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Who uses options ?
EwaDawg
Member Posts: 4,292
What is the best way to start?
I have always had the impression that they may be an integral part of portfolio protection from crashes.
Also, is it too late? Or, in other words, is any benefit to shorting gone given the whole GameStop fuck up?
I have always had the impression that they may be an integral part of portfolio protection from crashes.
Also, is it too late? Or, in other words, is any benefit to shorting gone given the whole GameStop fuck up?
Comments
And, for record - the worst post in the history of the internet was someone claiming that the reaction to a racist idiot actually caused the shortcomings of the racist idiot.
Hint: Since you are slow: It didn't
I've dealt with derivatives my entire legal career. Like rate swaps, I know what they are and how they work mechanically. But I don't have economic experience with them using my own money. I've worked on underwritten offerings of every kind of security you can think of, but I've never invested my own money in anything but common equity on the exchange.
Actually investing in these things is its own experience; and I have none.
But someone in the Club does.
What say you guys? I'd like to learn more about using these things myself.
@godawgst ? @DawgsCanDance ? @doogie ? Are these only for the super sophisticated? Or is it the sort of thing on which people can get down the learning curve quickly?
If the bet you make with them is wrong and they expire you lose your complete investment in them so that's why I stay away, but would love to hear from others who have used them successfully, along with their biggest gains they made on them.
I am not sure they would work well for what I would do anyway (even if they weren't so complex) since I deal in odd lots and they seem to be mostly be offered in even lots. I get that I could overpay and exercise only part of the option or only buy the option on part of my holding .......but still.
That reminds me of a time when prices were offered in fractional dollars and that complicated on line trading.
Anyway. I think my brokerage offers a simulated tutorial and perhaps requires an actual test to qualify to trade options. Thanks, again.
To me shorting is also a moral issue. You are a basically betting on and hoping a company fails. I’m the type to put my money into things that I want or think will succeed.
In November 2020 I believed that Energy as a group was grossly undervalued after having gone through the floor during the downturn and was one of the few asset classes that had not rebounded so I considered the impact and attractiveness of available investment vehicles and chose to invest in Exxon the stock [XON], as well XLE the Energy ETF and also the 2X leveraged ETF ERX.
Here is the scenario I considered at the time [prices and size of investment numbers employed consider the impact of size and scale for illustration purposes]:
Buy $100,000 XON Mobil Stock at 35 3/8 with a then stated dividend of 11% [would management cut the dividend as other energy co's had?]
Buy $100,000 Energy ETF XLE at 35 3/4 with a dividend of around 6% [subject to change because many energy co's were cutting the dividend]
Buy $100,000 Direxion 2X leveraged ETF ERX at 13.25 with a Dividend of around 4 3/4% subject to change
At the time I thought that the rebound price potential for XLE energy was 54 [+55%]+ dividend, and that Exxon might run to about the same price +55% and the dividend] and that the % return potential for the 2X was about 1.75X - 2X greater so upside to maybe the 25-28 range or about +100% return over some time period.
Here is the options kicker:
At the time, the relationship between puts and calls was favorable... option puts at the 35 level were 7-5 in favor of puts which meant that for a 100,000 investment in XLE or Exxon that you could sell 30 puts at the 35 price level [a commitment promise to buy 3000 shares at 35 if the buyer chose to sell you the shares at 35 later] and you could use the proceeds of sale of the puts to purchase 42 35 calls giving you the right to buy 4200 shares also at 35 before expiration. Options come with various expiration dates and premiums that vary accordingly. In this case the January 2023 would make the most sense to give the concept a longer period to grow into the desired outcome is what I was thinking.
The above illustrates that in that scenario your obligation is the same for selling 30 puts (the risk associated with the potential obligation to buy 100,000 XLE Energy or 100,000 Exxon stock so you need to reserve the un-invested funds to fulfill your potential obligation to purchase the shares via exercise later if the stock declines significantly below 35, which is exactly the same risk that you assume if you simply bought the 3000 shares].
The advantage offered by the above is that for the same downside risk associated with purchasing 100,000 of the energy stock you have acquired the upside potential of $140,000 worth of stock over the same period.
Consider the additional kicker later if the stock moves significantly higher during the holding period after your purchase and sale of the options...
say Exxon then moves from 35 to the 40-44 range. At that price level, the value of the options that you hold are now worth 4-5 times more than the value of the options you have sold so you can then sell lets say 25% of the call options [ 10 in this case ] to buy back the negative risk exposure of the 30 puts that you sold. This leaves you long 32 call options at an exercise price of 35 with no out of pocket cash invested and no further obligation to reserve funds for the potential obligation of purchase [you have now cloned your funds for additional investments in other areas
while retaining the upside of the $100,000 investment in Energy]
Hope this helps.
Another example and then I will quit:
So say I did go ahead and buy $100,000 of the the stock and the version I picked was to buy the 2X version at 13. So that means I would have purchased 7,500 shares of ERX in November of 2020. Going forward to now, the price is now sitting at 23 [a gain of +76%] and its a short term gain for tax purposes.
So say I'm now concerned about the additional risk of the stock moving back down in price to say the 16 level, and yet i still think that the upside is to 26 or 27. And I don't want to simply sell now because I think it will reach 26 or 27 and I don't want a short term gain for tax purposes as well.
So yesterday I would have been able to sell 75 calls at the 20 level for $7 giving someone else the right to buy my shares at 20 between now and the expiration of January of 2022. This now gives me downside protection to the 16 level [todays 23 stock value plus the $7 premium value] and a total sale price of 27 if they are exercised.
Perfect, exactly what I am hoping for and the exercise won't happen until after my long term holding period is achieved because the option will remain to be more valuable as an option right up until expiration because of remaining time value.
I do have one quick question. If I buy a call at $6.75 for purchase of 100 sh of HCH at strike price of $100 when it is currently selling @ $80.00 (45 day expiration) - Do I actually pay $6.75 for the option or $675.00? The brokers video that I am watching seemed to suggest that I would pay $675. Of course, options may be a non-starter for me if that were the case but I have watched it a few times now and it still sounds that way.
(Oh, I read the post - I definitely need coffee before I diagram it.) BTW, when did Exxon change its symbol from XOM? (Sorry, I can't help it). That is probably the reason that I can't understand my broker's videos. (I bought both Exxon and XLE for my wife late last year as well but no funky derivatives were involved).
Hopefully those of use who want to learn can bend your ear a lot more once we are able to get our feet wet assuming that I am interpreting my broker's video incorrectly.
And, yes, I expect you to say no. That would be too fair. We are dealing with the SEC, you know (I kid, I kid - creepy throbber).