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John: "Sheer terror" is watching an experienced option writer risk the net
worth of a company you've nurtured for 20 years. He had a relatively
no-risk system of option selling also. I don't believe that a conspircy
exists to prevent individual traders from selling options. I wish you much
good luck in your trading.
Regards, Jack.
----- Original Message -----
From: "John Pretorius" <johnpretorius@xxxxxxxxxxxxx>
To: "'Omega List'" <omega-list@xxxxxxxxxx>
Sent: Thursday, July 06, 2006 1:39 PM
Subject: RE: Implied Volatility for Futures Contracts
> "Sheer terror" is typical of the emotive language that is often used
> when anyone even mentions selling options. Those stupid enough to pursue
> the argument are silenced by references to the Black Swan effect, fat
> tails and how Victor Niederhoffer lost his fortune. Another mantra is
> "limited returns and unlimited risk". Oh, and the unspeakable horror of
> the option being "exercised", spoken to rhyme with "exorcised".
>
> Maybe we need find the source of these dark warnings. Perhaps those
> large institutions that write option contracts? Write, as in "write an
> insurance policy". The language is designed to confuse, so that it
> appears to be some complicated contract drawn up by a team of lawyers
> rather than what it really is - selling options, and it's as simple as
> selling a futures contract and even simpler than short selling a stock.
> Why don't they want individual traders trespassing on their turf?
> Because it's highly profitable, that's why. Option trading has often
> been likened to gambling, and to a large extent this is true, but in
> this game the option buyers are the suckers and the "writers" own the
> casino. In fact they own a casino where they even get to choose which
> bets to accept.
>
> Maybe we also need to look at some facts behind the spook stories. Black
> Swans and fat tails refer to the fact that market price movements are
> not normally distributed. Catastrophic events occur more often than they
> "should". This is true for all markets - stocks, bonds, commodities,
> whatever. Somehow the fallacy prevails that these catastrophies are more
> harmful to option sellers than any other trader. My own trading has
> proved that in fact the opposite is true.
>
> I have traded options for the last six years. More specifically I sell
> out-of-the-money options on US futures. I calculate what I call
> odds-to-miss, which is the probability of expiring worthless based on
> the statistical volatility, and take trades where this figure is higher
> than 70%. My stats indicate that 61% actually do expire worthless (i.e.
> I get to keep the whole premium). Of the remaining 39%, a further 12%
> are still profitable because the difference between the strike and
> futures price at expiry is less than the option premium. That leaves 27%
> losses with the dreaded unlimited risk, right? Not at all. I put a
> futures stop at the strike+premium and that takes care of another 22%
> where I (normally) just lose my brokerage, and the remaining 5% where I
> lose the premium + another 60% (I can explain all the details in a
> private email). So what's the downside? Well it's back to our
> catastrophic events, and specifically those that cause a gap through my
> stop. And so, finally, to my point which is that although those events
> still hurt like crazy, they don't hurt any more than for the futures
> trader trading the same commodity. And here's the thing I AM ONLY
> EXPOSED TO THOSE EVENTS IN ABOUT 39% OF MY TRADES COMPARED TO HIS 100%.
> The numbers are probably different for stock options, but the same
> principle holds.
>
> Unlike stock traders I can also cut down my exposure to catastrophies by
> for instance never selling puts on stock indexes and never selling calls
> on coffee - again I can explain the details in a private email - I will
> send my OptionScan booklet to anyone who asks. It details exactly how my
> trading system works as well as slaying some more dragons, everything
> from Black Swans to Black Scholes. It also explains why I will happily
> send out my calculations every day for free.
>
> John R Pretorius
> johnpretorius@xxxxxxxxxxxxx
>
>
>
> -----Original Message-----
> From: DH [mailto:catapult@xxxxxxxxxxxxxxxxxx]
> Sent: 06 July 2006 04:30
> To: Omega List
> Subject: Re: Implied Volatility for Futures Contracts
>
>
> Simple test, would your hedging strategy have protected you from being
> short puts on 9/11 when the market was closed for a couple of weeks?
> Would you already have had your protection in place if you'd shorted
> puts the day before the crash/market-closure, considering that Sept
> hedges would have expired worthless after the closure? If so, I'd say
> you've covered your risk pretty well.
>
> > I would like to declare the "selling of deep-out-of-the-money options"
> > a strictly a game of skills and understanding of statistical
> > properties of market returns etc. If you follow
> > my recipe than there is NO 1% of "sheer terror". All cases of
> "extreme" market
> > conditions
> > (that bankrupt gamblers like Victor N.) are handled with "business as
> usual"
> > attitude.
> >
> > So, you don't need any luck (but you need badly a math knowledge of
> > markets), and there is no fear involved in market extremes ("fat tail"
>
> > events), just a simple hedging invoked
> > with a proper timing.
> >
>
>
> --
> Dennis
>
>
>
>
> --
>
>
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