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Introducing Multi-Leg Options Strategies
- kaycebasques 8y agoIt’s weird to me that they’ve prioritized these complicated options strategies before shipping a dividend reinvestment program (DRIP).
- humbleMouse 8y agoComplicated options strategies == more money for the brokers.
- Raidion 8y agoNot weird when you realize what the target market is, which is basically those that want to get a little bit of "gamble" on. I'm sure their valuation is also closely tied to the volume of trades they provide, so they want people to be trading as much as possible on their accounts. A DRIP would just take away liquidity for amateur traders. They want people to see money in their account and trade with it, the DRIP would keep that money out of their accounts. While I obviously think Robinhood is amazing for disrupting an industry with pretty high fees, I worry that it is basically becoming gambling for a certain part of the population.
- kaycebasques 8y agoYou make some interesting points about incentives. Robinhood obviously doesn’t make money off of transactions, so they have to make it somewhere else. There’s the premium memberships, and I believe others have mentioned that they make money off of the cash that sits in your account (not sure how that works or if it’s true). In the latter case, DRIP would be directly opposed to their business model, since the dividends that would otherwise sit in your account are being funneled into a share of some sort, instead.
- nimish 8y agoThey would sweep the cash into an interest-bearing account, and simply pocket the interest.
- kaycebasques 8y agoThat's what I figured, but I was wondering what kinds of rules are in place around what kind of interest-bearing accounts they can park the cash in.
- pgwhalen 8y agoIt’s not entirely true that robinhood doesn’t make money on transactions, given that they receive payment for order flow.
- kaycebasques 8y agoCan you expand on how this works? What is "order flow" and who is paying them for it?
- humbleMouse 8y agoIf they're smart they are also just simply taking the opposite of all their user's bets, and pocketing the winnings. Statistically speaking most people's options bets expire worthless. All robinhood has to do is take the opposite bet and they are printing money.
- chasely 8y agoWait. They don't have an option for automatic dividend reinvestment? That would probably be in the top five most-obvious features to have. Of course, it's hard to make money on dividend reinvestment.
- jonknee 8y agoFrom the screenshots I have seen on reddit it appears they could be making a killing selling these orders. Market makers love doing options transactions with people who literally have no idea what they're buying. It's like hosting swimming lessons in a chummed up shark pool.
- lai 8y agoThey make money off of money sitting around doing nothing I hear.
- swarnie_ 8y ago/r/wallstreetbets need to be careful here, so many new and interesting ways to end up homeless.
- melling 8y ago“Multi-leg options strategies have been one of the most frequently requested features by options investors on Robinhood. With multi-leg, you can trade Level 3 strategies such as iron condors, straddles, strangles, call and put debit spreads, and call and put credit spreads more efficiently, invest at a lower risk, and with less capital requirements. ” I’ve never traded options. Have any non-traders here effectively used any of the above mentioned strategies? If so, how do you learn to use these techniques?
- durkie 8y agoyou have a few ways: * a paper trading account, where you can experiment with trading strategies without risking real money * reading about the strategies and their payoff scheme, eg: http://www.theoptionsguide.com/long-straddle.aspx http://www.theoptionsguide.com/long-straddle.aspx
- thro1237 8y agoThanks -- Is there some software (mostly free) where I can model these strategies and understand the payoffs, etc?
- officalrules 8y agoMy recommendation is to read, read, read and build out the models yourself in the language or application of your choice (Python is pretty easy, Excel is even easier to start with). Start by drawing the simplest payoff diagrams you can, then layer various additional positions to build up strategies until you can recall the payoffs of your combined position with your eyes closed. There are plenty of options models available online in various formats, but by taking the time to build it yourself you will have a much deeper understanding of the structure of the positions and you will be able to extend the model to fit your needs as you move beyond simple strategy payoffs. Source: I was a TA for a graduate finance class for 3 years
- jonknee 8y agoThis is a pretty clean list of all the common strategies along with charts showing their P/L: http://www.theoptionsguide.com/option-trading-strategies.aspx http://www.theoptionsguide.com/option-trading-strategies.asp...
- ww520 8y agoHmm, can we say this is the modern version of taxi drivers giving out stock tips and the market is near the top?
- KaoruAoiShiho 8y agoNope.
- swarnie_ 8y agoFor anyone interested Chris O’Neil, Robinhood Product Manager will be doing an ama on /r/robinhood Wednesday, June 13, at 2:30pm Pacific // 5:30pm Eastern.
- dhwroos 8y agoOption strategies can actually make a lot of sense in many cases. Ex, a zero cost collar lets you lock the value of a stock position in a narrow band in case you are worried about the market but don't want to sell of right now. A good source of info is: https://www.optionseducation.org/tools/strategybuilder.html https://www.optionseducation.org/tools/strategybuilder.html Good descriptions and visual tools for building and pricing strategies. If you like that you can sign up for early access to more advanced tools at: http://inside.cboevesttech.com/retail/ http://inside.cboevesttech.com/retail/ Happy to discuss other uses or applications of options, just drop me a message.
- branda22 8y agoIts about time!
- arunix 8y agoLooks like it's US only. Bummer.
- jorblumesea 8y agoI'm confused as to the popularity of Robinhood and others, do people really think they can beat the market? It's just gambling at this point, not investing.
- jonknee 8y agoAre casinos not popular?
- jorblumesea 8y agoThey are, but we don't refer to them as "investing" ;)
- bcheung 8y agoOptions can be used for speculation and to increase leverage. They can ALSO be used to reduce risk. It all depends on how you chose to use them. Both are common.
- m3kw9 8y agoIntroducing more ways to lose money
- cascom 8y agoI don't understand how brokers offer options trading without also offering an options analytics package (vol, greeks, etc.) or are people using some third party service and just coming to robinhood for execution? seems like its just leading the lambs to the slaughter...
- defen 8y agoRobinhood is the dumbest of dumb retail money. I suspect that a significant number of options users on there treat it more like gambling (OTM weeklies) than investing.
- jonknee 8y ago> Seems like its just leading the lambs to the slaughter... Well why do you think they aren't charging commissions?
- cascom 8y agofair point!
- freefal 8y agoYou are exactly right. The electronic options exchanges facilitate market makers paying brokers for order flow. The broker can send the order to the exchange with a field denoting their preferred market maker. In the absence of that field being populated, orders are allocated either by size (% of the best bid) or by time (who established the best bid first). If that field is populated and the preferred market maker is on the best bid or best offer, he receives an outsized allocation of the order. The market maker keeps track of the number of contracts it has traded with that broker where the field was set and pays the broker whatever fee they've contractually agreed upon multiplied by the number of contracts. The market maker can afford to do this because retail order flow is highly profitable to trade against (it's "dumb money"). In fact when a market maker runs a look back analysis on the profitability of his trading, he will see that his trading with other market makers and institutional orders results in almost no profit, whereas the retail flow is highly profitable. This "payment for order flow" (PFOF) is not shared with the customer. So even if the customer pays no fee to trade, Robinhood can still earn a profit. Source: Was an electronic options trader
- CEO_Fart420 8y agoJust to take a step back and look at the big picture here, isn’t it amazing what tech has done to the distribution of access to wealth? Instead of “blaming the system” like yesteryears idealists, now one can ‘bring home the bacon’ by doing some of those multi-leg options strategies (that we all love) themselves, without even leaving the house. Reminds me of the app’s namesake, Robinhood [0]. 0. https://en.m.wikipedia.org/wiki/Robin_Hood https://en.m.wikipedia.org/wiki/Robin_Hood
- than 8y agoYes! And the results have been outstanding! https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States#/media/File:US_Wealth_Inequality_-_v2.png https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...
- CEO_Fart420 8y agoYikes, was unaware. Have an upvote!
- marketgod 8y agoNo point using all these option strategies. Once you start using these strategies it means you don't know the direction. Why waste your profits and pay premiums. Find options you like and get in on them. TSLA over $347.50 buy short term options, targets are $400.
- jonknee 8y agoWhat are you talking about? You can do directional with multi-leg just fine. Like you could buy the August TSLA 350 for $25.50 and sell the August TSLA 400 for $9.25. Selling the higher contract lowers your entry price to $16.25 and you'll make money at expiration from TSLA being $366.25 instead of having to be above $375.50. Max upside ends at $409.25, but more likely to actually be profitable.
- marketgod 8y agoWhy am I going to sell and pay premiums when I can just make the money wasted on premiums. If you are hedging options then you are unsure of direction is all and limiting max profits. www.plainsitemanagement.com --> I hit winners. Better than anyone out there. Also, I don't hold until expiration but I want maximum profits, not basic money.
- wishart_washy 8y agoFrom any options theory class you'll learn that you can create any complex position you want with options. If you want to synthetically create a future just buy a put and call at the same strike price, etc. And all of this is really interesting except this is a terrible idea to open up to recreational traders. I say traders because when the average person thinks of options, they see it as a way to make leveraged bets and get rich quick. Likewise, institutions largely use derivatives (options, swaps, swaptions, etc.) to hedge their positions. The option, for an institution, is a hedging instrument, not a speculative instrument. Here's the real reason this won't end well for most recreational traders - you're going to get scalped by the desk traders and algos at the prop shops for any illiquid options, and hit by the broader universe of trading algos out of the funds for any liquid options. You won't be able to see the order book and wouldn't know how to trade it even if you could see it. (@SIG @JaneStreet @DRW chime in) But if you see this as a fun way to gamble knowing that the house (the Street) has a sizable built-in advantage, be my guest.
- Patient0 8y agoMinor nitpick: buy a call and sell a put to make a synthetic forward position
- deleted 8y ago[deleted]
- throwawaymath 8y agoI agree with the spirit of your comment. But this: > The option, for an institution, is a hedging instrument, not a speculative instrument. is not entirely correct. It's not at all uncommon for institutional capital to use options for directional leverage. Options are sophisticated derivatives for increasing upside, not just limiting downside.
- goodmattg 8y agoFair point. Looked back in my notes and can't find a percentile breakdown of the use of options in markets. For the derivatives markets as a whole less than 7% are even options.
- sawantuday 8y agoWhy this sudden rise in option trading facilities for retailers? Whats being cooked behind the scenes?
- Bluecobra 8y agoAs an amateur retail investor, my theory is that stocks are too expensive. It used to be common practice for companies to do stock splits to make it more affordable but that doesn't happen anymore. Options provide a cheaper way of speculating on stocks.
- synaesthesisx 8y agoI've been trading options for several years with some incredible luck (turned a few thousand $ into six figures in my early 20's). Granted my risk tolerance has changed quite a bit since - many would consider buying OTM calls/puts prior to earnings straight-up gambling. That said there are many fun yet effective strategies to hedge risk using these multi-leg trades (Reverse iron condor etc).