I have been ‘successfully’ trading index options for 8 years and have tried forex but cannot make any money foreign or otherwise out of it,so I stick with options. Van Tharp is my inspiration lately.
Could you give us some insights into your Options trading startegies that have been successful for you over the past 8 years?
I favour non-directional trades and mostly like long spreads,ratio spreads and positions which lend themselves to morphing into more complex strategies,sometimes pulling in more premium. I used to sell naked – mainly strangles,but lacked the discipline to close out losing trades-something which still haunts me. I have made profits over the years but have suffered the odd losing year, and confidence is,as we all know very hard to regain. Thanks for the interest.
Over time, I’ve only seen guys who use spreads make $ in options. The naked guys seem to eventually blow out. Option spreads are ok to use, but don’t see how you run entire account off of it.
I too am an options trader. I tried futures and equities, but I can only make money consistently with options. What firm do you trade through or recommend?
I have a traditional broker-Sucden,and online Interactivebroker. I don’t understand why people doggedly try (and lose) with other things when they know options guys are making coin.
In Total far more wealth has been made by individual traders, funds trading non option instruments. It’s just a mathematical fact, but I don’t want to take up more real estate here and list the facts. But hey, if options are moving your pnl needle than stick with. For me, they’re just condiments on the steak.
I’ve done options, warrants, and mostly equities but the one constant over the 20 years of prop trading I’ve seen is that most of my money came from hedged strategies or market making (scalping) and very little , if any, came from pure market bets in whatever I traded.
Show me someone who just plays market calls and you will likely see someone who has/will blow up or who’s lifetime average is the index minus commissions.
There’s no way you can factually say that most of the guys at top of trading food chain got there by running scalping and hedged positions all the time.
Especially over the last 20 years…..you can’t be serious. 20 years ago you could use any 2 moving averages to get long,short and make money unlike today. Most of the guys at top of food chain did just that. Kovner,PTJ,etc. They started trading when there was a lot lower hanging fruit, ie less noise in markets regardless of the fact that most people want to believe Market Wizards about them having some 6th sense.
I don’t mean to belabor, but how you come up with this half baked statements…..
There are some fallacies about what constitutes a ‘top’ trader. Take someone like John Meriwether. He was revered at Salomon Brothers during an age where it was much easier to make money (given Salomon’s edge) than today but subsequently has gone on to blow up two funds (LTCM and JMW) by doing pretty much the same business but (a) without any edge and (b) seemingly without managing risk properly.
Contrast this to Brevan Howard where they have excellent risk management (arguably the best on the Street along with JPM and Goldman) and it seems rational to conclude that the top traders are every bit as good at managing risk as they are at making money. The best proprietary traders I have come across are those who are capable of generating cheap ( … I hate that word … ) to zero cost options (either plain vanilla or embedded) for a living; have no specific view on which way markets will go (i.e. they don’t care about the variance) but can build large portfolios of these ‘free options’ and simply wait for markets to move. These ‘free’ options are very difficult to find and traders often have to wait months if not years for the stars to line up. Thankfully, markets seem to be reliable in one aspect only … their ability to melt down and melt up … so the certainty of the outcome is well worth the wait.
I think it’s worth making a distinction between option-selling and “trading”. Non-directional, hedged option spreads are the way to make money consistently as a business–I know, because I earn most of my living selling options (spreads, not naked). Arbitrage (“free” options) and scalping certainly are valid and potentially profitable strategies, but the former, as Richard notes, is a rare find, and the latter requires a lot of attention.
Completely agree. I’ve been involved in businesses throughout the curve (from delta 1 to convex products) and (from my experience) have only ever seen sustainably profitable businesses that are capable of option spreading (to use an O’Connor phrase from times gone by) from both a long and short premium perspective. Personally speaking, I find scalping very time consuming; but I respect the fact that many people may have lots of time to spend … and that this may be there ‘edge’. Also, businesses don’t need to have “perfect” strategies, they just need to have profitable ones that generate meaningful ‘edge’ in a tolerable risk adjusted fashion. Where I’ve seen people go wrong is they tend to ignore the risk element too much (which is where option spreading helps no end) … and, by doing so, they end up with much more volatile performance than they (or their investors) can stomach (even if it is profitable).
I didn’t mean to offend Manuel I was just supporting David’s strategy of non-directional trades. I do tend to generalize.
That said, you can’t compare trading of the last 8 years or so to that of prior periods. The low hanging fruit you refer to was often well placed niches or, more commonly, privileged positions. The bond guys, like at Salomon that Richard mentions, are a great example. The same applied to and even applies to a lesser extent today because the bond market was a completely closed system. It is only slightly more transparent today. How could you not make money when you are holding the order book ( all your customers bids and offers) and only you know the real market. There is a reason why most prop bond desks pay terrible payouts to their traders. It’s the system that allows the huge profits not really the trader. Even then, it was still common to see massive bonuses paid to bind guys because ti was such easy money. When I used to trade NASDAQ in the late 90’s I would always get frustrated that a stock could be $20 bid and see a trade go through at $19.50. Only then would I get hit at $20. The same went for the way stocks got traded on the NYSE back in the day. Options guys on trading floors all over the world did the same thing before we went electronic. nobody on the outside knew the real depth of the market. Even today, market depth is almost impossible to figure out in US equities without paying a fortune for the feeds to EVERY market (NYSE, Arca, Chicago, PSE and so on) and writing a program yourself that would consolidate the complete books – not just the top line bid asks from each exchange. Even in NY, you still can’t know what the market is before the bell. Stories of these “wizards” are a joke. Most of the guys trading under those old systems and raking in the $ are suffering greatly now because it did not necessarily rely on skill.
I do know a few guys who buck the stats and do well with directional trading but they are so far and away the exceptions. Also, traders I have known to produce the biggest years have also produced some of the more spectacular losing years. That does NOT come from a non-directional strategy. A lot of the biggest players I know working at firms are always on the edge of getting fired…
As for directional trading, there is a time and place for it. I did well in the frothy years of the late nineties and again between 2005 and 2009 when volume got better. Up or down. The financial collapse was a great period in late 2008 because there was some follow-through. But most of the time, very short time horizon, getting on the bid or ask instead of paying the offer and carefully hedging or pairs trading will produce solid results in the quiet years which outnumber the boom years.
There are lots of threads on this forum about what will happen to the markets in 2012. If you are actually a trader and not an investor, you should not give #### what the market will do for the year….
There’s really no difference between finding cheap options and waiting for the volatility explosion versus trading the underlying risking 1$ to make $4. Cheap options can stay cheap long time after you start buying.
Brevan Howard, agree about best risk management. From the few guys I know who trade there, I think one of their edges must be their high turnover. If you been trading for them for more than 2 years, you a survivor.
Meriwether, nothing more to add. You summed it perfectly.
I like vertical spreads. They are pretty save but not as volital as a streight directional call or put.
I agree that in order to consistently make high risk-adjusted returns trading options, it is best to focus on non-directional, hedged spreads. I focus on creating portfolios of highly liquid and low-cost long butterfly or condor spreads by timing the entries for first the debit spread and then selling the credit spread to complete the butterfly. Often times, if legged-into properly, I create two to three point butterfly spreads at a net credit! It was eluded to, these “zero-cost” options are obviously an attractive portion of a prop traders’ portfolio. I too like vertical spreads. Look into either buying or selling the other side to create the fly which will yield a much more attractive risk/reward profile.
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