31 lines
2.1 KiB
Plaintext
31 lines
2.1 KiB
Plaintext
Are You a Buyer or a Seller?
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The question is: which is better, selling volatility or buying volatility? I
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have attended option seminars with instructors (many of whom I regard
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with great respect) teaching that volatility-selling strategies, or income-
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generating strategies, are superior to buying options. I also know option
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gurus that tout the superiority of buying options. The answer to the question
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of which is better is simple: it’s all a matter of personal preference.
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When I began trading on the floor of Chicago Board Options Exchange
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(CBOE) in the 1990s, I quickly became aware of a dichotomy among my
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market-making peers. Those making markets on the floor of the exchange at
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that time were divided into two groups: teenie buyers and teenie sellers.
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Teenie Buyers
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Before options traded in decimals (dollars and cents) like they do today, the
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lowest price increment in which an option could be traded was one
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sixteenth of a dollar—a teenie . Teenie buyers were market makers who
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would buy back OTM options at one sixteenth to eliminate short positions.
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They would sometimes even initiate long OTM option positions at a teenie,
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too. The focus of the teenie-buyer school of thought was the fact that long
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options have unlimited reward, while short options have unlimited risk. An
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option purchased so far OTM that it was offered at one sixteenth is unlikely
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to end up profitable, but it’s an inexpensive lottery ticket. At worst, the
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trader can only lose a teenie. Teenie buyers felt being short OTM options
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that could be closed by paying a sixteenth was an unreasonable risk.
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Teenie Sellers
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Teenie sellers, however, focused on the fact that options offered at one
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sixteenth were far enough OTM that they were very likely to expire
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worthless. This appears to be free money, unless the unexpected occurs, in
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which case potential losses can be unlimited. Teenie sellers would routinely
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save themselves $6.25 (one sixteenth of a dollar per contract representing
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100 shares) by selling their long OTMs at a teenie to close the position.
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They sometimes would even initiate short OTM contracts at one sixteenth. |