Intro to options

[Nysoz]

...In the end, >80% of options expire worthless, but when they do, you feel like a fool and leave a lot of money on the table (calls) or lose a ton of cash (puts)... or you might pay to buy the option back. It's not for everybody. I think the OP will have a much different stance on selling long term calls on a volatile one like TSLA in 6 months. Everything works until it doesn't.

I think you misunderstood what I said at some point, but I sell calls and spreads 30-45 dte. The comment you replied to, I was selling 25-45% OTM on monthlies.

[Max Power]

...if someone is really bold OTM call option year out on company you believe in probably gets you great ROI. Or at least thats my understanding so far. But yea akin to lottery...

Not akin to the lottery.

Not good ROI to sell long term calls... much better month to month. Buying them long term is fine if you get them cheap and want to roll the dice (but again, not many ppl will sell long term on growers/volatile, so prices might be unavailable or high). Price is key. Also pay attention to QE dates when you buy or sell... and divi dates (but most paying divi aren't worth selling/buying options on).

...For covered calls make sure not only would actually be happy letting go of shares at that price (you most likely wont be) make sure you are getting paid for it. For the most part, selling far otm calls just doesnt generate enough money to make that true.

For puts its even worse. You sell it thinking you'd "own it at that price" however when it blows through it you neither want it and you've missed out on tons of premium...

^^^Concur completely. This is why limiting the term is key. I can lose (err, fail to gain) a bit on an index covered call 3 weeks out, but I can get DESTROYED on one 3 months out. Not only that, but selling the 3wk call four times pays me a lot more than the 3mo one.

The low volatility stuff won't be worth much/any short term. High volatility stuff is worth selling on and can pay... but that's since there is a real chance it (and that gets exponentially higher the longer term you sell the call for). It is a very bad feeling to have a call you sold deep ITM... and the worst part is that money is tied up until the duration is over also. Again... avoid long term calls over ~1month except on very low volatility stuff (utilities, dividend cows, etc)

...In the end, >80% of options expire worthless, but when they do, you feel like a fool and leave a lot of money on the table (calls) or lose a ton of cash (puts)... or you might pay to buy the option back. It's not for everybody. I think the OP will have a much different stance on selling long term calls on a volatile one like TSLA in 6 months. Everything works until it doesn't.

[BCBiker]

? so sell covered calls on your ETF?

No etf that does it for you and sends you dividend.

ticker qyld is largest one.

[formerly_cn]

Actually you can buy an ETFs that do nothing other than buy shares with your money and pays a 9-12% dividend in monthly chunks.

It is a very robust strategy, taking advantage of hedging strategies and hope from traders by selling covered calls. If there is anything close to printing money on a small scale this is probably it.

Of course not everyone does it because if everyone did then call option prices would be too low and then buying calls would be way to go.

? so sell covered calls on your ETF?

[BCBiker]

To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.

Actually you can buy an ETFs that do nothing other than buy shares with your money and pays a 9-12% dividend in monthly chunks.

It is a very robust strategy, taking advantage of hedging strategies and hope from traders by selling covered calls. If there is anything close to printing money on a small scale this is probably it.

Of course not everyone does it because if everyone did then call option prices would be too low and then buying calls would be way to go.

[BCBiker]

This is the most important part here, cannot be over stressed. Never be the holder of convex tail risk. You will win most of the time for a long time and then get wiped out all at once.

If anyone is confused on this point I suggest reading the very entertaining books by Nassim Taleb. I personally like Antifragile but the most digestible version is Fooled by Randomness. If you take Taleb seriously and ignore every hack preaching their skills in probability theory and “risk”, you will do well in options.

I personally don’t think about greeks too much but I also really only buy options on a few stocks and 95% of it has been Tesla in last year.

[Zaphod]

To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.

They do and dont. These premiums and regimes are not always in favor, most of the time these things lose money. TSLA rn is almost guaranteed not to pay out due to extremely high premiums on both sides (deserved ofc).

If you feel like dipping your toes first try to learn some basic stuffs like delta, gamma, vega, and theta, how much each component makes up the price and what your position, ie, long/short, put/call, spread/ratio/butterfly/etc...is and isnt. Are you long delta, short theta. etc...? Whats your directional assumptions and time frame and what makes you lose? When to cut?

Most will lose money, way faster than they can appreciate. Paper trade to convince yourself not to do it. Covered calls can be fine, but everything is a trade off.

[Zaphod]

This is good thread to introduce concepts. I think the more you do this the more clever you become.

The key is to never be on the wrong side of a trade that is convex (limited upside, and unlimited downside)

Buying naked call options is being on the right side of convexity if you can buy the contract at a low price.

This is the most important part here, cannot be over stressed. Never be the holder of convex tail risk. You will win most of the time for a long time and then get wiped out all at once.

As far as covered calls and cash secured puts, they sound great but mostly arent and you'll likely regret it if you're not doing something quite purposeful with rules on when/how. Tesla, is great for it right now, and not being able to 100x your calls and such is exactly right, the IV is high (meaning even if correct they dont pay out necessarily).

For covered calls make sure not only would actually be happy letting go of shares at that price (you most likely wont be) make sure you are getting paid for it. For the most part, selling far otm calls just doesnt generate enough money to make that true.

For puts its even worse. You sell it thinking you'd "own it at that price" however when it blows through it you neither want it and you've missed out on tons of premium.

You do these things trying to collect money, and hoping the premium is enough for the risk, and you dang sure do not want them to hit. Its rare you're selling it into a mania or ramp up, etc...Was lucky last week to do that.

Most of everyone including those of us that trade options should stay away, they're entirely unnecessary.

[formerly_cn]

There are situations where they have very technical people working to “minimize” risk in large institutions who blow up. Long Term Capital Management was the biggest one.

Now they are not beholden to linear models and really bad assumptions. They also probably make sure no one person is using same strategy in same equity.

Many brokers have web services for trading so anyone with some fairly basic programming skills could start a quant trading system. If I was not otherwise occupied I would give it a try.

Yea many offer API services to make a bot. Infact there are premade bots out there you could tweak. I had something a few years back at lending club, as you said, preoccupied with other things...

[BCBiker]

All this financial engineering...making my head spin. But it makes sense. Always interesting to see large institutions goj g for sure things vs small firms/individual investors taking more risk ?

There are situations where they have very technical people working to “minimize” risk in large institutions who blow up. Long Term Capital Management was the biggest one.

Now they are not beholden to linear models and really bad assumptions. They also probably make sure no one person is using same strategy in same equity.

Many brokers have web services for trading so anyone with some fairly basic programming skills could start a quant trading system. If I was not otherwise occupied I would give it a try.

[formerly_cn]

The most common strategy that is well known is to buy convertible bonds and sell calls to remove the equity risk from the bond. But yes Renaissance and others have all kind of ways to trade around these things to exploit inefficiencies in how options are priced. And they have better access to the book so can also get bid ask arbitrage.

as an observer of these prices I can see some patterns that are a bit illogical that I’m sure someone is making a killing on. Unlike the underlying equity though the space to exploit is enormous because you have time and strike variables and the prices move exponentially in response to underlying stock and with a slight delay.

All this financial engineering...making my head spin. But it makes sense. Always interesting to see large institutions goj g for sure things vs small firms/individual investors taking more risk ?

[BCBiker]

So this is a part where I’m learning about still and appreciate anyone correcting me.

so most of these super improbable options are being bought and sold by huge funds/market makers (and potentially retail investors looking for lotto tickets).

they make money with the bid/ask spread but also use complex algorithms to figure out which ones they need to buy/sell and how much to buy/sell them at to remain delta neutral and still make a profit.

Essentially the funds that provide the liquidity for these options try to maintain as little risk as possible while still making money.

say the bank/fund sold these options to bcbiker for next to nothing. As the share price went up, they then sold puts or bought shares in their fund to counteract/cover the share price going up. So they might be losing money in the ones the sold to bcbiker but then making money on the other side to even out the risk and still make money for themselves.

edit: we answered completely different questions lol. Hopefully one was right

The most common strategy that is well known is to buy convertible bonds and sell calls to remove the equity risk from the bond. But yes Renaissance and others have all kind of ways to trade around these things to exploit inefficiencies in how options are priced. And they have better access to the book so can also get bid ask arbitrage.

as an observer of these prices I can see some patterns that are a bit illogical that I’m sure someone is making a killing on. Unlike the underlying equity though the space to exploit is enormous because you have time and strike variables and the prices move exponentially in response to underlying stock and with a slight delay.

[Nysoz]

So this is a part where I’m learning about still and appreciate anyone correcting me.

so most of these super improbable options are being bought and sold by huge funds/market makers (and potentially retail investors looking for lotto tickets).

they make money with the bid/ask spread but also use complex algorithms to figure out which ones they need to buy/sell and how much to buy/sell them at to remain delta neutral and still make a profit.

Essentially the funds that provide the liquidity for these options try to maintain as little risk as possible while still making money.

say the bank/fund sold these options to bcbiker for next to nothing. As the share price went up, they then sold puts or bought shares in their fund to counteract/cover the share price going up. So they might be losing money in the ones the sold to bcbiker but then making money on the other side to even out the risk and still make money for themselves.

edit: we answered completely different questions lol. Hopefully one was right

[BCBiker]

To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.

you have to have a large long position that you don’t intend to sell.

the two negative sides of selling covered calls are 1) that you may have to sell your shares at a discount if the stock runs above the strike and 2) you cannot sell your long position if the stock tanks without also buying back the call you sold.

I personally don’t worry about 1 because you can always buy the the options back and sell more expensive options with better premium and possibly higher strike. In TSLA I’m long for 10 years so Zi font care if stock goes to $50. If it does I’m buying calls...

The two issues is also true of selling cash covered puts. 1) The cash you committed is locked up and 2) if the stock drops way below your strike you need to buy the shares or buy back the contract at a higher price.

I don’t think of this as cannot lose. Keep in mind that my initial investment was small portion of portfolio. I don’t think that “standard investing” is exactly without risk. Options just takes advantage of the fact that markets are not bell curves like idiotic financial theory assumes.

Hedging with put options is a pretty dumb strategy. You are paying someone to take your shares away at a discounted price... I cannot think of a worse financial contract to enter into...

[Panscan]

This is good thread to introduce concepts. I think the more you do this the more clever you become.

The key is to never be on the wrong side of a trade that is convex (limited upside, and unlimited downside)

Buying naked call options is being on the right side of convexity if you can buy the contract at a low price.

this is why when people ask about trading options I think TSLA is not a great place to get your feet wet. Any contract that is not impossible to go in the money is going to cost you $15K.

But for options that are reasonable in companies that are doing poorly/misunderstood you can get options that have reasonable shot for $300-400.

Let’s say xyz is trading at $20 per share but they had a bad quarter and their next product is not expected to factor into bottom line. But you think the new product will double their revenue. You can buy a call option expiring in 2 years with a strike price of $30 and premium of $2 per share ($200 per contract on 100 shares). You can lose that $200 if the stock never moves so be prepared. But if the stock goes to $50 the contract becomes worth $20 per share (stock price of $50 minus strike price of $30). Thus you can 10x your money on a small amount of money.

In contrast if you wanted the same exposure through buying stock you would need to buy 100 shares at $20==$2000. And if the stock went down to $10 you lose $1000. But with option you only lose $200.

I like the mathematics of this. If you can make small bets that can 10x then you can lose frequently and still do way better than a normal return. If I make 10 bets of $10 and one is 10x then I could lose everything on the rest and still make money. In my case I made 2000x plus. In that case you just need one good bet and you are done.

now I can sell covered calls for a ton of premium and could easily live off of these shares I got through options. When some is willing to pay me $10K for something is likely worthless I will take that. It is impossible to 100 x your return on most of the options people are buying now.

To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.