|
PureBytes Links
Trading Reference Links
|
A good rule of ultimate survival in selling options is: 1 Never sell
naked energy calls. 2 Never sell naked S&P puts and 3 Never sell naked
siver calls. I know that there have been numerous times that going
against these recommendations would have turned you a profit, however in
other instances you would have lost the farm. Option selling is indeed
the choice of many proffessional traders, but what most people don't
realize is that the options the proffessionals sell are the ones most
people buy.
Paul B
Wayne Moody wrote:
>
> Stuart Hazlewood wrote:
>
> >The real news is that, according to Anand, this range has held true
> >historically 90% of the time. He therefore recommends strategies that
> >are short at 1 sigma based on the at the money IV.
>
> My comments basically address the strategy of holding short option positions
> to expiration. I realize that Stuart is considering more sophisticated
> strategies with adjustments along the way. My main concern is the danger of
> trading based on statistical results at expiration, without understanding what
> a nervous ride it can be. The psychology is different when you're betting that
> an unlikely event won't happen.
>
> Richard correctly pointed out that maximum price excursion before expiration
> is more important than price at expiration. The method may be profitable, and
> the 90% figure may be accurate, but can the trader survive the experience?
>
> Imagine being short for 30 days in a trade that goes well until expiration
> week, when it reverses and threatens to become unprofitable, and is right
> on the line with 1 hour left to trade. This will happen. How will you feel
> if you hold and it fails right at the end? How will you feel if you exit
> to be safe, and it would have worked out OK? (30 days down the drain)
>
> The 30 day statistical trade can turn into a one-hour crapshoot.
>
> Some of your 90% winners will be easy, when the market never approaches
> the danger zone, and premium erodes steadily. You will sometimes be able
> to close at 1/16 or 1/8 long before expiration. Other times, the index
> will be close enough to the danger zone that premium will not erode
> until the bitter end in the last days or hours. As time runs out,
> a sudden move against you becomes more and more expensive.
>
> A successful trade on the long side carries with it a sense of relief
> because if your option goes from 2 to 3 right away, you can normally
> make sure it won't be a loser. When you're short with the intention of
> waiting until expiration, initial success means nothing.
>
> Psychologically, for the entire length of the trade, you're hoping that
> something will not happen, but you know it will happen 10% of the time.
> The S&P usually does not explode upward, but it possibly might, and
> you have to live with that fear. You could short a naked call at 2,
> watch it rise to 10 before the index threatens your limit, and then
> watch it open the next day at 20. (You don't cover at 10 because the
> market is still within normal parameters. Without some bail-out point
> you don't even cover at 20, or 50, or 100. If you DO have a bail-out
> point somewhere, it is based on price excursion before expiration
> and therefore you cannot expect 90% success, since 90% is based on
> holding to expiration no matter what.)
>
> The guy on the other side of your trade has a maximum risk of $200 and
> unlimited upside potential. When the call is at 10, his fear is losing
> some of his profit, or missing out on further gains. Your fear is
> unlimited loss and ruin. Who will be more prone to error, and which
> decision has greater consequence?
>
> Wayne Moody
> wlm95@xxxxxxxxxx
|