Controversial Option Discussion Of The Day - Calls and Puts

[Fox]

What do you guys think of this as a controversial topic:

That adjustment is the key to success and NOT mathematical/volatility analysis.

In some ways, this is a Cottle vs. Natenberg debate. Is option success a black art or rock solid science? Using the swimming metaphor, the Natenberg camp will probably say that a human being will sink in a pool unless the salinity level is sufficiently high. The Cottle camp will probably say that kicking and doggie paddling will keep you afloat. Salinity is only a minor factor.

Any takers?

 

[Grinder]

I'll have to go with adjusting, still think you need to know the math & be able to understand vol analysis but it's adjusting that keeps me in the game. Theory makes sense on paper but falls short in practice.

 

[wayneL]

What do you guys think of this as a controversial topic:

That adjustment is the key to success and NOT mathematical/volatility analysis.

In some ways, this is a Cottle vs. Natenberg debate. Is option success a black art or rock solid science? Using the swimming metaphor, the Natenberg camp will probably say that a human being will sink in a pool unless the salinity level is sufficiently high. The Cottle camp will probably say that kicking and doggie paddling will keep you afloat. Salinity is only a minor factor.

Any takers?

For me it's both!

I'll take the maths if I can find a trade like that. EG OTM Bull put spreads (I won't trade these unless I can get outrageously favourable odds) and seasonal non-tendencies on commodity option writes. But they don't show up all that often.

That means that to get a trade, most of the time it means doing the adjustment boogie. My bread and butter is thrust and parry, metamorphosis kung fu, partisan guerilla warfare... choose favourite metaphor.

Many times it turns out to be wasted energy, I could have won by sitting on my hands, but I'd prefer to manage than hope. Long term it works better for me.

But each trader's situation is different. Each philosophy has its own set of unique risks, the worst of which is knowledge risk. That's why I think "understanding" option pricing is so important.... that encompasses both theory and experience.

Unfortunately we can only acquire the latter by building up a great big fat "You Idiot" file!

 

[sails]

I would also have to say both. Wouldn't want to throw either one out - they are both necessary, IMO.

 

[mazzatelli]

Both, with > weight to vol in my case.

 

[Fox]

My bread and butter is thrust and parry, metamorphosis kung fu, partisan guerilla warfare... choose favourite metaphor.

Many times it turns out to be wasted energy, I could have won by sitting on my hands, but I'd prefer to manage than hope.

I have this wild hypothesis that energy (see examples in bold above) is being converted from one form to another when you adjust. Of course this energy needs to be converted intelligently in order to yield positive energy (ie. profits).

If the edge obtained from analysis is small, it is quickly dissipated with commissions, slippage etc. I think Natenberg uses the term "friction" ie. a form of negative energy.

Any mathematical edges that are quantifiable using formulas and software are observed by all market participants. As such, the edge will only be an edge if there are few who understand it.

So it looks like I have two choices:

1. start trekking the serene mountain tops of China to seek out a kung-fu master from a Shaolin Temple.
2. enrol myself into Harvard University's Quantitative Finance course, and leave with a PhD.

 

[mazzatelli]

For option:
1) Shaolin masters are long gone having fled during the last persecution
2) Even a PhD won't guarantee trading success, though it would increase the chances of it coupled with experience

 

[wayneL]

Shaolin masters are long gone having fled during the last persecution

Too rigid in form and style anyway.

Bruce Lee would have been a great options trader.

http://www.fightingmaster.com/masters/brucelee/quotes.htm

Change a few technical terms and you have some A1 options trading wisdom.

 

[mazzatelli]

Yeh, love Bruce Lee.
I'm amazed how he advanced without completing Chum Kiu and Bil Jee. An intuitive & inquisitive mind, willingness to learn combined with hard effort - amazing!!!

Fox, asking if adjustment is more important than vol is like asking a martial artist whether punches are better than kicks or whether speed is more important than power.

You can get by with one, but ultimately we would like the synergy

 

[Fox]

Hypothetical scenario:

The year is 2017. A child prodigy has invented the perfect options model which every exchange in the world adopts. Retail traders no longer enjoy any mathematical edge in terms of being able to find mispriced options. You personally believe that your mathematical edge is now ZERO.

Would you give up options trading altogether? Or would you persist with trading because you still believe that adjustments alone will still keep you profitable?

 

[cutz]

A child prodigy has invented the perfect options model which every exchange in the world adopts. Retail traders no longer enjoy any mathematical edge in terms of being able to find mispriced options. You personally believe that your mathematical edge is now ZERO.

Hi Fox,

I believe our mathematical edge is zero now, there's no way we'll ever see a mispriced option sitting in the order book and if we do brokerage and fees will render that arbitrage unprofitable.

I'm not from an academic background so this is probably out of my depth but the best models in the world can't account for the unaccountable, when a position is initiated you're at the mercy of a random market. You sell a call, the person using the hypothetical supreme modeler bought that call off you, the market tanks the next day, what you do next is what matters most.

 

[Grinder]

Think we're already there Fox. Well said cutz, you can't beat the bots so adjusting while not a science can at least level the playing field.