Buying Option & Carrying Option is kind of Slow Poison

[smartcat]

90% of speculative options buyers lose their premiums. The rewards for option writers is small in terms of percentage gains, but most of the option writers are big guys who have extremely good judgement of where the market will go and therefore they write options confidently.

The often mentioned "90% of options expire worthless" is based on a research/thesis by a bunch of university students, who have never traded options in their life.

Things to remember:

1) Option buyers need not wait till expiry to make money. They can square off positions at profit anytime. Nobody has done any research on what percentage of people have made money this way.

2) Many premium sellers are option buyers too (spreads). Has any research been done on what percentage sellers are pure naked option sellers?

3) An option might expire worthless. But the buyer could still have made money in a futures position. That is, some professional use options as a hedge. So all option buyers are not idiots.

4) Markets are incredibly efficient. If all option buyers REALLY lose money 90% of the time, and if all option sellers make money 90% of the time, then everybody will start selling options. And there will be no option buyers. Since that is not happening, the often repeated mantra "90% of option buyers lose money" is wrong.

5) Options are products that are designed to lose value over time. Since there are multiple strikes, lots of strikes options end up being worthless. That is a statistical certainty. But has any research been done on options that are profitable, and how profitable they have been? Among the options that have ended up in the money, what is the profit earned divided by premium paid? This ratio will be huge.

 

[RavishReport]

Thanks Smartcat for clarifying, but as per my personal experience & observation in trading community most of the people buying naked options & holding positions loose.
What is your personal observation/experience in buying option?

 

[smartcat]

Thanks Smartcat for clarifying, but as per my personal experience & observation in trading community most of the people buying naked options & holding positions loose.
What is your personal observation/experience in buying option?

I've made both profits and losses when I have bought naked options. But then, I have made both profits and losses when I have sold naked options.

The thing that matters most is what strategy you adopt when you are trading in naked options - naked buy/sell options are just tools of the trade. Both have desirable and undesirable qualities.

 

[RavishReport]

I've made both profits and losses when I have bought naked options. But then, I have made both profits and losses when I have sold naked options.

The thing that matters most is what strategy you adopt when you are trading in naked options - naked buy/sell options are just tools of the trade. Both have desirable and undesirable qualities.

But in my view in buying option one has to unnecessary suffer additional time decay loss whereas one get additional benefit of time decay in selling option with the same strategy.

 

[yankeetrader]

But in my view in buying option one has to unnecessary suffer additional time decay loss whereas one get additional benefit of time decay in selling option with the same strategy.

Risk is same whether you buy or sell options : Option pricing formula is same. Both are different strategies and require different analysis and skills to hold positions.

Both buyer and seller will have options to book losses or profits. The factors like volatility and time decay will impact both.

 

[RavishReport]

Risk is same whether you buy or sell options : Option pricing formula is same. Both are different strategies and require different analysis and skills to hold positions.

Both buyer and seller will have options to book losses or profits. The factors like volatility and time decay will impact both.

Mostly people buy options as the risk is limited predefined & reward can be unlimited and buying option requires less fund whereas it is other way in selling option I mean more funds required as full margin to sell option.
But if good funding is available for selling option what one should prefer buying option or selling option?

 

[SaravananKS]

The often mentioned "90% of options expire worthless" is based on a research/thesis by a bunch of university students, who have never traded options in their life.

......................................
Things to remember:

1) Option buyers need not wait till expiry to make money. They can square off positions at profit anytime. Nobody has done any research on what percentage of people have made money this way.

2) Many premium sellers are option buyers too (spreads). Has any research been done on what percentage sellers are pure naked option sellers?

3) An option might expire worthless. But the buyer could still have made money in a futures position. That is, some professional use options as a hedge. So all option buyers are not idiots.

4) Markets are incredibly efficient. If all option buyers REALLY lose money 90% of the time, and if all option sellers make money 90% of the time, then everybody will start selling options. And there will be no option buyers. Since that is not happening, the often repeated mantra "90% of option buyers lose money" is wrong.

5) Options are products that are designed to lose value over time. Since there are multiple strikes, lots of strikes options end up being worthless. That is a statistical certainty. But has any research been done on options that are profitable, and how profitable they have been? Among the options that have ended up in the money, what is the profit earned divided by premium paid? This ratio will be huge.

Smart Cat,

back testing Trading System is quit related to Researches But Unfortunately
I could not find a good software to back test option Strategies (Though option Oracle is there but it has lot of limitations )

in this traderji lot of threads are based on option Strategies But I never saw any scientific back test (Like what Amibroker having in future or cash segment)

So We are limited to know profit and loss for expiry date only.... that ignores volatility in options in whole month ...............

But one thing I can say for sure that there are more people loosing money then people who earning in option trading :thumb:

 

[RavishReport]

Smart Cat,

back testing Trading System is quit related to Researches But Unfortunately
I could not find a good software to back test option Strategies (Though option Oracle is there but it has lot of limitations )

in this traderji lot of threads are based on option Strategies But I never saw any scientific back test (Like what Amibroker having in future or cash segment)

So We are limited to know profit and loss for expiry date only.... that ignores volatility in options in whole month ...............

But one thing I can say for sure that there are more people loosing money then people who earning in option trading :thumb:

But that is even true for all type of trading not only just option trading, many people loose & few earn in trading.

 

[RavishReport]

prefer to buy ITM option and sell OTM option

Can you pls explain the logic.

 

[SaravananKS]

Can you pls explain the logic.

Logic is simple if you are Bullish Buy 6000 CE sell 6100 CE

if you are Bearish Buy 6100 PE sell 6000 PE

this type of Spreads called debit Spreads:thumb: