
Ask HN: Is option trading as bad as gambling? - Max-20
I guess many people here would have expected the Boeing stock to drop in value after the news emerged that a second one of their brand new plane models fell out of the sky.<p>Would it have been an irresponsible financial decision to buy Put options on the day of the second crash with an expiry of 3 months hoping that at some point in the next 3 months the stock would drop a little to sell with a profit?
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dsr_
It is always possible to think of a scenario in which you would have made a
fortune doing things at the right times.

These scenarios are daydreams. Picking the winners in the past is much easier
than picking winners in the future.

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ehsync
Depends on the strategy.

Buying out of the money options is a lottery ticket, where you pay a
relatively small premium with the chance of a large payout if the underlying
moves favorably or volatility increases. Your potential loss is limited to the
premium you paid for the contract.

In the case of Boeing, you're not guaranteed to profit when owning puts even
if the stock drops if time decay (theta) saps your premium at a rate faster
than the change in underlying price relative to the strike of your option
(delta), or if volatility decreased rapidly after the initial reaction to the
news (vega).

Selling naked options allows you to collect the premium up front but exposes
you to the risk of huge losses, in fact unlimited losses when selling calls.

Credit spread trading [0] also allows you to collect premium up front, but
your risk is defined as you buy a cheaper option to hedge the naked position
you created by selling the short option. The compromise is that your maximum
profit is capped. This is akin to selling someone an insurance policy, with
the stock as the underlying asset being insured. If you were bearish on Boeing
and didn't expect it to rebound anytime soon, selling a call credit spread
would be a good strategy to profit from your sentiment without taking on too
much risk.

[0] [https://omnieq.com](https://omnieq.com) (Disclaimer: This is my product)

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TheTank
It is a good strategy (and an interesting product). The execution side might
be complex for retail traders. Execution is particularly important because
although you get a cheap structure (selling one leg, buying the other), you
end up crossing the spread twice.

This sort of trade is usually done OTC or alternatively using a contingent
algorithm (wait passively on one side for one leg, and fire the second leg
automatically as the first leg is filled) which allows going from paying 2X
spread to 0 - but the latter has the tradeoff of taking longer and potentially
missing the opportunity.

I know they are sometimes called like this, but I find the naming "credit
spread trading" confusing. Are these strategies different from collars? I
traded credit in the past, and my immediate understanding of "credit spread
trading" in this context is shorting bonds of Boeing and buying treasuries (or
trading US rates) for example. It would also be a valid strategy in this case
that would use credit and rates instrument as a vehicle rather than equity
instruments, but not accessible to retail traders.

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jpxw
As a retail trader I'd lean towards yes. You have to remember that you're
competing against professionals, who have (most of the time) considered all
the information you are seeing and more. Markets often don't move as one would
intuitively expect. Often major events get "priced in" earlier than one would
intuitively expect. Be very careful.

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auslegung
A very recent example of things not happening the way I expected them: the Dow
Jones plummeted about 1,000 points last week due in large part to the effect,
or perceived effect, of coronavirus on the markets. No shocker that it went
down. But then just yesterday there was a huge rally because the Fed reduced
interest rates. That’s the unexpected part for me. Maybe others saw that
coming but I would’ve lost my pants on that gamble.

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srfilipek
It depends. Many techniques are very risky, but some are safe and useful, and
can have significantly less financial risk than owning stock directly.

E.g. basic call options: [https://www.optiontradingtips.com/options101/payoff-
diagrams...](https://www.optiontradingtips.com/options101/payoff-
diagrams.html)

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lol636363
Last year, I made about $4,000 using about 5k account selling credit put
spreads. Mostly weeklies around earnings.

I stopped because it was too stressful. And I was risking only 5k, cannot
imagine risking more money to make it worth the stress.

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harrisreynolds
I would say yes as well. Especially if are not an expert and have really solid
reasoning for the "bets" you are making!

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TheTank
Comments about events "priced in" are absolutely right. With a little work,
you can make it transparent and use it to your advantage.

In simple terms, the price of an option at a given time is equal to the
product of what you can expect to gain from it (its payout) and the likelihood
of each payout (the implied distribution of the asset at maturity). The
interesting consequence is that you can reverse-engineer option quotes to
derive the "market-implied probability distribution of a given asset at
expiry". You can then compare this to your expectations to enter positions
(for example if you think the market overpriced/underpriced a given event,
trade against it with options).

You first need to calculate the implied volatility of options quotes (both
calls/puts on both bid/ask) which requires you to correctly adjust your
forward, i.e divs and rates to obtain put-call parity. If your forward is
wrong, your implied volatility curves will look off (for example put bids
above call asks) which means you have the wrong rates or dividends
expectations. Once you computed the implied volatilities and are happy with
your forward, you can fit a curve between your 4 series (call ask, call bid,
put ask, put bit). This is your implied volatility mark. You can then use this
volatility mark to derive an implied probability density. There is a simple
example of how this is done here:

[https://www.mathworks.com/company/newsletters/articles/estim...](https://www.mathworks.com/company/newsletters/articles/estimating-
option-implied-probability-distributions-for-asset-pricing.html)

This is actually really useful when you are trying to manage your risk for a
given event. It also has interesting dynamics. Back in 2014 for example, we
were worried about our risk on PBR US (a massive petro company with strong
political links) ahead of Brazilian elections. By using this method, we found
out that the implied distribution of the stock was bimodal, each mode
corresponding to one outcome of the election. This gave us an idea of how much
the stock could move either way and helped us cover the risk.

If you would like to see whether a given event is indeed priced in as you
would expect, you can use this method, bearing in mind there is a timing
element and you should seek the option expiry just after the event or horizon
you are considering.

One last point that is important to consider is that this is “market-implied
distribution” and does not imply a future behavior for the asset in question.
It merely gives you an idea of the expectations of actors at this moment.
Moreover, it is highly dependent on your inputs (dividends, rates and how you
fit your volatility curve between bid/ask options quotes, particularly on the
wings).

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downerending
In general, by gathering enough information, you can make your expectation for
an options trading positive.

In general, this isn't true of games of chance, except somewhat for games like
poker.

That said, I think I recall that pros refer to amateur traders as "stupid
flow".

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TheTank
Former options trader here. The reason its called stupid flow is that 99.999%
of retail traders use them wrongly and don't understand them. That said, you
can educate yourself and use options properly. But don't let any broker or
retail educator "educate" you, they don't want you good and have huge
conflicts of interests. Get education from technical articles and by learning
the underlying maths and pricing dynamics, particularly the relationships
between implied volatility smile and price distribution.

One of the main reasons they are dumbly traded by retail has to do with the
ban of CFDs in the US. As retail investors want leverage (attracted by a quick
buck rather than making money on the long term), options provide an
alternative, and retail brokers push them to customers.

But there is a massively misunderstood dynamic: time. You don't only have to
be right. You have to be right by a certain time. Another misunderstood
dynamic is risk management. Options are useful as part of a portfolio, but if
you use them only as a means to get more leverage on your directional
portfolio, you will end up like all traders losing money that don't understand
why. Yet the reason is simple: you took too much risk.

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downerending
Good stuff. IMO, no one worth less than $1M should even be trading symbols,
much less options. The "poor" should pour their money into low-fee Target
Retirement 20XX funds and let them sit.

