The Sobering Truth about Options Trading

after a while, options traders will come to a sobering realisation...

that in a long run, if options premiums are always fairly priced, then the options trader should result in breaking even in all his options trades (exclude commission fees)....but only theoretically, because in reality Options premiums are almost always skewed to the disadvantage of the retail options traders...

to cement this phenomenon convincingly across, let's use the SPX options position (see link) to explain...

recall that theoretically, it has a 70% chance of winning that $100. conversely, it has a 30% chance of losing $400. in other words, if one establishes such conceptually equivalent options positions over 100 months, one can expect to win 70 times and lose 30 times. in $$ terms, one can expect to win 70 x $100 = $7000 and expect to lose 30 x $400 = $12,000

the net result is that the Options trader loses money...

but why does this happen?

there can be many reasons for this....

let me postulate just one reason here (actually, i can't think of any more than one reason...wahahaha)...please feel free to share your thoughts...

a) Mispricing of and especially of OTM options due to inflated Implied Volatility (ie artificially skewed IV by market makers)

so, then why would anyone entertain the thought of trading options, if indeed retail options traders are constantly disadvantaged? the answer is in knowing when to trade options and when to stay away.... and i dare say that the key lies in spotting mispriced options premiums...known otherwise as "the edge"..

without having a meaningful edge, very few options traders can last too long in the market place...