I read through this thread for the second time. I still don't understand what it takes to be successful selling options. There was a lot of discussion about skew, kurtosis, etc that was over my head. Do you need to be a math wiz to do this?
The short answer is: No, you don't need to be a math wiz to do this. In reality, very few on Wall Street are math wizes. The few true mathematicians that spend time on Wall Street are run out by the economists. I say few, because most mathematicians don't care about economics or markets (Mandlebrot one of the exceptions).
The long answer is: It depends. You hear a ton of statistics and examples about how unprofitable option trading is. One study I read in Muscular Portfolios stated that trades of 238,000 anonymous investors who bought and sold index options over a 6 year period showed 73% lost money, and only between 2-3% of options traders were profitable overall [unspecified time period]. There are a ton of other statistics out there about X% (I've seen 90%, I've seen 75%, and I've seen 30-35%, although I doubt the accuracy of all of those numbers) of options expire worthless (and someone bought it at some point, so lost all of their purchase price). But all of those statistics fail to consider that some option strategies, particularly on indexes, WANT to lose money. Because the option is the insurance against the worst case scenario, or the attempt to squeeze out another few percent gains per year. They want the options to expire worthless. Instead, a small percentage of options traders actually try to make money off them. Why? In part, there's a cap on the number of options positions you can hold, way more than any individual investor cares about but enough that large institutions care, especially when they are trying to use some options to hedge positions or as insurance. In part, options have never been popular with many institutionalized trading communities as speculative plays. There's some cultural influences, some bias, some "old time" thought processes, some concern over risk to reward ratios, but in the end it doesn't really matter.
So then, how does someone become profitable in options? Well, you basically have three ways:
1. You can use it for speculative plays. You have a hunch X stock will move up (or down, or within a range, or in some instances
not down massively). Use options as leverage plays. If your hunches are overall right and profitable, you'll be overall profitable with options. Although not exactly my choice.
2. You can put in the work to find stocks that are more likely than not to move in one direction or another, then find well priced options that provide consistent returns at lower risks. Essentially what
@Financial.Velociraptor does (quite well I might add). It's work though (although you'll get varying answers as to how much), as you need to decide the work to payoff ratio.
3. You can play the statistics game, and find options that are
more likely than not to be mispriced, and play the long numbers game by trading them over and over again, hoping you have edge. You can use backtest data sets, or data pulled by others to find your sweet spot.
The third option is what I prefer. It doesn't work for everyone, but I like it, it makes sense to me, and I'm comfortable with the risks. But not everyone is the same. The beauty of that choice, to me, is that you don't need to know the
why or behind how it works. You just need to know the sweet spot (and perhaps have a healthy amount of faith). You don't need to know why an internal combustion engine works in order to drive to the grocery store, you just need to know that hitting the gas pedal makes the car go. Of course, knowing why it works may help you if something goes wrong on the way to the store, so the engine doesn't blow up, but it isn't required. Same with options. If you want to know the why, you can dive into the statistics, the gaussian distribution, the skew, the kurtosis, the data, the fat tails, whatever you want. The more I read, the more I feel validated by what I've chosen. But there's likely quite a bit of bias there, as I have an innate desire to validate my own choices. So it is what it is.
So what does it take to be profitable in options? Be able to tell the future accurately . . . and if you can't do that, be able to put in the work to find well priced options . . . and if you don't want to do that, find a system that has theoretical edge and play the numbers and pray it works in your favor. So psychisizm, hard work, or faith. Or perhaps a combination. Take your pick.
