5 ms·

I bought some call options and they appreciated 3309%

47 points by jorgenveisdal 10y ago

pdog 10y ago
Great writeup. (Especially for your first trade—most new option traders don't do so well.) How do you screen for event-driven trading opportunities?
- jorgenveisdal 10y ago
  The only thing resembling a systematized screening method that I use is to keep a list of stocks I feel that I understand, and track their development over time (e.g. 30 days, 90 days etc). If a stock has moved 50% in 30 days, either something happened (which would be tangible and in the news) or there is a lot of speculation going on. Investigating the latter of such cases further, sometimes the event that will resolve the speculation is fairly specific. E.g. a shareholder vote or a court ruling. In such cases, if you are able to form an opinion about what the outcome of the situation will be, American options can be a great tool.
  - chillacy 10y ago
    From my rudimentary understanding of options, shouldn't a stock which moved 50% in 30 days have a pretty high IV, and therefore have pretty expensive options anyways?
    - FabHK 10y ago
      True, but when the option is sufficiently "out of the money", i.e. away from the strike price on the worthless side, then it can still be pretty cheap.
      - deleted 10y ago
        [deleted]
      - chillacy 10y ago
        The 35 to 1 odds spot has a $1 minimum bet in Craps, but the payout is way worse than the true odds. My understanding is that OOTM options are usually similar in that they don't reflect the true odds.
j_b_s 10y ago
What service do you use for options trading? (would you recommend them?)
- jorgenveisdal 10y ago
  I live in Norway, so my broker service is local and not available to people in the U.S. If I lived in the U.S. I would first look into Schwab's options trading service.
- swalsh 10y ago
  Think or swim has always been great. I think they are now technically TD Ameritrade.... it's been a while since I've bought options. I'm an ETF/mutual fund guy now.
alimw 10y ago
From your write-up, it seems like you had only one reason in advance to doubt the assumption of Normally-distributed returns, and that was the existence of short-sellers in the market. Is that fair to say?
- FabHK 10y ago
  He also mentions bi-modality, but yeah, not necessarily in relation to this stock. He also mentions the chart-technical argument that this stock was well supported and thus could not go down more, but I'd discount that argument very much.
FabHK 10y ago
The article betrays some misunderstandings of option pricing and trading. It's not necessarily right to say that the options were mispriced. Option trading desks hedge themselves, and then don't care whether the stock price goes up or down (unless they want an explicit long or short position in the underlyer, which is rare). What they do care about is how much the stock moves every day ("realised vol"), and how that compares to the (implied) volatility they originally sold/marked the option at. (If you sold the option, you lose on gamma the more the stock moves, while you gain on theta.) Big jumps in price are definitely a problem - the theory assumes continues trading, and as you get shorter to expiry, or the jumps get bigger, the approximation to continuous trading breaks down. At any rate, traders are well aware of the fact that prices are not lognormal, and vol not constant. Nevertheless, the theory and practice of replication works quite well all in all. Last comment: Every time a stock jumps, some people lose and some win. If people traded with leverage (options/futures), some lose a lot and some win a lot. (Derivatives have net zero supply, so it's in fact a zero sum game - but don't forget that the bank is hedged, generally, complicating the picture.) Bottom line: there are necessarily some winners, and some losers. Guess who writes articles on medium that get upvoted on HN? :-)
- cowardlydragon 10y ago
  It's like the old adage: Gamblers only talk about their wins.
  - chillacy 10y ago
    Sometimes the ball lands on 00 in roulette and you win a 35x payout. I'd be impressed if the author were winning consistently.
eutropia 10y ago
You advanced education in industrial economics: how much of your formal education has been important to developing an insight into option trading and investment?
- jorgenveisdal 10y ago
  Zero point zero!

47 points by jorgenveisdal 10y ago

pdog 10y ago

Great writeup. (Especially for your first trade—most new option traders don't do so well.) How do you screen for event-driven trading opportunities?

jorgenveisdal 10y ago
The only thing resembling a systematized screening method that I use is to keep a list of stocks I feel that I understand, and track their development over time (e.g. 30 days, 90 days etc). If a stock has moved 50% in 30 days, either something happened (which would be tangible and in the news) or there is a lot of speculation going on. Investigating the latter of such cases further, sometimes the event that will resolve the speculation is fairly specific. E.g. a shareholder vote or a court ruling. In such cases, if you are able to form an opinion about what the outcome of the situation will be, American options can be a great tool.
- chillacy 10y ago
  From my rudimentary understanding of options, shouldn't a stock which moved 50% in 30 days have a pretty high IV, and therefore have pretty expensive options anyways?
  - FabHK 10y ago
    True, but when the option is sufficiently "out of the money", i.e. away from the strike price on the worthless side, then it can still be pretty cheap.
    - deleted 10y ago
      [deleted]
    - chillacy 10y ago
      The 35 to 1 odds spot has a $1 minimum bet in Craps, but the payout is way worse than the true odds. My understanding is that OOTM options are usually similar in that they don't reflect the true odds.

j_b_s 10y ago

What service do you use for options trading? (would you recommend them?)

jorgenveisdal 10y ago
I live in Norway, so my broker service is local and not available to people in the U.S. If I lived in the U.S. I would first look into Schwab's options trading service.
swalsh 10y ago
Think or swim has always been great. I think they are now technically TD Ameritrade.... it's been a while since I've bought options. I'm an ETF/mutual fund guy now.

alimw 10y ago

From your write-up, it seems like you had only one reason in advance to doubt the assumption of Normally-distributed returns, and that was the existence of short-sellers in the market. Is that fair to say?

FabHK 10y ago
He also mentions bi-modality, but yeah, not necessarily in relation to this stock. He also mentions the chart-technical argument that this stock was well supported and thus could not go down more, but I'd discount that argument very much.

FabHK 10y ago

The article betrays some misunderstandings of option pricing and trading. It's not necessarily right to say that the options were mispriced. Option trading desks hedge themselves, and then don't care whether the stock price goes up or down (unless they want an explicit long or short position in the underlyer, which is rare). What they do care about is how much the stock moves every day ("realised vol"), and how that compares to the (implied) volatility they originally sold/marked the option at. (If you sold the option, you lose on gamma the more the stock moves, while you gain on theta.) Big jumps in price are definitely a problem - the theory assumes continues trading, and as you get shorter to expiry, or the jumps get bigger, the approximation to continuous trading breaks down. At any rate, traders are well aware of the fact that prices are not lognormal, and vol not constant. Nevertheless, the theory and practice of replication works quite well all in all. Last comment: Every time a stock jumps, some people lose and some win. If people traded with leverage (options/futures), some lose a lot and some win a lot. (Derivatives have net zero supply, so it's in fact a zero sum game - but don't forget that the bank is hedged, generally, complicating the picture.) Bottom line: there are necessarily some winners, and some losers. Guess who writes articles on medium that get upvoted on HN? :-)

cowardlydragon 10y ago
It's like the old adage: Gamblers only talk about their wins.
- chillacy 10y ago
  Sometimes the ball lands on 00 in roulette and you win a 35x payout. I'd be impressed if the author were winning consistently.

eutropia 10y ago

You advanced education in industrial economics: how much of your formal education has been important to developing an insight into option trading and investment?

jorgenveisdal 10y ago
Zero point zero!