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Stock options: There is a thrill to knowing that, however small the chance, there is a large payout potentially waiting for you.
by ttrreeww 13y ago
Stock options: There is a thrill to knowing that, however small the chance, there is a large payout potentially waiting for you.
- dyno12345 13y agostock options are a much better bet than lotto tickets but also take years of your lift to obtain.
- ttrreeww 13y agoHigher chance of payout, yes. But lower amount of payout. If you adjust for the payout amount, the liquidity difference, the amount of risk, and the amount of work involved, I say they work out to be roughly the same. Remember, no one can dilute your lotto tickets after the fact :)
- uptown 13y agoYou know you can just trade options without working to earn them, right? No years involved - just cash.
- gfodor 13y agoA lot of money can be made selling call options on high volatility stocks you own that are way out of the money. You are essentially selling lotto tickets to gamblers.
- gburt 13y agoI bet not. In the short term, it looks like money can be made, but you're dramatically under-estimating the likelihood of those high-sigma events. Edit: tail risk from modelling error, in particular.
- gfodor 13y agoThe point is if you own the stock the high sigma event does not result in a loss but a reduced gain. And we're talking way out of the money so it will be a substantial gain if you get called away. Many call buyers are retail investors speculating on price movements, and are using call options as a form of leverage since they do not have the capital to go long the same amount of stock. Whereas call sellers must own the stock (or be exposed to infinite losses.) There are a few studies that show there are excess returns for option sellers vs buyers but unfortunately don't have a link handy. (See "Expected Returns" the book on amazon.) edit: AAPL right now is an excellent example of a high volatility stock that is underpriced demanding large option premiums. If you have the capital picking up some AAPL to simply write calls until it goes back up to a fair valuation is a reasonable way to make money, with the caveat that it relies upon Apple breaking above being in the bottom 5% of the market valuation-wise.
- TheCowboy 13y agoIt's called a covered call position. If it was that risk-free and easy, then every hedge fund would be already on top of this and quickly bring prices back into parity. Unfortunately, you still expose yourself to the risk of holding the stock, while putting a hard cap on the upside. You have to hold 100 shares to cover 1 option. A decline in the price can quickly add up to a significant loss, not to mention when you actually have to sell your position when the calls are exercised.
- gfodor 13y agoI never said it was risk free or easy, and hedge funds do sell covered calls. The point is there is a well known and understood asymmetry between the long and short options markets due to the capital needed to write options. Intuitively the reason there is alpha for selling options is likely at least in part that you are letting people with little capital access leverage.
- brotchie 13y agoWell, mathematically you're constructing a synthetic put. You're giving up the potential upside in the stock while keeping all the downside risk. The "premium" or lotto ticket you're selling is your compensation for foregoing any upside past the option's strike. People seem to forget that, in general, options are fairly priced.