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No, You Aren’t Going to Get Rich by Options Trading

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Re: No, You Aren’t Going to Get Rich by Options Trading

#171

Post by svachalek »

polishdude20 wrote: post #165
d23 wrote: post #118

Earlier quoted context omitted.

I read "The Simple Path to Wealth." But honestly, the TL;DR is pick a low-cost broker (like Vanguard) and put your money into something broad, such as VTI for the United States stock market. You could also mix in a world index and bonds, but the expected return on both are lower. All about your own risk tolerance.

Just in case I missed anything... When you consider compound interest, it's not assuming you reinvest that money or anything. You just pick an index fund and keep adding to it every month for years and that's enough?

Yeah do DRIP (dividend reinvestment) as they'll periodically pay out dividends as cash. DRIP will automatically buy more shares. In a taxable account every time you sell you lose some to taxes, hurting your compounding, so stability is especially important in taxable accounts.

As you near retirement age you'll want to slide it towards a more conservative mix; you don't want a 50% stock market crash to add a decade to your career.

Re: No, You Aren’t Going to Get Rich by Options Trading

#172

Post by aeternum »

spacemadness wrote: post #144
aeternum wrote: post #134

Earlier quoted context omitted.

They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!

Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.

Selling a put can be thought of as similar to a traditional limit buy order.

For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order).

If it doesn't hit 90, you still pocket the premium.

It's like getting paid for having a limit order.

Re: No, You Aren’t Going to Get Rich by Options Trading

#173

Post by pjob »

spacemadness wrote: post #144
aeternum wrote: post #134

Earlier quoted context omitted.

They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!

Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.

The idea is that you have a specific entry price in mind and are waiting until it drops to that point. While you wait, you can collect a premium from selling the option. Let's say that based on your assumptions you think stock X would need to drop to $6 for you to make a good enough risk-adjusted return, but it's currently trading at $7. While you're waiting for the price to drop you could sell a Put (generally a cash-secured put) to collect a premium. If the stock price drops below $6 within the duration of your option, you'll get assigned the stock at the price you wanted ($6), but if it stays above this price the option expires worthless and you keep the premium.

There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price.

The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.

Re: No, You Aren’t Going to Get Rich by Options Trading

#174

Post by ankit70 »

MuffinFlavored wrote: post #140
unabridged wrote: post #127

Earlier quoted context omitted.

The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. They make more than just holding the underlying when it drops or stays flat, and in exchange they make less when the underlying goes up a lot. Options are just a tool that lets you dial in the amount of risk you want, they can be set up to be more conservative or more risky than the underlying. The latter is w…

Isn't the downside to selling covered calls that, not only do you need to hold the underlying, you can get the option you sold exercised, aka you lose your 100 shares per contract?

You can technically do it with buying future of a stock and selling covered calls.

Re: No, You Aren’t Going to Get Rich by Options Trading

#175

Post by clejack »

spacemadness wrote: post #144
aeternum wrote: post #134

Earlier quoted context omitted.

They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!

Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.

You can sell a put at a strike price you believe is reasonable and collect the premium for guaranteed.

If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted.

If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium.

The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable

Re: No, You Aren’t Going to Get Rich by Options Trading

#176

Post by jonfw »

docandrew wrote: post #109

I understood that options trading is zero-sum: to win, someone else has to lose. In this sense it’s like gambling, also in that the house always wins because they collect the fees no matter what. Like gambling I’m sure there are plenty of people with success stories too. Is this assessment wrong?

Options are zero-sum in the same that insurance companies are

Re: No, You Aren’t Going to Get Rich by Options Trading

#177

Post by [deleted] »

narrator wrote: post #79

YTD I'm up more than 300% on my options trading account. Options trading is making bets. The way I make bets is in regards to unusual news events. The events that made me the most money this year were Powell raising interest rates in a relatively unprecedented way, the monkeypox crisis and catching the end of the crisis before the mainstream, and the Nord stream pipeline blowing up. I didn't anticipate these events,…

[deleted]

Re: No, You Aren’t Going to Get Rich by Options Trading

#178

Post by rootusrootus »

spelunker wrote: post #82
highwaylights wrote: post #29

Honestly this is why after dipping my toes into this some time back (along with some very limited time spent in crypto without any kind of derivative shenanigans) I came full circle back to index funds and just putting what I can away at the end of the month. Are index funds going to make me crazy-bonkers-rich? No, but neither was anything else in all likelihood. What they’re brilliant at is giving me my time and att…

Options in particular are a trap IMO because they require a LOT of active attention to the market day to day, and in the end aren't really worth it. I also dabbled in options a while back, and ditched them after losing much more than I should. I did learn a lot about the stock market while doing options though, so I guess that is a plus.

> a LOT of active attention to the market day to day

Exactly this. I played options for a while, just with my lunch money, because it was fun. But it quickly consumes your life, you have to stay on top of it all the time. The stress is what made me stop doing it.

Re: No, You Aren’t Going to Get Rich by Options Trading

#179

Post by slothtrop »

ivanche wrote: post #65
slothtrop wrote: post #55

Does anyone know when us plebs will be able to create custom index funds? I recall reading this existed in some form, but not for the public.

What would be the use case that is not already covered with thousands of existing ETFs that track thousands of existing indices?

Avoiding companies I don't like.

Re: No, You Aren’t Going to Get Rich by Options Trading

#180

Post by chollida1 »

aeternum wrote: post #134
spacemadness wrote: post #104

Earlier quoted context omitted.

The reasonable approach to options, if you’re not trying to go crazy speculating, seems to me to be hedging strategies. Or selling options to take a little each sale if you don’t mind the somewhat lesser risk dependent on the type of market at play. All that said, that’s my armchair take as I don’t mess with them outside of Wall Street Raider.

They can also make for a great entry/exit strategy: Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!

> Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait.

This is not risk free:)

In your scenario you can either buy the stock at your entry price, call it $100

If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario.

You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put.

There is nothing risk free going on here:)

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