Who uses options ?
Comments
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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%.
