Do any traders trade only on incorrect options valuations?

Question

I'm tired of looking at options chains. I hate seeing, for example, a stock not moving at all and its 44 put dropping a standard 1% for time value while its 45 put gains 10%. It's absolutely ridiculous. I'm sure there are some patterns to this, but are there any traders out there who can consistently beat the market makers?

Thanks for your help.

Answer 1

I think this is cause by the IV and time remain.

Answer 2

<<<Do any traders trade only on incorrect options valuations?>>>

That depends upon what you mean by incorrect valuations. For most option traders an incorrect valuation would be one that allows a "risk free" arbitrage profit. For example, assume a stock is at $49.00, the July $50 call is trading at $2.50 and the July $50 put is trading at $3.00. A trader could buy the stock, sell the call and buy the put for a total cost of $49.50 per share. At July expiry he will can be sure he will sell the stock for $50.00, making a little over a 1% profit in two weeks, or a little over 26% annualized.

If that is what you mean by incorrect valuation, then I do not think any traders could make enough profit from the few times an arbitrage trade is available.

One way option traders frequently do make money, which could be called incorrect valuation, is by basing trades on estimations that the current implied volatility of an option is too high or too low.

<<<I'm sure there are some patterns to this ...>>>

There are. The "greeks" describe the pattern.

<<<... are there any traders out there who can consistently beat the market makers?>>>

I really don't know exactly what you mean by "consistently beat the market makers" but it does not matter. Your profit or loss probably has little if anything to do with the market makers profit or loss. The market makers will hedge their delta risk with the underlying stocks. You may or may not choose to hedge your delta risk as well.

Every option trader has some losses, so you can say no trader consistently has profitable trades. However, a lot of traders have consistently profitable years because they control the size of their losses.

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If you do not know how to pick spreads based upon your projection for the underlying, and how to control the risks of a spread once you have opened it, I strongly urge you to learn more about option trading.