DesertMan wrote: ↑
Wed Mar 25, 2020 12:18 pm
ChrisBenn wrote: ↑
Wed Mar 25, 2020 12:11 pm
I think your confusion is just not understanding options -- that 1% it had yesterday was not of SPY, but of option contracts (each one getting exposure to 100 shares of spy). These are leveraged, and it's expected they would go up more than the S&P.
But I thought you (or someone) said that the options were OUT of the money. The only way someone would pay a premium for out of the money options is if they think the options will become in the money before they expire, i.e., that the S&P 500 will go down between now and then, and that the decrease will be equal to or greater than the present difference between the options and the market. The leverage explains the *amount* of the gain but not the fact that it's gaining. It's only gaining because of psychology, i.e., someone thinks the options will be worth more in the future.
The June option is now in the money, it has a strike of 245. It was out of the money yesterday but today's gain pushed it over (SPY is trading at 253 as I write this). The option's delta is around .6, which means the 10 point increase in SPY translated into a gain of 6 points for the option. Out of the money call options are highly leveraged, though, so SPY is up 4% but the June option is up 35%. The December option has a strike of 283 and is still out of the money, which means it's even more leveraged, so it's up something like 65% today.
Long-term treasuries are about a quarter of their holdings and are up 2% right now, intermediate-term treasuries are up modestly, and the options are up around 50% between them, so today's performance looks about right to me.
Options don't behave like a normal long equity position, they were hard for me to wrap my head around at first. That's what I meant when I said this is a complicated product. It's not going to look like a regular stock/bond mix, but it's fairly priced.
Sorry, just read your comment again, this might be a point of confusion:
The only way someone would pay a premium for out of the money options is if they think the options will become in the money before they expire, i.e., that the S&P 500 will go down between now and then
These are call options, which go up in value when the underlying security goes up. Put options are the ones that increase in value when the underlying decreases. "Out of the money" for a call option means the strike price is above the current market price. For a put option it's the reverse.