How come it's not more expensive

[systematictrader]

Correct me if iam seeing things incorrectly, but it appears that somehow micro and midcap stocks move drastically more than large cap in percentage basis and do their (range trips) more frequently, now thats known, but seems to be options on those, if available are hardly more costly, yet these stocks in percentage basis move as much as a triple leveraged etf


A triple leveraged etf though seems to have its options premium high in anticipation of the movements


Those stocks do NOT, whats the reason? How is volatility exactly measured when it comes to stocks or its underlying options, not how is it calculated but how is it viewed is the question and is it due to these stocks moving these ( round trips) in several months that it doesn’t count as volatility necessarily ? Or does it ?


The above related to swing trading not day trading or intra day moves on a 3 year chat lets say


Take a look for example at IO and LOGI, swings of 50-100% are common enough on multiple times and multiple years. You can exclude this year since just about everything moved a lot. But there is tons more examples of such stocks and whats surprising is they have options on them, one might wonder who the hell would sell these ? Spreads aren’t awfully too bad when one compares the move of the underlying, sure they aren’t penny increment but they aren’t dollar increment spreads either


In a sense for any trader who’s system or style is capable of trading such underlying isn’t doing so assuming losses can be limited (via options for example, stop loss or other method) a better bet and a better instrument being their gain translates to a higher one isn’t it better to trade ? Why can someone argue the opposite ?



The above is referring to swing trading

 

[Amun Ra]

They seem more expensive to me. The options ask price on those two examples seem to be about 5-10% of their base stock price 1 week out at the money. Compare that with something like MO or AMZN which is 1-2% of their base stock price 1 week out at the money.

 

[guru]

1. There’s too many of them, and you’d lose if you bought calls on each one.
In a way you can look at all of them together like a large mix in a form of an ETF, and such ETFs do exist, for example IWC that isn’t too volatile. While it excludes many more crappy stocks. Generally more than 2/3 of these are worthless and continually go down, besides occasional spikes.

2. Option pricing is based on implied volatility, which in turn is partially based on demand. For example if you’d try to buy a few thousand options, you’d only get a few and the price would increase. And the more you’d buy the more the MM/seller would increase the price. If the interest was as high as on 3x ETFs then the pricing may also look as high as on those 3x ETFs.

3. The options pricing does increase prior to known events, especially FDA approval decisions on many micro-cap biotech stocks. And at those times the options will look pretty much like on 3x ETFs.

4. Other than that, $0.10 doesn’t need to be cheap on a $1 stock, as pointed by another person above. And MMs may not be able to sell them at even higher prices unless there are buyers, which leads back to #2.

5. Puts are very expensive on many of those, $1 puts can be $0.60+ on a $1 stock since its obvious it will go down. It gets even worse when a stock was already $0.20 and spiked up to $1. You can expect $1 put to be $0.80, implying for the price to come back down where it came from.

 

[systematictrader]

1. There’s too many of them, and you’d lose if you bought calls on each one.
In a way you can look at all of them together like a large mix in a form of an ETF, and such ETFs do exist, for example IWC that isn’t too volatile. While it excludes many more crappy stocks. Generally more than 2/3 of these are worthless and continually go down, besides occasional spikes.

2. Option pricing is based on implied volatility, which in turn is partially based on demand. For example if you’d try to buy a few thousand options, you’d only get a few and the price would increase. And the more you’d buy the more the MM/seller would increase the price. If the interest was as high as on 3x ETFs then the pricing may also look as high as on those 3x ETFs.

3. The options pricing does increase prior to known events, especially FDA approval decisions on many micro-cap biotech stocks. And at those times the options will look pretty much like on 3x ETFs.

4. Other than that, $0.10 doesn’t need to be cheap on a $1 stock, as pointed by another person above. And MMs may not be able to sell them at even higher prices unless there are buyers, which leads back to #2.

5. Puts are very expensive on many of those, $1 puts can be $0.60+ on a $1 stock since its obvious it will go down. It gets even worse when a stock was already $0.20 and spiked up to $1. You can expect $1 put to be $0.80, implying for the price to come back down where it came from.

The implied volatility and implied move based on how long of a duration? Same duration as the option it self?

the bid ask spread yes horrible on many but there are still a lot more with ok spreads

and iam referring to specially not the down move or a move in one direction per say but the fact the moves in general are strong percentage wise as compared with other stock yet the options price might be sure as you all discussed more but doesnt seem drastically more

take a look at TUR for example

iam not necessarily after why they move and how but rather from a math and a quantifiable format they seem to be better to trade? Os that the case ? Of course one needs to still know how to trade but if someone lets say trades KO or JNJ or AAPL it seems as if u get it right your most move assuming you say beginning to end is 10-15% while here can be drastically more

 

[guru]

The implied volatility and implied move based on how long of a duration? Same duration as the option it self?

Doesn’t matter how long. Demand is demand, so whoever wants to buy thousands of options for specific date then they’d create demand and higher IV for that date. Implied move won’t have much to do with it either, except being a result of some calculation.

I’m looking at penny stocks and their options almost every day. Trade them occasionally, but still prefer options on larger stocks. Depends on how you trade, but any edge in penny stock options could be countered by you creating demand for them and therefore playing against yourself. While usually they’re already priced accordingly, while the low demand also shows that no one had come up with a holy grail and acquiring huge volume of those options. They’re rarely traded for a reason.

 

[systematictrader]

Doesn’t matter how long. Demand is demand, so whoever wants to buy thousands of options for specific date then they’d create demand and higher IV for that date. Implied move won’t have much to do with it either, except being a result of some calculation.

I’m looking at penny stocks and their options almost every day. Trade them occasionally, but still prefer options on larger stocks. Depends on how you trade, but any edge in penny stock options could be countered by you creating demand for them and therefore playing against yourself. While usually they’re already priced accordingly, while the low demand also shows that no one had come up with a holy grail and acquiring huge volume of those options. They’re rarely traded for a reason.

Ok
That makes sense but not sure if i confused you i wouldn't necessarily be crossing 1000 contracts or even remotely over 50 contracts because iam looking for 20-40 instruments at once, also iam
A swing trader if needed i can scale
The entry exit over many days if 50 is even a lot

your opinion?

 

[guru]

Ok
That makes sense but not sure if i confused you i wouldn't necessarily be crossing 1000 contracts or even remotely over 50 contracts because iam looking for 20-40 instruments at once, also iam
A swing trader if needed i can scale
The entry exit over many days if 50 is even a lot

your opinion?

Well, this is not about you. I meant that if there was an edge then everyone would be trading these like crazy until an edge disappears. Or, maybe that’s already what happened and that’s why they don’t have much volume now.
Either way you can always try and see what happens. In fact, you can have an edge if you’re buying calls and able to somewhat predict which and when may spike up (again), and exit at the right time as well.
While there is really no way to figure much out with trying and testing, observing what happens and how to improve the approach.

 

[systematictrader]

Well, this is not about you. I meant that if there was an edge then everyone would be trading these like crazy until an edge disappears. Or, maybe that’s already what happened and that’s why they don’t have much volume now.
Either way you can always try and see what happens. In fact, you can have an edge if you’re buying calls and able to somewhat predict which and when may spike up (again), and exit at the right time as well.
While there is really no way to figure much out with trying and testing, observing what happens and how to improve the approach.

I understand

 

[systematictrader]

Well, this is not about you. I meant that if there was an edge then everyone would be trading these like crazy until an edge disappears. Or, maybe that’s already what happened and that’s why they don’t have much volume now.
Either way you can always try and see what happens. In fact, you can have an edge if you’re buying calls and able to somewhat predict which and when may spike up (again), and exit at the right time as well.
While there is really no way to figure much out with trying and testing, observing what happens and how to improve the approach.

I think iam not explaining myself correctly

what iam saying is stocks like ostk and Htz and logi move significantly more percentage basis than others, were talking here quantifiable stuff not an edge or a trick

its like this, if you have a driver license and you need to drive point a to b

if you can drive and know how to (as in u have an edge already identifying when to go long or short) aren't u automatically
Better off driving the faster of the cars choices you got ? Assuming they are not more expensive than the slower ones? At least not by a far margin?

So assuming you know when to go long and when to go short

doing so on htz seems to yieled more profits than luv lets say in 2016-2019 period based on their swings

and the same comparison to just about any small stock to big stock

yet the losses are the same or similar if
Your wrong because your using options

so much more of the upside and not much at all of the downside

what am i missing ?

 

[guru]

I think iam not explaining myself correctly

what iam saying is stocks like ostk and Htz and logi move significantly more percentage basis than others, were talking here quantifiable stuff not an edge or a trick

its like this, if you have a driver license and you need to drive point a to b

if you can drive and know how to (as in u have an edge already identifying when to go long or short) aren't u automatically
Better off driving the faster of the cars choices you got ? Assuming they are not more expensive than the slower ones? At least not by a far margin?

So assuming you know when to go long and when to go short

doing so on htz seems to yieled more profits than luv lets say in 2016-2019 period based on their swings

and the same comparison to just about any small stock to big stock

yet the losses are the same or similar if
Your wrong because your using options

so much more of the upside and not much at all of the downside

what am i missing ?

Well, you first asked how come those options are not more expensive, and I think the above answers address this. There may be variety of reasons, but the simple demand & supply is the main one. If someone will create demand then they'd become more expensive. While when they're too "cheap", it means there is competition in selling them and someone may not be able to sell them for much more. Just like SPX & UVXY options become super-cheap when VIX drops below 11, or vice-versa - VIX indicates how cheap they are. And they can be cheap when everyone wants to sell them but there aren't enough buyers. Once buyers come in, SPX options and VIX go up, and can go higher than those penny stocks and their options. Even though they're very cheap when nobody wants them.

So assuming that you get an idea why they're "cheap", you can try to do something about it but that's when someone else may not be able to answer "why this or that" because when you're the one trading them then it becomes you territory and everyone else should be asking you questions


Re: "So assuming you know when to go long and when to go short"

Then you can figure out all kinds of plays with any stocks or option. That is independent of why they're cheap, because just like in my UVXY & SPX example, those options can be way too cheap but when you know when to go long then you'd make a killing. And some people do.

Generally I suspect that some edge is possible here, but it would be limited by capacity/liquidity/volume, and options pricing that self-regulates based on demand, especially from people who know when to go long and when to go short.

Though you could also forget about all the if's and why's, and simply calculate and backtest some theories. I'd imagine that if you bough 10-cent options on 100 stocks with potential to double in price, you'd end up making money on 1-2 out of 10, so you'd need to make $0.50-$1 on each winning one (500%-1000%) to break even. When you add commissions and/or slippage then it'd be a losing game.
It can be more difficult to buy puts on those that spiked up and have potential to go back down - as those puts get very overpriced when the stock price spikes up.

However, it's quite possible that some traders do quite well with options on micro-cap stocks.
And I don't think anyone can argue that it's impossible to make money trading those options. You simply asked why they aren't more expensive. While trading them is a different topic and that's where everyone works on their own game plan.