13/01/2022
Options... and how to cook them properly
A bit of theory. A stock option gives the buyer the right to buy (call) or sell (put) a certain amount of stock at a predetermined price (known as the "strike price" or "strike") on or before an expiration date.
By the way, in the USA, the volume of options trading is many times greater than that of stocks, with the dominant majority of "American housewives" and retail investors simply buying calls in the expectation that the underlying asset (such as Apple stock) will rise.
However, 95% of people lose money on this, because in addition to trying to determine the direction of the quotes (rise or fall) and the price of the asset in the future (the "strike"), one must correctly predict the date until which these conditions will materialize.
Moreover, option sellers (vast funds and banks) rarely allow the quotations of the underlying assets (stocks) to reach the massive strike positions (otherwise they would incur losses), by various manipulations and pocket media correcting the markets in the desired direction before expiry.
So making money on buying calls is comparable to the lottery - you may get lucky one day, but the system won't. An example of the "right" strategy is selling "puts on" shares in first-class companies with a strike of 15-20% below the current price. That way, the option buyer will have the right to sell you that stock at the strike price if it drops to it before the expiration date.
Well, for us (the put seller), it is equivalent to buying a prime stock during a sell-off period, which many of us would do as investors anyway. But in addition to the discounted share, we also get an option premium*, which lowers the entry price. Well, if the asset doesn't reach the strike by the expiration date - we just make money on the option premium, selling another "guru" 1001 dreams to cash in on a market decline.
* To hedge the risk of the asset price falling below the strike, additional strategies are used