Listed options - you get the bid/offer and price action. Can also use LEAPS (long dated exchange traded options) if you want to extend out the timeframe
A PUT Option is in effect insurance. With huge volatility something like Tesla is likely to carry a very high insurance premium. That of itself is okay if you could be sure that the premium was "fair". In a direct Long/Short position there is complete transparency on the bid/offer spread. Unless the Option is being traded in a two way market there would be no transparency on the spread. My guess is that if there are writers of Options on Tesla they will have a whopping mark-up or spread.
If listed on a two way market, I agree that there would be transparency on the bid offer spread. I am not sure if Tesla options are so listed.Listed options - you get the bid/offer and price action. Can also use LEAPS (long dated exchange traded options) if you want to extend out the timeframe
If listed on a two way market, I agree that there would be transparency on the bid offer spread. I am not sure if Tesla options are so listed.
I agree the implied volatility is huge with Tesla which factors dramatically into the option prices but spreads on the bid/offer are relatively tight.
EmmDee can you explain that example a bit better for a poor Duke. I can see that with such a vast array of possibilities tailoring the best combination to suit one’s situation is possible.If volatility premium is a large chunk of the option pricing, it is possible to somewhat alleviate that element using spreads... For example buying 1,200 puts and selling 800 puts (or similar with expiry date spreads). While you pay a higher premium for the long put, you also receive a higher premium on the short leg.
Worth playing around with if you're looking for a more affordable short position
EmmDee can you explain that example a bit better for a poor Duke. I can see that with such a vast array of po - ssibilities tailoring the best combination to suit one’s situation is possible.
Understand. It was the double use of the word "higher" in the original post that perplexed me. I think it meant "higher because of the implied volatility". I won't be dabbling myself but I can see that with such a vast array of Options it should be possible to tailor a combination which better reflects one's personal risk/reward profile and judgement of the possible outcomes than the crude direct short.Sure - had a look at closing prices last night. I've picked strike prices which had active trading yesterday and therefore an active bid / offer. So a bit arbitrary but hopefully it's clear.
Looking at September 17th 2021 expiry - a year out. Assuming you wanted a short position which will move into the money if the price moves down between now and then - but not needing the price to get to the strike price by September.
Sep21 $1,015 put yesterday was $179.50 / $186.70. So essentially you would be paying $186.70 per share for the put option at $1,015 (these traded options are for 10 shares but the price is per share - so one option would cost $1,867 for 10 shares exposure). So even though the option is out of the money it's not cheap - because as mentioned there is a lot of volatility pushing up the price.
Sep21 $570 put was $45.70 / $49. You could sell these options (at the same time as buying the above) receiving $457 in premium. So the net cost on this spread would be $1,410. So reducing total cost to open a position.
The offset for the reduced cost is that you are capping your potential return - it is absolutely capped at $$445 per share. The gain on the position will also be a % of the absolute change in underlying stock price - true of all out of the money options.
Brendan, I think PUT options resolve this paradox. The problem with a short is that if it starts going wrong you get more and more exposed. Thus in your example you start off risking $1 for a 1% rise in price but that becomes a risk of $1.50%. Long positions do not suffer from this syndrome.Hi Coyote
It's the paradox of shorting.
If you short something at $100, and it rises to $150, then it's an even better short if nothing has happened in the meantime to justify the increase.
But from a portfolio point of view, your losses are probably too great and you can't risk any more.
Brendan
Understand. It was the double use of the word "higher" in the original post that perplexed me. I think it meant "higher because of the implied volatility". I won't be dabbling myself but I can see that with such a vast array of Options it should be possible to tailor a combination which better reflects one's personal risk/reward profile and judgement of the possible outcomes than the crude direct short.
Summarizing your example. The package costs $141 per share. If in Sept 2021 the price is above $1,015 you get nothing and therefore lose the full $141. If it is below $570 you receive $445 and therefore gain $304 and between these figures interpolate with break-even at $874. It doesn't look a great proposition to me but then again I could sell the package (subject to bid offer spread)
Great example @EmmDee. I understand though that an option contracts are based off 100 shares rather 10 shares as you outlined.
This is a truly fascinating site. I see that the Implied Volatility for At The Money Sept 21 Tesla options is c. 70% whilst that for Apple is 35%. In layman's terms that means the market thinks the chances of Tesla being less than 50% of its current value in Sept 21 is 1 in 3 whilst for Apple it is 1 in 20. Obviously this means options on Tesla are extremely expensive.
not a good month for shorts.
I am reminded of a saying attributed to Warren Buffett:I got back in after the announcement and am already up another 11% in just over 24 hours. It's madness , but it's madness what can you do.
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