Intro to options

[xraygoggles]

One of the easiest ways to juice your returns is to sell a call (or put) when the price of the underlying stock spikes (or drops) dramatically that day.

I was doing this with mainly MicroStrategy last few months as it was riding the momentum from Bitcoin, and to a lesser extent, with Tesla as well. Massive premiums, with huge drops in IV a day or week (IV crush) later makes for really juicy income.

[Brains428]

Zaphod one of the finance podcasts I listened to pointed out that same point- even when the trade was going against you, the explosion of IV allowed you to make money if you got in early, or lose money if the trade went your direction when IV collapsed if you got in late.

[Nysoz]

Same thing can happen with high iv stocks. Any option you sell is worth remarkably less after iv crush. I sold a put on gme and even though the price dropped like 50%, the put option was still worth less due to the huge decrease in iv

[Zaphod]

I remember a DM convo I was having with someone on twitter and they said, "probably we should just buy options, puts/calls, doesnt matter, theres no way the IV isnt jacked up for days ahead, anything you buy is a winner". Person was a former market maker and current commodities broker, and was dead right. Wish I had.

[Zaphod]

Higher iv is generally better for options sellers but also potentially more risk as well. If the price direction and velocity/magnitude moves against you, you can lose money quicker which typically doesn’t usually happen in a low iv environment. It’s much more risk for the options buyer though because even if the price moves in the right direction/magnitude you can still lose money if the extrinsic value/iv goes way down (iv crush).

Low iv is generally better for options buyers if certain things aren’t priced in correctly by the mm, like bcbiker did. It can be good or bad for options sellers as expected moves aren’t a large but since premiums are less you have to sell closer strikes to get any real premium which make it more likely to be itm and not expire worthless.

Yes, it seems good relatively, but the only thing that matters is if it ends up being underpriced relative to reality. Even when GME was like 800-1000% IV it turned out to be dirt cheap. In reality, its very hard to accurately price options at these weird edge cases and its likely that those kind of things that you're taught are "expensive" are actually cheap. They are expensive in a standard model that is discounting that those extreme moves happen. And of course its higher on more volatile stocks, and vol is agnostic, it will rip up and down. Sometimes you could be wrong overall and get bailed out by wild moves alone.

[Zaphod]

this is why in certain circumstances selling puts and selling covered calls makes sense. Obviously I have been very lucky in my strategy so far. I bought naked calls on Tesla for practically free in 2019 and then sold almost $1M worth of covered calls in Jan 2021. Now I’m selling puts on dip for crazy premiums and buying atm calls from proceeds of my covered calls. If you have a good understanding of a stock I don’t think there is a more profitable way to make money but it is very risky. Once you are working with money you made though it is Monopoly money that you can gamble without emotions.

What you're talking about is having a deep knowledge of a particular stock/fund, and "knowing" how it behaves, etc...it takes a bit of time to develop this. but once you have it, its an amazing skill. Its difficult to describe but the above is it.

I think its nearly impossible to do for too many things so I also prefer to focus on specific issues as opposed to broader, "whats moving today" ideas.

If you can do this with things that are more complex, that most people will simply refuse or not have the time/capacity to understand it can also be huge.

[Nysoz]

Higher iv is generally better for options sellers but also potentially more risk as well. If the price direction and velocity/magnitude moves against you, you can lose money quicker which typically doesn’t usually happen in a low iv environment. It’s much more risk for the options buyer though because even if the price moves in the right direction/magnitude you can still lose money if the extrinsic value/iv goes way down (iv crush).

Low iv is generally better for options buyers if certain things aren’t priced in correctly by the mm, like bcbiker did. It can be good or bad for options sellers as expected moves aren’t a large but since premiums are less you have to sell closer strikes to get any real premium which make it more likely to be itm and not expire worthless.

[Panscan]

I guess my question is more so like I see high IV presented as a universally good thing for options sellers due to the higher associated premiums and extrinsic value but to me that seems neutral to me for both parties. Like isn't the amount of extrinsic value directly tied to the IV so ya you're getting more money for the sale but you're entering a riskier position by nature in exchange compared to a lower IV situation (which obviously would have a lower premium).

[Nysoz]

Yep high iv means larger potential price swings.

I mean a few weeks ago the iv on gme was 400. I sold June/July call options with a 800 strike for 50.00. So for every contract I sold I got $5000. Gme may or may not spike that high with an infinity squeeze scenario but to sustain it for that long is basically impossible.

[Panscan]

I don’t think anyone can predict anything about the market in general. TSLA more so than a lot of others, but there’s even crazier mania stuff like nkla or cciv or gme. High volatility means good premium selling options though

isn't it more like high premiums but also higher risk? like IV being inherently high isn't good or bad right, the option should be priced relative to its risk? I guess you could find ones where you think the IV is higher than it should be.

The word good to me seems to imply you are at the advantage, rather than just the word high, where I would say the stakes have been raised.

[Nysoz]

I honestly don’t think anyone has a good understanding of TSLA.

I don’t think anyone can predict anything about the market in general. TSLA more so than a lot of others, but there’s even crazier mania stuff like nkla or cciv or gme. High volatility means good premium selling options though

[Brains428]

Elon saying something about beta FSD on the twit machine over the weekend. Probably belongs in the Tesla thread- the best and worst thing for that company would be for him to leave it/be called away.

Anyways- markets like these make the options a little more work. I'm wondering how many people will be using their stimmy money to go towards debt vs YOLO options on TSLA, APPL, or any of the many SPACs. Friday is quadruple witching, so some stocks will see some movement. Establishing a position 5 days in, you'd basically be flipping a coin.

[CordMcNally]

If you have a good understanding of a stock I don’t think there is a more profitable way to make money but it is very risky.

I honestly don’t think anyone has a good understanding of TSLA.

[AR]

Once you are working with money you made though it is Monopoly money that you can gamble without emotions.

Maybe you can. Others can't. And there are even those on the other end of the spectrum who can gamble without emotions even with money they've borrowed. It's a skill.

[BCBiker]

The problem with options is they all have a negative expected return after costs. So in that sense, none of them are a real investment, they're just different ways to gamble or at best speculate on the market. You should always ask yourself who is on the other side of the bet and what do they know that you don't.

My very first investment as a kid was an option that my dad's friend recommended to the two of us. I lost the whole $500, money I really didn't have to lose (it was most of my Alaska Permanent Fund Dividend as I recall, basically most of a year's income).

Good luck to those trying to make money this way. Please limit how much of your portfolio you use to do so.

this is why in certain circumstances selling puts and selling covered calls makes sense. Obviously I have been very lucky in my strategy so far. I bought naked calls on Tesla for practically free in 2019 and then sold almost $1M worth of covered calls in Jan 2021. Now I’m selling puts on dip for crazy premiums and buying atm calls from proceeds of my covered calls. If you have a good understanding of a stock I don’t think there is a more profitable way to make money but it is very risky. Once you are working with money you made though it is Monopoly money that you can gamble without emotions.