ET News & Sponsor Info
General Topics
Markets
Technical Topics
Brokerage Firms
Company Specific
Tools of the Trade
Trading for a Living
Community Lounge
Site Support

Discussion in 'Options' started by pstvthnk12, May 11, 2022.

1. ### MrMuppet

I don't understand why retail never get's this...

If I was making markets in this ticker, I would make sure to sell the options as high as humanly possible. If you buy straddles with a break even of 10% either way and the stock jumps 9% you lose, period.
It doesn't matter if he made the right call or not, the core principle is that you bet on volatility...and volatility is an annualized average of the daily % returns until the option expires.

If the ticker makes 2% per day on average and the option expires in 30 days, you can eyeball the annualized vol by multiplying it by sqrt(250) since there are 250 trading days. So 2 x 15,81 = 31,62 annualized vol.

Suppose you have a 100\$ stock with an option struck to 100\$ that costs you 4.50. You hack that number into an options calculator and find out that it trades at 39.4 implied volatility.
You reverse above calculation and divide that by 15,81. 39,4 / 15,81 = 2,49 so the option implies an average daily move of 2.49% until it expires. And that's why it's called implied volatility, because the option...well implies that volatility for the stock.

If you buy that option delta neutral and the stock returns 2% on average for the next 30 days, you'll lose. If the stock returns above 2.49% on average for the next 30 days, you win.

It's that simple. The option says "stock is gonna be very much up and down during the next 30 days" and the stock says "fuck you, I've done nothing the last 30 days and perhaps I'll keep it that way". Who is correct? And that's the bet you put on every single time you trade an option delta neutral.

But wait. Perhaps there is a guy that bids up that option from 4.50\$ to 5\$ after you bought it, although the stock keeps doing nothing...well, then you just made a profit from being long implied vol.

There are situations where a stock drops and the calls are getting more expensive or a stock explodes and the puts are becoming more expensive and this seems counterintuitive for retail pickers since stock up => calls up/puts down, right. No! that is only the case if implied vol stays the same. GME, AMC and most recently BTC and ETH options.

BTC drops below 30k and 25 delta calls trade up 20%, that's because implied vol went from 60 to 120 in three days. If you sell covered calls here, you're fked

Hammer that into your brains.

BTW, OP made the mistake of buying the options in equal dollars, that's why he bought more puts than calls since the puts were cheaper....but that's not how that works

Last edited: May 12, 2022
#11     May 12, 2022
spawnxxx, BlueWaterSailor and qlai like this.
2. ### TheDawn

I think it's because people just don't have the experience with the concept of volatility in options. They have never dealt with any instruments that are priced according to how much they will move in the future so they evaluate the value of the options according to their "cheapness" relative to others just like how they value other instruments like stocks.

#12     May 12, 2022
ET IS FREE FOR TRADERS BECAUSE OF THE FINANCIAL SUPPORT FROM THESE SPONSORS: