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The idea that always felt at least tentatively compelling to me is that options prices themselves allow a way for people to express their sentiments about wheth
by leoh 1y ago
The idea that always felt at least tentatively compelling to me is that options prices themselves allow a way for people to express their sentiments about whether a security is under-priced or over-priced — while putting money on the line to do so.
- throwaway2037 1y agoUnder-priced? Buy the stock. Over-priced? Long or short sell the stock. In your case, why do you need options? All are much lower risk than retail folks using options.
- solumunus 1y agoShorting the stock is much higher risk than using options. With options you can cap your liability at particular levels, whereas with traditional shorting your potential losses are theoretically infinite. It’s all about being able to control the risk/reward profile of a trade. Options can be deployed cautiously or recklessly.
- jjav 1y agoShorting a stock is risky, buying puts has more constrained risk.
- fooker 1y agoYes, this is the intuitive way to think about it. It is wrong. The insight that it’s wrong lead to an Economics Nobel price for the Black Scholes model for pricing options.