbpusd, vix
 
Posts: 49 since Jul 2014
Thanks: 11 given, 40 received


ACstudio View Post
There is a pricing advantage to the sellers of options as well as the fact that you collect theta decay and/or volatility contraction.

I cap my gains because I know that the so-called unlimited upside is not really unlimited. Prices are not going to go to infinity and beyond. So your gains will be limited by the amount the price moves and where you plan to exit. What are you going to do...hold out for a 3 standard deviation move to the upside that only happens 1 or 2% of the time? If you plan on exiting the trade at 50% profit (much more likely) then it only makes sense to sell OTM and take advantage of Theta decay and volatility contraction in high implied volatility environments. I only sell OTM because there is no advantage for me to sell intrinsic value. I make no bones about the fact that I have no idea if the price will move up or down no matter what some chart or analyst is saying. But I do know that expected moves in high implied volatility tend too be overstated and that it tends to revert to the mean and that time moves forward.

If I were to buy or sell ITM like at 60 deltas or more....then 10 or more deltas of that are going to be intrinsic value and just trade 1 for 1 with the stock.



Your explanation makes sense. For YOUR trading/option selling. I do option selling also. However the problem is you are encouraging OP to sell options when he is clearly looking for comparison of strategies that are very bullish on the market and holds for the intermediate term like 45 days call and synthetic stock positions. He makes absolutely no mention of wanting to hedge any sideways movement.

You are thinking option selling is one size fits all, it is not. It obviously works for you but to encourage OP to do it when he is looking for outright long is dangerous if he does not understand the dangers of selling is bad advice no matter how you look at it.

Having only 1% or 2% chance of 3 stdev move is only if you have no system for picking direction. If OP is wanting to long call/synthetic he most likely has a system that gives him the edge in directional trading.


ACstudio View Post
Selling OTM premium allows me to be directionally wrong and still make a profit. Selling ITM premium reduces that edge considerably.

Selling closer to the money does not reduce edge if you manage it properly. Look at the tastytrade video on short strangles (otm) vs short straddles (atm). Short straddles made more in the end.


ACstudio View Post
Tastytrade.com has done tons of research on these subjects and I take advantage of it. I have seen no research that shows there is any advantage to unlimited upside.

There does NOT need to be any research in having unlimited upside. Have a read of Market Wizards, there is not one trader/investor that primarily sells options. They are all stocks/futures/currencies/long options. The only LARGE option selling fund that is successful that I know if is Karen's. I can easily find hundreds of other funds that have "unlimited upside".

I love option selling but what you have stated is pretty one sided.

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  #12 (permalink)
Trading Apprentice
Nashville TN/USA
 
Futures Experience: Intermediate
Platform: Thinkorswim
Favorite Futures: Derivatives
 
Posts: 35 since Nov 2014
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k20a View Post

I love option selling but what you have stated is pretty one sided.


Which is why I took the time to use "I" and "me" quite a lot.


OTM can be anywhere....in their study they are selling straddles and strangles....but all OTM or ATM....how far out is up to the user. And both are non-directional plays which allow you to be profitable even when your assumption about direction is wrong. I believe that only serves to illustrate my point.

I've read "Market Wizards" thanks.

If you assume I'm encouraging anyone to do anything then you assume too much. I could not give a rat how anyone trades or how they arrive at their assumptions with whatever holy grail they have. But I think there is value in exchanging opinions or insights even when not everyone can see their value....because there will be some who will.

But if you want to trade directionally then just pick your deltas and trade them....but there will always be a pricing advantage to the sellers of options...that's just the way they are priced. And unlimited upside is not unlimited as people think.

Thanks for your time though.


Last edited by ACstudio; November 12th, 2014 at 08:37 PM.
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  #13 (permalink)
Trading Apprentice
TPE, TW
 
Futures Experience: Beginner
Platform: ib tws
Favorite Futures: gbpusd, vix
 
Posts: 49 since Jul 2014
Thanks: 11 given, 40 received


Fair enough, I liked how you describe options selling but as a response to someone looking for outright long I thought was out of place.

There is no pricing advantage to sellers over buyers 99% of time that is attainable by retail traders. Arbitrageurs/algorithmic trading/bots make sure of that. There is potential advantage when the value decays more than it gains from other factors.

FYI on Tastytrade while the ideas they present are good, keep in mind the 2 presenters are either unprofitable or very low profit traders. They were impressed at Karen's return this year of 11% and made remarks wishing how they could make 11%. Their trading abilities seem to differ a lot to the backtests they produce.

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