I guess many people here would have expected the Boeing stock to drop in value after the news emerged that a second one of their brand new plane models fell out of the sky.<p>Would it have been an irresponsible financial decision to buy Put options on the day of the second crash with an expiry of 3 months hoping that at some point in the next 3 months the stock would drop a little to sell with a profit?
It is always possible to think of a scenario in which you would have made a fortune doing things at the right times.<p>These scenarios are daydreams. Picking the winners in the past is much easier than picking winners in the future.
Depends on the strategy.<p>Buying out of the money options is a lottery ticket, where you pay a relatively small premium with the chance of a large payout if the underlying moves favorably or volatility increases. Your potential loss is limited to the premium you paid for the contract.<p>In the case of Boeing, you're not guaranteed to profit when owning puts even if the stock drops if time decay (theta) saps your premium at a rate faster than the change in underlying price relative to the strike of your option (delta), or if volatility decreased rapidly after the initial reaction to the news (vega).<p>Selling naked options allows you to collect the premium up front but exposes you to the risk of huge losses, in fact unlimited losses when selling calls.<p>Credit spread trading [0] also allows you to collect premium up front, but your risk is defined as you buy a cheaper option to hedge the naked position you created by selling the short option. The compromise is that your maximum profit is capped. This is akin to selling someone an insurance policy, with the stock as the underlying asset being insured. If you were bearish on Boeing and didn't expect it to rebound anytime soon, selling a call credit spread would be a good strategy to profit from your sentiment without taking on too much risk.<p>[0] <a href="https://omnieq.com" rel="nofollow">https://omnieq.com</a> (Disclaimer: This is my product)
As a retail trader I'd lean towards yes. You have to remember that you're competing against professionals, who have (most of the time) considered all the information you are seeing and more. Markets often don't move as one would intuitively expect. Often major events get "priced in" earlier than one would intuitively expect. Be very careful.
A very recent example of things not happening the way I expected them: the Dow Jones plummeted about 1,000 points last week due in large part to the effect, or perceived effect, of coronavirus on the markets. No shocker that it went down. But then just yesterday there was a huge rally because the Fed reduced interest rates. That’s the unexpected part for me. Maybe others saw that coming but I would’ve lost my pants on that gamble.
It depends. Many techniques are very risky, but some are safe and useful, and can have significantly less financial risk than owning stock directly.<p>E.g. basic call options:
<a href="https://www.optiontradingtips.com/options101/payoff-diagrams.html" rel="nofollow">https://www.optiontradingtips.com/options101/payoff-diagrams...</a>
Last year, I made about $4,000 using about 5k account selling credit put spreads. Mostly weeklies around earnings.<p>I stopped because it was too stressful. And I was risking only 5k, cannot imagine risking more money to make it worth the stress.
Comments about events "priced in" are absolutely right. With a little work, you can make it transparent and use it to your advantage.<p>In simple terms, the price of an option at a given time is equal to the product of what you can expect to gain from it (its payout) and the likelihood of each payout (the implied distribution of the asset at maturity). The interesting consequence is that you can reverse-engineer option quotes to derive the "market-implied probability distribution of a given asset at expiry". You can then compare this to your expectations to enter positions (for example if you think the market overpriced/underpriced a given event, trade against it with options).<p>You first need to calculate the implied volatility of options quotes (both calls/puts on both bid/ask) which requires you to correctly adjust your forward, i.e divs and rates to obtain put-call parity. If your forward is wrong, your implied volatility curves will look off (for example put bids above call asks) which means you have the wrong rates or dividends expectations.
Once you computed the implied volatilities and are happy with your forward, you can fit a curve between your 4 series (call ask, call bid, put ask, put bit). This is your implied volatility mark. You can then use this volatility mark to derive an implied probability density. There is a simple example of how this is done here:<p><a href="https://www.mathworks.com/company/newsletters/articles/estimating-option-implied-probability-distributions-for-asset-pricing.html" rel="nofollow">https://www.mathworks.com/company/newsletters/articles/estim...</a><p>This is actually really useful when you are trying to manage your risk for a given event. It also has interesting dynamics. Back in 2014 for example, we were worried about our risk on PBR US (a massive petro company with strong political links) ahead of Brazilian elections. By using this method, we found out that the implied distribution of the stock was bimodal, each mode corresponding to one outcome of the election. This gave us an idea of how much the stock could move either way and helped us cover the risk.<p>If you would like to see whether a given event is indeed priced in as you would expect, you can use this method, bearing in mind there is a timing element and you should seek the option expiry just after the event or horizon you are considering.<p>One last point that is important to consider is that this is “market-implied distribution” and does not imply a future behavior for the asset in question. It merely gives you an idea of the expectations of actors at this moment. Moreover, it is highly dependent on your inputs (dividends, rates and how you fit your volatility curve between bid/ask options quotes, particularly on the wings).
In general, by gathering enough information, you can make your expectation for an options trading positive.<p>In general, this isn't true of games of chance, except somewhat for games like poker.<p>That said, I think I recall that pros refer to amateur traders as "stupid flow".