This is pretty straightfoward. You should assume every time you trade an option it is -EV. The market maker buying it from you has thought a lot about it, and isn't in the business of doing -EV trades. Especially if you are doing very short term trades. There might be an argument (Warren B believed it) that longer dated downside options are overpriced. But the two week apple option is not.

It's okay to trade options even if its negative EV, because in the scheme of things its probably not that meaningfully -EV and you might like the risk profile better of having covered calls vs having a bunch of stocks. One piece of trading advice: instead of buying the calls back right before they expire in the money, let your stock get called and rebuy the stock. Will be much lower transaction costs.

But anyone here that thinks that there is some systematic way to profit from selling 2 week options to the most sophisticated market makers in the world is wrong. You're sacrificing some EV for a more favorable (in your mind) risk profile.

AAPL may options are ridiculous right now. $5 for at the money puts and calls.

Read Strasser's post.

AAPL reports earnings within that expiration

I know that - and probably apple watch volatility too. I wasn't even really commenting on whether to sell or buy, I was just surprised to see such a high price for 5 week at the money options. Even with earnings.

it is pretty normal, man

I'm new to this

yup, it's all good

I have a question about this (and I'm not super knowledgeable about options pricing so I could be way off base):

Obviously options pricing is very sophisticated and I'm just scratching the surface here, but my understanding is that most academic models (obviously I don't know about the proprietary ones), assume that the performance of an underlying stock is more or less a random walk. In other words, let's say a security runs up from 10 to 15. The options model would assume (I think) that $15 is the correct price at this particular moment, its performance is more or less random, and it's highly volatile, and price options accordingly.

But suppose you have an underlying fundamental reason to think that that the run-up is running out of steam, and it's much more likely that the stock is going to decrease in value (or do nothing) as opposed to increasing in value. Something exogenous that might not be built into the model. This seems like an opportunity where selling a call would be profitable.

I guess the issue that I'm struggling with is while option market makers are very sophisticated, they're also using a mathematical model, which is built on certain underlying assumptions and represents a simplified model of reality. So it seems like there could be an edge from time to time by thinking about qualitative factors in a way that a computer wouldn't be able to.

Thoughts?

Yes, what you're describing is all trading, you want to have a fundamental mispricing based on something real. Some examples I liked from Jamie Mai's chapter in Hedge Fund Market Wizards he talks about buying options that have a false assumption baked in.

Two examples he gave that I can remember:
-Buying long term options that were pricing a recent low volatility environment (something he explained many MMs do) when they expected a large change / binary event
-Creating a "worst of option" (your option priced based on the worst of the two) based for Aussie Dollars and Swiss Francs to the Euro which were inversely correlated before the Euro crashed giving a VERY cheap option cost because of the correlation assumption (that wouldn't exist in an environment like the Euro crashing)

On the flip side, when you're selling options (from the little I know) you're trying to specialize in certain type of environments and manage the risks efficiently. So you might say sell call options on stocks that have a high implied volatility between 60 to 45 DTE. I assume this works because people are willing to pay a -EV premium in environments perceived as volatile.

And fair warning, I'm mostly talking out my ass on options.

Selling near 45 vol on an option that is 45 x 60 vol isn't going to be +EV unless you have a fundamental reason why vol is too high at 45

Quite the thread gentlemen. Thought I would try and add some value:

1. If there is low volume or a huge spread just don't trade those contracts unless you really know what you are doing (likely if you are asking a question in this thread you do not).

2. For the most part your goal should be 70% of your initial credit rather than hoping what you sell expires worthless.

3. If you are a newbie learn how changes to the various "Greeks" will affect your options position. Like what happens if you are short a call and interest rates go up?

4. Learn some bond math. Yield curves, volatility smiles, etc.

Really, a lot of you are asking like, how to trade...its a huge subject. I can't find the book I have that I really liked on Options, but there are lots of good ones out there. Seriously, read a few of them...

TMUS of the 3 stocks seem like it might be undervalued (note I believe there are other stocks more undervalued so I don't own it). Thus no matter what you hold it will still be +EV. So if you hold 100 shares and write an option on it, what you are saying is options are overvalued. Generally I believe the entire call an put option market is overvalued in the long run, especially in the hot FANG type stocks. If this is true it would ok to write call options to catch volatility. TMUS is $37.57, and if you write $40 options if it goes to $40 and you stock is taken away, you can always buy the stock again. If you believe the value is $60. Thus you could even buy extra stock on margin and profit off the volatility.

But on the other hand option buyers are smart, so they may know something that might cause a stock to rise 20% in a week. Thus a good short-term trade idea might be to check the options of 200 stocks and pick the one with the highest call option spread.

I sold 4 $32.5 2/20 calls on TMUS for 0.24.

Today it is $37.57
Thus for $38 option
Thus a week option 3/18 is about .51 or $51.00
A month option 4/15 is about $1.20 or $120.00
A 3-month option 8/18 is about $3.35 or $335.

Looking over the course of a year. You can collect .51*50 = $25.50. Selling TMUS options. But the price is $37.57. But if the true value is $60. Seems like a good way to generate income due to the of optomism of option buyers.

Yeah the bold doesn't happen in the real world. It's the covered call fantasy (i'd admit I had these delusions back in the day). One problemed with covered calls/cash secured short puts is that you're basically turning what is an equity into a bond.

You are correct, maybe 3 times a year the stock might jump to $50. So you would lose out on those gains. Yea, but what interest does that bond pay?

A lot less than the run rate of the weekly covered cal.

If you're writing calls on the way up (called away at strike price and buy at higher price and sell another weekly), you'd be completed exposed to a downturn and probably give up all your losses, or get whiplashed in a volatile environment.

And if you are good enough to market time yourself out of these situations, writing calls is not the best strategy to optimize that ability. Get go some leverage and make $ millions instead.

Your intuition is right and is why trading options can be EV+ but requires work and discipline to find the right situations. A simple example of your idea is when a security trades to a major point of technical support. Quantitative-driven strategies might have stop orders below this support. If the security breaks this price point these stop orders can snowball and exaggerate the move to the downside. But when the security is sitting at the point of support - options pricing will often imply a relatively equal move to the upside and downside. But someone looking beyond the math could find a very attractive risk/return profile from buying out-of-the-money puts in this situation. If the security doesn't break support they will lose the small premium they paid, but if it does break support the move can be much greater than the options model implied.

Some decent articles on covered calls written by some smart folks:

https://www.aqr.com/~/media/files/pa...-uncovered.pdf

https://www.aqr.com/~/media/files/pa...ight-myths.pdf