5 ms·

I can see the risk in short positions - you theoretically could lose an infinite amount (if you borrow X shares of something, sell them, but then can't find any

I can see the risk in short positions - you theoretically could lose an infinite amount (if you borrow X shares of something, sell them, but then can't find any to buy when it comes to returning them), and it's certainly possible to lose more than you put in (sell 100 short at $10 netting you $1000, price doubles overnight on new news, you have to buy $2000, losing a total of $1000 in the process. If price trippled overnight you'd lose $2000 -- more than you could have ever made even if the company went bankrupt overnight) But put options? Surely all you can do is lose what you bet in the first place?

nopassrecover 5y ago
In principle you have the same problem if you’re selling naked put options
- NoboruWataya 5y ago
  I think you mean selling naked call options. If you're selling put options, you are selling someone else the right to force you to purchase shares from them at a given price. Which means that you are long the shares and also that your downside is limited by the strike price.
- robocat 5y ago
  The price of a stock can only go to zero, so the value of a put option is bounded. A put option at exercise price of $2 has a maximum value of $2 (ignoring discount rate, conditions, etcetera). There are corner cases because a stock going to zero has other implications (e.g. cannot actually trade in that stock) which can affect delivery. Matt Levine puts it nicely: “Betting on disaster is hard because, if you win, there has been a disaster, and you might not get paid.” and he writes about (under CDS heading[2]) some of the other costly risks of shorting, some of which might also apply to options. The value of a call option is unbounded. This link[1] has some good questions and answers about options, although it certainly isn’t complete (e.g. dividends are mentioned but voting rights are not). [1] https://www.blackwellpublishing.com/content/kolb5thedition/chapter_12_solution.pdf https://www.blackwellpublishing.com/content/kolb5thedition/c... [2] https://news.bloombergtax.com/tax-insights-and-commentary/matt-levines-money-stuff-leaving-russia-for-morals-or-money https://news.bloombergtax.com/tax-insights-and-commentary/ma...
- nopassrecover 5y ago
  Both sibling comments are completely correct, and support the parent comment (thanks!). I got myself mixed up and was misled by a Corporate Finance Institute quote (which incorrectly notes the loss is unlimited only to contradict itself): For the seller of a put option, things are reversed. Their potential profit is limited to the premium received for writing the put. Their potential loss is unlimited – equal to the amount by which the market price is below the option strike price, times the number of options sold.
mox1 5y ago
The main issue with options is the time component. Now you have to bet on the direction and be pretty precise with the when. Also, prices for these options (Tesla is a good example) aren't cheap. For example a bet that Tesla will be below $900 by Jan 19th 2024 will cost you about $250 / share at the moment. That means Tesla needs to actually be below $650 on Jan 19th 2024 before you make 1 dollar. As long as you understand whats going on and what you are actually betting on, you are fine. But options have lots of 'gotchas'.
- snake_doc 5y ago
  The time component is always implicit in both a vanilla short position or a synthetic option-based short. It's just easier to "see" in vanilla options, because it's priced in explictly. If you don't want to pay the cost up front by using long-dated options, just buy short-dated ones and roll them. The costs are likely similar as long as you construct the synthetic short position correctly. https://en.wikipedia.org/wiki/Put–call_parity https://en.wikipedia.org/wiki/Put–call_parity i.e. When you short a vanilla equity, you'll likely have transaction cost of borrowing the stock as an interest rate over time. This cost is incurred as you keep the position open. This cost is related to the cost of capital for the shares you've borrowed. Cost of capital is an implicit cost on time. To construct a synthetic short (using options/bonds), you basically short a synthetic equity. A synthetic equity can be constructed through a long call position, short put position, and long bond position. This synthetic will mostly replicate the the stock's return. To turn it into a synthetic short, you just do the reverse, short a call, long a put, and short a bond.
0daystock 5y ago
You can lose way, way more than what you "bet" in the first place with options. Check out optionstrat.com to play around and see strategies and results.
HFguy 5y ago
If you are buying options (i.e., you have the optionality), youre downside is limited. If you are selling options, that isn't necessarily the case.
belter 5y ago
For anybody who wants maximum risk, and wants to lose money as fast as possible, and in the biggest amounts, there is always the Cryptocurrency Futures market. A bit like Negative Chess...
- smabie 5y ago
  What's wrong with crypto futures?
  - TameAntelope 5y ago
    It's effectively unpredictable.
    - iso1631 5y ago
      So it's gambling, same as buying shares in Tesla.
  - belter 5y ago
    Risks... Leverage + Interest Rate Risk + Liquidity Risk + Settlement + Delivery Risk + Operational Risk + Volatility Risks + Unregulated By Governments And/Or Central Banks + Risks of Error and Hacking + Human Error... All together! Remember, we are trying to lose money as fast as possible...
- iso1631 5y ago
  Or you could bet everything at a casino and let it ride if you win. But unlike selling stuff you don't have (shares, options etc), you won't lose more than your stake. You have $1k, you put it on red, you invest in the S&P, you buy Roubles, you buy a meme stock, you buy a TSLA call for 6 months time at $2k, you buy dogecoin, at most you will lose $1k. You borrow 100 shares of TSLA when it's $900 and sell them, you'll get $90k now, but you might end up with TSLA jumping to $5k overnight and you have to send those shares back, that will cost you $500k, well done.
OJFord 5y ago
When you buy options you're buying exactly that, the option to make a potentially lucrative trade in the future at a price agreed now. (Bought) Puts have just as limited downside as (bought) calls. The bigger risk comes in selling options: you sell a call and (assuming you don't already have the underlying shares) your downside is unlimited - you might have to pay sky high market prices only to sell (to the call option holder) low; you sell a put and your downside could be the entire strike price - the underlying could have gone to zero but you're forced to buy high (at the agreed price).

nopassrecover 5y ago

In principle you have the same problem if you’re selling naked put options

NoboruWataya 5y ago
I think you mean selling naked call options. If you're selling put options, you are selling someone else the right to force you to purchase shares from them at a given price. Which means that you are long the shares and also that your downside is limited by the strike price.
robocat 5y ago
The price of a stock can only go to zero, so the value of a put option is bounded. A put option at exercise price of $2 has a maximum value of $2 (ignoring discount rate, conditions, etcetera). There are corner cases because a stock going to zero has other implications (e.g. cannot actually trade in that stock) which can affect delivery. Matt Levine puts it nicely: “Betting on disaster is hard because, if you win, there has been a disaster, and you might not get paid.” and he writes about (under CDS heading[2]) some of the other costly risks of shorting, some of which might also apply to options. The value of a call option is unbounded. This link[1] has some good questions and answers about options, although it certainly isn’t complete (e.g. dividends are mentioned but voting rights are not). [1] https://www.blackwellpublishing.com/content/kolb5thedition/chapter_12_solution.pdf https://www.blackwellpublishing.com/content/kolb5thedition/c... [2] https://news.bloombergtax.com/tax-insights-and-commentary/matt-levines-money-stuff-leaving-russia-for-morals-or-money https://news.bloombergtax.com/tax-insights-and-commentary/ma...
nopassrecover 5y ago
Both sibling comments are completely correct, and support the parent comment (thanks!). I got myself mixed up and was misled by a Corporate Finance Institute quote (which incorrectly notes the loss is unlimited only to contradict itself): For the seller of a put option, things are reversed. Their potential profit is limited to the premium received for writing the put. Their potential loss is unlimited – equal to the amount by which the market price is below the option strike price, times the number of options sold.

mox1 5y ago

The main issue with options is the time component. Now you have to bet on the direction and be pretty precise with the when. Also, prices for these options (Tesla is a good example) aren't cheap. For example a bet that Tesla will be below $900 by Jan 19th 2024 will cost you about $250 / share at the moment. That means Tesla needs to actually be below $650 on Jan 19th 2024 before you make 1 dollar. As long as you understand whats going on and what you are actually betting on, you are fine. But options have lots of 'gotchas'.

snake_doc 5y ago
The time component is always implicit in both a vanilla short position or a synthetic option-based short. It's just easier to "see" in vanilla options, because it's priced in explictly. If you don't want to pay the cost up front by using long-dated options, just buy short-dated ones and roll them. The costs are likely similar as long as you construct the synthetic short position correctly. https://en.wikipedia.org/wiki/Put–call_parity https://en.wikipedia.org/wiki/Put–call_parity i.e. When you short a vanilla equity, you'll likely have transaction cost of borrowing the stock as an interest rate over time. This cost is incurred as you keep the position open. This cost is related to the cost of capital for the shares you've borrowed. Cost of capital is an implicit cost on time. To construct a synthetic short (using options/bonds), you basically short a synthetic equity. A synthetic equity can be constructed through a long call position, short put position, and long bond position. This synthetic will mostly replicate the the stock's return. To turn it into a synthetic short, you just do the reverse, short a call, long a put, and short a bond.

0daystock 5y ago

You can lose way, way more than what you "bet" in the first place with options. Check out optionstrat.com to play around and see strategies and results.

HFguy 5y ago

If you are buying options (i.e., you have the optionality), youre downside is limited. If you are selling options, that isn't necessarily the case.

belter 5y ago

For anybody who wants maximum risk, and wants to lose money as fast as possible, and in the biggest amounts, there is always the Cryptocurrency Futures market. A bit like Negative Chess...

smabie 5y ago
What's wrong with crypto futures?
- TameAntelope 5y ago
  It's effectively unpredictable.
  - iso1631 5y ago
    So it's gambling, same as buying shares in Tesla.
- belter 5y ago
  Risks... Leverage + Interest Rate Risk + Liquidity Risk + Settlement + Delivery Risk + Operational Risk + Volatility Risks + Unregulated By Governments And/Or Central Banks + Risks of Error and Hacking + Human Error... All together! Remember, we are trying to lose money as fast as possible...
iso1631 5y ago
Or you could bet everything at a casino and let it ride if you win. But unlike selling stuff you don't have (shares, options etc), you won't lose more than your stake. You have $1k, you put it on red, you invest in the S&P, you buy Roubles, you buy a meme stock, you buy a TSLA call for 6 months time at $2k, you buy dogecoin, at most you will lose $1k. You borrow 100 shares of TSLA when it's $900 and sell them, you'll get $90k now, but you might end up with TSLA jumping to $5k overnight and you have to send those shares back, that will cost you $500k, well done.

OJFord 5y ago

When you buy options you're buying exactly that, the option to make a potentially lucrative trade in the future at a price agreed now. (Bought) Puts have just as limited downside as (bought) calls. The bigger risk comes in selling options: you sell a call and (assuming you don't already have the underlying shares) your downside is unlimited - you might have to pay sky high market prices only to sell (to the call option holder) low; you sell a put and your downside could be the entire strike price - the underlying could have gone to zero but you're forced to buy high (at the agreed price).