JDot wrote:
Hi Goseigen
Would you mind giving us beginners a little heads up as to what options are? And how they may be used to build wealth? Also I am interested to know your opinion on if now may be the time to start getting greedy whilst others are fearful or not?
[Long... ]
Options are not really a beginner asset class (which is why some posters are complaining about my posts). Very briefly though, an option is a contract to do something if you wish to. Typically in finance there are options to buy (called "calls") and options to sell (called "puts"). These options can be embedded as part of a wider set of contractual terms, but in the investment world there are financial products which consist pretty much entirely of the option to buy or sell some security (called the "underlying"). These put and call options are tradeable on exchanges like the CME and are considered a "derivative": their value is somehow proportional to the (mathematical) derivative of the underlying. Thus trading an option is like trading on the speed of price movement of the underlying.
Options contracts typically are offered at various "strike" prices: the price at which the underlying will be traded if the option is "exercised". The buyer of the option is the one who has the right to exercise, sellers "write" the options and carry the risk of the option being exercised: they are compelled to deliver or take delivery of the underlying on exercise or at expiry of the contract. In reality many options are "cash settled" which means the underlying is not delivered, just the value of the contract at exercise or expiry.
Options contracts typically expire at three month intervals; they thus have two elements to their value: an "intrinsic value" based on the price of the underlying relative to the strike price, and a "time value" which represents the value to the option holder of the right to exercise the option; this time value declines as exercise date approaches, but also rises and falls with the velocity of the price movements as mentioned above. This velocity is known as "implied volatility" in the options world. The implied volatility of options based on the S&P 500 underlying is tracked by an index called the "VIX" and is closely followed by investors. Implied volatility of options is typically calculated using the famous Black Scholes formula.
The above is a very very brief summary of the basics of options. As you can see they are fairly complex and there is far more, which you can look up if interested: e.g. the "greeks", or options trading strategies like "straddles" that I have been mentioning.
As for whether it is time to be greedy, the essence of what I and others are saying is that prices clearly are moving extremely rapidly. If you trade risky assets now you may make or lose money very quickly. Predicting which is a mug's game. Options let you trade on the volatility itself. In the short term volatility might grow as fear sets in, but over time volatility will die down -- and probably
before the direction of travel of the markets becomes clear. Straddles are a bet on growing volatility; short straddles bet on declining volatility. To a large extent the direction of the underlying market doesn't matter so straddles are "market neutral". Personally I time my trades based partly on the "term structure" of VIX options, which expresses how the implied volatility varies as a function of expiration date.
If you are mathematically inclined options may be interesting to you. If not, I personally would not bother with them, except to have a basic awareness of them to help build context around what is happening in the markets.
The markets having declined c30%, I feel it is okay to be buying, and have done so myself, but with the proviso that painful losses can still come from current market levels. I'd avoid sectors that have been performing well for a long period but are hitting long-term structural problems now. I think the airline industry is a prime example, having enjoyed a long and extraordinary globalisation and tourism boom but seemingly now coming up against Trump's protectionist instincts and growing nationalist anti-trade forces of which Brexit is a symptom.
OTOH I like banks which have made me and lost me quite a bit of money, but which have been in recovery for ten years but now look good to capitalise on growing inflation and interest rates.
Good luck with whatever you choose to do. If you're a beginner take it as slow as you can bear because you will make mistakes: small and painful is better than big and painful and in investment time is your friend!
GS
{written hurriedly, may contain errors... terms of art are in quotes...]