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An options pricing generates a price which - by definition -creates equal
probability for the buy and the seller. The concept of an options model is to
calculate a value which if you traded at with an infinite number of repetitions
would balance out exactly between buyer and sell.
What most people confuse is the concept of how frequently buyers/sellers will make
money. Sellers of options will be profitable more frequently than buyers ... but
sellers can only earn a finite premium and can lose a multiple of the premium they
might earn. Buyers will be profitable on less occasions than sellers, but buyers
can only lose their premium and can earn a multiple of their invested premium.
Buyers will make money when actual volatility exceeds implied(as has been the case
in the US equity market for much of the last 5 years). Sellers will profit when
actual is less than implied(a condition you would expect to exist most of the time
.... in effect about 2/3 of the time the market or stock should make a 1 sigma
move or less over the life of the option). The challenge is that you only really
get the balance between buyers and sellers when you sample a large population of
trades over a long period of time.
The reality as to if you should buy or sell is based both on you expectation of
direction(bullish, bearish or neutral)and your view of volatility over the expected
life of you trade.
Chris Jackson wrote:
> I have just read the new options book by William Gallagher - The Options Edge.
> He did
> an empirical study of actual traded options prices ( 1 on 15 futures
> markets) and it came out that there was no clear bias for option writers or
> buyers -
> something of a shock even to him.
>
> The positive side of that is that there does not appear such a bias to overcome
> when
> buying options i.e. makes buying the right kind of options a reasonable
> proposition.
>
> BrentinUtahsDixie wrote:
>
> > If you know you have a weekness exiting trades then you should emphasize
> > that and vice versa.
> >
> > This is overworking a fine point regarding entrys and exits but one of the
> > things that happens when learning about trading is that someone comes along
> > and makes a statement that sounds true on the surface and then many others
> > pick it up and go around stateing it as fact when it may not be factual at
> > all. Things like "90% of all options expire worthless" and "the market is
> > never wrong". You should question these kind of statements rather then
> > parroting them. If you find youself doing this without questioning and
> > seriously thinking about the issue then you are also likely to be a trader
> > that is always jumping in the market with the wrong crowd at the wrong time
> > just because someone said it was good idea, not because you did your own
> > research and developed your own skill at timming your entrys.
> >
> > Brent
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