A lot of people they go in and they try to trade options like they do stocks — you buy low, you sell high. You do this usually with calls.
You’re buying a single call and then you’re selling the call at a higher price, right? You buy something for five dollars you sell it for six. So. you make money.
Let’s take a look at kind of uh this position here that I have.
What’s interesting and fascinating is that a lot of people they get into buying shares/call contracts because they try to trade it like a stock.
Here I have a position on square Now is down about 38 dollars. It’s 200 or 100 shares.
When I have these 100 shares, I have a delta of basically 100. This delta of 100 what that means is that if this goes up let’s say one dollar I make a 100 dollars.
So let’s say we move it 10 dollars, what do you think we’re going to make? 10 times 100 dollars, you’ll be about a thousand dollars.
If I move this price up or down I make money. So if I buy the stock at a lower price, I get out at a higher price then I make money.
You’re dealing with price and this is what the delta tells you. The delta is the risk factor that you have. But it’s also your profit maker.
Gamma, Theta, Vega — this is what people don’t get.
These are zeroed out in a stock because you don’t have that in the stock. But they’re still there and you might be wondering why are they there.
Well, what a lot of people don’t get is when they go from trading stocks and they go into trading options, they don’t consider the Gamma-Theta-Vega factor. When you look at this call contract which is very similar to what we have in the other one in the stock area. but
We’ve got a a Gamma-Theta-Vega. We still have a delta and its 81. Which is kind of like 81 shares equivalent of stock, 81 shares of stock should in theory.
As it moves and wiggles around, it should make you money as it goes to the upside or at least not lose as much or as badly.
You can see with this one what’s happening.
I put these positions on almost at the same time within one or two minutes of each other. What’s happening with this one is I’m down 135 dollars and with the stock, I’m only down 50.
So why am I down only 50 on the stock? But on the option contract, I’m down 130? You might be wondering and take a look at when I executed these two trades.
So you could see here is Square right there. Its position is within basically at 1104 and 1102.
They were executed within two minutes of each other. It’s nearly the same exact kind of price.
I probably should have just blasted all of them but I didn’t put them on at the exact same time but close enough.
Here’s the thing, when you look at this, you’re losing quite a bit more than you are with the stock.
You might be wondering, why is that?
Because people don’t understand how options work. You have a time decay problem.
You are losing 24 a day and sometimes that picks things up a lot faster. That’s 24 then 25 the next day then 26.
So think of it right now we are down 125 dollars. This 125 dollars if i move the hypothetical date here
Look what’s going to happen to the profit and loss relative to this theta. Everyday you should be adding to that loss.
I’ll add an extra day.
So a few more days into the trade you’re down already 272 dollars.
You need to make up that difference because that red line that little tick right there that you see that’s your zero line, your break even.
So this is at zero look at this big dotted line right here. That’s your zero line.
Now as I move this forward multiple days, look what happens to this tick. It’s going to go to the right. Which means you need price to keep going and go even further to the upside for you too just to break even.
That’s one thing that people don’t get.
Now here’s a little bonus thing, think about it. What do you want the stock price to do, you want it to go up, right?
You have a positive delta. You do have a negative theta. So time decay works against you. Maybe you get that part. But here’s what people don’t get when they get call options. You also have a positive vega here.
Now what does that mean?
This tells you that you’re kind of long or short stock in this case. What’s really happening is it’s part of your position. It’s part of what creates the value for that position.
You’re making some money from price. You’re losing some money here on theta.
Now, are you making or losing money on your vega?
So how do you make money from vega, when you have a positive vega? You need vega to go up.
How do you make money from a stock when you have a positive delta or a positive stock? You need stock to go up.
When does vega go up? Well, let’s adjust the vega. Vega goes up when volatility goes up but stocks have to drop. So if we go ahead and bump this vega up three points
You can see I lose less money because I’m making money. That’s if all prices stood still. So there, I bumped the vague up seven percent points, which is a lot.
It cushions me and helps me out.
Think about it this way, we are positive vega. What does that mean?
Positive vega means I want volatility to go up from the volatility perspective. So I want volatility to go up but I’m positive vega and I want price to go up as well.
What happens when price goes up?
I bought this because I want price to go up.
What’s going to happen to the volatility?
When price goes up, volatility goes down because things are more calm.
So when price goes up, volatility goes down. Let’s move this down three points
So look at what happens.
Actually you’re chasing.
What’s happened is, as I reduce that volatility, you’re losing more money.
So not only are you losing money from the volatility, you’re also losing money from the time, the theta.
That’s the big issue with these single call contracts if you’re just doing them on their own. They’re great for hedging like let’s say you got a butterfly.
You buy a call contract. They’re fine for these kinds of concepts But when you’re buying single call contracts for speculation, that’s a bit of a problem especially when you’ve got this positive vega.
You’re assuming and you want the price to go up well. When price goes up, volatility goes down usually. What’s going to happen right there is you’re going to keep losing money as the volatility goes down and with the theta.
So you got to make up quite a bit on your deltas to make it even work. That’s what most people don’t get.
So I hope this gives you an understanding of why a lot of people fail when it comes to trading single call contracts.
In the same concept, single put contracts can lose money as well in a different way. Also the time premium and volatility but a little bit different, right?
When you really look at things, you got to look a little bit more multi-dimensional. This is what stocks options are all about.
With a stock, it’s single dimensional meaning you buy shares, you sell shares. It’s a price and price.
When you look at options, you’re looking at:
- time value
- volatility value
- price value
So there’s multiple factors to consider.
These are the things that we cover in the courses. These are the things that we cover in some of these freebies here and the getting started pages.
Check out some of those things and if you really want some in-depth sessions.
You might want to check out the coaching, where we work one-on-one. So I hope you found this video helpful.
