[dynamodispatch]

> I used to make equity derivative markets.

By market, I was referring to the stock market. Also, are you claiming to be a market maker?

> About thirty minutes after CNBC said something about something, a tsunami of idiotic Charles Schwab and friends order flow would hit our systems. It absolutely moved prices.

It doesn't take 30 mins after the news breaks for stocks to move. And the move is usually orchestrated by the big boys and their algos. The herd can certainly follow the move of the big boys as they dump their shares on the late arriving retail investors. But the move is controlled by the big boys and of course the market makers as they tried to leech out as much off the spread as possible. Unless you are referring to lightly traded stocks or OTC stocks with no volume.

There isn't much retail trading derivatives. The derivative markets are almost exclusively dominated by hedge funds, banks, large investors.

[JumpCrisscross]

> I was referring to the stock market. Also, are you claiming to be a market maker?

I used to be a market maker of stock options, amongst other things.

> It doesn't take 30 mins after the news breaks for stocks to move

When it comes to markets, test every assumption. In reality, information diffusion is unpredictable and heterogenous [1]. This is due to, in part, the "effects of limited attention in at least part of the population of investors in the market, interacting with some more sophisticated investors with better access to information processing technologies" [2].

> The derivative markets are almost exclusively dominated by hedge funds, banks, large investors

Individual stock (versus index) options are actively traded by individual investors [3]. Individual investors also actively trade futures [4].

[1] http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.652...

[2] https://pdfs.semanticscholar.org/b180/3e674cc6be4de275cda1aa...

[3] https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2013.184...

[4] https://www.sciencedirect.com/science/article/pii/S156601411...

[dragontamer]

Options are great, even for individuals. The main issue is that everything is in size 100 lots, so a huge number of stocks are simply "too big" for me to regularly use options on as an individual.

If I were to do something like sell a put option on AAPL ($156.41 at the moment) would be $15641 into a single stock that I may have to put up. I'm closer to ~$5000 per trade as an individual, its not like I have as much money as those banks or hedge funds. In short: I'm only really able to buy and sell options on shares with $50 or lower prices. At least with my relatively conservative trading style.

But still, selling puts is a cool way to be "paid to be forced to buy a stock", and if you're worried about missing the upswing, you can always sell a put (at the money) + buy a call out of the money. Such a trade benefits from the volatility of the market, and is still strictly safer than owning the stock outright.

I mean, I'm a long-term buy-and-hold investor. Selling puts + buying a FOMO out-of-the-money call option is a really good trade most of the time. Given the tradeoffs and the decisions I've made on my portfolio. It basically allows me to benefit from market volatility.

[grahamas]

Could you recommend any resource for gaining that understanding of options? Not just technically, but in terms of the strategies you've sketched here (obviously I can and have googled the definitions).

[JumpCrisscross]

> Could you recommend any resource for gaining that understanding of options?

The Options Clearing Corporation [1] actually has a solid set of introductory courses [2]. That said, I am very conservative about when I believe individual investors should be trading options. (With surplus investment capital, i.e. after tax-advantaged retirement accounts and liquidity reserves have been maxed out, and principally for purposes of hedging (versus leverage).

[1] https://en.wikipedia.org/wiki/Options_Clearing_Corporation

[2] https://www.theocc.com/education/

[dragontamer]

Well, retirement accounts are certainly awesome, but there should be an investment account for your 5-year to 20-year planned events.

Between weddings, funerals, car purchases, home purchases, major home renovations (new roof, new windows, etc. etc.), there are a lot of things that can be planned for 5 to 15 years out that probably should be properly invested. These lengths are long enough that sitting on cash is probably a bad idea, short enough that you need it before you can crack your retirement accounts.

Some of those things can be paid from your 401k or Roth IRA, but its a bad idea IMO to draw from your tax-advantaged retirement accounts in these cases.

A real world example: if you are beginning to look for a house and will likely need $70k+ for a good down payment, that would be the time to buy put-options to "lock in" your $70k.

You haven't found a house yet, but within 6 months or so, you'll likely need the money.

Without options, you'd basically be forced to sell your stocks ASAP, in case the market crashes and ruins your plans. But with a put-option, you negate all the downside risks, while retaining the ability to collect dividends and benefit from upward swings of the market. The put options allows you to confidently hold the stocks up until the week before closing (You'll still need time to transfer the money and generate a cashier's check, but you won't have to worry about market fluctuations)

[dragontamer]

There are 4-kinds of fundamental option trades (long call, long put, short call, short put). And virtually any combinations up to groups to four legs can become a legitimate strategy. (Ex: Long Call + Short call can be a bull-spread, or a bear-spread, depending on what strikes you did it at). Wikipedia's Option Strategies page is a decent start: https://en.wikipedia.org/wiki/Options_strategy

For more "in depth" into some basic, conservative strategies, I suggest "The Rookie's Guide to Options", which is the book that I personally used to learn this stuff.

https://www.amazon.com/Rookies-Guide-Options-2nd-Beginners/d...

Its probably better to become intimately familiar with the "basic trades" (long call, short call, long put, and short put). Because at the end of the day, the more complicated strategies are just those four trades combined together.

One tidbit of "algebra" is to remember that "Long Call + Short Put == Virtual Stock". Sometimes written as Call - Put == Share. This formula really helps to break down the more complicated strategies (ie: Iron Condor which has 4 legs). It also helps you determine which strategies are roughly equivalent. (IE: Owning a share and selling a call == Share - Call is roughly equal to selling a put without owning a share.)

The Black Scholes model, aka "The Greeks", also seems important from a theoretical point of view. I've talked to some financial professionals and the pros consider Black-Scholes to be overly simplistic... but its still a model... and you need to have some basis to reality for why options have different prices. So know the model AND know the inherent weaknesses of the model (Volatility smiles and whatnot)

-------------------

One last tidbit: if you are going to trade options, be sure to find a brokerage which trades multiple legs in a single unit. You don't want to pay commission on every single leg of each option strategy.

E-Trade for instance allows you to straight up buy an Iron Condor on one commission.

[vitohuang]

I'm new to options.

Looking at the AAPL options on yahoo finance, I can't find any puts that cost $156.41, even those in the money 2020 options.

How did you get selling a put cost same as the underlying share price?

I thought one of point of options pricing is you don't need to put up the same amount as owing the shares.

[dragontamer]

> Looking at the AAPL options on yahoo finance, I can't find any puts that cost $156.41, even those in the money 2020 options.

> How did you get selling a put cost same as the underlying share price?

1. Selling put options means you are PAID the price of the option.

2. You might be forced into buying those shares at that price at any time. Therefore, it would behoove you to have that much money in your account, "just in case". By selling an option, you've implicitly signed your name on a very powerful contract and your brokerage will do everything in its power to meet the terms of the options contract (including selling everything else in your account if necessary).

2.5 A Call option is the same thing, except slightly more dangerous in many cases. You are forced to sell those shares to someone else. So in the case of "selling naked calls", your brokerage will sell everything, then buy the stock (no matter what price that stock is at). Naked calls have infinite risk. In contrast, a naked put has a similar risk to buying 100 shares, so naked-puts are a good entry-point for learning the options market IMO.

3. Various options strategies can negate this possibility, but that's a bit more complicated. These more advanced strategies (ie: bear spreads, bull spreads, iron condors...) are a bit safer to play with, but are highly-levered.

> I thought one of point of options pricing is you don't need to put up the same amount as owing the shares.

That's called "leverage". I mean, play with it if you want, but if you really want excitement, there are lotto tickets and casinos. Casinos are great cause you pretty much get free drinks while you gamble.

[vitohuang]

Ok, I think I get it now.

I never touch naked options, From what you described

1. You get paid the price/premium for selling options (call/put).

2. Selling naked put

3. Selling naked call

Is that right?

I was thinking about debit/credit spreads options, so broker won't lock up $156.41 * 100 * X amount for the options period (e.g $15641 in your previous comment)

[lodi]

Why would you sell a naked put though? Sell a put spread (e.g. short 155 put, long 150 put) and you can exert extremely fine control over your max liability. $500 per contract in the aforementioned case.

[dragontamer]

> extremely fine control over your max liability

Alternatively, I may want to own shares because I'm a buy-and-hold investor. An out-of-the-money call solves the FOMO problem.

The "risk" of a naked put is that you might be forced into buying shares. Well, that's fine. I'm a buy-and-hold, relatively conservative investor. I was planning on buying those shares anyway.