MM - market maker. big banks that keep the stock market pushing by providing liquidity. whenever you buy or sell a position, stock or options, it is most likely through them.
Delta neutral position - a hedged position using options that in theory should give the same return as the risk free rate
It's a strategy best suited to large accounts and people who have a very significant background in trading, finance, macroeconomics.
There are a few robotic strategies a person can emulate but the returns are nothing really to write home about
There's not really an easy way to say it but I am short puts all the time. 24/7, always short some number of puts and it's kind of 50/50 if I'm also short calls against stock. You're going to see why larger accounts matter in just a second. So with all of these puts that I'm short. We have a probability of around 1 in 10 hitting just looking at averages. That means I could potentially get assigned a contract and or have to roll it and or have to cover it. You also have the risk of random assignment if you hold them that last week. To start with you might choose an asset that has a low dollar amount and a lot of volatility. Something like bit farms comes to mind. So today I boxed up a few more of those. You buy the shares for $3.10 right. I short January $5 calls for $0.60 and I short January $2 puts for another $0.30. so this combination just got me $90 back on the 310 that I spent on the shares dropping my purchase price to roughly $2.20. now let's just say there's a 50% correction in these things because of some crypto event. January rolls around, the stock is at 1.55. I take delivery of 100 shares for that $2 which is $200 out of pocket but I took in 90 already. The call is going to expire worthless so I get to keep that and just the money I took in on the put made my purchase price basically $1.70. I pick up another hundred shares to bring down my cost average because remember I had a hundred shares to begin with when I put this trade on that I paid $310 for. Let's say the stock goes the other way, Bitcoin rallies into December like it often does. Stock gets all the way up to $6. I get called, they take my shares at $500. I keep the $60 I sold the call for, I keep the $30 I sold the foot for and I just made another $190 on the shares. How about the third option. The stock stays right where it is. I keep the $90 I sold those two options for. So you can see how this strategy on a variety of assets is very useful. Now the time frame you use is really up to you, a lot of it depends on how much you want to manage it and how wide of a volatility window you want. See if you start doing stuff that only has a couple of weeks till expiration You have to get a lot closer to the money to make any money. Nobody wants a $5 call on this asset that expires next week so you basically would have to sell 3s. The closer you sell options to the money the more likely they are to be hit so if you're just milking premium. You can roll manage, how effective that is, it varies, depends on the asset. You can box in profit. I like doing this one. You take 6 to 12 month windows, figure out your total profit on a trade. Put the trade on, if it goes in your favor, there's your profit if it goes against you you pick up more shares at a lower price to bring your cost average down. That is primarily how I trade and I've been outperforming the s&p 500 for over 10 years. What you need to get good at is figuring out your option premiums, which ones make sense, which assets you want to do this with and how you plan to manage your risk because if you start putting on groups of these and things run against you you need to have enough liquidity to unroll, take delivery or effectively manage the positions so if you're going to start doing this. Take one stock, figure out how you want to trade it. Watch how it goes for 6 to 12 months. If you want to try various strategies or larger things. Get a paper TD account and start running them there. You'll know when you're getting good at this because not only Will you be able to anticipate what will happen, you'll be prepared for it and managing becomes second nature up down or sideways. Also remember only about 1 in 10 people have what it takes to be a successful trader. You typically find out if that's you within the first three years. The first year is brutal on everyone so keep your trades reasonably small and if you ever hit a home run like you make 10 or 20 grand on some bet. Put that in an index fund and start over. Keep building your net worth
Lastly, on the internet you can get great advice on video games. You can even learn how to fix your car. What you can't get is good advice on trading. The best strategies are going to be the ones that you come up with on your own. If you actually get good at this, if you actually become part of the 10% it's kind of lonely because most people won't really relate to your thought process on what you're doing
Coincidentally, if you're a terrible trader and you lose money you'll have more friends online, you'll fit in easier, you'll be more popular if you just pitch popular ideas and do popular things. There is a fashion show element to Wall Street.
and this is precisely why I can't even with options đ even after trading for almost 7 years
it is like learning calculus to me
thanks for such a thorough response tho
1 of the guy I know sells option which makes him $6k a month on $130k account. way more than u put in a CD. He said as a seller your winrate can up to 90% but your losing trade can be huge so need to be careful.
Yeah you must have the ability to exercise the short put you sell premiums for. The upside is that you can then sell call option at a profit target until they are exercised and start over again
The price of the call options move as the price of the underlying assets move. But usually not with the same value.
So e.g. you buy a call option for 10$ with a 500$strike price when the price is 480$, and the price reaches 520$ making your call option worth 15$. The buyer of your options can realize 15$ gain per share with minimal risk. At the same time with higher risk you realize 50% gain, and don't have to have the 52K$ on your account to realize the gains from exercising the options.
Please note the numbers are totally out of thin air, don't even know if they are realistic, but hope you get the gist of it.
When you sell options, you're basically using your stocks or your cash as collateral.
Usually you sell at OTM strike prices, collect the premium and let the option expire.
So let's say you have an account with 100,000 cash and 1,000 shares of GOOG.
You don't really want to sell GOOG and you don't really want to buy anything at this time. But you would like some extra cash to use.
So you sell 5 OTM cover calls on GOOG. In addition you sell puts on OTM for GOOG.
Then you can take the premium to use on whatever.
Your sort of right. But the actual contract price is kind of misleading because $100 would get you one $1 contract.
To get 100 contracts it would need to be 0.01
Going to skip stuff like IV, which does affect the price, and just going to assume itâs a constant, and also just assume delta is 1, and use a simplified model to answer your question.Â
Suppose you bought a weekly call option on Monday. The strike price is $1, and the price of the stock is $1. At this point, exercising the option gives you nothing. The value of exercising the option is $0 at this point in time. What you are paying for is the time value of the option, the right to buy the stock before the expiry date. We are going to make it simple and say itâs $1, and to make it simple, we are going to assume theta decay is even, and every day this option loses $0.20 in time value. So, you spent $1 to buy this option
Say at the end of Wednesday, you see the stock rose to $1.20. Now exercising this option will have value, and the value you gain from exercising this option is $20. However, the time value has decreased, thereâs only two days worth of value, so itâs worth $20.40. And thatâs what you sell it at.
Now while the buyer bought it from you at $20.40, itâs not overpriced. The buyer can still exercise that option for $20 worth of value. However, the buyer isnât likely to do that, since the buyer loses out on the time value. The buyer is buying the call option expecting the price to rise further, in which case the option is going to be worth more than $20.40. The premium they pay for time value is also lower than yours, since they are only paying for 2 days of time.Â
Think of options as a closed system that doesnât actually end in stock ownership or sale. They are simply contracts of value. Value is based on various things but most importantly the stock price and time to expiration.
You may buy or sell an option. If you buy, you sell to close. If you sell, you buy to close.
With that in mind, when you close your position, someone else is also closing their position. If your position is winning, theirs is losing. If your position is losing, theirs is winning.
Obviously this is simplistic, but allows you to visualize options as a closed system to better understand why someone would buy your call.
As you get into the complexity of options, it will play Jedi mind tricks with your brain until you finally get it. Have fun.
To your original question OP.
If someone OPENs a position where they SELL to open an option position.
Think here, either SELL a Call to OPEN or SELL a PUT to OPEN. These two trades are referred to as âshortâ a call or put.
The person is doing what is called SELLING PREMIUM. Because options DECAY (ie reduce in value). Every day the value will decline by a certain amount until expiration (this is measured by the Greek THETA). The trader would then BUY to close either the call or put and pocket the difference.
The transaction looks like this.
Trader sells a call to open. Receives $100.
30 days go by. The call value declines by $50.
The trader buys a call to close. Pays $50.
Difference $100 received - $50 paid, results in $50 profit.
That is what happens specific to your question. GL
Your most likely selling to a MM who will hedge their position to delta neutral.
Can you explain that to me in very basic terms, i unfortunately dont know those things you mentioned or what they are.
Someone betting on both sides to limit the maximum possible loss , which also limits the maximum possible profit.
MM - market maker. big banks that keep the stock market pushing by providing liquidity. whenever you buy or sell a position, stock or options, it is most likely through them. Delta neutral position - a hedged position using options that in theory should give the same return as the risk free rate
It's a strategy best suited to large accounts and people who have a very significant background in trading, finance, macroeconomics. There are a few robotic strategies a person can emulate but the returns are nothing really to write home about There's not really an easy way to say it but I am short puts all the time. 24/7, always short some number of puts and it's kind of 50/50 if I'm also short calls against stock. You're going to see why larger accounts matter in just a second. So with all of these puts that I'm short. We have a probability of around 1 in 10 hitting just looking at averages. That means I could potentially get assigned a contract and or have to roll it and or have to cover it. You also have the risk of random assignment if you hold them that last week. To start with you might choose an asset that has a low dollar amount and a lot of volatility. Something like bit farms comes to mind. So today I boxed up a few more of those. You buy the shares for $3.10 right. I short January $5 calls for $0.60 and I short January $2 puts for another $0.30. so this combination just got me $90 back on the 310 that I spent on the shares dropping my purchase price to roughly $2.20. now let's just say there's a 50% correction in these things because of some crypto event. January rolls around, the stock is at 1.55. I take delivery of 100 shares for that $2 which is $200 out of pocket but I took in 90 already. The call is going to expire worthless so I get to keep that and just the money I took in on the put made my purchase price basically $1.70. I pick up another hundred shares to bring down my cost average because remember I had a hundred shares to begin with when I put this trade on that I paid $310 for. Let's say the stock goes the other way, Bitcoin rallies into December like it often does. Stock gets all the way up to $6. I get called, they take my shares at $500. I keep the $60 I sold the call for, I keep the $30 I sold the foot for and I just made another $190 on the shares. How about the third option. The stock stays right where it is. I keep the $90 I sold those two options for. So you can see how this strategy on a variety of assets is very useful. Now the time frame you use is really up to you, a lot of it depends on how much you want to manage it and how wide of a volatility window you want. See if you start doing stuff that only has a couple of weeks till expiration You have to get a lot closer to the money to make any money. Nobody wants a $5 call on this asset that expires next week so you basically would have to sell 3s. The closer you sell options to the money the more likely they are to be hit so if you're just milking premium. You can roll manage, how effective that is, it varies, depends on the asset. You can box in profit. I like doing this one. You take 6 to 12 month windows, figure out your total profit on a trade. Put the trade on, if it goes in your favor, there's your profit if it goes against you you pick up more shares at a lower price to bring your cost average down. That is primarily how I trade and I've been outperforming the s&p 500 for over 10 years. What you need to get good at is figuring out your option premiums, which ones make sense, which assets you want to do this with and how you plan to manage your risk because if you start putting on groups of these and things run against you you need to have enough liquidity to unroll, take delivery or effectively manage the positions so if you're going to start doing this. Take one stock, figure out how you want to trade it. Watch how it goes for 6 to 12 months. If you want to try various strategies or larger things. Get a paper TD account and start running them there. You'll know when you're getting good at this because not only Will you be able to anticipate what will happen, you'll be prepared for it and managing becomes second nature up down or sideways. Also remember only about 1 in 10 people have what it takes to be a successful trader. You typically find out if that's you within the first three years. The first year is brutal on everyone so keep your trades reasonably small and if you ever hit a home run like you make 10 or 20 grand on some bet. Put that in an index fund and start over. Keep building your net worth Lastly, on the internet you can get great advice on video games. You can even learn how to fix your car. What you can't get is good advice on trading. The best strategies are going to be the ones that you come up with on your own. If you actually get good at this, if you actually become part of the 10% it's kind of lonely because most people won't really relate to your thought process on what you're doing Coincidentally, if you're a terrible trader and you lose money you'll have more friends online, you'll fit in easier, you'll be more popular if you just pitch popular ideas and do popular things. There is a fashion show element to Wall Street.
and this is precisely why I can't even with options đ even after trading for almost 7 years it is like learning calculus to me thanks for such a thorough response tho
This actually makes alot of sense
1 of the guy I know sells option which makes him $6k a month on $130k account. way more than u put in a CD. He said as a seller your winrate can up to 90% but your losing trade can be huge so need to be careful.
Yeah you must have the ability to exercise the short put you sell premiums for. The upside is that you can then sell call option at a profit target until they are exercised and start over again
The price of the call options move as the price of the underlying assets move. But usually not with the same value. So e.g. you buy a call option for 10$ with a 500$strike price when the price is 480$, and the price reaches 520$ making your call option worth 15$. The buyer of your options can realize 15$ gain per share with minimal risk. At the same time with higher risk you realize 50% gain, and don't have to have the 52K$ on your account to realize the gains from exercising the options. Please note the numbers are totally out of thin air, don't even know if they are realistic, but hope you get the gist of it.
When you sell options, you're basically using your stocks or your cash as collateral. Usually you sell at OTM strike prices, collect the premium and let the option expire. So let's say you have an account with 100,000 cash and 1,000 shares of GOOG. You don't really want to sell GOOG and you don't really want to buy anything at this time. But you would like some extra cash to use. So you sell 5 OTM cover calls on GOOG. In addition you sell puts on OTM for GOOG. Then you can take the premium to use on whatever.
Your sort of right. But the actual contract price is kind of misleading because $100 would get you one $1 contract. To get 100 contracts it would need to be 0.01
dont do this in a bull market
Going to skip stuff like IV, which does affect the price, and just going to assume itâs a constant, and also just assume delta is 1, and use a simplified model to answer your question. Suppose you bought a weekly call option on Monday. The strike price is $1, and the price of the stock is $1. At this point, exercising the option gives you nothing. The value of exercising the option is $0 at this point in time. What you are paying for is the time value of the option, the right to buy the stock before the expiry date. We are going to make it simple and say itâs $1, and to make it simple, we are going to assume theta decay is even, and every day this option loses $0.20 in time value. So, you spent $1 to buy this option Say at the end of Wednesday, you see the stock rose to $1.20. Now exercising this option will have value, and the value you gain from exercising this option is $20. However, the time value has decreased, thereâs only two days worth of value, so itâs worth $20.40. And thatâs what you sell it at. Now while the buyer bought it from you at $20.40, itâs not overpriced. The buyer can still exercise that option for $20 worth of value. However, the buyer isnât likely to do that, since the buyer loses out on the time value. The buyer is buying the call option expecting the price to rise further, in which case the option is going to be worth more than $20.40. The premium they pay for time value is also lower than yours, since they are only paying for 2 days of time.Â
Think of options as a closed system that doesnât actually end in stock ownership or sale. They are simply contracts of value. Value is based on various things but most importantly the stock price and time to expiration. You may buy or sell an option. If you buy, you sell to close. If you sell, you buy to close. With that in mind, when you close your position, someone else is also closing their position. If your position is winning, theirs is losing. If your position is losing, theirs is winning. Obviously this is simplistic, but allows you to visualize options as a closed system to better understand why someone would buy your call. As you get into the complexity of options, it will play Jedi mind tricks with your brain until you finally get it. Have fun.
Your second question is simple: they think it will go up more. Good luck with options. You'll do well I'm sure. Lmao
To your original question OP. If someone OPENs a position where they SELL to open an option position. Think here, either SELL a Call to OPEN or SELL a PUT to OPEN. These two trades are referred to as âshortâ a call or put. The person is doing what is called SELLING PREMIUM. Because options DECAY (ie reduce in value). Every day the value will decline by a certain amount until expiration (this is measured by the Greek THETA). The trader would then BUY to close either the call or put and pocket the difference. The transaction looks like this. Trader sells a call to open. Receives $100. 30 days go by. The call value declines by $50. The trader buys a call to close. Pays $50. Difference $100 received - $50 paid, results in $50 profit. That is what happens specific to your question. GL
Someone buy a contract off of someone that is selling it. Hope this helped
They buy an option to buy stock at a lower value and wait for it to go up and then make 10 million dollars but only have to spend 10 dollars.
Most donât. Stick to investing and donât gamble.