Are naked calls/puts insanely +EV? What am I missing here?
 

Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

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Experience? Logic?

I dunno, what aren't you missing?

J

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Etrade lets you see the the Theoretical Value of calls/puts for stocks. This theoretical value is based off the Black-Scholes formula. I assume they base it off the derivation of the formula that is used for American options. The thing is I plugged in a few stocks and it seems like the theoretical value of every call/put option is less than what the option is trading for. For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?

[/ QUOTE ]

Experience? Logic?

I dunno, what aren't you missing?

J

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Care to elaborate?

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

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The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

What you're missing is the theoretical value is based on the average volatility over the past 30 or 60 or something days. Does this market in the last few days seem like it's trading with the same volatiity as the last couple months?

They used to show the current volatility so you could see if the option was mis-priced, but they took that feature off the last time I looked.

There are options professionals that have software that continually looks for options mis-pricing opportunities.

You are missing unlimited risk
 

When you go long a call or a put your risk is limited to what you paid for the option.

When you are naked short either your risk is unlimited.

Unlimited market risk with your level of experience and understanding might not be a good idea.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

Read "Fooled by Randomness", by Nassim Taleb or "the Black Swan". Look up Long Term Capital Management as well.

Basically the Black-Scholes formula doesn't describe the reality of risk taking.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

the payoff profile of selling options is basically win win win win win win win win win win win LOSE HUUGGGEEE

you are earning a premium for selling coverage to those who want it.

aside from the fat that the B-S model is woefully deficient in pricing of these options, the payoff profile itself isn't very attractive.

Barron

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

My father just bought me a copy "Fooled by Randomness" because he read it randomly and thought I would like it. I didn't realize that other people had actually read the book and actually recommended it for financial reading.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

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The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for.

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Your assertion is false for one thing.

Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk.

Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

rofl you think everyone that trades options has $100mm liquid????

pls tell me I'm misunderstanding your post

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

You obviously didn't even read my post, so obvs you did not understand it. ROFL!

You are free to sell whatever options you legally can, of course.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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rofl you think everyone that trades options has $100mm liquid????

pls tell me I'm misunderstanding your post

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i'll help you out a bit:

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Your assertion is false for one thing.
.
Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk.
.
Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have > $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living.


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NoD's old trading clients are probably not the entire market.

Barron

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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rofl you think everyone that trades options has $100mm liquid????

pls tell me I'm misunderstanding your post

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i'll help you out a bit:

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Your assertion is false for one thing.
.
Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk.
.
Third, no matter how good you are at poker, you don't have NEARLY the bankroll <font color="purple"> to sell naked options. </font>Not even close. I required my old trading clients to have &gt; $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living.


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NoD's old trading clients are probably not the entire market.

Barron

[/ QUOTE ] <font color="purple"> </font>

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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I required my old trading clients to have &gt; $100mm liquid to start doing those trades.

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One of the more over the top comments I have read in this forum. I can not understand the $100m threshold here. A guy writes a 50 contracts, absolute worse case, loses 100 points per net -$500,000. Why isnt $5-10 mil more than adequate?

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

The goal of pricing options is to price them to be 0 EV. So your total EV is zero minus the transaction costs.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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The goal of pricing options is to price them to be 0 EV. So your total EV is zero minus the transaction costs.

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Theoretically, and if you have no edge.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

It's hard to say what causes certain options to appear more expensive than their theoretical value without knowing how the brokerage fits their model.

My guess is that they use a constant implied volatility for all expiries and/or strikes. However, this is not true. Read up on implied volatility smile (IV smile) and implied volatility skew.

Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.

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What do you mean by true price if you mean something other than market price?

There are too many degrees of freedom to say for sure what a theoretical value is. You've got the model itself (e.g., Black-Scholes), as well as the inputs to that model. You can only calculate a theoretical value when you assume the remaining N-1 values.

That's why you can't really come up with a theoretical value of options without specifying an assumption. So there's no such thing as saying the theoretical value of a Nokia 35 call with 30 days to expiry is $X. Rather, you can only say "using a Black-Scholes model and expected volatility of V (and other observed variables), the theoretical value is $X".

When you talk about implied volatility, you're simply seeing the missing degree of freedom fall out of the Black-Scholes value, but you need to remember that you're basing that implied volatility on the assumption that Black-Scholes was used to generate the market price, which isn't necessarily the case.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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What do you mean by true price if you mean something other than market price?

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By true price, I did not mean theoretical price....I meant fair value. Sometimes there are inefficiencies in the options markets too, so the market price is not the true price. However, on average it is very hard to beat the option markets, so market price is fair price.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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I don't know anything about options but as a guess I'd say there are some aspects of the stock that would be impossible to compute mathmatically that are priced into the options.

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The formula is only theoretical but I want to know why it's always pricing the options lower than they are trading for.

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Your assertion is false for one thing.

Secondly, markets are discontinuous is the biggest risk, i.e. blowup risk.

Third, no matter how good you are at poker, you don't have NEARLY the bankroll to sell naked options. Not even close. I required my old trading clients to have &gt; $100mm liquid to start doing those trades. Some years you make $12mm net, others you lose $4mm [or more.] It's a very rough way to make an easy living.

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Please. Being naked short calls is no more deadly than selling short the common. Yes, one can lose an infinite amount of money and it happens all the time. Look at how many stocks are priced at infinity.

Shorting naked puts is slightly less dangerous. I've seen a lot of stocks tank, but I haven't see one go below zero yet.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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It's hard to say what causes certain options to appear more expensive than their theoretical value without knowing how the brokerage fits their model.

My guess is that they use a constant implied volatility for all expiries and/or strikes. However, this is not true. Read up on implied volatility smile (IV smile) and implied volatility skew.

Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.

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No they aren't. Most options are very thinly traded compared to stocks. People buy them for many different reasons. For insurance, to hedge, for speculation. People are not always that concerned about getting the perfect price.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Please. Being naked short calls is no more deadly than selling short the common

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The deadly part comes with the leverage. Sometimes folks may sell a few more than they have the stomach for. Or they get into some sort of ratio position where they are long closer ins and short double the amount of further outs. Take yesterdays fed move for example. If some poor sap had call ratios on and the SPX blew through his ratio he was dead meat. And the ratio type position is very common.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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For example "QQQUP", a sept put option on nasdaq is trading at .58, and the theoretical value is .13. I understand naked calls/puts are insanely risky, but this seems like they are also ridiculously +EV. What am I missing here?


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We are currently in a volatility spike. When that happens all options go up due to fear and uncertainty. This "probably" is a good time to be looking at selling options. Not naked but for juicing the bottom line.

See a stock you want to buy? Sell the put instead and hope you get excersized. The risk is the stock rockets and you miss getting long it. But at least you keep the premium. The other risk is it tanks and you are stuck with it. But if you really wanted to buy it anyway at least you bought it better due to the premium.

Long in the portfolio? Excellent time to sell covered calls. Risk here is blowing through your short call making you sell prematurely but you still got the premium plus the gain until the strike if it was out of the money. Downside risk is having the stock crap out but if you wanted to be long it anyway at least you get the premium again. And if you want to puke it you have to probably pay up to puke the options as well.

The returns on these kinds of strategies is currently very appealing but you have to understand the risks.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

IMO buying and selling options on individual stocks is -EV for nearly everyone but the market makers. The bid/ask spreads are far too large on all but the very biggest stocks. You give away 10%+ just getting into and out of your positions. Plus commissions are higher, which adds another 5% onto a $1000 position.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Please. Being naked short calls is no more deadly than selling short the common

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The deadly part comes with the leverage. Sometimes folks may sell a few more than they have the stomach for. Or they get into some sort of ratio position where they are long closer ins and short double the amount of further outs. Take yesterdays fed move for example. If some poor sap had call ratios on and the SPX blew through his ratio he was dead meat. And the ratio type position is very common.

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Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Please. Being naked short calls is no more deadly than selling short the common

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The deadly part comes with the leverage. Sometimes folks may sell a few more than they have the stomach for. Or they get into some sort of ratio position where they are long closer ins and short double the amount of further outs. Take yesterdays fed move for example. If some poor sap had call ratios on and the SPX blew through his ratio he was dead meat. And the ratio type position is very common.

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Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

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But I guarantee you someone on this forum will short 10 OTM calls of Apple or whatever and take in their $750, and the stock will run up 20+ points on them and they'll be very unhappy and out $20k, because they thought they understood the risk when they had no idea whatsoever.

RIMM ran up $23 yesterday alone. But of course, you're a big boy and can do whatever you want. Teach those market-makers a lesson and grab all the +EV you can!

Re: Are naked calls/puts insanely +EV? What am I missing here?
 

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Please. Being naked short calls is no more deadly than selling short the common

[/ QUOTE ]

The deadly part comes with the leverage. Sometimes folks may sell a few more than they have the stomach for. Or they get into some sort of ratio position where they are long closer ins and short double the amount of further outs. Take yesterdays fed move for example. If some poor sap had call ratios on and the SPX blew through his ratio he was dead meat. And the ratio type position is very common.

[/ QUOTE ]

Yeah, you have to be careful in what you are doing. If you would normally do 1000 shares you shouldn't be doing 30 contracts. But you don't need a hundred million dollars in order to be careful.

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But I guarantee you someone on this forum will short 10 OTM calls of Apple or whatever and take in their $750, and the stock will run up 20+ points on them and they'll be very unhappy and out $20k, because they thought they understood the risk when they had no idea whatsoever.

RIMM ran up $23 yesterday alone. But of course, you're a big boy and can do whatever you want. Teach those market-makers a lesson and grab all the +EV you can!

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So you're implying the only people that can trade RIMM have a hundred million bucks. I know guys that can trade RIMM on a day like that, from the short side only, and make decent money. They have somewhat less than a hundred million.