Stocks and Trading Thread - Channeling your inner Mono

[MadImmortalMan]

I made some money shorting Apple, but I'm regretting not selling off my AMZN as well...

[Admiral Yi]

I made some money shorting Apple, but I'm regretting not selling off my AMZN as well...

I'd be interesting in learning the ABCs of option trading if you're feeling so inclined.

[Barrister]

I made some money shorting Apple, but I'm regretting not selling off my AMZN as well...

Very wise.  The rule is always "buy on rumour, sell on news", so last week was a perfect time to short AAPL.

[MadImmortalMan]

I'd be interesting in learning the ABCs of option trading if you're feeling so inclined.

Extremely rough overview:

An option is a sort of promise to trade shares (usually 100) at a certain price at a certain time. You are trading the promise, not the shares. It's a contract, basically. An option will have a date and a price (strike price) attached to it. There are two types of options. A call option is the right to buy the stock at the set price. A put option is the right to sell a stock at the price given.

They take this form: (AMZN April 125 call) and will have an option price, say $7.

That is, an option to buy 100 shares of Amazon by April at $125 per share. The price of the option is $7, so I can buy the right to buy 100 shares in April right now for $7. If I don't want to buy the shares before April, I lose my $7. Actually I don't get my $7 back, no matter what happens, but I digress.


The current price of AMZN is like $117. So, if I just buy my 100 shares right now, it would cost me $11700.




Say I think AMZN will go to 130 before May. I can buy the 100 shares for $11700 and then sell them at 130 for $13000. Or, I can buy the April 125 call option for $7 and wait until it gets to 130. Then I can exercise my option at 130, which is, buy the stock per my contract for 125 and sell it for 130 right away. I make $500 bucks and only pay $7. If the stock goes higher than that, I can make more, but only if I do it before May. If the stock never goes over my option price, I lose my $7.

It's useful if you either don't have the money to pay eleven grand for the stock, or for controlling large amounts of stock with only a little money. Say I have the eleven grand in my pocket as in the scenario above, but instead of buying stock and turning my eleven grand into thirteen, I buy options with it:

11k x AMZN April 125 call at $7 = 1571 April 125 call options, or the contract to buy (1571x100) shares of AMZN by April for $125. AMZN goes to 130. I exercise the options (buying 157100 shares at 125 and selling them for 130, making $5 per share)

Risk=$11,000

Profit=$785,500


If it never goes over 125, I lose my 11k.


Put options are the same, only shorting the stock (strike price will be lower than the current trading price of the shares).

Another use is to hedge your bets. Say I bought a bunch of shares in AMZN and I suddenly decide I'm not sure if it will actually meet my predictions or I think it might tank. I can keep the shares I own and also buy some puts. So if the stock goes up as I thought, then I make the money I thought I would and the money I spent on the puts is lost. If it tanks, I can exercise the put options I bought and make enough money to offset the losses in the stock tanking on me.

[Admiral Yi]

Let's say your call is in the money, but you don't want to excercise it (maybe you don't have 11 large).  You can sell it before the strike date, right, and presumably the price has risen above 7 dollars?

How are brokerage fees on options?

[MadImmortalMan]

Let's say your call is in the money, but you don't want to excercise it (maybe you don't have 11 large).  You can sell it before the strike date, right, and presumably the price has risen above 7 dollars?

Yeah, most of the time, that's what happens. You can trade out your option position in that case, because the price of the option itself will have risen proportionally. ie--the same option you bought for 7 would now be worth a lot more than that.

How are brokerage fees on options?

Bad. 

[The Minsky Moment]

Option King used to pretty cheap IIRC

[Caliga]

How are brokerage fees on options?

Bad. 

I have to enable options trading on my account (and there's a fee just to do that), and have never done so due to the costs.

My dad does tons of options trading and is (or claims to be ) very good at it.

[Ed Anger]

I don't do options.

I prefer the Spread or Power I.

[MadImmortalMan]

I don't do options.

I prefer the Spread or Power I.

The spread can kiss my ass. Three yards and a cloud of dust.

[Ed Anger]

I don't do options.

I prefer the Spread or Power I.

The spread can kiss my ass. Three yards and a cloud of dust.

Nobody does fullbacks anymore.

[Monoriu]

I don't do options.  Hong Kong has thousands of different kinds of options (if not tens of thousands) being traded at any given moment.  Read any newspaper and you are bound to be bombarded by them.  But research shows that 60-70% of people lose money on them.  The thing is, you are not betting against fellow retail investors.  Those options are issued by large investment banks, who have teams of rocket scientists to do the number crunching.  The terms on the options are specifically designed to make money for them.  The odds are stacked against the little guys.  It's just like the casino.  I won't touch these. 

[Admiral Yi]

Actually Mono, though things may be different in HongKongistan, in the US anyone can sell an option, and the price is set by the market, not by evil banks out to fuck you.

[Monoriu]

Actually Mono, though things may be different in HongKongistan, in the US anyone can sell an option, and the price is set by the market, not by evil banks out to fuck you.

The issue of evil banks aside, I have doubts if options can be classified as an investment.  Options, by definition, have an expiry date.  And it is short to begin with, usually months or even weeks.  In the case of bonds, you're supposed to get back 100% of your principal plus interest when you approach the "expiry date".  Not the case with options.  Come expiry date, you either win, or lose.  If you lose, you lose everything on the option.  That fits the definition of gambling more than the definition of investment.  Options are supposed to complement an existing stock portfolio to reduce risks but for retail investors it is almost impossible to get a good hedge out of the deal.

[DGuller]

Based on my knowledge of options, they are indeed a gamble, not an investment.  They're basically a zero-sum (on present value basis) side bet before expenses get taken into account.  They can be used for hedging, but they can't be used solely for investing.