Market Curiosity: Exploring Markets And Systems

February 9, 2011

Love And Options, Nassim Taleb; Options Writing Mistakes To Avoid

Filed under: Just Watching, Short Calls, Short Puts — Tags: — Jeff Fitzmyers @ 10:44 am

Love And Options, Nassim N. Taleb
Why did you find options so attractive?
Because they are nonlinear in their payoffs. They seem to require a lot of complex mathematics, but in reality, we can figure them far more effectively with a diligent use of guts. With some imagination, you can mentally play with their payoff and develop intuition for how they work.

What did you observe?
I noticed that options had a tendency of sucking in very intelligent people and blowing them up. The smarter the person, the more spectacular the blowup.

Options Writing Mistakes To Avoid, James Cordier and Michael Gross
…option selling is becoming a popular choice among high net worth investors and traders. This has been mainly because of the strategy’s high probabilities of success on individual trades, ability to generate reliable income and positive performance in all types of market conditions… Experience shows, however, that not doing the wrong things will have as much, if not more, an impact on your portfolio’s ultimate performance than doing all of the right things. Therefore, we can learn a lot from the errors of others.
– Mistake one: Over-positioning
– Mistake two: Selling too close to the money
– Mistake three: No exit plan

The article also has this nifty chart:

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