
I bought some call options and they appreciated 3309% - jorgenveisdal
https://medium.com/@JorgenVeisdal/event-driven-investing-inflection-points-and-how-i-made-33x-my-money-in-two-weeks-de6afe3eb9f6#.i805k09ej
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FabHK
The article betrays some misunderstandings of option pricing and trading.

It's not necessarily right to say that the options were mispriced. Option
trading desks hedge themselves, and then don't care whether the stock price
goes up or down (unless they want an explicit long or short position in the
underlyer, which is rare). What they do care about is how much the stock moves
every day ("realised vol"), and how that compares to the (implied) volatility
they originally sold/marked the option at. (If you sold the option, you lose
on gamma the more the stock moves, while you gain on theta.)

Big jumps in price are definitely a problem - the theory assumes continues
trading, and as you get shorter to expiry, or the jumps get bigger, the
approximation to continuous trading breaks down.

At any rate, traders are well aware of the fact that prices are not lognormal,
and vol not constant. Nevertheless, the theory and practice of replication
works quite well all in all.

Last comment: Every time a stock jumps, some people lose and some win. If
people traded with leverage (options/futures), some lose a lot and some win a
lot.

(Derivatives have net zero supply, so it's in fact a zero sum game - but don't
forget that the bank is hedged, generally, complicating the picture.)

Bottom line: there are necessarily some winners, and some losers. Guess who
writes articles on medium that get upvoted on HN? :-)

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cowardlydragon
It's like the old adage:

Gamblers only talk about their wins.

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chillacy
Sometimes the ball lands on 00 in roulette and you win a 35x payout. I'd be
impressed if the author were winning consistently.

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alimw
From your write-up, it seems like you had only one reason _in advance_ to
doubt the assumption of Normally-distributed returns, and that was the
existence of short-sellers in the market. Is that fair to say?

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FabHK
He also mentions bi-modality, but yeah, not necessarily in relation to this
stock. He also mentions the chart-technical argument that this stock was well
supported and thus could not go down more, but I'd discount that argument very
much.

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j_b_s
What service do you use for options trading? (would you recommend them?)

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jorgenveisdal
I live in Norway, so my broker service is local and not available to people in
the U.S.

If I lived in the U.S. I would first look into Schwab's options trading
service.

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eutropia
You advanced education in industrial economics: how much of your formal
education has been important to developing an insight into option trading and
investment?

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jorgenveisdal
Zero point zero!

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pdog
Great writeup. (Especially for your first trade—most new option traders don't
do so well.)

How do you screen for event-driven trading opportunities?

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jorgenveisdal
The only thing resembling a systematized screening method that I use is to
keep a list of stocks I feel that I understand, and track their development
over time (e.g. 30 days, 90 days etc).

If a stock has moved 50% in 30 days, either something happened (which would be
tangible and in the news) or there is a lot of speculation going on.
Investigating the latter of such cases further, sometimes the event that will
resolve the speculation is fairly specific. E.g. a shareholder vote or a court
ruling. In such cases, if you are able to form an opinion about what the
outcome of the situation will be, American options can be a great tool.

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chillacy
From my rudimentary understanding of options, shouldn't a stock which moved
50% in 30 days have a pretty high IV, and therefore have pretty expensive
options anyways?

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FabHK
True, but when the option is sufficiently "out of the money", i.e. away from
the strike price on the worthless side, then it can still be pretty cheap.

~~~
chillacy
The 35 to 1 odds spot has a $1 minimum bet in Craps, but the payout is way
worse than the true odds. My understanding is that OOTM options are usually
similar in that they don't reflect the true odds.

