I do not understand how these option trades evenworks.
Discussion
I got chatGPT to explain some of the strategies my IBKR options wizard gave me. It scared me and I moved on quickly.
Do not use chatgbt for options trading. I did the same and was horrified at the simplistic answers I got back. No substitute for understanding the principles in play. I recommend starting with tastytrade on yt. 100 hours later you dip your toe.
Thank you. Just found that and it looks like a good place to learn.
It’s simpler than it might seem:
When you normally buy stock, you do so at today’s price, then you could sell it at tomorrow’s price right? You make or lose based on the difference.
A short, or a bet that it will fall, makes money because it’s actually an agreement to BUY it tomorrow, and a promise to sell it at today’s price. So if today’s price is $90 and tomorrow it’s $85, someone just agreed to buy at $90 what you can now buy for $85 (pocket the $5).
Now a typical option contract is a super exaggerated version of that. In the simple example above, you need $85 in order to make $5. And you could be on the hook for $90 or more. So what if you said, “let’s make that short bet, but I only want to put up $5 for the $90 price, so if it falls more than that $5, I get auto closed out of the trade and lose everything, but this way I can make that same $5 by only betting $5” - ie. He gets like 16X exaggerated gains or losses.
So in this case you do the same thing, but have a limit to the option that it can’t hit because you are betting on way more shares than you actually have the money for. So if you have that same $85 to bet in total, you could make $85 (or double your money) if it simply goes up to $90 (obviously assuming you bet that it goes up, a “call”). However you lose ALL of your $85 if it merely falls back down to $80.
This is how someone can bet $10 million on a “long” (i bet its gonna go up), at $97K, but then lose EVERYTHING if it just falls back down to $95K, because they thought they could MAKE $10 million if it only went up to $99K instead.
This is pretty simplified, but the gist of the idea.
TL;DR It’s basically just a hyper leveraged contract with very strict limits on what the price can do and how much time things have to happen in, meaning both your gains and your losses are insanely exaggerated. So you mostly either get rich, or get rekt.
Im confused, if they long don’t they have the right to exercise the contract? If they aren’t in the money, they wouldn’t exercise it and would just lose the premium. Is this saying this degen paid a premium of 92 BTC???
Remember that they are super leveraged on it. So if they exercise it, it probably means they would need to buy like $200 million in BTC. And they would still lose the $10 million in the option value itself. It wouldn’t change how much they lost, just whether they can exit broke by only losing the option value, or $200 million in debt 😅
Damn. Just buying Bitcoin sounds like a much simpler way to go long. There is also the added benefit of no forced liquidations.