Intro to options

[Zaphod]

Agreed, Tim. The market makers are much smarter than we are at markets, much like we are smarter than them at medicine. There is a ton of free learning available, but I'm sure they look at us like we look at intelligent and articulate people who bring a google page or webmd page to a clinic visit.

The experts I've read and listened to can go into a lot of depth that we we can't, simply because we (as in the retail crowd) don't know enough to even ask the right in depth questions.

Obviously, there are people here who might have a deeper level of understanding. But there is likely an overestimation of ability given the "stonks go up" mantra that exists. There is a reason why books like "random walk down wallstreet" and "fooled by randomness" exist and can provide examples over different trading periods of people getting wiped out, or exposed as frauds after.

The only deeper understanding you need in this game you've articulated. The pros (not market makers, theyre neutral) have access to much better tools, are usually some kind of astrophysicist making insane models and doing crazy math in their heads and are very talented. Of course they dont yolo because this is their job and there is a fair amount of risk management otherwise they wouldnt have a job for long.

Know there isnt an idiot on the other side of your trade, and usually there isnt anyone (this actually makes me feel good I dont want some rando going broke), and for goodness sake know what you dont know and that the lack of knowledge in this area could hurt you badly. You're unlikely to make it beyond the basics (which is enough given the above) unless you're very mathy.

I havent updated my volatility list in a couple years since that trade kind of died with volmageddon on 2/5/18, but its chock full of excellent vol/options people. Twitter can be a great guide but it helps to be able to find instructive vs. selling types of accounts.

[Panscan]

Nysoz I don't know if you follow Michael Burry, but he identified a whale/fund who bought 25000 TSLA puts at a $20 strike. I believe even though his interest in Tesla is short, he sees this as an asymmetry in the market that someone is trying to exploit.

They recently did this? I guess I'm sure there is more to their strategy than this one trade but that seems so far OTM with such a low chance of happening. Or maybe I'm just completely misunderstanding

[Zaphod]

Nysoz I don't know if you follow Michael Burry, but he identified a whale/fund who bought 25000 TSLA puts at a $20 strike. I believe even though his interest in Tesla is short, he sees this as an asymmetry in the market that someone is trying to exploit.

He blocked me lol.

[Zaphod]

A lot of options strategies are boring because you cap your upside to lower the overall risk, as well as to have a smaller cash outlay. There are options to the upside, downside and if the underlying stays flat. Also, let's say you're bearish for the next 6 months- you could sit in cash and sell cash covered puts. You can also protect downside risk without cashing out by simply buying 5% or whatever puts on whatever you hold (it'll cost money, but less than losing 10, 15, 20% at a time).

Also, pretty much anyone who teaches buys options in 3 or 6 month intervals (at least on the long side). Short puts and calls are typically in the 30-45 day range. Weeklys and shorter are essentially coinflips. So, I think when you think about it from an outside perspective, then you think of options as things for day traders, who essentially never win in the long run. But if you want to make money in the long run, then it's finding where the asymmetry is.

A good place to start: https://www.optionseducation.org/

My desire to learn the stuff is because I have the time to and trying to understand some of the stuff the macro and finance people I follow talk about.

The whole point of options is to sell whats expensive (vs some kind of forecast) and buy whats cheap. Weeklies are very expensive, longer term ones are cheaper. They have other issues like theyre loaded with gamma and can go up/down quick.

[Panscan]

At what point do you determine there’s no longer money to be made? That seems to be the most important piece of information to have.

Some could argue there is always money to be made and that just because the market is going down doesn't mean you can't make money with options. You can find asymmetries where the cost of an option doesn't reflect its true value, especially related to sentiment/volatility. It's not like you need a bull market to make money, its just probably the easiest way. That line of thinking isn't inherent to options though, tons of stock pickers who have been making money too since nearly everything going up.

There are some interesting facets of options IMO that feel similar to some of the concepts behind index investing, times where you might not know where something is going to go but you can bet it won't move significantly in one direction or the other and profit from it, even if it moves quite a bit in one direction as a few have previously alluded to.

Or you can use them as an insurance policy if you are growing increasingly weary of current market positions and feel we are near the top. You can essentially spend a little money as insurance to limit downside risk.

[Zaphod]

if you believe the market goes up with time, isn't leverage going to be your friend in the long run? I mean I guess if you get over-leveraged you can get cleaned out, but a modest amount coupled with the circuit breakers make this pretty difficult

What I've been saying for years, and of course have not been meaning for people to pile into options. They could of course just not pay off a mortgage so fast, or have more equity in their allocations, or use a small amount of of 2x leveraged etps (on sp or nq, no they dont go to zero) to get to 1.2-1.5x stock and keep their bonds for rebalancing. In the old days the only way to achieve this was buying deep in the money (.99 delta) 2 y call options.

Deleverage as you age, add bonds in at the end nearer to retirement, giving your equities the longest time to compound. Its dumb in any other sense besides behavioral to have many bonds when young. 80/20 or 60/40 is a final scenario, fill up the equities bucket first its actually safer.

The great thing about the levered ETFs is that you dont risk getting margin called which can ruin many a great appearing strategy on a chart. Non callable leverage is the better kind.

[Brains428]

https://twitter.com/michaeljburry/status/1359621222904991745

Here is the tweet for reference

[Brains428]

Nysoz I don't know if you follow Michael Burry, but he identified a whale/fund who bought 25000 TSLA puts at a $20 strike. I believe even though his interest in Tesla is short, he sees this as an asymmetry in the market that someone is trying to exploit.

[Jack_Sparrow]

Rather than FOMO, I wonder if it’s boredom that is driving me to distraction!

I do feel though that the options marketplace, albeit decidedly risky is also prone to inefficiencies and behavioral issues may be at play. At this point, I simply want to learn more about this and it is quite possible that I may never put any money in.

I do agree with this. The momentum betting and option betting can be nice because you just buy the narrative and don't have to worry about fundamentals in the short term.

I'm coming off my first big play in options and it was an exhilarating 2 weeks. It was the once in a lifetime bet on GME. On the plus side I walked away with 4 years worth of residency salary. It was an unbelievable experience. On the negative side though, I averaged about 4 hours of sleep a night, a few nights without sleep at all. It really put a strain on my day job, and I completely ignored my family during this run. Glued to my phone and CPU. I completely understand why everyone on wall street does drugs as it seems to be the only release when all this is going on. After I won alot of money, I felt the rush and kept going into other options. I dropped another 20k in options which turned into 5k in 3 days. It feels like Pandora's box a little bit. Just know there is a dark side to it.

[CordMcNally]

But for the time being, there’s money to be made. Strike while the iron is hot, make hay while the sun is shining, etc.

At what point do you determine there’s no longer money to be made? That seems to be the most important piece of information to have.

[Nysoz]

I do use a fairly significant amount of buying power to get the returns that I get. I also use TSLA which most people aren’t happy owning for the long term which makes my returns higher than other tickers or the indexes.

I’ll run the numbers later but I briefly looked at Apple and Amazon and the returns on capital invested with them were decent as well but not as good as Tesla.

Also it’s true that I’ve become detached from the gains and losses. I try and base my trades around support and resistance levels with any potential catalysts around the company. After letting emotions get the better of me a few times leading to poor decisions managing trades going the wrong way, I’ve learned to leave emotion at the door for the most part.

MM will always win in the long run I agree 100%. The reason why I like selling options is because it’s almost like being on their side. I’ll never be as efficient as them but I’m also able to pick and choose where I enter my positions as they make sense to me.

But for the time being, there’s money to be made. Strike while the iron is hot, make hay while the sun is shining, etc.

[Brains428]

Agreed, Tim. The market makers are much smarter than we are at markets, much like we are smarter than them at medicine. There is a ton of free learning available, but I'm sure they look at us like we look at intelligent and articulate people who bring a google page or webmd page to a clinic visit.

The experts I've read and listened to can go into a lot of depth that we we can't, simply because we (as in the retail crowd) don't know enough to even ask the right in depth questions.

Obviously, there are people here who might have a deeper level of understanding. But there is likely an overestimation of ability given the "stonks go up" mantra that exists. There is a reason why books like "random walk down wallstreet" and "fooled by randomness" exist and can provide examples over different trading periods of people getting wiped out, or exposed as frauds after.

[Tim]

“But if you want to make money in the long run, then it's finding where the asymmetry is.”

And this basically assumes that one can consistently find where the market has incorrectly valued options. Good luck with that in the long term. Similar debate on stock picking.

Simple puts and calls built around current or planned holdings can increase returns. That is not the options trading being discussed as a source of income.

[Brains428]

A lot of options strategies are boring because you cap your upside to lower the overall risk, as well as to have a smaller cash outlay. There are options to the upside, downside and if the underlying stays flat. Also, let's say you're bearish for the next 6 months- you could sit in cash and sell cash covered puts. You can also protect downside risk without cashing out by simply buying 5% or whatever puts on whatever you hold (it'll cost money, but less than losing 10, 15, 20% at a time).

Also, pretty much anyone who teaches buys options in 3 or 6 month intervals (at least on the long side). Short puts and calls are typically in the 30-45 day range. Weeklys and shorter are essentially coinflips. So, I think when you think about it from an outside perspective, then you think of options as things for day traders, who essentially never win in the long run. But if you want to make money in the long run, then it's finding where the asymmetry is.

A good place to start: https://www.optionseducation.org/

My desire to learn the stuff is because I have the time to and trying to understand some of the stuff the macro and finance people I follow talk about.

[DocFi]

Good investing is boring. There's no way to get around it. 98% of people who are raking in the bucks now will lose that money (and likely more) when things take a turn for the worse. People who aren't good with money typically don't keep it very long. Right now, a lot of people who aren't good with money are making a lot of money.

That is exactly what I wonder! Is there a cross-section of investors who can be boring like me and still invest in options and can generate income through singles as opposed to home runs. I certainly don’t see myself buying out the money call options and hoping for the best!!