optionsellers gold premium

[savetimer 0]

In this optionsellers post linked by the recent SO article on them, https://seekingalpha.com/article/4216814-option-selling-opportunities-good-scary , he says there are $500 puts on $1100 Aug gold. Where is he getting that premium figure? Thanks.

 

"Gold can either come down to [gestures at chart] this level, this level, this level, it could stay the same, or it could rally. As long as it stays, of course, above the $1,100 level, the premium winds up being captured and it's a winning position. The idea about selling options is we have a lot of volatility right now and, believe it or not, these $1,100 puts are still quite expensive. I know it looks like it's a long way out-of-the-money, it does look like it's probably not going to be reached, but right now investors are spending $500, $550, $600 to buy this option. I'd be a big seller to that right now."

Edited November 28, 2018 by shrimpy1

[cuegis 683]

5 hours ago, shrimpy1 said:

In this optionsellers post linked by the recent SO article on them, https://seekingalpha.com/article/4216814-option-selling-opportunities-good-scary , he says there are $500 puts on $1100 Aug gold. Where is he getting that premium figure? Thanks.

 

"Gold can either come down to [gestures at chart] this level, this level, this level, it could stay the same, or it could rally. As long as it stays, of course, above the $1,100 level, the premium winds up being captured and it's a winning position. The idea about selling options is we have a lot of volatility right now and, believe it or not, these $1,100 puts are still quite expensive. I know it looks like it's a long way out-of-the-money, it does look like it's probably not going to be reached, but right now investors are spending $500, $550, $600 to buy this option. I'd be a big seller to that right now."

Maybe he was using like 3 year options to make such an extreme point!

 

Or, he was just lying...he's been known to do that!

Edited November 28, 2018 by cuegis

[Kim 7,513]

No he was not lying He was referring to Aug2019 futures. He is a screenshot from ONE:



Here is the problem:

Margin one contract is around $3,500, and you control $122,000 worth of gold. That's 1:34 leverage. So $500 premium represents 14% return on margin in 10 months, but it is using 1:34 leverage. This is exactly what happened with his /NG contracts. He didn't think NG will increase by 40% in just few days - but it did. Who says it cannot happened to gold?

[cuegis 683]

3 minutes ago, Kim said:

No he was not lying He was referring to Aug2019 futures. He is a screenshot from ONE:



Here is the problem:

Margin one contract is around $3,500, and you control $122,000 worth of gold. That's 1:34 leverage. So $500 premium represents 14% return on margin in 10 months, but it is using 1:34 leverage. This is exactly what happened with his /NG contracts. He didn't think NG will increase by 40% in just few days - but it did. Who says it cannot happened to gold?

I misunderstood his question....I thought he was referring to $500 strike puts and , since SA no longer has an options section, I assumed it was an article from a long time ago.

I guess I had it all wrong!

[savetimer 0]

Ok, that makes sense, and jives with what I was able to find. His comment $500 on $1100 strike is misleading cause the $500 is on 100 lot. It's really $5 premium. I guess it was part of the extreme and misleading marketing that has been mentioned many times already. It certainly made me scratch my head a bit.

[Kim 7,513]

Correct.

So lets say he had a 100k account and was aiming for 25-30% gains annually. To get there (30k), he had to sell around 25 1100 puts, giving him exposure to over $3M gold futures on 100k account.

[cuegis 683]

3 minutes ago, Kim said:

Correct.

So lets say he had a 100k account and was aiming for 25-30% gains annually. To get there (30k), he had to sell around 25 1100 puts, giving him exposure to over $3M gold futures on 100k account.

Based on his risk tolerance, this was a lower risk trade. By HIS standards!

 

But these options are 300 days away....That is a LONG time to be outright naked!

Edited November 28, 2018 by cuegis

[garyh 1]

7 minutes ago, shrimpy1 said:

Ok, that makes sense, and jives with what I was able to find. His comment $500 on $1100 strike is misleading cause the $500 is on 100 lot. It's really $5 premium. I guess it was part of the extreme and misleading marketing that has been mentioned many times already. It certainly made me scratch my head a bit.

Not entirely correct. Gold futures have a $100 multiplier. 1 lot of a $5.25 option is worth $525. A 100 lot trade would be $52,500.

[Kim 7,513]

1 minute ago, garyh said:

Not entirely correct. Gold futures have a $100 multiplier. 1 lot of a $5.25 option is worth $525. A 100 lot trade would be $52,500.

The cost of the option is $5, the real dollar cost is $500. It is $500 premium in real dollar terms, but the options price of $5 is really low, considering it is a $1,200+ instrument. This is a true definition of "collecting pennies and risking thousands".

[garyh 1]

6 minutes ago, Kim said:

The cost of the option is $5, the real dollar cost is $500. It is $500 premium in real dollar terms, but the options price of $5 is really low, considering it is a $1,200+ instrument. This is a true definition of "collecting pennies and risking thousands".

I was just pointing out the error about it needing to be a 100 lot. I'm sure not defending sellling it!!! And, I sure as hell am not defending optionsellers.com. I haven't sold a naked short option since 2008, and I will never will again.

[cuegis 683]

Since it is the same multiplier as a stock option (x100), just think of selling an $1100 put with 300 DTE, for $5.00 ($500), on a $1228 stock.

 

Since, with these guys, it is all a game of chance, this might have been one of the "lucky ones" where it actually did expire worthless.

 

But, over a 300 day period, this put might have traded 5.00, 12.00, 1.00, 32.00 etc...and ultimately expired worthless.

It's not about where it expires, it's what did it do during it's lifetime!

 

 

[FrankTheTank 839]

Sorry to hijack this thread but I was thinking about OptionSellers on my drive into work this morning.   If I understand their position correctly, they were selling naked calls on /NG.

 

I am somewhat new to options but this just seems completely insane.   Assuming they had a strong bearish case for /NG, why not buy puts which would be risk-defined vs. selling calls?   This is an honest question.  Were the premiums richer or something by selling the calls or could you get more leverage this way?

 

[Kim 7,513]

As their name implies, they like to sell options not buy them.

In his interview from couple years ago, James Cordier said: "Once I realized that 80% of them expire worthless I started selling commodity options instead of buying them."
 

[cuegis 683]

49 minutes ago, Kim said:

As their name implies, they like to sell options not buy them.

In his interview from couple years ago, James Cordier said: "Once I realized that 80% of them expire worthless I started selling commodity options instead of buying them."
 

He didn't seem to understand that, even if a large percentage of options expire worthless, that piece of information has no value, or relevance to anything.

An option might start out at $5.00,and throughout it's lifetime, trade at $1.00, $12.00, .50, $22.50 etc...and then expire worthless.

He seems to have either no understanding of, or pays no attention to, any sort of options pricing, IV etc.

Also, there is no form of risk management of any kind once these positions are put on.

They either expire worthless, or you are dead, as in the recent debacle, where he sold far OTM calls on gas, and puts on crude, for pennies, where IV wasn't even relevant.

 

You open an account, and he just sells far far OTM strangles, and hopes the "statistics" will work out, and he will beat the odds!

He actually got lucky, and did beat the odds for a few more years than he should have.

Which means he was very due for this situation.

 

Even if he wanted to make his outrageous commissions, for his superior expertise, and still behave irresponsibly, all he had to do, to not lose his company and have a total blowout, was just sell OTM verticals.

At least he would have had some form of being stopped out of a black swan.

[FrankTheTank 839]

Yeah I just don't understand this.   I have only been trading options for a few months but even I know this is a completely crazy way to trade.  At least if he was selling puts your loss is limited because a stock cannot go below zero but to sell naked calls with leverage, wtf.   Is there a more risky strategy than that?

 

If he wants to sell naked calls in his own account more power to him but to trade other people's money this way really is disturbing.       

 

 

Edited November 29, 2018 by FrankTheTank