I think he means, that if you buy ITM close to expiry there's hardly any extrinsic left... but the value of the ITM options is relatively low compared to the stock... so... Say stock is 50, you buy the 48 call just above 2, with about 5 days to expiry... if stock goes up 8%, you make 100% on the option. Easy... The risk is stock dropping 4% and you're out.... You're basically buying the stock at 25x leverage with the 48 put for just a little bit.... so it's a leveraging game... If you have 100k. With no margin account.... you can only buy 2.000 shares, and you need to buy some puts. But If you buy the 48 call for 2, you can buy 50.000 underlyings worth of call options....
Correct. The leverage is not for getting big but to limit loss to pennies when wrong. When you are right, the deltas allow for equal return as stock with no theta decay in sideways market. Whether you buy calls or stock+puts, margin and return is the same. Always look at both to determine real market. It's not to say you always buy options. I had mentioned a trade in AXON a while ago. Bought stock at 14 and sold 25 Straddle for 23 dollars nine months out due to vol skew. It's directional with extreme implied vol due to seven binary events this year. Like free call option spread. Vols will stay high but as it rallies to 20 today, still nice return on 25 Straddle. Time and direction is on my side for now. The Long stock caps upside to 47 dollars at expiry with daily decay in my favour. Rich man problem deciding when to take profits or wait for expiry.
But that's kinda doubling up on the long position. Long stock, and short ITM straddle... That straddle should be long delta, since the 23 put was 11 ITM. Although your model would probably say that short straddle was short delta's since the IV was/is so extreme... (IV was 200, 250?) Although... the extrinsic almost finances the stock position (12 vs 14)... hmm... Did you buy a put now, since stock moved up and you could buy some cover? Even though puts would be expensive in absolute terms... I've seen a lot of biotechs on high IV's drop 60-90% on trial results in the last 6 months....
@Stymie, I just re-read your post in the other thread regarding AXON. That worked out very well... You we're short the Sept 25 straddle right? That vol came down nicely... Will you trade out of this one and re-enter the maybe Oct?
I would not buy a put when vols are this high. Stay small and short high vol with directional view. The way I think about the straddle is if I'm wrong, I own more stock at $2 dollars so my average price drops to $8 dollars with upside capped at 48 dollars. If vols crash and I'm up enough to fund another trip, I will consider unwinding by buying the put back first and then sell a covered stock/call. They have 7 trials due this year so don't expect vols to drop that much till September. Tick Tock...money,money...
There is little liquidity in these options so difficult to trade in/out for size. That's too much work. I like to put these trades on and go travelling. Market makers don't provide fair spreads so you have to wait for customer order flow to come in. It's work!
The article that you referenced does in fact bring up many of the weaknesses of the Black Scholes (BS) model that I mentioned. Read the whole article. The BS model is used as the basic foundation by most professionals and then they layer on TOP of it to address the weaknesses. That's why you have many alternatives to the BS model. If you do all the work and observations, you end up with my statement above. Knowing this, trade inside 5 days and more than 45 to get an edge in terms of valuations. Time is the key. That should get you started. Obviously, you need to figure out why it's wrong but you know where to look.
My sincere thanks to you, Stymie and JackRab for your helps and explanations. Best regards and best wishes.
The only way to turn a $1k trade into $100k in 1 year, is if you know what you have to do, and can do it without fail. Without same, you really are just wasting your time and money!