Hello everyone, this is an example of how to detect unprofitable options BEFORE you take the trade, to better your chances.
We are all doing this (trading) for our own personal reasons, so we need to make sure we succeed.
I see many people want to SHORT GME, some other people suggest they buy PUT options on GME ---> This is a MISTAKE! Because those options are considered not probable to generate money.
In this example of GME (notice this is LOG CHART), you can buy a relative short-term put option for 41 days, but as you can see, to make 2 points of your risk you need the price to crash to a price of $50 within 41 days.
Why is it not profitable?
It costs 34.3, so you need the price to move down 34.3 dollars to be break-even, then another 34.3 dollars to 1 point of profit, and another 34.3 dollars to make 2 points of profits. All this within 41 days... price could stay flat on a range of 160-255 and only then crash... Assume that you fantasize about a 3 point profit on this PUT option, do you see the purple line? this is where the price needs to get so this fantasy will be true. HIGHLY UNLIKELY to happen. So just avoid it!
Now, we will check the long-term option, maybe it gives us better results... If we look at the long-term put option for 97 days, to make 2 points of profit you need the price to crash to 6!!! So just avoid it!
It is fair to say though, that the longer-term put option, if someone thinks that a crash will happen testing the price of 45 within the next 3 months, he has a play of 1 to 1, that could be profitable. But you can clearly see, that once you get that 1 to 1, you better snatch it and grab it because you are probably not going to get more $$$ from this trade.
Currently, the options on GME are not worth it (unprofitable), because the implied volatility is very high (150%+), they are very expensive.
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Short term option ended WORTHLESS! as expected... The flipside is: if you know when the options are not profitable for buying => that means that they are profitable for selling...
@HeWhoMustNotBeNamed, Hi, glad to hear from you. First, you need to be aware of the risks and limitations (possible margin call) that selling options have. You can see my youtube video in signature and go to the selling section. There are situations that selling options become a very attractive strategy, you can see in the attached post, that the profit zone is HUGE, and even when the price popped out of it for a little time since the selling gives you a huge premium you have a lot of "AIR" to hold the trade [something that must be taken into account when selling].
Trendoscope
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@ZoharCho, Thanks for the response. I do sell covered calls or naked puts for some of the very volatile but uptrending stocks for which premium is very high. Few weeks ago when GME IV was 400+, I did think about selling covered calls combined with cheap OTM put. It was kind of covering 20% of the price. But, did not proceed as I thought it is too much of risk.
This a straddle, strike 155 with the data of Friday close. I don't sure that even this worth it, because of the risk to the up side.
Maybe when it was IV +400% as you said. Let's see how it will play out :)
ZoharCho
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Heisenberg2019
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Selling covered calls is the way to go on this stock the IV is sky high but trading in a tight range