[raverbashing]

If only we had learned something from 2008... But apparently not

(For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000

You shortsell NTJS because they use JS instead of Ruby, but guess what NTJS rose to $200 per share and at the time of selling you need to cover the difference.

(Edit: had conflated put options with shortselling, https://www.investopedia.com/articles/trading/092613/differe... ), as the article says "Because of its many risks, short selling should only be used by sophisticated traders familiar with the risks of shorting and the regulations involved. "

[vmception]

Learnings from 2008:

- banning short selling during a market sell off irreparably harms the options market, exacerbating market dysfunction.

- the tail wags the dog. although equities/asset prices should dictate options prices as an afterthought, options activity often can dictate equities/asset prices.

- options market should not be ignored in policy decisions and should be made more efficient to ensure better price discovery in both options and their underlying assets.

- options market hours should be extended

- big data challenges across broker dealer firms hamper the immediate rollout of all possibilities regarding improving options contracts, the solution being incremental rollout of series and smaller quotes

[bananaface]

Why would anyone assume equity price dictates options price? If there's arbitrage between the two instruments, they'll both exert a force on one another and the larger market (options) will exert the larger force.

[vmception]

options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

its not really about arbitrage between markets, it’s the varying motives within the options market and varying prices others are willing to pay. Although this can be influenced by arbitrage between markets for some people.

the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be

[JumpCrisscross]

> options pricing formulas are not settled and the predominant formula was made by a firm that blew up using it

Options arbitrage between equity and options via BSM variants is settled science. As is put-call parity, an arbitrage between put and call pricing. The latter is a perfect arbitrage—it is riskless. The former is not, there is risidual risk that must be continuously managed. (That management is another transmission mechanism for information between the markets.) When mismanaged, it blows you up. But it still enforced a tight, arbitrabgeable relationship between equity prices and options.

What does blow people up is thinking options models are B.S. and then going and trading options. They’re likely the reason my options-trading hedge fund stakes have been doing so well.

[bananaface]

What?

If I think stocks are mispriced, I will probably buy an option to maximise the profit from my edge. That will drive the equity market. How arbitrage is derived is irrelevant.

[vmception]

> For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000

> You shortsell NTJS because they use JS instead of Ruby with a strike price of $90 but guess what NTJS rose to $200 per share and now you're down $110 per option you put (minus the call option sell price).

Regarding your edit about the trading example, you are conflating so many things to make your point. People that know how to control risk don't have this problem, or use those terms.

Your risk issue is shortselling an options contract. Not shortselling a stock, which would be the actual opposite of your buying example. The options equivalent of both your buying example, and the corrected opposite, would lower your risk substantially more than purchashing/shortselling in the shares market, instead of increasing your liability.

Let me know if you wish to have that explained. It is distressing for me to see misinformation forming a mob against a benign market, which may result in even worse regulations for managing risk.

[raverbashing]

> People that know how to control risk don't have this problem, or use those terms.

I am aware of this and I agree that my example is a simplistic one. But it is what seems to be on the mind of most option traders.

> Your risk issue is shortselling an options contract. Not shortselling a stock, which would be the actual opposite of your buying example

You mean this right? https://www.investopedia.com/articles/trading/092613/differe...

Agreed, I think I got that mixed up. Yes, if you're covered for your put option then your liability is limited

[JumpCrisscross]

> The problem with options is that your liability with them can get bigger than your equity

Only if you sell them. A bought option’s maximum downside is the premium.

Does Robinhood let users sell options?

[rwmurrayVT]

You can't sell them naked. You can sell covered calls & cash covered puts. You can also wrangle margin into it, but as far as I can tell you're unable to do it naked.