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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

#211

Post by mox1 »

chollida1 wrote: post #180
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!

> 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 re…

His point was if you are about to literally buy the stock, there is no downside to selling a put (upside is a different story of course).

Especially Cash secured puts.

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

#212

Post by jovial_cavalier »

filoleg wrote: post #198
jovial_cavalier wrote: post #62

Earlier quoted context omitted.

Put in limit orders that are way out of line and pray for unsophisticated takers?

Exchanges are legally obligated to provide the best possible buy/sell quotes to people, so this is not gonna work. For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50. Now, imagine you queue in your way out limit sell order at $200, and then some unsophisti…

The width of your spread should be inversely proportional to your certainty about the price level.

If you are an unsophisticated maker, you have to quote wider, and yes you will probably get hit very very rarely. But occasionally someone comes through and just needs to unload something as quick as possible, and they will put in a market order to basically take the whole one side of the book and trade down to your level.

Obviously not super profitable, but not losing either! If I knew an easy way to make markets as a retail trader and be wildly successful, I wouldn't blab about it ;)

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

#213

Post by 4oo4 »

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.

This 100%.

It's a trap to follow the advice of investment savvy people that recommend higher risk options without taking into consideration the energy it takes to properly manage risky investments if someone isn't doing it for you. They falsely assume that what works for them (higher risk/return investments and closely following the markets for signals) is what also works for normal people that don't follow markets and financial news very much at all. They mean well and are genuinely trying to help people make the most money possible, but it's a huge blind spot that the time/energy/attention costs of investing aren't also taken into consideration.

It's the same reason I wouldn't recommend Linux to someone that isn't motivated enough to learn how to use it. It definitely can maximize what you get from your computer, but only at the expense of requiring more responsibility and time to learn how it works. Though, it's far easier to get solid Linux advice than solid investment advice and a bad financial decision is way harder to recover from than a bad technology choice.

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

#214

Post by LanceH »

chollida1 wrote: post #185
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…

> The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2 The stock then goes to $200. You have lost $90 of gains to make $2. That's a huge loss. Selling covered calls decreases your downside slightly but earning the option premium but it completely destroy…

At least get the numbers right. This would be losing $90 to make $12.

Using Abbot Labs as an example, a $2 option for 10% over current price would expire roughly 4 months out. So you could make $6/year, and only risk losing the gains over 10% that occur within each 4 months.

The types of stock I'll do with this are generally those I view as reliable, possibly with a dividend (yes, increasingly rare these days), with little exposure to catastrophic downside. This chunk of my portfolio is about minimizing the catastrophic as dollars 1-100,000 have a lot more utility in retirement than dollars 1,000,000 -> 1,100,000.

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

#215

Post by ivanche »

NovemberWhiskey wrote: post #186
vgt wrote: post #132

Earlier quoted context omitted.

I've heard this strategy referred to as "picking up pennies in front of a steamroller" - it works until the CEO is discovered to be a fraud, goes to jail, and stock loses 80% of its value in a week. Then you lose everything on a single position. Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn'…

> "picking up pennies in front of a steamroller" ... generally that refers to the strategy of writing (far) OTM options. Like: the Dow is currently trading at about $49.44; and the bid/ask on a Nov 18th put with a strike of $40.00 last traded at $0.04. So you can write 25,000 of those and get $1,000 in premium. Those are the pennies. You can't lose any money unless the Dow actually below $40.00 because those options…

Just a correction that the steamroller is $1,000,000 in this case - 250 contracts x 100 "shares" x $40.

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

#216

Post by ivanche »

chollida1 wrote: post #185
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…

> The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2 The stock then goes to $200. You have lost $90 of gains to make $2. That's a huge loss. Selling covered calls decreases your downside slightly but earning the option premium but it completely destroy…

The problem with this line of thinking is assumption that the OP would hold the stock until it reaches $200. But he wouldn't. He was ready to sell at $110. He is better off selling covered call + shares @$110, then only selling shares @$110. Another problem is the assumption that everybody can sell on the top (in this case, $200), while it's obvious they can't. And since when is profit of $10 per share == a huge loss?

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

#217

Post by chollida1 »

mox1 wrote: post #211
chollida1 wrote: post #180

Earlier quoted context omitted.

> 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 re…

His point was if you are about to literally buy the stock, there is no downside to selling a put (upside is a different story of course). Especially Cash secured puts.

Well that's where you are wrong. There is potentially a huge amount of downside.

The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry.

And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put.

Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.

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

#218

Post by chollida1 »

ivanche wrote: post #216
chollida1 wrote: post #185

Earlier quoted context omitted.

> The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2 The stock then goes to $200. You have lost $90 of gains to make $2. That's a huge loss. Selling covered calls decreases your downside slightly but earning the option premium but it completely destroy…

The problem with this line of thinking is assumption that the OP would hold the stock until it reaches $200. But he wouldn't. He was ready to sell at $110. He is better off selling covered call + shares @$110, then only selling shares @$110. Another problem is the assumption that everybody can sell on the top (in this case, $200), while it's obvious they can't. And since when is profit of $10 per share == a huge loss…

And the problem with yoru line of thinking is that at the moment you write a call you are stating the time at which you may be selling the stock.

if you didn't write the call you could sell at any time, but you did write the call so you set the time at which you sell.

if the stock goes up alot then you end up losing alot of the upside.

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

#219

Post by vagab0nd »

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.

This is exactly why I _do_ options trading. I used to only put money into index funds. But it's really boring, so recently I've allocated a very small amount to wheel strategy on a couple stocks I'm interested in. I know it's likely that they'll lose me money, but it's fun.

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

#220

Post by arde »

"Like the workplace itself, for most of us the stock market is simply another arena of capital extraction". So, to the author, workplace is an arena of capital extraction. Although the comparison is uncalled for, I'm glad of this candid Marxism because it lets me put this opinion piece in perspective. Given that bias I don't think I'll spend time reading it unless I'm bored.
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