Comment by bluGill
6 months ago
Right but if you are wrong you are only out 3k. Many people with more money think they have a good strategy and lose a lot before they realize it wasn't bad luck and risk management but a bad idea.
6 months ago
Right but if you are wrong you are only out 3k. Many people with more money think they have a good strategy and lose a lot before they realize it wasn't bad luck and risk management but a bad idea.
Well it's true, you do need an idea. But good ideas aren't hard to come by when you understand basic risk management. Take for example recent events. Say your idea is if this election goes one way, it's neutral/slightly bearish for TSLA, if it goes the other way it's wildly bullish for TSLA. Since one possibility isn't going to result in much movement you ignore it. For the other one you structure some options trades to go long where gamma will runaway in your favor. Assuming polls are to be believed, you have a roughly 40% chance of that bet paying off, and you can structure it to pay off a heck of a lot better than 150%. And if you're wrong? Well them's the breaks, but your risk management strategy means you're still in the game to give it a shot at the next good idea. And even then you won't lose your whole bet unless you picked an extremely aggressive expiry.
This is, incidentally, basically how VC works too.
You also need an idea that's somehow different from the rest of the market. (It's the difference of opinion/point of view that makes a market.)
If everyone has the exact same expectations as you, no one is going to offer you the options trade structure at a price that would be profitable for you.
Need for a different idea depends on the full size. If there are 10 shared available for $10, then nearly anyone could buy them all up and so all ideas are saturated at just one poor person. However if the idea is for a large company there are thousands of shared traded every day, and so if your idea is the company will go up in value almost nobody could buy enough shares to make a difference - even rich would struggle to find enough free money to move the value of the company by $1.
In the market there are ideas on all levels, some really are the $100 trade that will make money but that is the most possible to trade. However many ideas are on the large end where there is plenty of room for more people. If you think a fortune 100 company is under valued by $10/share you can make a ton of money (assuming you are right of course) and safely tell all your friends without affecting your ability to make money.
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Of course, but at the scale of a responsible retail options gambler (think a high six to low seven figure bankroll, properly managed), you can pretty reliably find people willing to take the other side of your seeming long shot. The temptation to pick up pennies on the train tracks is ever present.