options trading for the long run???

[bamm]

I would like to know people's viewpoint on trading options for the long
run... i.e. for 10-20 years.

Is this a viable trading strategy?

I am very skeptical and feel that the options market is for short term
gains.

[John]

Yeah, if used as a risk vehicle, an options trader should outperform a
straight stock trader or a buy and hold investor over the long term.
If used purely for speculation, maybe, maybe not.

Generally the reason most people underform indexes over the long term
is because most people have bombs in their portfolio. All it takes is
one or two to kill your performance. With options, you can remove
those bombs. It's amazing how one can add substantial performance
merely by removing their horrific trades.

I once saw a study that said if the avg investor removed their worst
performing stock from their portfolio, their returns would more then
double on annual basis. Over a long term horizon, that can be
staggering.

John

[Joshua Calloway]

You could argue for every bomb there is a rocket which should propel
the individual investor past the indexes.

--------------
In brief, Options trading does not provide a free lunch. In fact many
of the strategies suggested involve front month trading - hence lots
of trading commissions. Statist. this should be a losers game ( in
the amt of commissions ).

Have you traded options long term - say for 10 years..., and if so
have you beat the indexes?

Did it require lots of expertise, and active management of your portfiolio?

--
Joshua Calloway

[John]

True, but here is the kicker. There are far more bombs then rockets.
So it comes down to probability. You are far more probable to find a
bomb then a rocket. There are many, many long term studies on this.
In fact, even during the boom of the late 90's more stocks got killed
then went to the moom. But due to survivorship bias, you don't hear
about the bad ones because they go away. The good ones stay around.

There is also another point I want to bring up here and this delves in
the psychology aspect of trading and investing. Most people are
genetically programmed to dump their rocket stocks way too early. So
even if you are lucky enough to find a rocket, chances are, you will be
out of it way too soon. Whereas when people find those bombs, they
tend to hold them to the dear end and in some cases, avg down into
them. Because of this, it makes it almost impossible for the avg
investor to beat the indexes.

The indexes have the advantage of getting rid of losers and adding
winners. Think about it. When stocks get hit really bad, they effect
on the index becomes less and less are most indexes are market cap
weighted. At some pt they even fall out of the index. Stocks that do
well, will eventually be added to the index, and as they go higher and
higher, their mkt cap gets larger and they will have a positive effect
on the index. In other words, the index has perfect discipline,
something no human can ever achieve.

I have been trading for 9 years and I would say I have far outperformed
the indexes. I've never sat down to calculate actual numbers but it
has to be by a huge percentage. Especially considering me meager
starting capital.

I did manage my positions pretty actively. Althougb I guess the word
active can be a very ambigious term. Expertise? Sure, what doesn't
require expertise?

You know if you do a search on google you should be able to locate lots
of studies on individual performances against mkt indexes. In the
1970's and 1980's, Merril Lynch did a comprenhensive study that found
that 95% of their clients not only did not beat the indexes, but did
not even earn a positive return over the long run. Very scary indeed.
Also 90% of mutual funds do not beat the indexes and an even scarier is
that even more hedge funds don't beat the indexes. So that that for
what it's worth.

John

[Pirate]

Just one comment per the trading of front month and generating lots of
commissions - this really shouldnt be an issue nowadays with dollar
rates and no minimums.

[Joshua Calloway]

Ok so active individual investing does not make sense. And to extend
it, most active funds don't make sense

---
You continue to actively manage your investments because you've done
well for 9 years ( in spite of all gloomy stats ).
Why do you do this?
i.e. is it a gambler's addiction?

--
Joshua Calloway

[John]

Joshua,

These are not my investments. This is a business. Much like running a
dry cleaner or restaurant. I trade to earn a positive monthly cash
flow. And for 9 years I have done that. I have never had a salaried
job since leaving college. I have supported myself for 9 years on
trading. That is why I do it. I assure you, I am probably as far from
a gambler as anyone you would meet.

Generally gambling infers 50/50 odds or an uncertain outcome. Making
money year in and year out for 9 years would not qualify under those
definitions.

So I will continue to do this until one of two things happen. Either I
stop making money, or I find someone that I can both trust and can make
more money then I do. And since I don't trust anybody with my money, I
think I'll stick to what I am doing.

But you need to understand there is a difference between investing and
trading for a living.

[Joshua Calloway]

John,
what did you study in college?

--
Joshua Calloway

[John]

Joshua,

I studied finance and public relations. If I could do it all over
again, I would study psychology hands down.

John

[Joshua Calloway]

John,
If you're beating the indexes for 9 years .. then it must be true that
you are incurring more risk then the indexes?

Is this true? How does trading options provide lower risk and greater
returns then investing in the indexes?

--
Joshua Calloway

[John]

Joshua,

Here is the difference between options and just holding an index. With
an index you have pure directional risk. With options, you can shift
your risk somewhere else. You can't get rid of it, you just move it.
You can eliminate your directional risk and add either vega risk or
time risk. A good options trader can control his risk. An index
holder can't, at least not without options. If you were long the
nasdaq in 2000, you lost 80% of your position from peak to trough.
That's pretty brutal.

Everything in life has risks. The key is in deciding which risks to
take. That makes a huge difference. Also, you want to be compensated
enough for the risk your taking. With options you can control your
payoff. With stocks or indexes, your payoff is always one to one.

Also, holding an index or a stock long is like holding a naked put.
Naked puts are always bad bets. An option trader can hedge that put.
An index or stock investor can't, unless of course he trades the
options with the stock or index.

Let me ask you a question. Would you feel comfortable holding naked
puts on all your stocks in your investment portfolio? Because in
reality that is what you have. Of course, they are not synthetic puts
in that you don't have short calls against them. But in terms of risk,
that is what you have. Think about it. You are actually trading
options without even knowing about it.

John

[Joshua Calloway]

I understand options and investing in general ( I have read a dozen
books or so ).

I'm not convinced though that options trading provides a "FREE
LUNCH"..... ( I.e. lower risk with higher returns than the index ).

Yes you maybe enjoying higher returns for 9 years, but I would argue
that you're also taking on more risk.

Also in the long run, options trading entails more trading commissions
costs.... so statistically it maybe an uphill battle.

--
Joshua Calloway

[Cedrick Johnson]

Not necessarily so. Armed with the right option strategies, you can be
agile to risks that are posed, and dynamically shift the risk profile,
much like John said, between vega, time, etc.. From my experiences in
the fixed income market, the ability to shift the risk is king. Risk
will always be there, but you can attempt to shift and control risk as
it occurs.

--

"But when you're passionate you can do anything."
Michael Milken

[Gabriel Alindogan]

With options you can "create safety" amidst risk - quote from Billabong
oddysey-a film documentary about big wave surfers. Rent it a your local
blockbuster- a very appropriate film for traders.

[John]

Joshua,

I never said anything about a free lunch. I't's about controling your
risk. You simply cannot control your risk when you are long stocks or
long an index naked. You just can't. All you can do is try to
diversify your risk. But in bear markets, all markets seem to be
completely correlated to the downside.

The idea of trading for a living is to generate cash flow each and
every month. There is nothing wrong with investing. But you are not
going to earn a living from investing. You are also taking on
substantial risk if you have a long term portfolio that is unhedged.

I'm not sure why you are not understanding this. We are not comparing
apples with apples here. We are talking about generating cash and
controling risk. So let's remove the free lunch part out of the
equation since I never mentioned anything about a free lunch.

Also commisions are a non event. You can trade options for a $1 a
contract anywhere. Commisions are not going to eat you alive. If you
are losing money because of that, you shouldn't be trading.

John

[Joshua Calloway]

First, I've paid about $1900 in commissions ( at $1.25/ contract ) in
Jan, and Feb.

Second.. if you're trading for a living then you are basically saying
that you can make more than the index by actively trading.

Third.. risk is relative, performance is relative. The GOAL is to
beat the index with lower risk than the index.

--
Joshua Calloway

[John]

I'll try to reply to all three of your points here.

First, the fact that you paid $1900 in commissions is not the issue
here. You obviously did a lot of trading. You could have easily made
5 times that in profits. If you didn't, then the issue is your trading
and not your commissions.

Second, yes that is exactly what I am saying. I am saying you can make
more then an index by actively trading. I have said that now for 5
posts. You cannot make a living just being long an index. It just
isn't going to happen. You can however make a living trading options
month to month. I'm not saying you WILL, I'm saying you CAN. There is
a difference.

And third, of course risk and performance is relative. I thought I
said that earlier. With options, you are not getting rid of risk, you
are shifting it. And by the way, my goal is not to beat the index. If
that was my goal from 2000 to 2002 I would be living on food stamps as
the indexes got killed. My goal is to earn a living. Not to beat the
indexes. It just so happens I do beat the indexes because the indexes
are pretty easy to beat if you are actively managing your account. And
as far as having lower risk then the index, I think I stated earlier
that by being long an index you are essentially short puts in that
index without the upside of receiving the put premium. You are taking
on substantial risk by being short those puts. It's not hard to create
option positions with less risk then a naked put.

John

[Joshua Calloway]

I did do regular trading ( in lots of 10 to lower commissions ), the
front month options for the last 2 months.

I did beat the index for the last two months, but this is only due to
taking on alot more risk.

I'm undecided whether this is worth continuing....

I have a high risk tolerance, but I don't want to play against uneven
odds ( $1900 in commissions is uneven ).

--
Joshua Calloway

[John]

Joshua,

How does trading in 10 lots lower your commision? You should be paying
per contract with no minimums. Also, 1.25 per contract is only 1.25
cents per option contract. That's not negative edge or uneven odds.

So $1900 in commisions equals about 1520 contracts. If you just made a
single tick on each contract that would equal $7600 in gross profits.
Commisions hardly play a role here.

And maybe if you discussed your trades here, we could see what kind of
risk you were taking. The phrase a lot more risk can be very
ambiguous.

John

[Joshua Calloway]

There is a minimum at OptionsXpress of $12.50 a trade.

I shorted a lot of strangles on the front month.

--
Joshua Calloway

[John]

OK, well if you traded at a place like Interactive Brokers, you pay
only $1 a contract with no minimums. So you might try switching
brokers. That fixes one problem.

And as for selling strangles, this is not something I would ever
recommend anyone doing. You are taking on a lot of risk for very
little reward. Selling strangles is probably not a good long term
viable strategy for you to use. It's very hard to control your risk.
There are much better ways to sell premium then selling strangles.

John

[Susan Kleinman]

Hi Joshua:

I believe the minimum at Options Xpres is 14.95. I have an account there.
It is 1.50 contract with minumum of 14.95. If you have something different,
I would like to know.

Suse

----- Original Message -----
From: "Joshua Calloway" <repeat...@gmail.com>
To: <Chicago-Opt...@googlegroups.com>
Sent: Thursday, March 10, 2005 3:56 PM
Subject: Re: options trading for the long run???


>

[Joshua Calloway]

Ask them for an active trader's discount.

--
Joshua Calloway

[Susan Kleinman]

Hi Joshua:

Thanks for the info. How many trades do you need to do a month to qualify.

[Joshua Calloway]

I'm not sure what the minimum is.


On Thu, 10 Mar 2005 17:20:35 -0600, Susan Kleinman

--
Joshua Calloway

[Susan Kleinman]

Thanks again.

[Archer SF]

Suse / Joshua,

 

From OX, " Trade more than 35 times a quarter and qualify for our Active Trader Rate². $1.25 / Contract, $12.95 min / trade "

 

Well,  I want to say one thing Joshua those were a lot of trades/contracts you played in the last couple of months.  And $1900 in comm. is a lot especially when you are not seeing profits. (Well, I don't know if you had any profit or loss)  

 

If you don't mind sharing, could you post some specifics of your experience, trades, data and what you've learnt out of this?  This would help someone like me.  One thing that I am learning is, "Keep your trades simple"  because once you start trading complex strategies you loose in comm. + slippage + adjustments + may be comm. again.  I am not saying that these strategies are not profitable but at my level and for me and at this time, I don't like them.  For someone like John / Mike ( and may be You) it's a different story altogether.

 

Archer

 

Joshua Calloway <repeat...@gmail.com> wrote:

I'm not sure what the minimum is.


On Thu, 10 Mar 2005 17:20:35 -0600, Susan Kleinman

wrote:
>
> Hi Joshua:
>
> Thanks for the info. How many trades do you need to do a month to qualify.
>
> Suse
> ----- Original Message -----
> From: "Joshua Calloway"
> To:
> Sent: Thursday, March 10, 2005 4:35 PM
> Subject: Re: options trading for the long run???
>
> >
> > Ask them for an active trader's discount.
> >
> >
> > On Thu, 10 Mar 2005 16:27:06 -0600, Susan Kleinman

---

Do you Yahoo!?
Make Yahoo! your home page

[Yll]

Ill add my opinion into this discussion. There are very few long term
investors who do this for a living. And the ones (long-term investors)
that do have very deep pockets and hold extremely large positions. This
is not something I can afford or even want to do. My goal is to
generate enough monthly cash-flow so I can leave the rat-hole job I
dread going to everyday.
Short-term is the only way to generate a good average monthly income
and this can be a lot more work then most people want to commit to.
This is because it requires more time to find your setups. It also
means constantly being exposed to risk day in and day out. As long as
one can define their edge and risk/reward then it can be done as long
as the plan is followed. At this point in my life (which took 5-6
years) I am confident enough in my trading to go out on my own. In
other words if I got fired tomorrow I would not care. Im just waiting
until I get my 11 years in the company to get vested into the pension.
In my learning curve the thing I found the hardest to learn was
execution. This is what separates the winners from the losers. Tools
and tactics are not very hard to learn. As a matter of fact I think
there are more people out there trying to teach you how to trade then
there are successful traders. Its sad but true. Execution can only be
learned with real money and tears and it takes a lot of work and time
to learn it. In my losing years I found that 80%-90% of my trades
always ended up moving in my direction right when I entered them. I had
a great approach but why was I still losing money?
Because I had no patience, discipline, or position sizing methods.
When I evaluated all the trades I realized that there were so many
losing trades that I could of scratched (get out at even) and so many
winning trades that could of ran so much farther. The only problem with
my system was me.

[Joshua Calloway]

I shorted lots of straddles.

One such trade I did was shorted 20 puts on GOOG at 185 and 20 calls
on GOOG at 195 - Feb. expiration.

Of course Feb. was very risky month for GOOG & many stocks due to
earnings releases.

----------

Naked straddles are simple trades - ( usually you incur higher
commissions through spreading, condors, etc.. ).

--
Joshua Calloway

[Michael Catolico]

it depends when you shorted them and for what prices and what (if any)
adjustments you made. you may have either cleaned up on these trades or
gained a lot grey hairs. care to provide more details? why did you pick
this stock and those strikes; when did you enter; what stop provisions
did you set for yourself; how disciplined was your execution/adjustment;
how did the overall trade work out?

thanks
michael

[John]

Hi Yll,

That was a great post. I think you covered all the bases there. On
the most simple and basic level, if one just looks at their previous
trades and finds a way to take a couple more ticks on their winners and
cut their losers by a few more ticks, the results are absolutely
astounding. It amazes me how many traders don't milk their winning
trades. When you look at the greatest traders of all time, or perhaps
just the traders that have made the most amount of money, one of the
characteristics they all had was the ability to ride something to the
moon or short something all the way down.

If you put on a trade to make 2 pts and risk 2pts and you only take .20
out of the trade. The risk/reward is horrible. You risked 2 full pts
to make a lousy .20? That's not going to work. Execution is
everything. The best ideas in the world are meaningless if you don't
execute.

John

[the...@aol.com]

John,

Something is happening with the emails. On 3/10/05 I received more than
20 emails.
How can this be reduced to a more managable amount?
Please send to me an email with the blogger address and the yahoo
address so I can still participate in the discussions after this is
corrected. Thanks, Andrew

A few comments:
Many have the impression that $1.00/ contract at interactive brokers is
an attractive commission rate. However when one digs deeper they will
find that they will be penny wise and pound foolish. If they place the
contract on their preferred exchange and you lose a nickle on a 10 lot
you saved (1.25 - 1) * 10 = 2.50 on commissions and you lose (.05 * 10)
* 100 = 50. The net loss is $47.50. There one can pay a higher
commission rate to direct their orders.

In a previous email the company that you discussed offered 15% margin
maintenance. Please comment more on how this is better than what most
brokerage firms offer with their formulas or 20% and 10%.
15% is better than 20% as it frees up more capital at the start. But
when a position goes out of the money most brokerage firms go to 10%.
Its .2 (closing price - out of the money) + premium to close the
position) (#contracts)* 100 or .1(closing price of the security) +
premium to close the position) (# contracts) * 100. Whichever is
higher of these two formulas most brokerage firms use. Some even add a
third formula which usually is the highest for out of the money options
and is a dollar amount per contract. After a contract that is at the
mone or near the money is sold the company that you mentioned is
better. But once the option is out of the money and the 10% formula is
used this firm ends up restricting more capital. Please correct me if
I do not understand the firms formula at 15%?

I think that prior to 1 year ago one could do reasonably well selling
naked puts, naked calls, naked straddles, naked strangles for monthly
income. I find it very difficult now as one's monthly income is
significantly reduced with the lower equity volatilities. The cost of
doing business is the same or higher (commissions are the same but
short term interest rates are higher for borrowing). So one can still
enter all the same trades but the reward to risk ratio is substantially
lower. At this time I have switched to having long and short positions
and have not found another suitable strategy and am open to ideas. The
short and long positions leave me open to large risks and rewards
although I felt this was better than cash. I may be wrong and have
thought about collars but have not yet put it into action. I am open
to ideas about startegies with such low volatility.

Does anyone subscribe to ivolatility.com? If you do how long was your
learning curve and what parts of it do you find helpful?

Thanks,
Andrew

-----Original Message-----
From: John <jknot...@aol.com>
To: Chicago-Opt...@googlegroups.com
Sent: Thu, 10 Mar 2005 20:29:45 -0800
Subject: Re: options trading for the long run???

[John]

Hi Andrew,

I still think you are not understanding retail margin correctly. I
also think you are confusing initial margin with maitenance margin.

Let's start with the easy ones here. Debit spreads. In a retail
account you put up 100% of the debit for any debit spread since that is
the max amount you can lose. So if you buy 10 straddles for 5pts, you
have to put up the full $5,000 dollars. This never changes. At
VTrader, you would put up $250 (25 x 10).

Now let's move to a short straddle. Say you sell 10 straddles on the
100 strike for 5pts. You will be required to put up 20% of the stock
at the short strike. Here is where I think you are getting confused.
This is 20% of the STRIKE, not the loss. So we take 100 x 1000 =
100,000 then multiply that times 20% which equals 20k. That is your
margin for that trade. In a VTrader account, your margin is measured
in terms of loss, not strike. So we would take your max loss 15% up
and down. Let's say in this case it's $3500. So at VTrader, your
haircut would be $3500 versus $20,000. A huge difference. Now, let's
add a kicker. Say you want to hedge this position because it's going
against you. Let's say you decide to buy 500 shares of stock to hedge
your deltas. Now we take 500 x 100 =$50,000 x 50% and we get $25,000.
That is how much money you have to put up for your hedge. At VTrader,
that hedge costs you nothing. In fact, it now reduces your haircut to
$1,000. So let's compare. So far you have put up $20,000 plus $50,000
for a total of $70,000. I have put up $1,000. That's 70 to 1!

I hope this helps you understand this better. On avg what I have
noticed is on short premium positions you get about 8 times the
leverage on a retail account and on long premium positions, anywhere
from 15 to 50 times the leverage.

John

[Pirate]

Gulp - talk about taking on some risk...shorting 20 front month
strangles in a nut case stock like Goog is probably only 2nd in line to
selling naked options in an FDA play.....though I am still confused how
you can be trading so many contracts if this is a typical trade for
you......maybe you are doing a lot of butters or condors but whatever
the case I would really try to stop trading so much......I would be
surprised if anyone on this board, including John, trades that much and
he is full time in the business (and I am assuming you are not? is this
wrong?)....also I would agree that the overall vol numbers just arent
there now to be short much premo as evidenced by Vix being so
low...sometimes we just have to sit on our hands and be patient and
wait for opportunitys to arise......its obviously a tough thing to do
when one is trying to generate cashflow....

[John]

Joshua,

Just curious, exactly how many positions do you trade a month? you
seem to be a very active trader. In order for you to do 1520 contracts
with an avg of 20 lots we are talking 76 positions here! Obviously
some of those positions had more contracts I'm sure, but still, that's
a lot of trading. And it appears that you are a premium seller.
That's a lot of contracts to be selling. I will side with Mike here
and ask for more details about your GOOG trades such as your hedging
parameters, your profit goal, your risk tgts and so on.

Also curious how you manage so many positions a month? Especially with
all of them being short gamma. If you are really trading this kind of
size and are trading primarily short gamma, give me a call. You really
need to be in a professional trading account. It's not not feasible to
do what you are doing in a retail account.

John

[Joshua Calloway]

For the last 3 months, I have been trading actively... identifying
stocks that are either depressed or overextended.

I then proceed to sell naked puts/ calls... on a slight rebound...
I'll sell the other side of the straddle.

I'm basically doing this on gut feel.. I know this sucks.. but I feel
that the market is pretty efficient and that any work I apply will be
useless.

--
Joshua Calloway

[Pirate]

now thats an interesting approach........ remember flat is a position
and loss of opportunity is always preferable to loss of capital

[Joshua Calloway]

Pirate,
How long have you been trading options?
Have you beat the indexes?

--
Joshua Calloway

[Pirate]

I worked for a derivatives fund in the 80s and 90s so we obviously had
much higher thresholds than beating the indexes.....we were primarily
premo sellers - we had real money behind us, could take some serious
hits, and the partners knew the risks/rewards of selling options and
could stomach it. That being said the risk /reward just isnt there for
balls out premo selling like we used to do....amazingly VIX was around
mid teens then and VIX at 20 was a gift from the option gods to load
the boat short premo - but like most things the business is way
different now and there arent many people doing that stuff anymore....I
dont trade options full time anymore for various reasons, not the least
of which is the fact that I know very few people making money trading
options in a retail account. The advent of multple listings has
tightened up the markets so much that they have definitely gotten much
more efficient and leveled the field from floor vs non floor traders.
I just dont know how a part time retail trader can make money in
options trading against pros who eat, live and breathe the greeks.
Also trying to compare investing money in the indexes vs investing the
money in the option market just doenst make sense to me...Putting 200k
in an index fund is investing in my mind....putting 200k to work in the
option market is not investing, its called trading and requires
exponentially more time and resources. My general comment to you was
that unless you are a full time trader (with the obvious committment of
time and resources), the amount of trading you are doing from a part
time approach just doenst make sense to me - it just seems like a way
to make Ave Gray and Son much richer than they already are without
materially increasing your net worth.....so I guess my bottom line is
this - unless I was to start trading options full time again, I just
dont see the risk/reward of trading much size or allocating much
capital to it, especially when I get 8% on my money ....anyway thats my
3 cents.....

[Cedrick Johnson]

Beating indexes can sometimes be highly overrated :)

-c


On Fri, 11 Mar 2005 15:14:47 -0600, Joshua Calloway

--

"But when you're passionate you can do anything."
Michael Milken

[Joshua Calloway]

From the discussions, you guys are saying that for retail investors
---- trading options is not practical for long term.

Especially a strategy of just selling premiums.

--
Joshua Calloway

[Gabriel Alindogan]

Before opinions are bandied about retail trading , it has to be defined.
Retail option trading has different connotations for different people.

1. Is is the commissions ? Not material these days, Retail trading is cheap
nowadays with IB, Tradestation,etc.

2. Is is the margin? Probably the most important consideration due to
different rules covering retal vs. pro traders. i.e. Reg T vs. Mkt based
haircuts.

3. Systems.- difference between the systems not as wide as they were 2-3
years ago.

4. Time spent- if you stare at the screen all day vs. someone w a day job
and occasionally puts on trades.

So what exactly does retail trading mean?

----- Original Message -----
From: "Joshua Calloway" <repeat...@gmail.com>
To: <Chicago-Opt...@googlegroups.com>
Sent: Monday, March 14, 2005 11:09 PM
Subject: Re: options trading for the long run???


>

[John]

No, Joshua. What people are saying is that anybody that decides to
trade options for income, should take this very seriously. I probably
put 50 to 80 hours a week into this. It's a real job. It's not
something I do on the side for a little extra cash. Investing is
different. But if one wants to be successful trading, this has to be a
serious pursuit.

As far as selling premium goes, I'm a decent size premium seller as
well. It doesn't matter if you buy premium or sell premium, the
probabilities are exactly the same. There is no statistical advantage
either way. This can be proved mathematically by the deltas of the
options you are buying or selling. They are the same for a buy as they
are for a sale.

I think what Steve was trying to say, is the game of simply selling
premium requires a tremendous amount of capital. Because in order to
do it safely, one must be able to trade a large number of positions to
absorb any hit you take an any one position. It also requires the
ability to do complex hedges which for the retail trader could involve
substantial amounts of additional capital. Most small retail traders
simply don't have the sufficient capital to make simply premium selling
a viable method. I'm course I'm talking about just plain naked
options. If you are spreading your options, you will make things much
easier for yourself. I hope this helps answer your questions.

John

[BooV...@gmail.com]

Hi John.

I'm a newbie to the board and I've read some of your replies.

If you don't mind me asking, are you beating the indexes with trading
strategies such as spreads (i.e., long put calendar spread) or
straddles?

I'm just wondering...thanks.

[John]

Hi Boo,

No real easy answer to that question. I really believe that there
isn't "A" strategy that beats the indexes. It just takes good trading.
I know that's a vague answer but that's the real answer. The key is
to find a strategy that you know you can execute. Execution is very
important. Some people execute calendar spreads very well, some people
execute straddles well. It really depends on the individual. The
thing you do need though is a solid understanding of risk. Learn the
risk, then find something your comfortable with.

John

[bamm]

Last night I spent about 20 minutes setting up virtual accounts to
mirror my actual accounts.

If I had $14,000 in my account, I would set up a virtual account of
$14,000.
This morning I then bought $14,000 worth of QQQQ in my virtual account.

Over time, I can then see if my options trading does beat the QQQQ
passive virtual account.

[John]

Hi Bamm,

You might want to pick a different index then the QQQQ. That index is
dead. I would go with the SPY or the DIA. Good luck.

John

[jpal...@earthlink.net]

John,

Would you mind to say a word about why you think Q's are dead? I'm trading them together with SPY and DIA, and like them for their lower price in some applications, so I'm curious about your statement.

Jacek

-----Original Message-----
From: John <jknot...@aol.com>

Sent: Mar 31, 2005 10:54 AM
To: Chicago-Opt...@googlegroups.com
Subject: Re: options trading for the long run???

[John]

Jacek,

I was referring to an index barometer. The nada historically is
probably not the best index to measure your trading performance
against. Most fund managers and mutual funds measure their performance
against the SP 500. I just thought that would be a better index to see
how you are doing vs the general market. The comment was directed
towards trading the index or it's viability. I hope that clears things
up.

John

[Joshua Calloway]

To Mike's suggestion, I set my virtual accounts to SPY.

----
So overtime, I can now see if I'm wasting my time/money.

--
Joshua Calloway

[Aaron]

I agree with John. The key word here is "strategy". If you are
looking to reduce your portfolio's risk (i.e., possibility of loss)
over a period of ten to twenty years, then options trading can possibly
be a long-term trading strategy when used as "insurance".

If, on the other hand, your strategy is for quick "hits and runs" over
a long period of time, then, IMHO, I would say that trading options is
not a viable long-term strategy. It's a lot harder than it looks
(trust me from someone who has lost money trading on paper!)

[John]

Hi Aaron,

Good to see you at the meeting Monday night. The guy that you listened
to speak for an hour on Monday night would probably be happy to refute
that argument. LOL.

I agree though, if one is only trying to take shots and make quick
bucks, that simply cannot be sustained over the long run. However,
that's not to say that one can't conistently and conservatively
generate income for the rest of their life with options trading. Of
course nothing is easy in life and options trading certainly is not
exception here.

I hope to see you again at the next meeting.

John

[Joshua Calloway]

I think that trading in and out of options is a losing game for the long run..

This is based on the bid/ask spread difference..
1. you will always slightly overpay for your options
2. you will always slightly sell your options for less

--
Joshua Calloway

[Gabriel Alindogan]

All mkts have vig.

Options, used restaurant equipment, real estate, Elvis memorabilia. All of
them have bid/.asked spreads.

Vig is one factor but nowhere near other material factors such as wrong
forecast on vol, direction, and lax discipline . I know... since I
experience all of the above.

From: "Joshua Calloway" <repeat...@gmail.com>
To: <Chicago-Opt...@googlegroups.com>

Sent: Thursday, April 07, 2005 12:33 PM
Subject: Re: options trading for the long run???


>

[John]

Great post Gabby,

You are absolutely right. Everything in life has a vig. Mike Williams
has been making money the last 15 years, I've been making money the
last 8 years. I guess we are both very lucky then. I hope the luck
continues for both of us!

John

[Joshua Calloway]

so basically you guys are arguing that

1. your assessment of market risks is generally better than other
investors assessing market risks.

2. item 1 is so much better as to overcome the challenges and
theoretical dis-advantage of ...
a. commissions
b. losses in the bid/ask spread

--
Joshua Calloway

[John]

Joshua,

I'm not arguing anything. First of all, commissions are a buck a
contract. There is no way that is eating into your bottom line. That
accounts for a single penny on an option contract!

And spreads should not matter either. If you are trading front month
or 2nd month options, like you said you are, spreads are only a nickel
wide for most liquid issues. I don't trade options for nickels, I
trade options for dollars.

And btw, investors are never assessing market risk, they have a long
synthetic call on prosperity. That's really what they are betting on.
They are not assessing risk. Maybe they have diversified their
portfolios. They may even sell a covered call here or there. But in
the end, they are simply betting that the world is not going to come to
an end. That is not even remotely close to how a professional trader
looks at the market.

John

[Joshua Calloway]

as you can see I believe that trading options in the long run is a loser's game.

regardless if you're a trader or an investor.

This is more true now then ever.. as more money gets invested into the
markets ( more players -- and smarter players -- equals less
opportunities ).
------------

--
Joshua Calloway

[Joshua Calloway]

oh by the way.. why do people sell covered calls versus a strangle ?

It seems like the short strangle is better - collection of premium on
both sides.

On Apr 7, 2005 2:44 PM, John <jknot...@aol.com> wrote:
>

--
Joshua Calloway

[John]

Joshua,

If you believe it's a losing game, why are you trading options and why
are you trading them so aggressively per your previous posts?

I'm not sure I understand. And if it's a loser's game, then somebody
has to be winning right? So where is all this money going then that
people are losing? It doesn't go in a vacuum. Trading options is a
zero sum game. The money that is lost has to be transferred to
somebody. This is where your argument falls apart. Obviously somebody
is making money. The question is, will it be you? Will it be me?
Mike Williams? Someone is going to get it. Only you can answer that
question.

John

[John]

Because they are already long the stock. They just want to increase
their yield. They are selling synthetic puts on stocks they want to
own.

John

[Joshua Calloway]

I'm a bit of a gambler... hoping for the big win.

you are right .. options is a zero sum game --- except for the costs
of commissions/ bid-ask spreads. These are significant - especially
for the long term trading.

--
Joshua Calloway

[John]

Joshua,

Why are you gambling? You would probably make a lot more money trading
conservatively. Ironic I know but true.

And I still have to disagree with you on the commissions and bid ask
spreads. The only way they will hinder your performance is if you are
only making 2% to 3% a year. And if you leg into spreads, the bid/ask
spread is a non event. Trust me, when people fail at trading there,
there are many reasons for their failures. I have never met a single
guy that failed because of the commissions and slippage. Not one. I
think this is just a crutch you are using if you don't mind me saying
so. Everyone has a crutch. Some people blame their family. Or they
say they don't have the time. They blame their broker. They blame
their software. Very few people admit to being bad traders. At the
end of the day you have to be honest with yourself. You can tell
yourself it's commissions and slippage if that makes you feel better.
But it's not the right answer.

Btw, if you want to trade in a professional account, let me know. We
can lower these so called commissions that you are worried about. but
you have to take action. You can't just sit there. You have to be
pro-active.

John

[michael]

as i see it, there are (at least) two ways to win at a zero-sum game.

1) gambling. make a big bet, win and walk away.
2) skill. develop knowledge and experience to recognize situations with
a high probability of success.

options trading is a lot like poker in that there are
known/determinable probabilities for each hand and each situation. so
the first goal is to determine what those odds are. there are many,
many card players and options speculators that never learn the
fundamental probabilities. thus skill will pay small repeatable and
consistent rewards to those few that know the odds and play against the
less informed.

where options trading parts from the poker analogy is that the trader
doesn't know who the opponent is. the successful trader exploits market
situations that mimic the poor poker player. it could be spread
relationships. it could be volatility extremes. it could be numerous
situations. attuning yourself to these opportunities takes lots of
study and commitment. i credit john (and others) for attempting to
impart some of this knowledge to this group.

it is indisputable that there are skilled professional poker players
that win consistently for decades on end. it is indisputable that there
are long term, highly successful options traders.

michael

[John]

Great post Michael.

Poker is a great analogy to options trading. And poker players pay a
vig too! Doesn't stop the good players from winning them though.

John

[Susan Kleinman]

Hi Joshua:

I have been reading your posts and the responses, and I am asking myself why
do you continue to post these very negative points of view when you seem to
spend lots of time trading. What is your point? Who are you trying to
convince about what? There are very experienced traders on this site, and
you continue to discount their advice and experience... sometimes to learn,
one must surrender and be open to the fact that they may not be right. And
there are others who will die to be right. Which are you?

Forgive my bluntness, but I am really baffled by your participation on this
board as it seems there is nothing for you to learn.

Suse

----- Original Message -----
From: "John" <jknot...@aol.com>
To: <Chicago-Opt...@googlegroups.com>
Sent: Thursday, April 07, 2005 4:44 PM
Subject: Re: options trading for the long run???


>

[Joshua Calloway]

Suse,
I've read quite a few books ( most influential - portfolio management
by David Swensen - who manages Yale's endowment funds ). He argues
that overtrading - and options trading seems to lend itself to
frequent trading - in efficient markets is a loser's game.
( today the markets are getting more efficient )

Ok so you argue that there are professional traders ( i.e. people who
know better how to manage risk ) who do this for a living..,

But if the professional trader's are playing a loser's game ( if we
agree on that ), and they are winning - then we can attribute this to
a "good luck" run.

--
Joshua Calloway

[Joshua Calloway]

Personally I like option 1)...
Like really... do I really want to be staring down financial data for
the rest of my life?

--
Joshua Calloway

[Cedrick Johnson]

Steven L. Miller comes to mind... He's a successful long term options guy

SLM (folks called him Slim on the floor)

-c

-----Original Message-----
From: michael [mailto:mcat...@mindspring.com]
Sent: Thursday, April 07, 2005 6:20 PM
To: Chicago-Opt...@googlegroups.com
Subject: Re: options trading for the long run???

[John]

Joshua,

You keep refering to trading as a losing game? This is very
inaccurate. We just discussed earlier that it's a zero sum game. Do
you know what that means? That means if I invite 5 guys over to my apt
to play poker. Each guy brings with him $10. We play all night till
one guy has all the money. That means at the end of the night, the sum
total of all the money is the same, $60. The only thing that changed
is one guy won all the money. He is leaving with $60 and the rest of
us are leaving with zero. This is not a losing game but a zero sum
game. You need to understand the difference.

Also you say markets are efficient. This is another argument I have a
problem with. Option markets cannot possibly be efficient for two
reasons. One, there are far too many puts sold to institutions as an
insurance policy on their long stocks. Because of this demand, put
prices are generally overpriced.

Two, there is a very large covered call crowd out there. Again, these
are institutions that sell calls to bring in a little extra premium
each month. This heavy call selling means that often calls are
underpriced to their equidistant puts. Now as we know from options
pricing theory, because of put to call parity, all options must be
priced correctly on the same strike line relative to each other. But
they are not priced the same to their shadow counterpart on the other
end of the strike. This is what creates what we call a smile or a
skew. This skew is implying very bluntly that the options are
mispriced if the stock is trading efficiently. Because an efficient
stock should always be the right price, at least according to EMT
(efficient market theory). You can't have it both ways. Either the
stock is priced efficiently or the options are. But if there is a
skew, it is saying one of them is not. So much for academic BS.

And last but not least, you ask, "do I really want to be staring down
financial data the rest of my life?"

You over the weekend, Mike Williams made an interesting point about
passion and discipline. He said, in order to be successful you need to
have one or the other. A passionate person is driven by the love of
what he/she is doing and will be successful because the work and effort
required to be succesful is rewarding to them. A person without passon
needs discpline. They hate what they are doing and they have to force
themselves to behave like a robot and just get the job done. Some of
these people can be successful but they will never enjoy what they
doing and most of the time, they won't stick it out.

It seems to me by your statement that you do not enjoy this. You are
forcing yourself to trade so you win the big one. You get no joy out
of bettering yourself with knowledge nor do you get any joy out of the
challenge that trading provides. Even if you win the big one, and make
all this money. What is it for? You will just be miserable and
unhappy as your life has no meaning. You have accomplished nothing.
All you did was get lucky.

One more question for you Joshua, you say you are only in this to
gamble. You say you are trying to win the big pot. Then why on God's
green earth are you selling premium. You cannot mathematically win the
big one by selling premo because your gains are limited. Shouldn't you
be buying options and going for the moon. You should be loading then
boat with deep OTM options for the big homerun. You are just full of
contradictions aren't you. The irony here is that you are trying to
win the lottery but you are engaging in a strategy that at best forces
you to stay in this game for the long run due to the small gains
receieved. I think you really need to re-evaluate what you are doing
here. Every statement you make contradicts your previous statement.

John

[Cedrick Johnson]

Group-

(Referencing John's mention of skew in another thread)

Anyone have any research on the Skew? I have a basic understanding of it, my
mentors in the grain options pits have made mention of it. Where can I find
out more? How is skew used and what are the advantages of it?
Disadvantages/downfalls?


Thanks,
Cedrick

[Joshua Calloway]

John,
Can you explain the skew in more detail?

I understand that on the strike, calls and puts are priced a bit
differently....

Usually this is due to dividends, interest rates, carry costs.

===
If options and stocks were not priced efficiently, then wouldn't
someone take advantage of this... and play out the inefficiency.

In other words any inefficiencies in the markets will be short-lived (
in matter of seconds ).

--
Joshua Calloway

[Joshua Calloway]

Options is a loser's game in the amount of the cost to play the game...

i.e. commissions and difference between bid/ask.

On Apr 7, 2005 7:57 PM, John <jknot...@aol.com> wrote:
>

--
Joshua Calloway

[Michael Catolico]

when people talk about skew they can mean a several different things:

1) the difference in implied volatilities (IV) between calls & puts at the same strike and in the same expiration class/series

2) the difference in IV between strikes for the same expiration period

3) the difference between IV levels for different expiration periods.

in the case of #1, any discrepancy will be quickly arbitraged out via put-call parity. this is what you are thinking of Joshua.

#3 is a function of many complex factors. essentially it boils down to market perceptions about the future for the various expiration periods. for instance, the front month may be a non-news period and the second month may include an important earnings announcement. the greater uncertainty of the 2nd month should lead to higher IV. there is no pure arbitrage between expiration periods - this is a function of market opinions and forces at work.

#2 is the most interesting and the focus of John's comments (though I won't puts words in his virtual mouth). the discrepancy in IV levels between different strikes has baffled academics and market participants since it first became pronounced (which  occurred after the '87 stock market crash).  John has correctly pointed out that because most holders of securities are concerned with sudden adverse declines in portfolio value (i.e. a crash), put IV values (which includes any strikes - puts or calls - below the current spot value) are pumped up. recent more stringent short sale rules have made this more significant on some illiquid issues. 

basically option pricing models are flawed in that they assume continuous markets and smooth price movements. obviously prices gap frequently so the higher skewed OTM puts (and in certain situations or stocks, calls) will reflect the potential for sudden price gaps.

from a trading perspective there are opportunities to profit from this type of skew. often particular strikes will trade outside of expected IV ranges and a sharp trader will be able to exploit the discrepancy by trading a spread. effectively, spread trading creates a " net  IV"  for the position. consistently buying IV levels below where you short IV levels of the same expiration series (while keeping all other risk parameters neutral) is one profitable way to trade.

michael

[Michael Catolico]

by that definition, any activity that includes a transaction cost is a
loser's game. which, when you include economic externalities, includes
every conceivable human activity.

sorry, just feeling philosophical today.

michael

[John]

Michael, you hit another one out of the park. I'll add one more thing
for Joshua. There is a serious contradiction here with the academics
on EMT as they pertain to stock and option prices. In other words, in
a perfectly efficient market, it's not mathematically possible for a
skew to exist.

A skew is outright telling you that the market is actually inefficient.
In a perfectly priced market there would be no skew. The academics
always try to dance around this issue and use words like anomaly. LOL.
The bottom line is, the very presence of a skew of any sort is
explicitly telling you that the market is indeed very inefficient.

John

[Joshua Calloway]

Ok... let's argue that there is a skew.. and that the markets can be
inefficient.

It would be to your advantage to
- identify the markets with the biggest or most skews ... i.e. the
most inefficient markets ( maybe not NYSE or NASDAQ publicly traded )

- try to trade with the lowest costs ( i.e. commissions )

--
Joshua Calloway

[John]

Joshua, I'm not sure what you mean by maybe not NYSE or Nasdaq. All
publicly traded stocks are on NYSE or Nasdaq.

Aside from that, yes, it would be to your advantage to trade those
skews.

I asked you this yesterday and I'm still curious about this as maybe
I'm not sure exactly what you are doing here. But you said you wanted
to gamble and go for the big win but you said also they you were
primarily a premium seller which has no big win potential. Did I
understand you correctly? Clearly I misunderstood one or both of your
posts. If you could clarify that, it would be great. Thanks.

John

[Michael Catolico]

Joshua,

you have just identified my job description.

michael

[Joshua Calloway]

Generally speaking the NYSE and nasdaq publicly traded stocks ( and
their options ) are efficiently priced.

You claim that you're able to identify inefficiencies ( skews )...,

you maybe more successful taking your abilities to more inefficient
markets ( whether that be third world emerging stock markets,
commodities... etc. )

--
Joshua Calloway

[John]

Joshua,

People have been doing this for 50 years. What do you think 80% of the
arb hedge funds out there do?

John

[Joshua Calloway]

John,
50 years ago ( or even 10 years ago ), the NYSE and NASDAQ was not as efficient.

As you know more money is in play, markets are more regulated, and the
information distribution is instant.

--
Joshua Calloway

[John]

Joshua,

We've been through this already. Put skews/call skews. Institutions
will always pay up to insure their stocks just as you will pay up to
insure your car or your health. If you don't want the protection,
fine, don't buy insurance. But institutions don't have that luxury,
they have to. Same is true with the call selling. When stocks aren't
moving, the only way they can bring in yield is to sell calls. Why do
we keep going over and over this stuff.

Pull up an options chain. Look at your vertical skews. Then come back
here and tell me the stock or option is priced efficiently. Both of
them can't be at the same time. Something has to give here.

And I'm still waiting to hear how selling premium is your one big
lottery ticket. Maybe you are on to something you would like to fill
the rest of the group on. You know it is possible for other people to
learn from you. If you are going to post on here, it might not hurt to
contribute something. Just a thought.

John

[Joshua Calloway]

John,
Ok... so institutions buy puts to insure stocks...

There will be other institutions/ traders that know this and will
trade on this.... - squeezing out the inefficency.

--
Joshua Calloway

[Joshua Calloway]

My trading style... though somewhat irrelevant to this discussion ...

is long/ short on various positions...

right now I have half of my holdings in GOOG long and TZOO short.

On Apr 8, 2005 2:16 PM, John <jknot...@aol.com> wrote:
>

--
Joshua Calloway

[John]

Joshua,

Do you not understand that as a country, the American public is net
long stocks to the tune of probably over a trillion dollars! Who is
going to sell these puts you speak of? Who? There is way too much
paper.

Do you understand the concept of buying and selling volatility? When
someone goes to buy paper, there is a MM on the other side. HE is the
one fading it! The reason volty is going up is because there are that
many more buyers then sellers. If there weren't more buyers, the volty
wouldn't go up! Do you understand? And the reason there are buyers is
because they expect a large move or a possible large move.

Are you going to sell those puts? Remember you are the one that
believes the market is efficient. What will you do when the market
opens down 20 pts and you are out a million dollars? You see where I
am going with this. It's all supply and demand.

Hence the reason why calls are dirt cheap, there are net sellers. So
you go to buy them. But has it not occurred to you that the reason
they are selling them is because none of these stocks are moving to the
upside? At the end of the day, the reason prices move to where they are
is because there are either net buyers or net sellers or they are
offsetting each other. The skew exists because the crowd is leaning
one way or the other.

John