
Introducing Multi-Leg Options Strategies - ericliuche
http://blog.robinhood.com/news/2018/6/12/introducing-multi-leg-options-strategies
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wishart_washy
From any options theory class you'll learn that you can create any complex
position you want with options. If you want to synthetically create a future
just buy a put and call at the same strike price, etc.

And all of this is really interesting except this is a terrible idea to open
up to recreational traders. I say traders because when the average person
thinks of options, they see it as a way to make leveraged bets and get rich
quick. Likewise, institutions largely use derivatives (options, swaps,
swaptions, etc.) to hedge their positions. The option, for an institution, is
a hedging instrument, not a speculative instrument.

Here's the real reason this won't end well for most recreational traders -
you're going to get scalped by the desk traders and algos at the prop shops
for any illiquid options, and hit by the broader universe of trading algos out
of the funds for any liquid options. You won't be able to see the order book
and wouldn't know how to trade it even if you could see it. (@SIG @JaneStreet
@DRW chime in)

But if you see this as a fun way to gamble knowing that the house (the Street)
has a sizable built-in advantage, be my guest.

~~~
throwawaymath
I agree with the spirit of your comment. But this:

 _> The option, for an institution, is a hedging instrument, not a speculative
instrument._

is not entirely correct. It's not at all uncommon for institutional capital to
use options for directional leverage. Options are sophisticated derivatives
for increasing upside, not just limiting downside.

~~~
goodmattg
Fair point. Looked back in my notes and can't find a percentile breakdown of
the use of options in markets. For the derivatives markets as a whole less
than 7% are even options.

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melling
“Multi-leg options strategies have been one of the most frequently requested
features by options investors on Robinhood. With multi-leg, you can trade
Level 3 strategies such as iron condors, straddles, strangles, call and put
debit spreads, and call and put credit spreads more efficiently, invest at a
lower risk, and with less capital requirements. ”

I’ve never traded options. Have any non-traders here effectively used any of
the above mentioned strategies? If so, how do you learn to use these
techniques?

~~~
anoncoward111
Multi leg options sound weird on paper but aren't too hard to understand when
explained properly.

An option is a bet on the future price of a stock. If you think that Stock XYZ
will go from $15 today to $20 next month, you can buy an option that will
reflect your prediction.

A multi-leg option allows you to bet on the "magnitude" of a stock's price
change, rather than the "direction".

For example: "Tesla reports earnings next month. They're either gonna be
REALLY good, or REALLY bad. So let me buy a multi-leg option that predicts a
10% price jump either up or down". You'll make money whether Tesla goes up 10%
or down 10%. You'll lose a ton of money if Tesla remains roughly the same
price.

~~~
wdn
Actually, it doesn't work like that.

If a stock is volatile, as TSLA is, the out of money (OTM) options will take
that into consideration and the premium for it will be very very high.

A OTM straddle options trade probably a very bad choice. Like you said, if
TSLA don't make a big move, you will lose. Even if they do make a big move,
you will still lose because you are opening a trade on both directions.

My personal opinion on options is this: 1\. Find stocks that move 2\. Buy in
the motion options 3\. Expiration at least 6 weeks away, prefer to be longer.
If price move into your target, great, take profit early.

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hhmc
I suspect you meant to type "2\. Buy in the money options"

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erpellan
Given the context, wouldn't 'out of the money' options make more sense? You
win big if the price goes into the money.

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cascom
I don't understand how brokers offer options trading without also offering an
options analytics package (vol, greeks, etc.) or are people using some third
party service and just coming to robinhood for execution? seems like its just
leading the lambs to the slaughter...

~~~
jonknee
> Seems like its just leading the lambs to the slaughter...

Well why do you think they aren't charging commissions?

~~~
freefal
You are exactly right. The electronic options exchanges facilitate market
makers paying brokers for order flow.

The broker can send the order to the exchange with a field denoting their
preferred market maker. In the absence of that field being populated, orders
are allocated either by size (% of the best bid) or by time (who established
the best bid first).

If that field is populated and the preferred market maker is on the best bid
or best offer, he receives an outsized allocation of the order. The market
maker keeps track of the number of contracts it has traded with that broker
where the field was set and pays the broker whatever fee they've contractually
agreed upon multiplied by the number of contracts.

The market maker can afford to do this because retail order flow is highly
profitable to trade against (it's "dumb money"). In fact when a market maker
runs a look back analysis on the profitability of his trading, he will see
that his trading with other market makers and institutional orders results in
almost no profit, whereas the retail flow is highly profitable.

This "payment for order flow" (PFOF) is not shared with the customer. So even
if the customer pays no fee to trade, Robinhood can still earn a profit.

Source: Was an electronic options trader

~~~
ccostes
> Source: Was an electronic options trader

So did you make your millions and retire to an island, or did the options
trading not work out?

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dhwroos
Option strategies can actually make a lot of sense in many cases. Ex, a zero
cost collar lets you lock the value of a stock position in a narrow band in
case you are worried about the market but don't want to sell of right now.

A good source of info is:

[https://www.optionseducation.org/tools/strategybuilder.html](https://www.optionseducation.org/tools/strategybuilder.html)

Good descriptions and visual tools for building and pricing strategies.

If you like that you can sign up for early access to more advanced tools at:

[http://inside.cboevesttech.com/retail/](http://inside.cboevesttech.com/retail/)

Happy to discuss other uses or applications of options, just drop me a
message.

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kaycebasques
It’s weird to me that they’ve prioritized these complicated options strategies
before shipping a dividend reinvestment program (DRIP).

~~~
Raidion
Not weird when you realize what the target market is, which is basically those
that want to get a little bit of "gamble" on. I'm sure their valuation is also
closely tied to the volume of trades they provide, so they want people to be
trading as much as possible on their accounts. A DRIP would just take away
liquidity for amateur traders. They want people to see money in their account
and trade with it, the DRIP would keep that money out of their accounts.

While I obviously think Robinhood is amazing for disrupting an industry with
pretty high fees, I worry that it is basically becoming gambling for a certain
part of the population.

~~~
kaycebasques
You make some interesting points about incentives. Robinhood obviously doesn’t
make money off of transactions, so they have to make it somewhere else.
There’s the premium memberships, and I believe others have mentioned that they
make money off of the cash that sits in your account (not sure how that works
or if it’s true). In the latter case, DRIP would be directly opposed to their
business model, since the dividends that would otherwise sit in your account
are being funneled into a share of some sort, instead.

~~~
pgwhalen
It’s not entirely true that robinhood doesn’t make money on transactions,
given that they receive payment for order flow.

~~~
kaycebasques
Can you expand on how this works? What is "order flow" and who is paying them
for it?

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swarnie_
/r/wallstreetbets need to be careful here, so many new and interesting ways to
end up homeless.

~~~
brobinson
I think you mean /r/robinhood... WSB is mostly just going to laugh at people
over there detonating their accounts

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jorblumesea
I'm confused as to the popularity of Robinhood and others, do people really
think they can beat the market? It's just gambling at this point, not
investing.

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jonknee
Are casinos not popular?

~~~
jorblumesea
They are, but we don't refer to them as "investing" ;)

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synaesthesisx
I've been trading options for several years with some incredible luck (turned
a few thousand $ into six figures in my early 20's). Granted my risk tolerance
has changed quite a bit since - many would consider buying OTM calls/puts
prior to earnings straight-up gambling. That said there are many fun yet
effective strategies to hedge risk using these multi-leg trades (Reverse iron
condor etc).

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ww520
Hmm, can we say this is the modern version of taxi drivers giving out stock
tips and the market is near the top?

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KaoruAoiShiho
Nope.

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swarnie_
For anyone interested Chris O’Neil, Robinhood Product Manager will be doing an
ama on /r/robinhood Wednesday, June 13, at 2:30pm Pacific // 5:30pm Eastern.

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m3kw9
Introducing more ways to lose money

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sawantuday
Why this sudden rise in option trading facilities for retailers? Whats being
cooked behind the scenes?

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Bluecobra
As an amateur retail investor, my theory is that stocks are too expensive. It
used to be common practice for companies to do stock splits to make it more
affordable but that doesn't happen anymore. Options provide a cheaper way of
speculating on stocks.

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arunix
Looks like it's US only. Bummer.

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branda22
Its about time!

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marketgod
No point using all these option strategies. Once you start using these
strategies it means you don't know the direction. Why waste your profits and
pay premiums.

Find options you like and get in on them.

TSLA over $347.50 buy short term options, targets are $400.

~~~
jonknee
What are you talking about? You can do directional with multi-leg just fine.
Like you could buy the August TSLA 350 for $25.50 and sell the August TSLA 400
for $9.25. Selling the higher contract lowers your entry price to $16.25 and
you'll make money at expiration from TSLA being $366.25 instead of having to
be above $375.50. Max upside ends at $409.25, but more likely to actually be
profitable.

~~~
marketgod
Why am I going to sell and pay premiums when I can just make the money wasted
on premiums. If you are hedging options then you are unsure of direction is
all and limiting max profits.

www.plainsitemanagement.com --> I hit winners. Better than anyone out there.

Also, I don't hold until expiration but I want maximum profits, not basic
money.

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CEO_Fart420
Just to take a step back and look at the big picture here, isn’t it amazing
what tech has done to the distribution of access to wealth? Instead of
“blaming the system” like yesteryears idealists, now one can ‘bring home the
bacon’ by doing some of those multi-leg options strategies (that we all love)
themselves, without even leaving the house.

Reminds me of the app’s namesake, Robinhood [0].

0\.
[https://en.m.wikipedia.org/wiki/Robin_Hood](https://en.m.wikipedia.org/wiki/Robin_Hood)

~~~
than
Yes! And the results have been outstanding!
[https://en.wikipedia.org/wiki/Wealth_inequality_in_the_Unite...](https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States#/media/File:US_Wealth_Inequality_-
_v2.png)

~~~
CEO_Fart420
Yikes, was unaware. Have an upvote!

