Who uses options ?
Comments
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I didn't say that I was.Bob_C said:
You aren't ready for the deep end.EwaDawg said:
So you admit that you, as a conservative, lie.Bob_C said:
Yea you have posted much worse.EwaDawg said:
Maybe I should have just said I've posted much worse.Bob_C said:Worst internet post of all time.
And, I could leave it there.
BTW, if you are referring to Stalin's post on the appalachian backwoods campfire (AKA tug tavern) Race has already confirmed the stupidity of the post I was referring to. Please, try to keep up.
You are confirming just how lacking of intelligence that you are.
Thanks.
On another matter, please allow me to retract he second line of my last post. It doesn't fit with the unwritten rules of creepy's club.
I have been multi-tasking and forgot where I was for a moment.
But pardon me if I ignore your input on whether or not I am ready for the deep end given your propensity to make questionable statements (to which you concurred) displayed earlier in this thread.
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Get that shit talk out of @creepycoug’s classy joint.EwaDawg said:
So you admit that you, as a conservative, lie.Bob_C said:
Yea you have posted much worse.EwaDawg said:
Maybe I should have just said I've posted much worse.Bob_C said:Worst internet post of all time.
And, I could leave it there.
BTW, if you are referring to Stalin's post on the appalachian backwoods campfire (AKA tug tavern) Race has already confirmed the stupidity of the post I was referring to. Please, try to keep up.
You are confirming just how lacking of intelligence that you are.
Thanks.
Resepct the business.
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@PurpleThrobber said:
"Get that shit talk out of @creepycoug’s classy joint.
Resepct the business."
I retracted it. And I think I apologized.
If not, I do now.
How is your excel worksheet coming on the first option scenario coming?
We share things in the club and are greatly appreciative when others do (okay, you guys share and I appreciate it).
Please tell your pal race, I remembered the preview button.
Thanks, in advance.
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Finally read it and YES it does help. I am not looking to do too much on margin (at least for a while) so maybe I'll at least see my broker about upgrading my account to include capability to play with some small dollars (hey, my wife won't miss it if its in her account).DawgsCanDance said:Options are highly useful and interesting to employ in a variety of ways and are simply an exercise in math to calculate the projected impact of. Some of the theoretical use of Options is quite simple to , other relationships are more complex but are easily understandable after you think about it. To give you the idea of how you might employ them consider the following examples...
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.
Its weird, that USO, XLE and XOM all have risen about 37 % (according to when I bought them) and I am pretty sure that I bought them because you like the upside. Well, I think I sold the XOM and bought USO because it duplicated some of my wife's holdings.
Thanks again for the generous explanations.
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@Another poaster for whom I formerly held a lot of respect said
"You need to respect creepy's struggling bidness here and keep my name out of your mouth"
My apologies. You are correct. Between the two threads on different boreds and sending e-mails back and forth to my actual/real (not pretend like creep) attorneys - I should have not named who actually confirmed it.
Point taken.
I have begun to not refer to trump by name. He is now known as the former POTUS twice impeached.
I should have said "another poaster for whom I formerly held a lot of respect". Or some such poorly worded dodge.
And, I have no idea how I missed your post earlier since it has your classic sig.
Thanks for reading. . .
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My cousin who is a 20 yr big tim hedge fund trader has said this book is the bible on options
*it drove me nuts reading through the first chapter ... i've never been told (except in the tug) that I'm a pea-brain, and that book made me feel like it
https://www.amazon.com/gp/product/B007VLQQU4/ref=dbs_a_def_rwt_hsch_vapi_tkin_p1_i1
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The debate in my brain : this book or membership to @Swaye's wigwam?pawz said:My cousin who is a 20 yr big tim hedge fund trader has said this book is the bible on options
*it drove me nuts reading through the first chapter ... i've never been told (except in the tug) that I'm a pea-brain, and that book made me feel like it
https://www.amazon.com/gp/product/B007VLQQU4/ref=dbs_a_def_rwt_hsch_vapi_tkin_p1_i1
My wife : WTF is a wigwam?
Me : I didn't say that out loud.
Sorry, Stalin.
Men are simple beings, indeed.
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This explains my view on it to a T.greenblood said:Option trading, especially shorting is a huge risk in that non-market or non fundamental activity can absolutely crush you, and your losses can be infinite. Look at GameStop. A bunch a internet nerds banded together to artificially inflate a stock and crippled short positions, because they could. Shorting has no cap on losses, because a stock could “go to the moon”. Call options at least limit your risk to the amount you invested. I’m completely against either, but most of the reason is that I admittedly don’t have the balls or the stomach for it.
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. -
It’s an interesting discussion but it seems too easy to lose all your money while trying to figure it out.
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Hence my original response to Ewa. I know what they are; I don't know how to execute them with my own money, and I don't want to learn the hard way with options.USMChawk said:It’s an interesting discussion but it seems too easy to lose all your money while trying to figure it out.
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A little bit of nitpicking - options trading doesn't mean infinite losses unless you're naked shorting (stock price can theoretically reach any amount), but that's not normally allowed for an average retail trader.greenblood said:Option trading, especially shorting is a huge risk in that non-market or non fundamental activity can absolutely crush you, and your losses can be infinite. Look at GameStop. A bunch a internet nerds banded together to artificially inflate a stock and crippled short positions, because they could. Shorting has no cap on losses, because a stock could “go to the moon”. Call options at least limit your risk to the amount you invested. I’m completely against either, but most of the reason is that I admittedly don’t have the balls or the stomach for it.
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.
Agreed on shorting, though I don't really care if someone is betting against a company. I take umbrage when it's used to actually effect the price of a stock or dismantle a company. Funds like Hindenburgh are known for releasing false negative press in combination with heavy short attacks/ladders to create massive downward momentum on stocks. Those people should be shot as far as I'm concerned. -
Which is as illegal as "Blue horseshoe likes Blue Star". SEC Enforcement should be all over them.Sources said:
A little bit of nitpicking - options trading doesn't mean infinite losses unless you're naked shorting (stock price can theoretically reach any amount), but that's not normally allowed for an average retail trader.greenblood said:Option trading, especially shorting is a huge risk in that non-market or non fundamental activity can absolutely crush you, and your losses can be infinite. Look at GameStop. A bunch a internet nerds banded together to artificially inflate a stock and crippled short positions, because they could. Shorting has no cap on losses, because a stock could “go to the moon”. Call options at least limit your risk to the amount you invested. I’m completely against either, but most of the reason is that I admittedly don’t have the balls or the stomach for it.
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.
Agreed on shorting, though I don't really care if someone is betting against a company. I take umbrage when it's used to actually effect the price of a stock or dismantle a company. Funds like Hindenburgh are known for releasing false negative press in combination with heavy short attacks/ladders to create massive downward momentum on stocks. Those people should be shot as far as I'm concerned. -
You'd probably know better than I would - guessing there's some sort of intent requirement that shorts use to skirt around getting pinched.creepycoug said:
Which is as illegal as "Blue horseshoe likes Blue Star". SEC Enforcement should be all over them.Sources said:
A little bit of nitpicking - options trading doesn't mean infinite losses unless you're naked shorting (stock price can theoretically reach any amount), but that's not normally allowed for an average retail trader.greenblood said:Option trading, especially shorting is a huge risk in that non-market or non fundamental activity can absolutely crush you, and your losses can be infinite. Look at GameStop. A bunch a internet nerds banded together to artificially inflate a stock and crippled short positions, because they could. Shorting has no cap on losses, because a stock could “go to the moon”. Call options at least limit your risk to the amount you invested. I’m completely against either, but most of the reason is that I admittedly don’t have the balls or the stomach for it.
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.
Agreed on shorting, though I don't really care if someone is betting against a company. I take umbrage when it's used to actually effect the price of a stock or dismantle a company. Funds like Hindenburgh are known for releasing false negative press in combination with heavy short attacks/ladders to create massive downward momentum on stocks. Those people should be shot as far as I'm concerned. -
In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
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There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
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Thanks. For the discussion on theta - is that primarily a function of time remaining before the option expires and is therefore fairly linear? I guess my question more precisely is can a portion of the option's price movement be linear?Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
You didn't mention beta specifically but you mentioned that the volatility of stock price effects the price of the option. Is the term beta relevant to your post or do I need to watch the tutorial again?
Sorry for the low level questions. I understand the reward is getting the pupil to a significantly higher level of understanding.
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Thanks. Is there a general rule of thumb you use when buying the option? IE if you buy it 90 days out and the stock goes up a dollar the option will go up 98%, etc all the way out to day 89?Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
Also can the option trade even higher than what the share price did on a certain day? Again stock goes up or down a $1.00 on day 22, but the option can trade at $1.09 or down $1.03 -
Yes, theta is generally referred to as the "decay" of an option, but it's not linear. It's non-linear in its decay because the probability of the option being "in the money" at expiry is also non-linear. You can imagine that if I have a $10 call and the price of the stock is $8, I'm much better off if I have more time for that stock to rise beyond $10. Here's a generic example that would highlight a perfectly theoretical decay:EwaDawg said:
Thanks. For the discussion on theta - is that primarily a function of time remaining before the option expires and is therefore fairly linear? I guess my question more precisely is can a portion of the option's price movement be linear?Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
You didn't mention beta specifically but you mentioned that the volatility of stock price effects the price of the option. Is the term beta relevant to your post or do I need to watch the tutorial again?
Sorry for the low level questions. I understand the reward is getting the pupil to a significantly higher level of understanding.:max_bytes(150000):strip_icc():format(webp)/dotdash_Final_Time_Decay_Apr_2020-01-a2824c7ac5ad47ed9082ea52f9ace031.jpg)
Now, that isn't to say that movement of the price can't be linear as the price of the stock moves, but it would be a coincidence rather than the expectation.
Beta weighting is a measure of a stock's volatility against the rest of the market. That's really of less concern with respect to the option because the option cares only about the underlying stock itself. Beta is useful in measuring your portfolio bias but less so in an isolated case for one asset type. The volatility that is important to options is implied volatility as that measures the likelihood of a move of an underlying asset for a certain amount over a particular amount of time (each option has it's own quantity of IV)
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Well, fuck. Gonna need a new Excel workbook.Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
I'm kinda joking, kinda not - you want to talk Black Scholes or Binomial calculation of derivative instruments? I'm more of a BS guy.
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Depends if it's short term or long term. I generally don't bother with long term options because I'd rather just buy the stock at that point and avoid trading decay for leverage, and fundamentals of a company are likely to play out a lot more significantly (earnings, etc.). Short term, I take a much more technical approach than I would long term and initially look for stocks that have recent consolidation - that is the price hasn't fluctuated for sometime (inside bars on a weekly chart are crack). That way, when the stock makes a move, volatility will spike and the price of the option will go up. I've actually had stocks drop and still had calls increase in value due to the rise in IV. The timing is a bit tricky and I tend to use a number of variables, but essentially I look for good entry based on fibonacci levels of the stock, overall market conditions and moving averages (particular Keltner channels and bollinger bands).godawgst said:
Thanks. Is there a general rule of thumb you use when buying the option? IE if you buy it 90 days out and the stock goes up a dollar the option will go up 98%, etc all the way out to day 89?Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
Also can the option trade even higher than what the share price did on a certain day? Again stock goes up or down a $1.00 on day 22, but the option can trade at $1.09 or down $1.03
That being said, I normally actually just sell covered calls using inverse logic. It's free money as far as I'm concerned.
I'm not quite sure what you mean about if the stock goes up a dollar, the option will go up 98%. That a stock goes up a dollar is sort of meaningless as a stock can go from $1 to $2 or $49 to $50. Price fluctuation matters, obviously, but so does the rate of the increase. Rapidly changing prices mean higher volatility, which means higher option prices. It's easier to think of options as "probability contracts" rather than just 100x leveraged bets.
And yes, an option can certainly "move" more than a stock because it corresponds to 100 shares. For example, if a stock moves from say $20 to $25, you can expect a single contract to move far more than $5. Today is a great example. At the moment, meme stock SOS has increased about 43%. The .SOS210305C7 call (SOS 3/5/21 call for $7) has increased 188%. -
Thanks, you answered my questions even if I didn't ask them properly.Sources said:
Yes, theta is generally referred to as the "decay" of an option, but it's not linear. It's non-linear in its decay because the probability of the option being "in the money" at expiry is also non-linear. You can imagine that if I have a $10 call and the price of the stock is $8, I'm much better off if I have more time for that stock to rise beyond $10. Here's a generic example that would highlight a perfectly theoretical decay:EwaDawg said:
Thanks. For the discussion on theta - is that primarily a function of time remaining before the option expires and is therefore fairly linear? I guess my question more precisely is can a portion of the option's price movement be linear?Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
You didn't mention beta specifically but you mentioned that the volatility of stock price effects the price of the option. Is the term beta relevant to your post or do I need to watch the tutorial again?
Sorry for the low level questions. I understand the reward is getting the pupil to a significantly higher level of understanding.
Now, that isn't to say that movement of the price can't be linear as the price of the stock moves, but it would be a coincidence rather than the expectation.
Beta weighting is a measure of a stock's volatility against the rest of the market. That's really of less concern with respect to the option because the option cares only about the underlying stock itself. Beta is useful in measuring your portfolio bias but less so in an isolated case for one asset type. The volatility that is important to options is implied volatility as that measures the likelihood of a move of an underlying asset for a certain amount over a particular amount of time (each option has it's own quantity of IV)
Decay seemed likely linear to me if you take away related volatility of the underlying stock. But, surprise, its more curved which makes sense.
And, yes, I see now the volatility of the stocks price were not necessarily being referred to as in relation to the rest of the market. So reference to beta in your last sentence could/would be innacurate.
Thanks.
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Disclaimer: you're better off talking to my wife who is the real finance guru of the house and used BS/Binomial/MC in banking.PurpleThrobber said:
Well, fuck. Gonna need a new Excel workbook.Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
I'm kinda joking, kinda not - you want to talk Black Scholes or Binomial calculation of derivative instruments? I'm more of a BS guy.
That being said, my view is that while BS seems to be the more widely accepted approach, binomial gives more flexibility if desired. My understanding is that MC is somewhere in between, not sure if you've had any luck there.
Admittedly, learning / applying this kind of approach has been a matter of diminishing returns for me - too much time in a science I scarcely understand, for marginal benefit. Because market tomfoolery is more of a side hustle / hobby, I elect to follow a simpler approach where it's easier to backtest / implement more macro approaches (e.g., how to play gap ups/downs, inside days, etc.). As a former engineer, the math and probabilistic nature of all of this is very interesting to me, but as a lawyer, I simply don't have the time to do it justice. If you have particular resources that are worth diving into, let me know. I'm happy to read up when I can and discuss.
Additional thought: I suppose I could use the modeling approach to optimize when and how I sell covered calls, but I tend to have them so far out of the money I'm not sure it would make a difference. Let me know if you think there's value here. -
That is why I plan to learn to trade the options in my wife's retirement account. Well, at least until I understand them better.creepycoug said:
Hence my original response to Ewa. I know what they are; I don't know how to execute them with my own money, and I don't want to learn the hard way with options.USMChawk said:It’s an interesting discussion but it seems too easy to lose all your money while trying to figure it out.
And, no, Hawaii is not a community property state.
Actually, at this late in the game I am looking to enhance my trading options (no pun intended but I couldn't spell repertoire) without going crazy on the margin. -
I'm one step removed from @creepycoug - done all sorts of deals with weird provisions and convertibles and preferreds and downrounds, etc - all of which require knowledge of how to value this kind of stuff and derivatives and investor disclosures.Sources said:
Disclaimer: you're better off talking to my wife who is the real finance guru of the house and used BS/Binomial/MC in banking.PurpleThrobber said:
Well, fuck. Gonna need a new Excel workbook.Sources said:
There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.godawgst said:In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?
I'm kinda joking, kinda not - you want to talk Black Scholes or Binomial calculation of derivative instruments? I'm more of a BS guy.
That being said, my view is that while BS seems to be the more widely accepted approach, binomial gives more flexibility if desired. My understanding is that MC is somewhere in between, not sure if you've had any luck there.
Admittedly, learning / applying this kind of approach has been a matter of diminishing returns for me - too much time in a science I scarcely understand, for marginal benefit. Because market tomfoolery is more of a side hustle / hobby, I elect to follow a simpler approach where it's easier to backtest / implement more macro approaches (e.g., how to play gap ups/downs, inside days, etc.). As a former engineer, the math and probabilistic nature of all of this is very interesting to me, but as a lawyer, I simply don't have the time to do it justice. If you have particular resources that are worth diving into, let me know. I'm happy to read up when I can and discuss.
Additional thought: I suppose I could use the modeling approach to optimize when and how I sell covered calls, but I tend to have them so far out of the money I'm not sure it would make a difference. Let me know if you think there's value here.
But damned if I'm writing a check or putting any of my coin at risk into this option stuff. Mrs. Throbber v2.0 only gives me $5 allowance each month and I need to save up for six months to buy some delicious edibles.
And I'm certain there will be budget cuts to pay for her new home makeover/kitchen remodel/Property Bros episode.
FYFMFE
