Lost (MORE!?!?) in options?

[KINGOFSHORTS]

Looks like you got gangbanged by the greeks as if you were a 19 year old sorority student in a frat party.

l suggest you get a full understanding on the Greeks, options pricing etc.

 

[FrankInLa]

I meant nonlinearity not "no linearity". Now @guru can rest well. Good night my friend and stay safe.

Look up the term "no linearity of options". It explains the answer to your question in detail.

 

[taowave]

If I interpreted what he supposedly did,it wasn't the Greeks that got him.It was the bid offer spread on the option on a fast moving stock.

Most newbies are clueless to the impact of transactions costs on options..Im guessing he got nailed on bid offer spread as badly as his delta hit.

Looks like you got gangbanged by the greeks as if you were a 19 year old sorority student in a frat party.

l suggest you get a full understanding on the Greeks, options pricing etc.

 

[taowave]

Stock got hammered an he got creamed on his option..

10 dollars says he was long a call

You didn't specify whether you bought a call or put, so it can be difficult to picture your case. I'm assuming it might've been a call option.

Generally no one uses stops on options, or trades options at market price (as far as I know) specifically because of the example you provided. Most options are very illiquid and have just a few trades per hour or per day, and have very wide bid/ask spreads, which widen even more when the stock price moves. It's not like somebody is waiting to buy your option at a fair price. This means that when you need to sell an option at market price (assuming that was your case) then you'll get the worst price possible. A market maker can set the price as $0.01 bid and $5.00 ask, even temporarily, so when you sell at market price then you may actually get only $0.01 for your option. You were lucky you've got nearly reasonable price for that option.
Trading options usually requires manual review and decision-making, or a fairly smart automated trading system, not just basic stop.

Here is an example of a very wide bid/ask, where an option seems to be worth $1.2, but if you simply place an order to sell it without using the limit price, you'll only get $0.20 for it:

View attachment 224004

 

[ET180]

I'm new to options, and trying to figure out how to make money at this. I bought an option...

Buying options provide leverage at a cost. So first question to ask: Are you consistently profitable trading stocks and ETFs without using leverage? If the answer to that question is no, then adding leverage and paying a cost for that leverage will not help your profitability. If the answer to that question is yes, then read the other responses.

 

[ironchef]

I'm new to options, and trying to figure out how to make money at this. I bought an option for 4.40 on a stock that was at about 12.50, today - strike price 10 - expires in 44 days. I wasn't able to set the proper conditional order, so I figured if the stop for the stock price I wanted was $10.20 (down ~20%), I'd set the stop loss bracket for the price of the option down 20%, and left it. Well, it's Friday, so naturally the stock tanked, and 20% on the option price was nowhere near 20% on the stock price - it stopped out between 11.81 - 11.97 according to my 1 minute candle. When it stopped out, it lost me 80 bucks - .79/share. My question is this: If I had a $10 strike price on it, why did I lose significant money on an option for a stock that was 11.90, or so, and 6 weeks from expiring.

I'd appreciate as plain English as possible - like I say - I'm still a noob.

Welcome to ET. You lost 18% probably because:

1. You bought at ask and sold at bid? ~ 10% spread.

2. The leverage nature of options, when the stock lost ~ 5%, your ITM (Delta ~.6) lost ~ 10%.

For us newbies, options lesson 101: Always trade with limit order, never market.

All things considered, losing 18% on a trade is not a disaster. Could be worse, it could expire worthless. More than half my long options expired worthless.

Good luck.

 

[taowave]

I would think long and hard about newbies placing limit orders vs market..especially if they are short gamma,which the OP wasn't..

For a newbie,a limit order MAY save a couple of pennies..But when a newbie is in a bad trade ,they are a like a deer caught in the headlights.Better to smack the first bid and GTFO as opposed to splitting markets, hoping to be filled with limit orders...

Why screw around for pennies when you are a newbie??

Welcome to ET. You lost 18% probably because:

1. You bought at ask and sold at bid? ~ 10% spread.

2. The leverage nature of options, when the stock lost ~ 5%, your ITM (Delta ~.6) lost ~ 10%.

For us newbies, options lesson 101: Always trade with limit order, never market.

All things considered, losing 18% on a trade is not a disaster. Could be worse, it could expire worthless. More than half my long options expired worthless.

Good luck.

 

[taowave]

This is a really good post..

I get the appeal of the built in stop of options,but if you cant trade the stock,you cant trade the option.

For a newbie,the hidden costs of long options is likely too much to overcome..

Buying options provide leverage at a cost. So first question to ask: Are you consistently profitable trading stocks and ETFs without using leverage? If the answer to that question is no, then adding leverage and paying a cost for that leverage will not help your profitability. If the answer to that question is yes, then read the other responses.

 

[ironchef]

I would think long and hard about newbies placing limit orders vs market..especially if they are short gamma,which the OP wasn't..

For a newbie,a limit order MAY save a couple of pennies..But when a newbie is in a bad trade ,they are a like a deer caught in the headlights.Better to smack the first bid and GTFO as opposed to splitting markets, hoping to be filled with limit orders...

Why screw around for pennies when you are a newbie??

Thank you for your comment. It is a fair question. Some of us don't trade SPY or QQQ or DIA with bid/ask difference of a few pennies. I don't think OP was trading index option.

I made a trade on Friday, an option with a bid of $5.00 and an ask of $8.00. If I bought at ask and then sold immediately at bid I lost $3.00 a share. You simply cannot make money buying at ask and selling at bid, but if your opinion is correct, much easier to make money if you can get mid/theoretical when buy and sell.

 

[ironchef]

Buying options provide leverage at a cost. So first question to ask: Are you consistently profitable trading stocks and ETFs without using leverage? If the answer to that question is no, then adding leverage and paying a cost for that leverage will not help your profitability. If the answer to that question is yes, then read the other responses.

This is a really good post..

I get the appeal of the built in stop of options,but if you cant trade the stock,you cant trade the option.

For a newbie,the hidden costs of long options is likely too much to overcome..

Unfortunately @taowave is correct. the price of the move is usually priced in so it is very difficult to come out ahead going long, especially in high volume index options.