You are still missing the point. With QE, the call options are far less risky than they look. It has been this way for over a decade. People somehow cant get it into their heads, when the fed prints money, assets go up. Capitalists are having an all you can eat buffet while everyone else thinks the only thing they can do is put 3k into the SPY every month. Its a joke
I gave you the last word and I'll stand by that, but I think you misunderstood me and I'd like to clarify this point:
The SPY is an index fund. Of the S&P500. So no, you're not saying "they're both stupid". You're saying "buy an index fund" and I'm saying, there are more sophisticated ways of doing exactly what you're advocating.
And I'll answer your questions:
1. I don't have to "beat" professionals. When you sell options, you're selling at the Bid price. The market makers are still making their few-pennies cut, because that's how their business works.
2. Option pricing is transparent. One of the multiplicands in options pricing formulas is Implied Volatility. This is a forward looking, crowdsourced guess of where the market thinks volatility is headed. It's not backward looking, that's Historical Volatility. The thing about IV is that empirically, it over-estimates. Since the CBOE first invented the Call option 20 or 30 years ago, actual volatility has been lower than the Implied Volatility predicted. And that's the edge dufer, it's an arbitrage opportunity between IV and actual volatility. There is of course no guarantee it will always be there, but it always has been, and that counts for something.
Another way to look at this is simple: People buy options for a variety of reasons. Speculation and Hedging primarily. The options market has to build-in an edge for option sellers, otherwise nobody would sell them.
Alright, I'm sorry if ever my emotions ran a little high. I love HN but the tendency to shout-down what you don't agree with sickens me a little and I have a hard time just yielding to it.
I dropped ~$1000 of my last savings into options earlier this year because "DIS is going to print." Actually, it's because I was unemployed and staring down the barrel of a rent payment that that money would not be able to cover. I figure I lose the money and not make rent, just as if I'd done nothing, or it makes the money back and then some, and I'm able to cover another month. If I'd sold about a week into holding, I'd have made ~50%. Then our Fed Chairman made the totally sane and not completely unprecedented decision to pump $2 trillion dollars into the economy. The underlying stock shot up and my options values evaporated overnight, amidst the issuing corporation announcing that all of its revenue streams would be effectively dead for the foreseeable future.
Options are relatively complex instruments with an enormous amount of risk involved. If you can’t understsnd the difference between “call” and “put” will you understand strike price and expiration date and that you will literally lose 100% of your money if an option ends up out of the money on the expiration date? I doubt it.
For example, Robinhood calls Facebook July puts that are 10% out of the money “medium risk.” In other words if Facebook doesn’t go up 10% by July you lose all your money.
Options are very high risk, high reward plays. Making that more accessible is... risky.
I mean, it was a joke, but also that only works if someone wants to buy them. I've bought options (not on $SPY) where I made a quite a bit of money on paper but couldn't sell them and didn't have the cash to exercise so they ended up expiring. Especially on low-volume securities a big part of the risk is that you simply won't be able to unload them if you don't have the cash on hand to exercise.
Source my friend? I worked in hedge funds for almost two decades. All of them touched options plenty. There is a big difference between using options to get a particular risk/reward exposure you want and clueless retail chasing some meme short squeeze nonsense which has the expected value of a drunk newbie sitting down at a Vegas poker table.
It's 2012. Anyone who sincerely expects options to vest without dilution and other shenanigans is naive at best. Been there, done that in 2000 and 2004.
Yes, in "normal times" of the past decade, when you invest in call options, you are basically being compensated for discounting the risk of a crash at any particular moment.
But there's no free lunch - the risk you are taking is being priced in, but sometimes the actually risky thing does happen.
This line you keep repeating about "only the lower classes" xyz while the "true rich" have some deep wisdom is belied by the fact that rich people become not-so-rich trading options every day.
It's straight out of the "this one trick they don't want you to know about" advertising playbook.
You can certainly make a lot of money on options, but the behavior may be non-obvious to someone who doesn't have experience with them. If you buy a 10% OOM call and the market stays flat, you end up losing the entire investment even though the underlying hasn't moved. Do you know how does that 10% relate to the current implied or realized volatilities, are you actually buying the optimal strikes or have just gotten lucky? If this was just a fraction of your portfolio, then it's no harm done, but if you repeatedly punt your entire portfolio into OOM options, you are running a serious tail risk of being completely wiped out even if the market goes up!
Options absolutely are rocket science. The actual pricing is anything but obvious and requires undergraduate level math. More advanced models require graduate level math and focused study. Yes, making money on stocks is easier than ever, but please for the love of God at least use something like levered ETFs or futures and don't bet the entire farm. The bubble is going to pop. Inflation is picking up, and the moment central banks step off the gas pedal (which they will have to), there's going to be a de-leveraging. Retail will almost always end up holding the bag one way or another.
You can generally get 2-3x leverage with futures or ETFs as well and they are a linear instrument with obvious payoff characteristics. Informed players absolutely know and track the amount of flows that these super leveraged retail traders are injecting. Make no mistake, you are being monitored and trades are being done in anticipation of the flows you'll generate. And once the bubble pops and you are forced to liquidate, you are going to be liquidating at a really bad price.
I said at the money not deep in the money genius. That call is almost a stock. Most options are traded at the money and most of the money is made there too. My statement is true.
I never said it was risk free or easy, and hedge funds do sell covered calls. The point is there is a well known and understood asymmetry between the long and short options markets due to the capital needed to write options. Intuitively the reason there is alpha for selling options is likely at least in part that you are letting people with little capital access leverage.
What is your issue with my comment? What I said is true.
You can essentially guarantee yourself an income. The risk comes from anytime you're holding stock and the stock value decreases, but you can sell calls on that and earn an income on that until a company goes out of business. This type of wheel strategy is inherently less risky than merely buying stock. There's obviously a lot of nuance to even simple options trading and I don't want to write out 100 paragraphs for some casual comment.
I think his description of what a call option is missed the "...and over 50% of them expire worthless" part. I trade options a fair amount and have done so for many years, and I make good money doing it, but I don't have the balls to go all-in on a contract that stands a 50/50 chance of going poof come expiration day. I don't think anyone that has working knowledge of what they're doing with options has that kind of testicular fortitude, at least not without feeding a gambling problem.
Options are supposed to be a hedge, by my understanding (even though I personally don't use them that way); but call them what you like, just don't call them a "safe bet" no matter the underlying stock.
Yes, I know. I was using <quote>"call option"<unquote> as analogy and not a strict legal financial instrument. Sort of like the "Greenspan Put" isn't really a "put option". Or how some might saying investing in Uber is a sort of like a <quote>"call option"<unquote> on future taxi & employee regulations favoring companies like Uber.
Ok, forget TSLA: Why is it less risky to buy 100 shares of SPY (at around the same $20k as TSLA) vs a $300 call spread on SPY? How can it POSSIBLY be riskier to spend $300 vs $20,000?
I'm sorry man, you don't get it, but you're sure that you do, and you're so sure that you can't be wrong that you dismiss things you clearly don't really understand. You disagree that retail investors should use options? Make an argument aside from "it doesn't work" because I have years of returns -- and you can watch HUNDREDS of hours of studies on TastyTrade and others -- that makes a far better case than your abject dismissal.
I write about option strategies because I'm certain that it's good for individual investors to see serious, experienced people talk about it. I know, I know, you're certain I can't possibly be right (for some reason) and I guess you think I'm just making it all up out of some 4chan like desire to ruin people. Whatever, man. The only traffic to this page now is you and me and other existing commenters.
What's crazy is, TastyTrade, it's a startup! They took VC money and have a dozen data scientists producing meaningful research -- the same stuff hedge funds and prop firms do -- and they release it all publicly. They have a market theory, and they've built fantastic free trading software (first Think Or Swim, now Dough.com) to give investors tools to implement their strategies. These are the good guys, empowering people to not get screwed by some shitty store front financial advisor. They had a 1/2 billion dollar exit with ThinkOrSwim and they give everything TastyTrade does away for free. There's an app you can subscribe to if you want to, but there's no obligation, it's real altruism.
Now, feel free to have the last word. If you're up to it, I'd love your take on the question I asked somebody else:
Wouldn't you agree that it would be a bad idea for a retail investor to invest in OTM options hoping the stock price will move in their direction? It's an awful strategy, with a low probability of success. Almost certainly those options you bought will expire worthless. So why on earth are you advocating so strongly against taking the OTHER SIDE of that trade? Here's a good answer: If you just do not have any time to invest, if you can't put in 15 mins each morning, then fine. But you must feel pretty strongly, so please, explain why you wouldn't want somebody to make that trade.
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