Blowing Up: An Article on the Mindset of Option Seller and Buyer

[PaulCao 51]

Hi, 

 

I want to share some weekend reading that I think any option trader would enjoy. 

 

I came upon this 2002 New Yorker article written by Malcom Gladwell profiling Nassim Taleb's "black-swan" fund, Empirica and Victor Niederhoffer who is a known SPX seller - so you can already see how these two men smash heads (buying straddles vs. selling iron condors and calendars). To be honest, I never liked Malcom Gladwell nor Nassim Taleb's public spectacles and thought both of them to be more showmen than professionals, but Gladwell does a really good job in his profile to give away not so much trading insight but human insight into the profile characters' mindsets as traders. 

 

It is a very long reading, but I think it's worth your time just to get a chuckle on how you might relate to the characters and their emotions in times of trouble; here's the article:

http://gladwell.com/blowing-up/

 

I'd love to hear your guys' feedback on the article. My take is that I am more like Victor Niederhoffer in that I love the selling premium part of options trading being that it has the illusion of being predictable and steady. I came upon SteadyOptions after I have of course being disciplined by the market and came to begrudgingly accept that there is value in buying options. I like having both approaches balanced in the SO portfolio although I'm still biased towards the theta-decaying trades. 

 

Would love to hear your guys' opinion? Do you see earning straddles as the way to make money and the iron condors/calendars as simply hedges in case the market doesn't move, or vice versa? Are you a option seller or buyer at heart, or prefer the balanced approach? 

 

Best,

PC

 

 

[Kim 7,497]

Interesting reading, thanks for sharing.

 

As for your question - I was asking myself the same question, and then I realized - who cares? Call it whatever you want - as long as it works. What I usually do is simply adapting to market conditions. Meaning that when volatility increases, I will be overweight gamma positive trades, and when the markets are calm, I will have more theta positive trades. But I still want to maintain gamma exposure for exactly the same reason mentioned in the articles - the black swan events are unpredictable (this is why they are called black swan) and I want to be prepared.

 

Too many traders ignore the risks of black swan, or even a simple correction. They can sell premium for months or even years and look like geniuses, All it takes is one bad month to wipe you out.

 

What is even more amazing is how people completely ignore the gamma risk and sell options expiring in 1-2 week. To me, this is almost criminal.

[Stephen 4]

What I find shocking is that with all the so called geniuses in the room he would be so exposed with those naked Puts!