Buffett: No textbook could have predicted the strange economy we have today

Buffett: No textbook could have  predicted the strange economy we have today

Coming in May 2019

CME Group launches Micro E-mini Futures | Hedgeweek

A Huge Options Trade Is Betting Markets Are Wrong on Fed Cuts - Bloomberg

A Huge Options Trade Is Betting Markets Are Wrong on Fed Cuts - Bloomberg

Options Strategies for an Aging Bull Market - Barron's

Options Strategies for an Aging Bull Market - Barron's

What you see vs. what you get The options risk curve Part II:

Your beautiful risk curve did not provide you with the beautiful profits it seemed to promise on day one.

In our previous installment, we said we asked the experts about this phenomenon, and they gave 12 reasons, nine of which we covered in part I:

1.       Options are more like quantum physics than classical physics.

2.       The map is not the territory.  The risk curve is merely a theoretical model.

3.       Vega – implied volatility -- will make or break you.

4.       Supply and demand are the final arbiters of options value, not risk curves.

5.       Your options may not mirror the VIX.

6.       Market-wide risk is always lurking in the background, even in today’s ever-upward market. A “volatility eruption” has the same effect as extending days to expiration (DTE).  The opposite is true as well:  a “vol crush” is the same as shortening DTE.

7.       Theta expectation is more reliable early in a position vs. late.

8.       Then, there’s the little matter of execution.  If you pay too much, it will affect the P/L of your risk curve.

9.       Anomaly weekend pricing.  Neophyte options sellers think it a great idea to sell on Friday and collect theta over the weekend, but in reality, market makers mark down options in advance of the weekend.  Translating:  there is no free lunch.

Here are the last three considerations in our list of 12:

Three classes

Options gambler
Options speculator
Options strategist

Which are you?

What you see vs. what you get: The options risk curve

You are sitting there admiring your freshly-executed, income-generating options strategy.  What a beautiful risk curve.

You have positive theta (options decay) coming your way from one or more of the following:  calendars, butterflies, short calls, short puts, short verticals, short strangles or short straddles.

Your brokerage platform “Risk Profile” tells you to expect a significant mark-up in your profit-and-loss (P/L) tomorrow.  And an even bigger amount the next day.  Terrific.

Only it never arrives, at least not the next day. Or the next. You may be flat versus the expected gain or you may even have a loss vs. today's P/L.

How can that even happen?    What gives?  Where’s my theta?  Why isn't the market paying me my due?  I did everything “right!”

If you’ve tried a time or two or more to make profits out of options “decay,” you likely have had this unnerving experience, unnerving because one soon learns to distrust the “graphic instrumentation,” a.k.a., the risk curve.  So, we asked some seasoned options pros about this phenomenon:  the difference between what you see and what you get.  Here's what they said: