Perfect and complete markets are a theoretic construct, not an empirical necessity. Incomplete markets are the rule.
I think the path to success would be to write options to buy above the current price expiring today and see if there were any takers. There may not be.
Or trade a single stock future in DJT. Good luck though: the last US single stock futures exchange (OneChicago) closed in 2020. Eclipsed by the options market, I presume.
There absolutely will be. Every strike price above the current stock value should have a market bid, which is what the market makers will pay to any public seller (as opposed to institutional) that wants to sell (or write) those calls.
But your broker may not let you sell “naked” calls (i.e., unhedged by stock or other calls) because doing so leaves you open to severe upside risk. If you sell the June 70 calls and the stock goes to $120, you’re still obligated to sell the stock at $70.
Sorta.
The puts were priced based on whatever everybody else was predicting was going to happen. Which was some amount X of decline. Ignoring close-out costs and spreads, if the stock declined more than X the puts would be pay off and you’d be ahead. If the stock declined less than X the puts would be worthless and you’d have lost what you paid for them.
So the point is you don’t need to just be right about gain vs. loss. You need to be “more right” than everybody else about the amount of loss. That is a much harder hurdle to clear.
There’s also a timing component to get right, but the explanation is already muddy enough without adding that into the mix.
True – if you hold them until expiration. But you can always sell options you own, so you may have opportunities to profit (or sell at a smaller-than-total loss) by selling them before expiration.
What about strike prices below the current stock value as of a few days ago ($70 in Greg’s example)? I took a course on options many years ago, but I still have difficulty getting puts and calls straight.
I see that Charles Schwab allows naked calls if you have the funds to back them up.
Yep, them too. Every strike price will have a bid (buy price) and ask (sell price) for puts and calls.
Go to this page and in the “Moneyness” box click “All.” You’ll see options expiring this Friday with strike prices from $5 to (if you go to the next page) $115. There are no bids on the furthest out-of-the-money options because, with two days to trade, they’re worthless. But you could sell anything else, or choose a different expiration date and explore there.
Interesting to know about Schwab, but it’s still a bad idea to sell naked calls (or puts).
Yes, but that’s where the fog isn’t clearing for me. The stock price was high and rising, so “everybody else” was betting on it going up, but the puts prices were also extremely high, so “everybody else” was betting on it going down. I think that may be because there were two groups of “everybodies” with very different ideas, and the “everybodies” overvaluing the stock just weren’t sophisticated enough to sell cheap puts, something that would make sense if you were betting on the stock staying high or going up.
IME it’s never helpful to try to decode what anybody thinks. I always try to imagine a stock price as a random number that goes up and down randomly. Some stocks are calm and usually rise and fall in small increments, while others are more volatile, rising and falling in large, unpredictable movements.
Option prices are based on three variables: stock price, time until expiration, and volatility. Options expiring at the same time on a $50 stock with low volatility will be priced lower than similar options on a $50 stock with high volatility.
DJT is a very volatile stock, so even though the price may go up, the options will in general be very expensive – not because some people think it may go down, but because the algorithms that determine option prices take that huge volatility into account.
Add in the reality that it’s nearly impossible to sell DJT stock short, and the put options gain even more of a premium.
That’s why you can have a strong, high-priced stock with staggeringly high-priced puts.
NYT: “…short-sellers are finding it difficult and costly to trade in Trump Media. There are roughly 137 million shares in the company, and only around five million of those are available to short-sellers.”
Mr. Trump owns about 60 percent of shares, and company executives also hold a chunk of the stock. Company insiders tend not to lend their shares to short-sellers. Big asset managers like BlackRock, Vanguard and State Street, which regularly lend out shares, are not major holders of Trump Media, further crimping the supply.
According to S3, 4.9 million of the roughly five million available shares are already on loan. As with any loan, when share owners lend their stock to a short-seller, they charge a fee, usually expressed as an annual interest rate on the stock’s current value. Typically, the fee for borrowing stock is a fraction of a percentage point. For Trump Media, it has risen to 550 percent, Mr. Dusaniwsky said.
Trump Media’s stock currently trades at around $50. That means that shorting it for a month would cost more than $20 per share. For a short-seller to break even, the stock price would have to fall by almost half by early May.
Gifted article, which notes that options are expensive as well.