What option strategy has a positive expectancy of profit ?

Albert said: "except from pure arbitrage and skew (skew is a cousin of arbitrage) for example - a covered call is similar to writing naked put(allthought I agree that some traders think that writing naked put is much more dangerous). I meet few days ago someone that used to trade options and he told me that the options is a real mystery, it is a market in which money consistently changes hand (zero sum game) and there are no one with positive expectancy of profit except from arbitragers and the market makers.... In this question I'm talking about indexes options (not stocks) so I wanted to hear your opinion... Albert."

prohobo said: "Options (do NOT have to be a zero sum game) in a collective hedged vs. unhedged position. You buy the call, I sell the call and buy stock. We could both win and both lose. However, the question you should be asking is probability of expected returns (rather than profit). One way to look at it is delta (based on the option volatility) is also the probability of finishing in the money. Calculating expected value, understanding skew, and probabilty will give you expected returns. From there you can exrapolate your profitability from the strategy. Index options are really no different - but they tend NOT to have the similar "Fat" tails that individual listed securities. Additionally - pricing will be affected based on Euro vs. Amer. However - calculating expected return will be similar (remember to adjust the skew accordingly) - example while an OTM and ATM butterfly may have the same value - we both know (logically) they don't have the same expected return - even though the math would suggest that. This is a function of skew."

Albert said: "Good answer, :th_dblthumb2: I liked it(although I didn't understand all of it. I will read it againg when I'll have time and will response to it) As for the butterfly strategy, I had never see a situation where OTM and ATM butterfly have the same price. I know that butterfly ariund/near the money have high price then OTM and ATM butterfly have the max price.I think that this situation might be a kind of "risk arbitrage" so buying ATM butterfly and selling (short) the OTM butterfly might be good trade. Anyway, this is the situation in the market that I trade. bye the way, from my experience, as the expiration day come closer, ATM butterfly price gets higher and higher, but again this is how things work where I trade(I'm more studying & researching then dealing with active trading). I don't like one thing in butterfly strategy : commissions."

prohobo said: "[QUOTE=Albert;70205]Good answer, :th_dblthumb2: I liked it(although I didn't understand all of it. I will read it againg when I'll have time and will response to it) As for the butterfly strategy, I had never see a situation where OTM and ATM butterfly have the same price. I know that butterfly ariund/near the money have high price then OTM and ATM butterfly have the max price.I think that this situation might be a kind of "risk arbitrage" so buying ATM butterfly and selling (short) the OTM butterfly might be good trade. Anyway, this is the situation in the market that I trade. bye the way, from my experience, as the expiration day come closer, ATM butterfly price gets higher and higher, but again this is how things work where I trade(I'm more studying & researching then dealing with active trading). I don't like one thing in butterfly strategy : commissions.[/QUOTE] Flies can be priced very close in price depending on the stepness of the skew. To determine expected value - determine your own volatility and run that as a flat line for the month. Then price out your strategies. That will give you an expect value based on your volatility. You will not be able to determine expected returns if you use current implied volatilities (different for each strike). Options relationship is only binary in nature with the call or put on the similar strike. Creating reversal/conversion arbitrage (RHO Arb). The model does NOT account for skew between strikes. Thus pricing up and down the chain will give using current implieds will not solve for expected return. However - looking at an option as a singluar position will. I hope this has not complicated the matter. Most retail people fail to get the most out of an option pricing model, they use it for dismenating the greeks from the existing prices. However, the true power of a pricing model is how to use it. Enter in your OWN volatility and solve for greeks and theoretical pricing. That is how you determine if in option is over or under priced (According to you analyst). I think most retail people use options as a surrogate for stock and nothing more. Remember - the market works on one simple principal: two people agree on price, but not on value. At the end of the day the person that understood value wins."