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Politics : Ask Michael Burke
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To: Knighty Tin who wrote (56320)4/17/1999 4:12:00 PM
From: Don Lloyd  Read Replies (3) of 132070
 
MB - (10. The most gratifying piece in the issue is Michael Santoli's coverage of Larry McMillan's new theory that sellers of volatility are not the winners in the options game. Volatility buyers win much more often than the academics would have us believe. In other words, for the past thirty years, buyers have been beating sellers, but sellers have always claimed that only sellers win. The Chief Quant Jock at Pru agrees. Off the bell curve results happen much more often than standard analysis predicts. Whew! I don't have to give back all the money I've made on long options over the decades. <g> I hope Edamo on the Dell thread has his nose rubbed in the Barron's piece. And I hope Spot used it first. <g> )

My take on the article is that far from the money options are seriously underpriced by distributing volatility over a normal curve, but this does not necessarily say that either buyers or sellers are long term winners in general. The problem is that selling naked calls is like strolling across a superhighway at fixed time intervals regardless of traffic. -g-

From the article - 'Selling calls or puts without owning the underlying stock is ... a much-disparaged strategy..., as it represents a trade where the upside is limited and the downside potentially infinite if the stock rushes against you.'

This is, of course, untrue for puts, as a short put will always have a finite and lower absolute risk than long stock. Of course, long stock is often very risky as well.

The article does tend to support your buying of far from the money options.

Regards, Don

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