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There's also wheeling, selling calls, etc.

I think the problem with a lot of these is that you can think about how the strategy might work for a couple minutes. Then you think it must be a good strategy, because it's complicated to you. This is a very common fallacy I've noticed reading about "options strategies" by extreme amateurs: because the options strategy is complicated, I am smart for understanding it (at a basic level) and thus it must be a good strategy. They don't hold up to scrutiny:

"I'll just sell 10% OTM weekly calls on this stock until I get assigned, then I'll sell OTM puts until I get assigned again." -> You can lose money selling puts. Pays less than investing in the S&P 500 unless you pick a stock with high volatility, which is more likely to hit. No free lunch.

"I'll sell covered calls on SPY and if they get close to expiring ITM, I will buy back the options and start over" -> If you backtested this, it performs worse than holding SPY. You won't backtest this though, and feel smart for spending so much thought on a losing strategy.

"I'll enter some hideously complex, multi-leg position. Because it's complex, and I'm smart for understanding it, it must be good." -> No.

"I found an arbitrage opportunity." -> If you're not using computers, 99.99% chance you didn't. If you did, it's probably very small. Or it's due to some misunderstanding like the fact that American options can get exercised early.

> This is a very common fallacy I've noticed reading about "options strategies" by extreme amateurs: because the options strategy is complicated, I am smart for understanding it (at a basic level) and thus it must be a good strategy. They don't hold up to scrutiny

THIS. so much this.

I admit I fell into this trap after reading about iron condors. "I can print money now from home" I thought, "omg I am so smart creating these exotic positions".

Selling puts on a reputable stock is a great way to enter a position though. Anecdotally it has worked for me. But am I stupid or naive? Genuine question.

here's the thing you simply don't know when CNBC will start shitting on it and then cause a dip that would put you in the red. So you could be eating for 200 days and then blow up your account and this does seem to happen to traders.

but I am thinking what if you were writing LEAPS. We've been in the longest bull run in history since 2009, so you could've made a lot of money selling LEAPS until maybe 2020 where you would blow up your account and end up owing more than your balance.

Also another area that I could never find an answer on: i was told most traders never excersie their options. so if you sell puts and they never exercise you don't have to deliver the stocks right? you just end up paying what the options market price is on the day the reputable stock dips?

> i was told most traders never excersie their options

What you were actually told was probably that most options expire worthless.

If the alternative was going to be buy and hold on the same underlying anyway it’s a perfectly ok strategy, certainly not a stupid one. Worst case is you get assigned a stock you wanted to own anyway, but at a discount to the original face value + you’re paid to do it.

Actual worst case is the underlying pops and you “only” get the premium you collected and not the full upside.

So definitely not a profit maximising strategy but still a reasonable one. Especially if the market/underlying are generally moving sideways.

but when you sell options you are betting that the stock won't move towards the direction described in the option because if it does you are going to be margin called by your broker.

I don't know exactly how it happened but someone on wallstreetbets a while ago said he woke up to find he was -250% and asking what to do. I assume he wrote bunch of options which ran against him.

It's disturbing because I talked to this kid literally a week before I told him I blew up my account buying far OTM puts (I was right about the price but SEC froze the stocks far past the expiry).

If you have enough cash + leverage to buy the underlying on the puts you won't get margin called, you'll get assigned.

This is an over simplification and generalization of what the underlying motivations might be.

I will semi-regularly sell puts with a reasonable expectation of being assigned. It is in effect the same as putting a limit order in, with the upside of getting paid for doing it.

How do you feel about covered calls? From a risk perspective they are equivalent positions, limited upside and big downside risk.

They are not equivalent positions. Selling covered calls has unlimited loss potential.

Do you mean selling uncovered calls? With a covered call your potential profit is capped, but you aren't exposed to the infinite risk of buying the stock (since you already own it) at a bananas price if it exceeds your strike.

Selling covered calls can be a fine substitute for limit sells if used carefully. Assuming one is comfortable selling at the strike price, the covered call trickles a little profit in the meantime.

There are two failure modes of this strategy.

1. New information comes to light, the stock crashes, and you realize you were wrong and the stock is a dog. You no longer want to own it at the strike price. Oops. You effectively bought it above your updated estimate of its worth.

2. The stock keeps rising and rising, you collect the option premium but you could have made a lot more money if you just bought the damn thing outright.

These are more subtle failures than the usual "Oh my God, I blew up my account!" but they're real.

It's perfectly fine to keep doing what you're doing if you're comfortable with this risk. There is no strategy without a downside.

What do you think of iron condors?

The market is not as efficient as you think. There is a lot of money to be made in options, but no one wants to give you free alpha. The market like any other system can be reversed engineered. I'll give you a hint, learn how the VIX is calculated.

Also if you believe just buying the S&P 500 is going to be most profitable, then why not buy deep ITM calls on SPY. You'd at least 2x your exposure at the same cost.

> why not

Because time. Options expire, shares don't. When you own shares, time is your friend — if the market goes down and you still believe your thesis holds, just wait. When you own options, time is your enemy. Should anything happen at just the wrong time, you have no choice but to take a hit.

> Then you think it must be a good strategy, because it's complicated to you. This is a very common fallacy.

Exactly this.

A friend of mine (PhD, smart guy, excellent programmer) called me for advice and his argument was - I am smart so surely I will find some unique opportunity in the markets.

And my answer - You don't believe but there are hundreds of thousands smarter people with deeper pockets...

Be humble...

> You don't believe but there are hundreds of thousands smarter people with deeper pockets...

Even if he is much smarter than all the quants at Goldman, they do this for sixty hours a week in a context where time matters a lot. That was the

I will say that the efficient market hypothesis is probably overrated when it comes to an area where you have expertise; I used to make a bit higher than SPY or the Nasdaq by trading tech stocks on big movements (which are often insane), without using any insider info[1]. But the delta just wasn't worth having to spend my mornings looking at the markets so I didn't miss any trades, and I liked my day job a lot more.

Even mathematicians whose favourite topic is mathematical illiteracy can fall into the trap.

"A Mathematician Plays the Stock Market" by https://en.wikipedia.org/wiki/John_Allen_Paulos#Bibliography

Reminds me a bit about what was said about ingenious composer Dmitri Shostakovich: He was a brilliant poker player, and lost every time.

Part of the problem with options trading is that (to the unininformed retail investor) your position can sometimes look profitable/good until all of a sudden it isn’t.

One of the most common I’ve heard from regretful friends is a variation on your scenario #1 where they buy a deep OTM call a few weeks out right after a recent pop in the underlying. Maybe the rally continues a bit, underlying goes up in price, they’re clapping themselves on the back. A few weeks pass and the price has gone up a bit more, but the options position is already blown up.

“I don’t get it... the stock price went up and everything but I still lost all my money on options.”

Worse still, due to the leverage offered by options, the losses can sometimes be real bad.

I blame r/wallstreetbets and Robinhood.

They've figured out a way to get people who shouldn't be trading options to gamble online.

In the scenarios painted here and by the parent (buying puts or calls), the losses are capped at whatever was outlaid in premium. The leverage is entirely expose to the upside potential.

I think he means that deep OTM is cheaper and you can buy more of it compared to what you would with ITM or near strike options.

So yes if you think Tesla is going to be $1000 in a few weeks and it moves towards that direction but not enough to make up for other greeks, IV, theta, etc, then yeah it could happen.

After a very lucrative exit I was looking at options chains and saw that I could make six figures every month, selling monthly expiring options that were far OTM enough to make me feel like I wasn't crazy.

However, even then, it's not even close to being my best option because the tail risk, however small, is there — and when things come down to the wire I'm going to get ulcers, win or lose.

Albeit, if you actually do want to sell or buy at market price (and are patient about it), you can use option premiums to get just a little bit more money for something you were already going to do (the goal being to get assigned, on purpose).

let me take a guess you can tell me if I'm warm or cold.

assuming you risk 10% on your broker's account with 90% tied up in fixed income or t-bills or stocks.

assuming you stand to make 100,000 USD per month selling far OTM options presumably on indices or blue chips.

you are worth $10 million and above.

If he’s feeling that much stress he’s probably risking more than just 10%.

That's right! It'd be more like 50% (of my N.W.) risked. Haven't had time or motivation to move assets anywhere so 90% of my money is in taxable brokerage.

wait so you keep most of your money on something like Interactive Brokers???

I guess when they give you better rates than any retail banks this makes sense....

but I'd feel nervous even with 2FA.

It's not actually money, it's securities. I use Schwab.

With cash, I prefer to put it in Marcus, but their rates have really gone down so much I need to look into private banking.

> After a very lucrative exit I was looking at options chains and saw that I could make six figures every month, selling monthly expiring options that were far OTM enough to make me feel like I wasn't crazy.

That's the classic picking up pennies in front of a steamroller trade. You'll make $100k a month for a few years and then one day you will lose $10m in a single day.

Selling covered calls is a widely used strategy, especially when the underlying doesn't give dividends. There's nothing wrong with it. As for the tail risk, that's what buying options is for. Look at the rest of the options chain and use your imagination.

That's true — there are ways to cap the loss. I haven't played around with this market enough to have good intuition about that sort of thing, but maybe I'll use the simulator in the ToS platform to see how I'd do.

As an option seller, what really really sucks is earning "only 20%" in a year when just holding the same stocks/indices would have yielded 80%. Basically, you can only earn the premium -- you have all the downside and a tiny portion of the upside, just consistently.

but isn't it fun knowing pocketing premiums on a consistent basis? Like most of your trades are winners, you don't have to worry about directions much.

for me trying to determine the timing AND the price target was stressful as hell. Like every morning my heart would beat rushing downstairs to check my tendies.

in the end what screwed me was the SEC. There is just no way to predict how long a stock will be halted. I also learned that in a class action lawsuit, option traders are pretty much unable to recoup their money in a fraudulent company (although I do appreciate the SEC sending me the letters, the rule of law is taken very seriously, scammers almost always see the inside of a jail).

Correct - The primary benefit is Consistency, but I often wonder if something with 1% chance of going to zero can be considered consistent.

Why would you be selling options on companies with a 1% chance of going to zero? There are much more stable companies out there.

The company doesnt have to go to zero, but your options account equity can easily do that. Even options on very safe things like, say, MSFT/GOOG/AMZN/SPY/BAC/VZ/etc can lead your account down to zero, and it mostly depends on how leveraged you are.

Suppose you sold puts on Verizon at 55. You are on the hook to buy Verizon at 55. If you have 5500 in equity, you're fine. You get the stock and hold it, perhaps wheel it.

But if all you do with $5500 in account equity is sell a single put contract, you wont make much money. So most people sell more than they have equity to support. So perhaps you sell three Verizon contracts. Your $5500 in account equity is now on the hook for 3*$5500. If Verizon stock goes down to 36, you are wiped out.

Oh, and all this while, you arent capturing any of the Verizon upside either! You only get the premium.

Oh right. i would say that's more function of messing with leverage than it is selling options.

Assume one buys with the intent of selling well before expiry, is there much of a difference between buying relatively fewer deep in the money options vs buying relatively more cheaper out of the money options?

I've always thought buying deep ITM was more like holding leveraged stock and nice for that conceptual reason, but what's the advantage/disadvantage of buying OTM options (in contrast to ITM)?

as the distance from the current market price increases, the rule of thumb is that it becomes cheaper because the probability of hitting that strike is a lot lower supposedly.

I've read money managers use far OTM options to hedge against a potential shock (high confidence in bad earnings) but you also stand to lose your premium.

Nassim Taleb, Black Swan author, runs a fund that consistently buys far OTM options. They lose money most of the time until that one time where they strike it big. As he describes in "Random Walk in Wallstreet", he cleaned up his desk on the trading floor on Black Monday when his far OTM puts he bought for pennies on the dollar turned into double digit million figure. This is how he made his FU money and has been the subject of emulation by amateurs and professionals alike.

But then you look at people like Jim Chanos who shorted Enron successfully but have not been able to crush Tesla. Had he used options, he would've not only saved a lot of capital, he would still have his skin left in the game.

Not sure I undrestand your second question but I assume you mean near strike OTM vs deep OTM. You have to pay a premium for near strike options or if its in the money.

Sorry that was a typo, I meant OTM vs ITM

So basically you're saying that you can "leverage" more with OTM than ITM?

yeah so if your options are ITM then your stock doesn't need to move that much to profit but the downside is its very expensive.

OTM is cheaper but much more riskier because your stock has to travel further.

No you would leverage more with OTM because you can buy a lot more OTM with the money you spend on ITM.

This is a gross generalization, when I say "riskier" it is purely from an academic point of view. In reality there are so many other factors at play, fundamentals, theta, delta, vega, etc. I can't really explain it because I don't understand their exact relationships but in general when you have an option position the clock is against you and so many other factors that has to go right.

It's like in Casino Royale when that Marilyn Mason look-alike invests African warlords money on an airline company on far OTM near expiry options and then launching an attack in the airport.

The SEC has a safeguard against these things. If you have large far OTM options near expiry and the stock dips the next day, expect a visit from the SEC or FBI.

> OTM is cheaper but much more riskier because your stock has to travel further.

This answers my question, thank you. The piece I was missing was the difference in the amount OTM vs ITM needs to move, thanks

Breakeven = strike price + premium paid

> is there much of a difference between buying relatively fewer deep in the money options vs buying relatively more cheaper out of the money options?

From a strategy/risk management perspective, for sure.

Upsides with deep ITM calls is you'll pay less of a time premium and mitigate some effects from volatility. It can also be a "cheap" means for covered calls.

As for downsides - larger upfront risk as well much less liquidity / greater chances of an order not being filled.

Buying many OTM calls can be more or less a gamble.

> less liquidity

THIS. THIS. THIS.

I remember calling Interactive Brokers panicking because I couldn't dump my position since there was no counter party at the deep OTM strike.

> You have to be lucky every time and the market needs to be lucky only once to end your trading career

It's not for everyone. But with proper risk management and mindset, it's not a casino either.

Common sense rules: Only play with risk capital (what you can afford to lose). Don't go all in WSB style, that's the surest way to blow up your account. Don't FOMO chase, wait for the right setups, look at support and resistance levels. Take profit incrementally. Use stop loss. etc, etc.

Selling would be naked not buying