i understand options are priced to lose. also, that it is various strategies that sell options that have consistently outperformed historically. nevertheless, i want to understand, for a strategy that bought options on the stocks that are most rabidly speculated on and whose multiple expansion has been one of the principal drivers inflating the latest bubble; faang and similar stocks, ¿do supply and maniacal demand have any discernible effect on the price to be paid for options on these instruments? ¿are there any benefits to the deranged activity around these stocks, like tighter bid - ask spreads, more favorable implied volatility, lower prices to be paid or any other? if on the contrary, these stocks were actually worse that average to speculate on via options, ¿would screening for options with very high or very low implied volatility make sense? ¿do supply and demand have a significant effect on the price of options or does the modelling process override everything else? when i started learning about options, i was considering buying options on futures but lost all interest when i learned that the atm prices for these options can range from 30% to far more than 100% of the corresponding margin for the underlying which is a ridiculous price to pay. if the greatest probabilities for success buying options are afforded by the lowest prices to pay, i'm now trying to identify the best opportunities and how to screen for them. very well, thanks to all.
We trade all three the stocks, options and FANG futures. You can't create liquidity so we go where we need until the liquidity goes away.
Buying call spreads on FAANG stocks can give you upside participation without tying up large amounts of capital (compared to buying the stocks outright) and without too much time decay overall.
Since no one addressed most of your questions, I'll take a stab. Most of the option pricing variables are known at any given moment and are not subject to much, if any fluctuation (strike, time, dividend, interest rate). Price changes but that's known at any given moment. The wild card is volatility and that is entirely dependent on supply & demand as well as forward expectations. When there is 'deranged activity', premium expands and options become more expensive. For example, check out your FANG stocks just before and just after an earnings announcement. Or check out what happens to the option prices of a healthcare company when the results of a clinical trial is about to be released. In general, B/A spreads tend to widen when IV bumps up a lot. Sometimes they can become Holland Tunnel wide (see clinical trials). Screening for low IV options makes sense in that you aren't paying a lot for them but keep in mind that in order for a long option to be profitable, you have to get price movement in your direction by expiration. If you don't have good timing and selection then buying cheaper (not undervalued) options because it's a low IV stock is a Pyrrhic Victory. If I had to sum it up, screen for stocks that you think (hope?) will move and then check the premiums to make sure that they are not inflated due to some pending news event that is about to deflate them. The exception to this would be if you are trading the volatility of the event. And as Visaria suggested, vertical spreads will offset some of the time premium that you pay, more so if the long leg is ITM.
Buying options is a good way to get into a stock make sure its deep ITM that way your paying less extrinsic value and you get closer to a 1:1 move though trying to liquidate can take a while because the spreads will be wide but you should get the min of the intrinsic value of the deep ITM option. OTM options are trickier they have all extrinsic value and you have to be very right on the move unless your daytrading them and are ok with 20-40% of the move then i would use these less. Day trading long options may take some getting used to though you have to test things yourself. I mainly daytrade or swing $SPY and $AAPL when i can get a nice discount. I like $SPY options vs $ES futures because it lets me be slightly wrong on my entry and i can use a wider stop than with futures directly. You have to weigh the benefits for you dont listen to people telling you one thing is better than the other.
buying options during the latest raging bubble has allowed many people to multiply their capital several times over. buying options on individual stocks like nvda, faang's and the like has allowed those who are proficient at taking directional positions to make very large gains with a limited and defined risk. if those are losers, i definitely want to be one of them. selling options for premium has worked without problem and provided steady income for a decade of the most manipulated and moronic markets ever, i won't argue with that. however, in those same conditions, the upside of buying the right options has been orders of magnitude higher than selling premium.
I bet you would salivate at the idea of being able to trade options as a buyer. Because that's where the true money, or potential gains, are. -- But it's also riskier, so you will need the skill and wisdom and composure to successfully pull it off, Sweet and Sour Bobby...it just struck me...that you kind of look like Tom Sosnoff of TastyTrade. No wonder you're such a fan and disciple of that show and Karen the SuperTrader. May you make a divine bundle of money in 2018.
thanks. this is the kind of technical analysis i'm looking for. for fang stocks price divided by last 12 month earnings has been obscenely inflated for years and will have to significantly go down at some point in time. i'm trying to understand if these ridiculous premia are also present in the price of options on this kind of stocks or if having the masses focus on these stocks actually makes their options better instruments for speculation. ¿where are the options theoreticians of et in this case? ¿mr. morse, JackRab, mr. Klaiman, tommcginnis, others?