I'm very familiar with option spreads and trying to minimize time decay, directional bias and basically trying to capitalize on what is probable versus what is not probable. But let's say you wanted to buy a lottery ticket. Something improbable, with a high likelihood of not panning out. It might pan out over time and it might not. I think Mr. Black Swan probably talked about this in his books, but let's put the theory into practice. He thinks far out of the money options are underpriced because they don't consider the black swan. So let's assume this is true ... If you had $100 or $1,000 month after month to put on red/black in Vegas vs. an option strategy month after month, what would you do? Would you put it on a roulette wheel? Or would you put it in options ... if in options what sort of strategy and where? This is a very hypothetical question that is an attempt to stimulate constructive conversation, not to berate strategies or ideas. In other words, do you believe in Taleb's assertion and if so, how would you take advantage of this market inefficiency? A spread? Outright puts/calls? Do this on a single stock, an index? Leverage it?
Well those March 17.5 strike GE calls that were selling for 2 pennies ended up to be lotto tickets for someone a few days later
yeah, 2 dollars a contract (2 pennies per share) The calls finally closed at closed at 55 cents a share (55 dollars per contract)
Right, you said "ended up being". So your idea is buying calls on an individual stock? If you had $100, $1000 per month for pure unadulterated speculation, would you buy calls on an individual stock?
Remember the morning of 8/17/07? Op-ex, and the fed comes out pre-market and cuts the discount rate by 1/2 a point. The SET on the SPX is 30 some points above the previous close. Well, a couple of weeks after that, a friend of mine and I went to an options seminar by think or swim and had a chance to talk to a few floor traders. Turns out that the day before the cut, someone representing the one and only evil empire bought many many (I forget the amount) of OTM SPX calls for pennies. We were told that the result was at least one CBOE floor trader who had been trading there since the 70's, got knocked completely out of business, and the Goldman trader made millions. This was hearsay from other floor traders, and maybe someone reading this can verify or correct the info, but I can definitely see it happening. Not a bad lotto ticket, especially if you know in advance when the fed is going to cut rates.
Thanks spacelord, this is exactly what this thread is to be. It's not a trading strategy to feed your family. It is something to discuss. If you had money to put in a slot machine or into options (I hope you would pick an option) ... so what option would you purchase? Index, individual stocks, futures options, etc.
i will weigh in on this and say that buying deep otm puts or calls on major indexes may be lucrative as a legimate strategy.(by no means as a sole source of compensation) i will usually trade these lotto tickets after months and months of one way movement.
Considering that you're doing this, it must be a positive thing over the long haul? I imagine there are very lengthy stretches of losing. Do you stick to the same 'bet' month after month?