3 ms·

Options are non-linear and highly leveraged (usually 100:1)

gavinray 6y ago
And 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 ago
  Nah, 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 ago
  Options 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 ago
  Amusingly, 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 ago
    What 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 ago
    Does 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 ago
      Someone 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 ago
        That 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 ago
Options are not leveraged 100:1. Rather, the price you see is the per share price. The price you pay is the 100 share price.

And 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 ago
Nah, 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 ago
Options 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 ago
Amusingly, 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 ago
  What 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 ago
  Does 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 ago
    Someone 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 ago
      That 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 ago

Options are not leveraged 100:1. Rather, the price you see is the per share price. The price you pay is the 100 share price.