Nice thought experiment… I appreciate your time and effort. If I may make the case for a slightly different point of view: the danger it seems does not lie in utilizing the option contracts per se, rather than in the failure of proper/prudent risk management as seen in scenario 3 (betting the farm on 1 uncertain event) I’d even go as far as saying you proofed the opposite is true! You accurately stated there is LESS danger in this example when structuring this earnings play with (an) option considering the example account balance of 100k… Just to summarize: you mentioned your expected max loss in the stock price could be as high as -20k or potentially -20% of the entire account… i.e. Nike & Walgreens just recently had precisely that kind of move to the downside, whereas the option gives you an incredible risk-reward ratio while only putting 2% of the entire portfolio at risk - but “only” with 1 option though. Sometimes I am convinced traders, speculators, and investors (temporarily) forget what an option contract is really all about and what it is intended for. 😅 Small “bets” (calculated risks) lead to small losses with occasional outsized profits and might be one way to grow a portfolio successfully… over time. 😊 Patience is still a virtue 🙏
Great points! But you are correct that it is all risk-management! I am just trying to illustrate how easy it is to blow an account! I also agree with you about like 1 contract since if you think about Put-Call Parity and Ignore the Interest Rate and the fact we have American Options for a second it is just CALL_PRICE=STOCK_PRICE-STRIKE_PRICE+PUT_PRICE so one call is kind of like having 100 shares + a put option
Irrelevant examples. Stocks rarely crashes 50% or go to zero. Unless you are trading super volatile penny stocks. In that case options would be to expensive anyways, if available at all. There's no free money in this game. I prefer to trade the real thing.
![Six Hundred Strike [EPIC: The Musical] Full Animatic](http://i.ytimg.com/vi/zov6NXIAuow/mqdefault.jpg)
Presentation was made fully in plotly-dash and deployed on Pythonanywhere.com btw. See www.trademamba.com
Nice thought experiment… I appreciate your time and effort.
If I may make the case for a slightly different point of view: the danger it seems does not lie in utilizing the option contracts per se, rather than in the failure of proper/prudent risk management as seen in scenario 3 (betting the farm on 1 uncertain event)
I’d even go as far as saying you proofed the opposite is true!
You accurately stated there is LESS danger in this example when structuring this earnings play with (an) option considering the example account balance of 100k…
Just to summarize:
you mentioned your expected max loss in the stock price could be as high as -20k or potentially -20% of the entire account… i.e. Nike & Walgreens just recently had precisely that kind of move to the downside, whereas the option gives you an incredible risk-reward ratio while only putting 2% of the entire portfolio at risk - but “only” with 1 option though.
Sometimes I am convinced traders, speculators, and investors (temporarily) forget what an option contract is really all about and what it is intended for. 😅
Small “bets” (calculated risks) lead to small losses with occasional outsized profits and might be one way to grow a portfolio successfully… over time. 😊 Patience is still a virtue 🙏
Great points! But you are correct that it is all risk-management! I am just trying to illustrate how easy it is to blow an account! I also agree with you about like 1 contract since if you think about Put-Call Parity and Ignore the Interest Rate and the fact we have American Options for a second it is just CALL_PRICE=STOCK_PRICE-STRIKE_PRICE+PUT_PRICE so one call is kind of like having 100 shares + a put option
@@MLAlgoTrader 👌
why not just straddle? :/
Even more leveraged LOL.
Irrelevant examples. Stocks rarely crashes 50% or go to zero. Unless you are trading super volatile penny stocks. In that case options would be to expensive anyways, if available at all. There's no free money in this game. I prefer to trade the real thing.
If the option expiry is even 1 month out then 50 pct crash is very possible. Look at RIVN to start year..
But also that isn't even the main point
If stock doesn't change prices and you over leverage with only calls you can wipe your account