8 ms·

>The nice thing about options is that there isn’t just one way to lose money. No, you can lose money in many different ways – far more than I can write on this

• deleted 6y ago
  [deleted]
• llamataboot 6y ago
  Why would an option ever be 50/50? You are getting the odds you pay for... On a double zero roulette wheel, you have about a 47% chance of hitting red. There's options I'd buy at that price, and options I wouldn't. With options in particular you also have your various calculations regarding time, volatility and so forth. But you can be pretty sure if an option is being bought and sold, that the buyer and the seller are pretty happy about the price of it...
  • zdkl 6y ago
    I believe an important point is that happy != informed.
    • TheSpiceIsLife 6y ago
      It might also be true that neither the buyer not the seller, in any transaction, are happy about it as such. It could, or even probably should be, argued that one should remain dispassionate about the outcome of any specific transaction in particular. If you can't do that, then you probably are gambling, and that's probably a bad thing.
      • nanis 6y ago
        > It might also be true that neither the buyer not the seller, in any transaction, are happy about it as such. "Happy" here is used in a very specific sense: If two parties engage in a transaction without coercion, it must be because they are both made better off by the transaction or they would both be less happy without the transaction. This is where "gains from trade" come from. The ability to make this statement disappears the moment either or both parties are required to participate in the transaction or are required to engage in different transaction. The argument of the grandparent is that just like in any transaction, there are two parties to an option being traded at a given price. One party believes it's a good deal because they think the price they paid is low enough to accept the risk-reward balance and the other part believes the price they received is high enough for the certain payoff to cover the reward-risk balance they are giving up. They might both be right because the reward you seek and the risk you can bear is a function of your current endowment in human and financial capital.
        • TheSpiceIsLife 6y ago
          Thanks for clearing that up. Obvious now.
        • ClumsyPilot 6y ago
          "If two parties engage in a transaction without coercion, it must be because they are both made better off by the transaction or they would both be less happy without the transaction." That's is about as accurate as physics homework you do in school, two objects collide without friction and air resistance, no energy is lost to sound, heat or deformation of the objects, calculate their resulting velocity. As soon as you enter the real world and those objects are cars, equations aren't remotely accurate. Any layman can come up with examples where this statement doesn't hold, drugs, etc. We should focus on discussing real-life effects of options trading rather than spouting free-market theory clishes, everyone knows them, there are at least 3 such statements in every HN thread and I don't feel they contribute much to the coversation
          • eloff 6y ago
  • Pyramus 6y ago
    I think the OP is pointing out that many people think of options as a bet on stock price movement with the probability of success being the probability of the stock moving. When in fact volatility, time decay and many more factors are really shaping the success probabilities.
    • nightski 6y ago
      Agreed all those factors go into the value and it's important to understand what you are purchasing. At the same time it is a leveraged position. If winds tilt in your favor you have the option for 100 shares of the underlying for only the cost of the premium.
• kgwgk 6y ago
  It's a 50/50 bet if you pick sides at random. You may have a loss in expectation but it will be because of spreads, transaction costs, taxes, etc. (Only half-joking.)
  • anupamchugh 6y ago
    Well, it can’t be 50-50 bet ever since there’s the time decay. 33 percent is the best bet to win!
    • deleted 6y ago
      [deleted]
    • kgwgk 6y ago
      I'm not sure how that is relevant. The price of the option will decay to zero or to its intrinsic value and if it ends in the money one side will give $X to the other at the end. Someone also paid a premium to the other (ignoring the bid-ask spread and transaction costs). Peter's gain is Paul's loss. You have 50/50 probability of being Peter or Paul.
• thiago_fm 6y ago
  Even though I agree options is generally a losing game, it does serve a purpose. You can actually even hedge your risk with options -- there are many usages, just because SOME people use it as a casino, it doesn't mean it is. A lot of hedging companies do to raw materials, oil etc follows a similar pattern. The author doesn't mention anytime that, he seems clueless, just use it to play like casino and complain about the losses.
  • ilikehurdles 6y ago
    People often think of options as a cheap shortcut to wealth. They end up losing everything with that strategy. No one becomes wealthy in trading with one-off trades. Trading options effectively and sleeping at night starts with studying and monitoring 30-50 underlying securities across different sectors, understanding their price action, liquidity, binary events, current volatility (both relative to their own volatility range and to their markets’ volatilities), the effect of that volatility on expected prices, and how these underlying selections balance a portfolio’s risk and expected moves. Of course there’s a lot more to it beyond that, but having that list helps you pick an underlying to play with at a given moment. There are many strategies of options trading out there for managing risk while making money in every kind of market. If you’re intellectually curious about options, don’t take tips and lessons from people on Reddit, twitter, or hn. Why do people spend years honing a craft like software development yet spend no time vetting symbols they hear about online before dumping money money into trading them? How is that acceptable? If anyone is intellectually curious about this, I suggest they go to YouTube and start by watching tastytrade’s videos as well as basic introductory videos on option definitions, mechanics, and strategies.
  • maverik 6y ago
    completely agree...options have a ton of value in risk management
• newcrobuzon 6y ago
  Options should be used as intended: as a hedge. E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Similarly you sell options. Trading options on the other hand is just pure gambling. Even if you get the direction right you likely won't get the timing right (or the volatility). edit: typo
  • tim333 6y ago
    You can also write them in a low risk way for the benefit of others. If you hold some stock write options for people to buy it off you for twice what you paid, or if you are thinking of buying a stock write options for people to sell it to you at lower than the current price. But yeah trading can be iffy.
    • nemo44x 6y ago
      The problem with covered calls is you take on all the downside risk of the stock collapsing and get none of the upside gains if the stock rockets. Writing way OTM covered calls will not net many proceeds unless the stock is super volatile which means you likely have a lot of downside risk. A good example from recently is Ford. Was trading at around $6 a few months ago and not too volatile. OTM calls were pretty cheap that were a few dollars up and essentially worthless at double the price. Anyone writing those was getting almost no premium. But then the stock took off quickly and hit over $12. Anyone who wrote those calls enjoyed none of those gains. So even a stock like $F can move in very unpredictable ways.
  • throw0101a 6y ago
    > E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Why don't you just change your allocation? If you can't sleep at night because of your current portfolio, and gyrations that are occurring, or that you are worried could occur, I would say it's obvious that it's not suited towards your risk profile. You're burning up some of the potential upside by spending money on the options, so why not simply take some money off the table instead and have a less complicated setup?
• mam2 6y ago
  It's not 50/50 but you can win 10x sometimes.. What people can't accept is that there IS some people who have made consistent gains on options. You just don't have play all the time and you should always have many factors lined up to you.
• xondono 6y ago
  tbh, the problem with options is that you can loose a lot of money that you don't have. People start to play with strategies without fully grasping how they work, and especially how exposed you are if you sell naked options. It's very easy to fall into the trap of creating an option strategy that even if it has good odds, will require a massive amount of margin. If this happens to you on a regular retail account, you're going to get crushed.
  • ssharp 6y ago
    This is easily avoided by not writing option contracts. If you're new to options and are ready to start exploring with real money, you should only be buying them and then selling them, not writing new ones. The exact same thing can be said for shorting stocks and, to a lesser extent, buying stocks on margin. I'm happy to say after getting margin-called in 2008, I haven't been since! Writing options and shorting makes you way more likely to expose the rest of your portfolio to that risk.
    • nemo44x 6y ago
      You can write spreads and not have infinite downside risk. Iron condors are designed to collect premium and you’re covered (at a loss, but a fixed loss) if the stock goes one way or another too far. Of course at that point we are already more advanced than a YOLO casino roller. But yes, in general it’s wise to avoid bets with infinite downside and limited upside. You tend to win these bets frequently (and make small gains) but when you do lose it’s catastrophic.
      • Pyramus 6y ago
        I would like to add that even with a spread you can bankrupt yourself if you are assigned to one side of the leg on expiration day after hours, stock moves against you, you aren't notified in time and therefore can't exercise the other leg. It's rare but not that rare.
        • TuringNYC 6y ago
• dannyw 6y ago
  Earlier last year around May, when the stock market seemed to pick up after the COVID crash, I purchased a number of deep OTM LEAPs (long expiry options; until early this year). They were incredibly cheap. I often had trouble finding a market maker for those. I only chucked about $2000 in, but these options have grossed $15,000 in realised returns and $25,000 in unrealised returns. Options allowed me to make a “bet” that stocks would go crazily up. Options can be a valuable tool if you know how to use it.
  • skinnymuch 6y ago
    Congrats! I sometimes will do what I should not do and do regret day dreaming of if I had done more than just think about what you actually did back around same time.
  • nemo44x 6y ago
    Of course money is made. Likewise the same amount of money was lost by the people on the other end. You won this one. However, long term you’d also lose some and in the end you’d probably be about even in terms of cash won and cash lost. Unless you’re an options guru which I don’t know exists. The market maker who gets the contract fee and hedges the contract is the only guaranteed winner long term. Saying that I trade options when I sense opportunity and have had some outsized winners compared to my losers. However taxes need to be considered too, especially when you have a year with a net realized loss that’s greater than what the IRS let’s you deduct. The way I’ve seen people get wiped out with options is not managing their bankroll. They’d have just too much of it spread across numerous options bets thinking they were diversified. And then the bottom falls out of nearly everything and the whole thing goes to 0. It happens. Congrats on the win!
  • notyourday 6y ago
    I think it is rather well known since Taleb's book came out that deep OTM options, including LEAPs tend to be mispriced as there's just not enough data to model better pricing.
    • base698 6y ago
• nemo44x 6y ago
  Correct - some options have a more than 50% chance of winning and some much less. They are priced accordingly. In theory, options are priced such that you’ll break even (minus contract fees) long term in terms of money in and taken out. Of course bankroll management is a concept I’m not sure the YOLO crowd is too cautious about.
• icu 6y ago
  It really depends on how you use them. My favourite strategy is to identify a stock I want to own, enter the market by writing a put at a price I want to own the stock at, and then if executed (and the stock price hasn't crashed), write covered calls at an inflated strike price. If the price goes down you can buy back your call and lock in your return, and write another call. I only do this on European style options to limit risk. Assuming your stock selection criteria is sound, you can make money when the market is moving sideways or going up. When markets are down you wait it out. If your stock selection was sound, your stocks will recover when market sentiment becomes rational. Having said this, you have to stick to the trading plan. You need to know when your trade assumptions are wrong and what to do prior to having to deal with a trade that goes against you. That's the reason why it's "hard" and people loose money... it's not options per se, it's the personalities that trade them that are the problem. Correlation is not causation.
  • maverik 6y ago
    this is a great point. have you read the Psychology of Money?
    • icu 6y ago
      No, but I will. Thanks for the recommendation! Currently I'm reading Mark Jeavons - The Equity Edge: A complete guide to building wealth through the stock market. It so far has helped me improve my stock selection.
• itsoktocry 6y ago
  >There are a million ways to lose, and just a few narrow ways to win. I'm not sure I understand. You can take either side of the trade you want, so if you think you've determined how lopsided it is, why aren't you doing the opposite trade?
  • 147 6y ago
    An options trade means you have to be right about 3 things: the direction, the timing, and the amount. Even if you get the direction right you might not make money.
    • totalZero 6y ago
      > An options trade means you have to be right about 3 things: the direction, the timing, and the amount. You just have to be more correct about one thing than you are wrong about all the others. For example, if you buy 10yr calls and term structure blows out as the market sells off, you make way more on vega than you lose on delta. It's a neat trick when you get the timing, direction, and magnitude correct, but it's not necessary to pull off the hat trick in order to make money.
• clipradiowallet 6y ago
  > You literally have better odds going to the roulette table and placing a bet on red This is true in most markets, and the casino isn't going to charge you a commission either.