It sounds to me like you have a modicum of experience trading options, and have developed a disciplined approach---IMHO, the only approach to use with options, unless you enjoy frequent and severe haircuts.
But I'd also be willing to bet you have developed this approach largely the same way that I did: by trying less disciplined approaches and losing; watching winning positions expire worthless out of greed; achieving spectacular gains quickly, only to be lulled into a mindset where I thought I could do no wrong, thought I knew the game, then flying by the seat of my pants only to learn the hard and expensive lesson that none of this was true.
So, I can very much appreciate the survival advantage a disciplined approach imparts.
But if you are implying that options traders as a whole have a good chance of making money, well that is simply not true. The reason for this IMHO is that most options traders (and stock traders, for that matter) do not have a disciplined approach governed by objective rules, or if they do, they break their own rules. Furthermore, they tend to be buyers just when excessive bullishness is signalling a top and they should be considering selling, and sellers just when bearish sentiment is at a peak, and a reversal is at hand.
Now, that is not at all to say that a given contract will lose money, just as is the case with individual stocks. With stocks, most people tend to buy high and sell low, in part because they buy stocks at the height of their popularity, and then watch as the big boys exit and even go short, then hang on tenaciously hoping the stock will reverse, then finally throw in the towel---which is the signal for the big boys to jump back in.
BRCM's chart provides a pretty good case in point. On a 12 month chart, the big runup in BRCM began in earnest with a gap up on big volume in late October. The volume on these two days was over 10 million shares each day, much more than the average volume at the time:
askresearch.com
My take on this is that the gap up was caused by buyers (i.e., big buyers) suddenly overwhelming sellers, radically tipping the supply/demand balance, resulting in a rapid raising of the ask by those sellers available. That is the unmistakable footprint of big investors jumping in, sometimes called a professional gap, even as so many were bemoaning BRCM's overvaluation. But the bulk of the retail investors, listening to this talk, held back. But, BRCM continued to move, generating more and more talk in the press. This buzz eventually caught the attention of the retail investors, who began buying. But the ability of the retail buyers to significantly affect stock price is, IMHO, dwarfed by the ability of the big boys to do the same. A continuation gap occurred in mid-January on rather low volume (5 million), significantly----less than half the volume of the first gap in late October. Finally, there was another gap just before the first of the two tops in March, and a tall white candle, on even lower volume (about 3 million). After the double-top failed at the end of March, there was massive selling, which in fact caused the failure. This was the big boys making their exit and probably taking short positions as well. There was increasing volume as the stock moved down from the second of the tops, and a gap down at the end of March, with a candle with a tall tail above the real body as the stock hit a wall of sellers, then a filling of that gap and a big selloff on climactic volume at the beginning of April (second candle):
askresearch.com
From there, BRCM was pretty much in disarray, the rally fully routed and in tatters, every man for himself, and a lot of selling during a strong downtrend. This trend reversed only with the gap up on about twice average volume which occurred on June 20, and strong buying ensued-----the big buyers covering or having already covered, and now taking big long positions----the cause of the gap up.
The loser in all this tends to be the small, ill-informed, unthinking and undisciplined investor who makes the additional mistake of listening to the buzz just as optimism is at a peak----and a reversal close at hand. Or, as Humphrey B. Neill succintly puts it: "The public is perhaps right more of the time than not....the public is right during trends, but wrong on both ends."
And similarly, the loser in options tends to be the small trader, or the naive trader. Since the options game is more easily manipulated than stocks because of the much lower overall volumes, then most options traders can be more easily separated from their money. Looked at another way, if I am a big options trader, and I'm selling calls on a stock, then I am also prepared to do whatever I can to make sure those calls expire worthless, and my stock is not called away. If I have big blocks of the stock, then I may be able to do this. Or, if I'm a big customer of one of the major brokerages, I could just let them do it for me----via analyst downgrades, warnings, PR BS of various kinds, or simply MM manipulation. They will have every incentive to to that, knowing full well I can easily take my money elsewhere.
Admittedly long-winded, but the bottom line is that the "real options traders" you speak of are NOT the rank and file. The "real options traders" are, in your own words, "people that know what they are doing." But it is the rank and file which largely account for the losers in options trading (as in stock trading), not the "real" traders, primarily secondary to a lack of understanding of the game, i.e. not knowing what they are doing. In fact, the "real options traders" make their gains at the expense of the rank and file----and so are dependent on them; and if there were none, the "real traders" would quit the game. Somebody, after all, must come up with the premium, and somebody must provide shares called away at a price significantly away from the market. And so the game will continue, because of two staples of human nature: greed and fear. Couple either or both of those with naivete, and you've got the makings of an options loser. Since there seems to be much more greed and fear relative to sophistication and discipline in options trading, then it will likely continue to be true that most options traders will lose, most of the time. But when discipline and sophistication begin to displace greed and fear, then you have----you guessed it----a "real options trader."
As always, JMVHO...........
Regards,
Walkingshadow |
