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> Bohra’s Husband and Bohra’s Father-in-Law had spent more than $850,000 on purchasing Amazon call options and common stock in order to trade > Amazon’s stock
by gavinray 6y ago
> Bohra’s Husband and Bohra’s Father-in-Law had spent more than $850,000 on purchasing Amazon call options and common stock in order to trade
> Amazon’s stock price increased 2.87% over the prior day’s closing price.
> In total, accounts belonging to Bohra’s Husband, her Father-in-Law, and her 10 Mother-in-Law made a profit of approximately $664,000
Am I stupid?
$850,000 * 1.0287 = $874,395, which is $24,395 profit.
Where are the other ~$640,000 coming from?
- ununoctium87 6y agoOptions are non-linear and highly leveraged (usually 100:1)
- gavinray 6y agoAnd it has become clear to me now that I have dipped well out of my wheelhouse. Thanks for the attempt at explanation at least haha. (Though to me, this sounds like a monopoly-money game, really odd concept).
- icelancer 6y agoNah, you innately understand it! It's not a 1:1 relationship because a 2% drop of a stock will change the derivatives of that instrument in "imperfect" ways. The further away from the ground truth in anything, the more noise/variance/differing signal.
- vmception 6y agoOptions are awesome. When you are long options, you get massive leverage without the possibility of getting margin called while the price moves against you. When you are short options you can take down the whole financial system with you.
- boulos 6y agoAmusingly, this is part of why some folks are deeply terrified of Robinhood: with a few clicks here and there, you’ve just bought yourself 10-15x leverage. I actually think it’s a great thing to let someone easily try out “let me try out options trading, I’ll start with $100”. The write ups about r/wallstreetbets though are sometimes heartbreaking. So like you said, at least you know what you don’t know!
- notnap 6y agoWhat are you talking about. Loss porn on r/wsb is great entertainment and scratches the “cautionary tale” itch very well. You can’t say that Robinhood users do that to themselves without consent at this point in time
- dogma1138 6y agoDoes robin hood actually allows you to leverage to the point where the loss is beyond your investment? Usually these platforms close/liquidate the position so the maximum you can lose is the money you bet.
- marvin 6y agoSomeone else can probably answer if Robinhood allows you to sell options short, but if you do, you can lose more than your initial purchase/deposit if the price moves faster than Robinhood can forcibly liquidate your position. You would almost expect this to happen occasionally, if you’re not super careful, due to the massive volatility of options. Being short out-of-the-money call options will expose you to a ridiculous downside if the stock makes an unexpected upwards move. Easily 10x-100x your deposit.
- dogma1138 6y agoThat can happen on quite a few other platform in theory but not in practice basically the platforms assume the risk in that case I remember that form the good ole days of online FX options and binary option trading in the late 2000’s. Basically you always had forced liquidation or some sort of a hedge on the opposite leg that made sure you couldn’t lose more than the leveraged amount you’ve bet on.
- smabie 6y agoOptions are not leveraged 100:1. Rather, the price you see is the per share price. The price you pay is the 100 share price.
- callmeed 6y agoOptions go up/down in value at a different rate than the underlying stock. This is known as the "delta" (one of the "greeks"). More info here: https://www.investopedia.com/terms/d/delta.asp https://www.investopedia.com/terms/d/delta.asp A 2.87% change in the stock can move option values quite a bit. Example: https://www.barchart.com/stocks/quotes/AMZN/volatility-greeks https://www.barchart.com/stocks/quotes/AMZN/volatility-greek...
- batiudrami 6y agoOptions are effectively gambling on which way you think a stock will go, rather than traditional share investment, and has much bigger returns and losses.
- yosho 6y agoOptions aren't gambling, they're typically used to hedge your position, hence the 100:1 leverage. You can easily hedge out entire positions with just a few contracts.
- dragonwriter 6y agoThat a bet is used to hedge another bet doesn't make it not-gambling.
- deleted 6y ago[deleted]
- boulos 6y agoAlso, even though you misunderstood the leverage of options, the complaint doesn’t tell us what kind of price they’d bought in at either. That is, the stock went up 2.87% the day after the earnings, but they had purchased it over the weeks beforehand (but kept adjusting their bet, both in scale and price). So even in “regular stocks” of 1:1 leverage, the SEC telling us only that Amazon shares went up 3% that day doesn’t tell us how much it went up from when they purchased their securities. Amazon stock had moved quite a bit during January 2018.
- kosievdmerwe 6y agoThere are 2 kinds of options: calls and puts. Calls allow you the option to buy 100 of stock at a certain price any time before the option expires. Puts are the opposite, they allow you the option to sell 100 stocks for a certain price any time before they expire. Note, that I said "option", you're not obliged to sell or buy stocks; however, if you let the option expire you lose the money you spent on the option. I haven't bought options so I can't tell you exactly what the price of an option is relative to a share (some posters say 100:1), but it would have to be much less than the price of a share to be worth it. Since to make money from an option, the stock has to move enough to pay for the price of the option and if the option is too expensive, the stock price would have to move a lot.