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It's wrong because we don't want to simplify concepts to a level beneath the minimum information needed for understanding them. Call and Put specifically refer

It's wrong because we don't want to simplify concepts to a level beneath the minimum information needed for understanding them. Call and Put specifically refer to what happens on maturity or exercise of the contract. You either call the stock from the counterparty, or you put it to the counterparty. The only reason we don't refer to them as "buy" and "sell" options is because you can both buy and sell either of them. Nobody wants to shout into a phone "buy 10,000 AAPL Jan19 100 sells," and hope that the broker on the floor gets it right. In actual fact, a call doesn't just represent "I think it will go up." Nor does the holder of a call always make money when the stock appreciates in value. They are volatility products, and they decay with time. If you buy a put before a catalyst with a 9% implied move, and the stock drops 2%, you probably just lost money on event theta as the vol resets. How do you explain that a down option can lose money on a down move? Giving a false sense of simplicity probably will tempt more folks into making losing trades on options.

dopamean 9y ago
How many people who trade options actually call up the shares at the end or vice versa? I'd imagine very few and even fewer on Robinhood's platform. I think a level of abstraction that clarifies things is fine.
- totalZero 9y ago
  > How many people who trade options actually call up the shares at the end or vice versa? In-the-money options are automatically exercised by OCC at maturity, unless the holder contacts them and tells them to do otherwise. American listed single-stock options are physically settled, meaning that you either exercise them for stock, or you don't exercise them at all. If you're short in-the-money options, you generally assume they will be exercised. Also, if you have a deep in-the-money call option on a stock that pays a dividend, you may need to exercise it to capture the dividend. You will lose money if you fail to exercise. Option exercises are sometimes contrarily decided (that is, not exercised when they are in the money) if the holder of a very large option position has a hedge that cancels out his stock delivery. In practice, this is infrequent, and you usually only do it when the market impact of trading out of your residual shares will lose more money than the intrinsic value you forgo by failing to exercise your options. Robinhood will liquidate options prior to maturity if the holding account cannot afford to exercise them, but (A) this is done at a loss and (B) this will not happen if the account has enough capital to perform the option exercise. "Up options" and "down options" are not a clarification nor a level of abstraction. Rather, they are a misnomer that suggests a false level of simplicity.
- acchow 9y ago
  No. This level of abstraction hides the fact that your call option can drop in value even if the stock goes up tomorrow.
perl4ever 9y ago
Isn't tempting people into making losing trades the point, though? Robin Hood presumably has some way of profiting from trades which does not include directly charging people, such as commissions. So the more confused novices are, the more valuable they are as resources whose money can be systematically extracted by counterparties.
- filoleg 9y ago
  IIRC aside from Robinhood Gold, they are mostly profiting from all the waiting you have to do (few business days) when you put the money in or take it out.
  - perl4ever 9y ago
    I don't know exactly how they would profit from option trades, but I have heard of something called "payment for order flow" and I believe it is a substantial reason why discount broker commissions are so low these days, let alone free at Robin Hood. I have faith that if a population of traders can be identified that consistently lose money, someone will figure out how to legally exploit that. Paying to attract them is also a good sign someone knows how to exploit them.
- brianwawok 9y ago
  How long do people stay around if they lose every time? In an ideal world, people using Robin Hood would "win" like 49% of the time. Enough to keep them coming back like the casino, but let's not be unrealistic and expect some guys clicking around to out trade wall-street.
  - perl4ever 9y ago
    People don't get discouraged if they don't connect their failures to those profiting. Compulsive gamblers just need a way to avoid making the connection. There is a stock that I used to follow that kept plummeting indefinitely - it would very frequently issue more stock, so you could (and did) always have the opportunity to lose 90% or more of your investment. But maybe once in several years, there was a spike in the stock price, so apparently people kept putting more money in hoping it would happen again and/or believing in endless rationalizations why the printing of stock was finally over. There are people out there who, even when it's really obvious they are being regularly and systematically fleeced, will continue to bet on the idea that it can't go on forever.

dopamean 9y ago

How many people who trade options actually call up the shares at the end or vice versa? I'd imagine very few and even fewer on Robinhood's platform. I think a level of abstraction that clarifies things is fine.

totalZero 9y ago
> How many people who trade options actually call up the shares at the end or vice versa? In-the-money options are automatically exercised by OCC at maturity, unless the holder contacts them and tells them to do otherwise. American listed single-stock options are physically settled, meaning that you either exercise them for stock, or you don't exercise them at all. If you're short in-the-money options, you generally assume they will be exercised. Also, if you have a deep in-the-money call option on a stock that pays a dividend, you may need to exercise it to capture the dividend. You will lose money if you fail to exercise. Option exercises are sometimes contrarily decided (that is, not exercised when they are in the money) if the holder of a very large option position has a hedge that cancels out his stock delivery. In practice, this is infrequent, and you usually only do it when the market impact of trading out of your residual shares will lose more money than the intrinsic value you forgo by failing to exercise your options. Robinhood will liquidate options prior to maturity if the holding account cannot afford to exercise them, but (A) this is done at a loss and (B) this will not happen if the account has enough capital to perform the option exercise. "Up options" and "down options" are not a clarification nor a level of abstraction. Rather, they are a misnomer that suggests a false level of simplicity.
acchow 9y ago
No. This level of abstraction hides the fact that your call option can drop in value even if the stock goes up tomorrow.

perl4ever 9y ago

Isn't tempting people into making losing trades the point, though? Robin Hood presumably has some way of profiting from trades which does not include directly charging people, such as commissions. So the more confused novices are, the more valuable they are as resources whose money can be systematically extracted by counterparties.

filoleg 9y ago
IIRC aside from Robinhood Gold, they are mostly profiting from all the waiting you have to do (few business days) when you put the money in or take it out.
- perl4ever 9y ago
  I don't know exactly how they would profit from option trades, but I have heard of something called "payment for order flow" and I believe it is a substantial reason why discount broker commissions are so low these days, let alone free at Robin Hood. I have faith that if a population of traders can be identified that consistently lose money, someone will figure out how to legally exploit that. Paying to attract them is also a good sign someone knows how to exploit them.
brianwawok 9y ago
How long do people stay around if they lose every time? In an ideal world, people using Robin Hood would "win" like 49% of the time. Enough to keep them coming back like the casino, but let's not be unrealistic and expect some guys clicking around to out trade wall-street.
- perl4ever 9y ago
  People don't get discouraged if they don't connect their failures to those profiting. Compulsive gamblers just need a way to avoid making the connection. There is a stock that I used to follow that kept plummeting indefinitely - it would very frequently issue more stock, so you could (and did) always have the opportunity to lose 90% or more of your investment. But maybe once in several years, there was a spike in the stock price, so apparently people kept putting more money in hoping it would happen again and/or believing in endless rationalizations why the printing of stock was finally over. There are people out there who, even when it's really obvious they are being regularly and systematically fleeced, will continue to bet on the idea that it can't go on forever.