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.
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.
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.
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.
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.
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.
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.
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.
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.
You'd probably know better than I would - guessing there's some sort of intent requirement that shorts use to skirt around getting pinched.
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?
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?
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.
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?
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.
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?
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.
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?
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.
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?
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
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?
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.
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?
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.
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:
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)
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?
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.
Well, fuck. Gonna need a new Excel workbook.
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.
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?
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.
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?
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
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).
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%.
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?
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.
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?
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.
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:
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)
Thanks, you answered my questions even if I didn't ask them properly.
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.
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?
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.
Well, fuck. Gonna need a new Excel workbook.
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.
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.
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.
It’s an interesting discussion but it seems too easy to lose all your money while trying to figure it out.
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.
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.
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.
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?
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.
Well, fuck. Gonna need a new Excel workbook.
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.
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.
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.
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.
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.
Comments
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 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.
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
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)
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, 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%.
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.
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.
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.
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