call options

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Nelly2013
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Joined: Mon Apr 06, 2009 11:23 pm

call options

Post by Nelly2013 »

Has anyone here bought call options? I'm currently reading The Big Short by Michael Lewis and he tells this story about two guys investing out of their garage. They started with only 110K and started investigating this sub prime lending company. The company's stock was trading at $30 but they figured pending some regulatory announcement the stock would be worth either zero or $60. They bought 30K worth of call options at $3 each and made 500K when the regulator ruled in the company's favor. They then reinvested the 500K into another company using the same strategy and turned that into 6M.

Obviously they got extremely lucky. Seems like they flipped a coin and got it right twice in a row. On the first bet though their downside was limited to 30K while their upside was quite high since the figured the company would either go to zero or double and call options only cost $3.
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indexfundfan
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Re: call options

Post by indexfundfan »

Nelly2013 wrote:Obviously they got extremely lucky. Seems like they flipped a coin and got it right twice in a row.
This says it all.

And the chance of it happening is much much lower than one in four (flipping a coin and getting it right twice in a row).
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Wagnerjb
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Post by Wagnerjb »

If this option strategy really works, you and I would be the very last people on earth to hear about it. An intelligent investor would keep the strategy to themselves. The reason for this is that other investors would be competing with you to invest in these call options. The more competition, the higher the prices of the calls, thus making your returns less attractive.

When an individual writes a book about a strategy that promises extraordinary returns, you can tell that the strategy isn't effective at generating reliable and consistent profits. But....selling a book to naive investors is an excellent strategy that produces reliable and consistent profits.

Just say no.
Andy
ScottW
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Post by ScottW »

Wagnerjb wrote:When an individual writes a book about a strategy that promises extraordinary returns, you can tell that the strategy isn't effective at generating reliable and consistent profits. But....selling a book to naive investors is an excellent strategy that produces reliable and consistent profits.
The Big Short isn't a how-to investment book. It's about the subprime mortgage debacle, and focuses on a few hedge funds that saw the crisis looming before anyone else did. The trades being discussed in this thread were merely how one of the hedge funds got started. It's more of a historical account than something meant to be a training manual.

It's an interesting book. I finished it a few weeks ago.
billb
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Re: call options

Post by billb »

Nelly2013 wrote:On the first bet though their downside was limited to 30K while their upside was quite high since the figured the company would either go to zero or double and call options only cost $3.
This is the often twisted perspective that you get from people pushing an option buying strategy. The probability that the options will expire worthless are far greater than a big hit. This is no different than betting black 33 on the roulette wheel, for example. Sure, the time it hits, your downside was "limited" to your single bet, but the odds that you'll hit black 33 means that you'll lose the original 30K over and over again before a big winner.

I trade options in a speculative manner and in a speculative account with fun money. I have been doing this for a number of years.

I can tell you that buying options (puts or calls) as a strategy is typically a loser. In fact, most of the strategies are losing strategies because of the ridiculous spreads and complete lack of understanding of how the instruments work (delta, gamma, theta, rho) by the trader. Even with a good understanding, the odds are not in your favor.

If you really want to play with options, start with a tiny, insignificant amount. Watch how time, volatility and price fluctuations change the value. I think you'll have a lot of questions and misunderstandings. To this day, I do not wager (yes, I chose that word on purpose) more than I can afford to lose and not get beat up for. It's not much better than going to Vegas, really. Well, no free drinks.
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hollowcave2
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options

Post by hollowcave2 »

The original investment could have lost 30K, so you always need to remember the risk involved. It's easy to forget risk and focus on the gains, but for large gains, you take a sizeable risk.
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indexfundfan
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Post by indexfundfan »

I dribble with a little options on the sideline. I would write one or two contracts of put options on securities which I owned (and would like to add more).

So far, all of them have expired worthless. Currently I still have four contracts in my holdings. I am looking forward for them to expire worthless as well.
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FinanceGeek
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Post by FinanceGeek »

The only options strategy that I believe has value for average retail investors is writing near the money covered calls in an IRA. There are no tax consequences if its done in an IRA, and the strategy can generate income although it does limit the upside, so choose your buy/writes carefully.
FredPeterson
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Post by FredPeterson »

But didn't Lenny "Nails" Dykstra make it obvious to everyone that deep in the money calls are easy money?!?!?!
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