47 lines
2.0 KiB
Plaintext
47 lines
2.0 KiB
Plaintext
28 • The Intelligent Option Investor
|
||
5/18/2012
|
||
-
|
||
20
|
||
40
|
||
60
|
||
80
|
||
100
|
||
120
|
||
140
|
||
160
|
||
180
|
||
200
|
||
5/20/2013 249 499
|
||
Date/Day Count
|
||
Stock Price
|
||
749 999
|
||
BE 1
|
||
BE 2
|
||
RED
|
||
RED
|
||
There are a few important things to notice. First, notice how much shorter
|
||
the time frame is—we have moved from a 500-day time exposure to a two-week
|
||
exposure. In general, a floor trader has no idea of what the long-term value of a
|
||
stock should be, so he or she tries to protect himself or herself from large moves
|
||
by limiting his or her time exposure as much as possible. Second, look at how
|
||
little price exposure the trader is accepting! He or she is attempting to control his
|
||
or her price risk by making several simultaneous option trades (which, by the
|
||
way, puts the trader in a worse position in terms of breakeven points) that end up
|
||
canceling out most of his or her risk exposure to underlying moves of the stock.
|
||
With this position, the trader is speculating that over the next short
|
||
time period, this stock’s market price will remain close to $50 per share;
|
||
what basis the trader has for this belief is beyond me. In my mind, winning
|
||
this sort of bet is no better than going to Atlantic City and betting that the
|
||
marble on the roulette wheel will land on red—completely random and
|
||
with only about a 50 percent chance of success.
|
||
3
|
||
It is amazing to me that, after reading books, subscribing to newslet-
|
||
ters, and listening to TV pundits advocating positions such as this, inves-
|
||
tors continue to have any interest in option investing whatsoever!
|
||
With the preceding explanation, you have a good foundation in the
|
||
concept of options, their inherent directionality, and their peerless flex-
|
||
ibility. We will revisit these themes again in Part III of this book when we
|
||
investigate the specifics of how to set up specific option investments.
|
||
However, before we do that, any option investor must have a good
|
||
sense of how options are priced in the open market. We cover the topic of
|
||
option pricing in Chapter 2. |