An Important Lesson for All Options Traders
One of the persistent and pernicious myths regarding options is that 80% of them expire worthless. The number belies the fact that most options get closed well before expiration and can create some misleading belief that selling premium is the only sure way to make money trading options. In the current volatile environment, using options on the assumption that they will expire worthless is especially risky and can lead to large losses.
Given the big price swings, I don’t care how far out-of-the-money or how little time is remaining, there’s no guarantee the option will expire worthless. And those that stay short on puts or calls trying to collect the last 10c or 15c of premium are creating a situation of extreme asymmetric risk/reward that can result in financial ruin.
Just this past Thursday during the final hour of a regular trading session, “Gilead (GILD)” saw an unusual flurry of options activity with buyers scooping up some 7,500 contracts of the 80 strike calls for a mere $0.15 per contract, which were set to expire the next day.
Just after the market closed a reporter leaked the early results of GILD’s Remdesivir treatment for the Covid-19 virus in STAT magazine.
GILD shares popped to $86 in the aftermarket and those 80 strike calls went from 15c to $6.00. Big win for the lucky bunny with a sharp nose. But huge losses from those that had sold those calls short. Remember, options are a zero-sum game in that for every buyer, there needs to be a seller to create a new contract of open interest.
Similarly, in the… Continue reading at StockNews.com
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