There are financial instruments that allow you to profit from betting that a company’s stock price will go up, or that it will go down.
If you think a company’s stock price will not move either up or down (within limits), is there a way to bet on that?
Well, in theory, options allow you to do this.
You can “sell” a futures option to me. Basically, I’ll give you $100 (say $1 per share), and I have the option to purchase the shares from you at todays price (or more typically a slightly higher price) at some time in the future.
If the stock doesn’t move, I’m not gong to exercise my option, and you just pocket my $100.
There are ways to do this if you don’t own the stock. It’s called a naked option or something.
Right, you would simultaneously sell a “call” and a “put”.
So if the stock is trading at $100, you sell an option to buy the stock for $110 (the call) and an option to sell the stock for $90 (the put).
If the stock goes over $110, the guy you sold the “call” to will exercise his option, buy the stock from you for $110, and sell it on the open market for a profit, which is your loss. Similarly, if the stock goes under $90, the guy who bought the “put” from you will purchase the stock on the market and force you to buy it at $90.
But if the stock stays between $90 and $110, you get to keep the money you made on those options and nobody exercises them.
Conversely, you can bet the opposite, by buying both a put and a call. You will then profit with any wide fluctuation in underlying price, in either direction.
What about intra-day?
I assume the above only works over more than one day.
What if, at 10am, say, I want to bet that for the rest of the day the stock will not move (within limits). Are there any ways of betting on this?
You assume wrong.
Are there options that expire in X hours, instead of days?
American options can be exercised at any point up to the expiry date, and their prices change in line with the underlying. So to profit from your scenario, you don’t actually need to buy or sell the stock, only the options, whose price will go up or down (generally in real time, although there’s a bit more to it than that) in accordance with the price of the underlying stock.
Well, in theory you could close your position at the end of the day by buying back the same options you sold in the morning.
Theoretically, if you are one day closer to the expiration of an option and the stock is no closer to the strike price, that option ought to be worth a little bit less. So you can make money by selling it in the morning and buying it back at the end of the day. Assuming that the price of the stock hasn’t changed at all.
Not sure how this would work in practice.
For a technical description of how you might wish to do this, you can read the wiki that I linked, what you are describing would be called “Shorting volatility”.
In practice, markets are, of course, generally efficient. For example, if it’s common knowledge that some kind of big news item is going to hit on a certain day (earnings report, or something), and it’s fairly easy to see that SOMETHING is going to happen to the stock price, then the premiums on those options are going to go up, and many people go “Long volatility”, or the opposite of what you propose.
The opposite would happen during times of calm - if nothing is expected to happen for the next little bit, then the premiums for those options would fall. If you go ahead with your plan and take up a short position on volatility, and nothing happens as expected, then you would make the premiums on the options but they would be very low. If you go a little closer to the edge and go short volatility when most people think something IS going to happen, and premiums are high, then you make more money (if you’re right and nothing happens) or lose more money when the stock does take off or fall.
In short, it’s not really any different from anything else.
Does this accurately price the risk? Say you sold a call at $100.01 and a put at $99.99, if the stock stayed at exactly $100, you would need a return of $100,000+ to get a decent ROI. I don’t see how you could arrange it so you could do that.
It’s been quite a while since I studied option pricing, but I would imagine you could charge a relatively good amount of money for an option on a stock that’s within a penny of the strike price.
Well that would obviously depend on HOW MUCH you sold the options for (the premium). Remember the option premium also includes a return at the risk free rate for the time up to the expiry date.
As long as you use a reasonable option pricing method, the premiums are a reasonable price of the risk. The thing to keep in mind is that an option that’s at the money has as good a chance of being profitable as it does being worthless (at least under every model I’ve seen, and as long as it’s not too long-lived).
Just for fun, I priced some European options using Black-Scholes with the stock price at $100, the strike prices as in your post, the risk-free rate at 4%, annualized volatility at .2, and no dividends. If the options expire six months from now, the call is worth $14.87 and the put is worth 12.94. If they expire in one day, the call is worth .66 and the put is worth $1.41. American options with the same characteristics will be more expensive, but I don’t know how to account for that.
Chicago Board Of Trade has (or had - been a few years now) ‘Flex’ options which are bespoke options involving abnormal quantities or expiration periods. It is common to have 1 day options in the Flex pit and they are mainly used as short term insurance policies against adverse market movements whilst some other complex trading takes place. Volumes in the Flex pit are very low.