Can we get real about Options on ASF?
Yet people’s introduction to options is invariably with insufficient knowledge; myself being no exception. Yep, I had my ass handed to me too.
My thought was that if I was getting screwed, somebody else was making money and I wanted to figure out how that happened. It was a long road to hoe for someone with a less than an Einstein-esque intellect such as me.
Has it been worth it? Learning how to use options? The answer is yes on two levels.
1/ it has enabled me to understand on a deeper level how our markets work, what I once thought was manipulation was nothing more than options market makers hedging their books (not to say that there isn’t manipulation), the so-called max-pain theory and so on.
Even non-option traders can benefit by understanding how this works in the short to medium term.
2/ because of factors mentioned by Duc, above. Pure stock traders have two options, long or short. Pick the right direction and you make money, pick the wrong direction and you’ll have your wife on your back quizzing you why she can’t afford the extortionately expensive hairdo that month, or why it’s Chateau Cardboard rather than Möet & Chandon.
In its base concept, options are an insurance-like product, pricing considerations almost identically mirroring how much you pay for your car insurance.
As such, we should be thinking a little bit like an insurance actuary, balancing revenue versus any and all possible eventualities… from both sides of the equation, ie in terms as both the buyer and seller of insurance… And sometimes both at the same time in the same transaction.
Indeed, spread transactions are roughly the same concept as an on course bookmaker at the races, hedging off his risk via the tote. If a roughy comes in, he makes out like a bandit, but if the favourite wins he has his @ss handed to him, possibly facing near ruin in a major, high turnover race. The bookmaker hedges off his risk of ruin at the cost of an absolute windfall. But he’s in this for the long haul. It’s about creating a positive mathematical expectancy over many many events.
The bane of pure stock traders, especially with mechanical trend trading systems is drawdown. These are psychologically very difficult periods for any trader, so I would posit that the first use of options is in reducing volatility of returns.
Most investors would be happy to accept lower potential returns in return for lower drawdown. In the Autumn of my life, I am certainly in that category. Intellectually, I can certainly accept the idea of potentially large drawdowns with popular trend trading systems and even buy and hold, in favor of higher returns in the long term.
But when those drawdowns happen, it is bloody difficult to have faith that the system will win out in the end no matter how much back testing you have done.
Options can ameliorate that *somewhat*.
Just some random thoughts (and walked on much more than intended) and setting up further discussion.
Edited: laughable typos and grammatical errors 
