How much initial investment do you need to buy puts and calls?

erudec

Is it an activity that a small-scale investor can partake in without being murdered with transaction costs?

I understand that OTM derivatives are the core of Black Swan investment. I know that large funds can essentially ignore those costs as they are a tiny fraction of one per cent of their spend, but for those of us going it alone, it's no good unless the transaction costs are small enough to allow some profit to slip through.

dickface

Well i would think since the swings can be very large with these instruments the transaction costs are actually less important than long positions. I don't know or sure though...

Mr_Roger_Bongos

What's your knowledge of options like?


 From a trading perspective, the idea behind the black swan approach is that the market views an event happening as extremely unlikely.
Because the market doesn't think the event will happen, the option or trade to bet on the unlikely event is considered 'cheap', akin to a 'long shot' in sports betting.
Here's what i'm getting at:
[*]If it's truly 'black swan', then backing your idea in the options markets should be very cheap and won't eat through your capital
[*]If it's contrarian, but the market thinks it could well happen e.g. a market correction, then it will be more expensive and will quickly eat through your capital 
As an example of this, i thought Tesla was very expensive in 2017. It had been on a complete rampage up in price and had a ridiculous valuation. So i investigated put options. Long story short, they were very expensive. To break even Tesla would have needed to get to $290 by Jan/Feb time and i didn't think it would fall much further than that for me to actually get into profit.
It was a good idea, but the market had priced in that possibility and made it prohibitively expensive to pursue that idea.
I could have shorted it instead, but the beauty of options is that paying the premium is your maximum loss, whereas the way Tesla was going i could have easily been stopped out of a short position.
To affect a Black Swan trade, you need to find something that's priced really cheaply (because the market doesn't think it will happen) and then you need your idea to be right!

erudec

Mr_Roger_Bongos wrote: »

What's your knowledge of options like?


 From a trading perspective, the idea behind the black swan approach is that the market views an event happening as extremely unlikely.
Because the market doesn't think the event will happen, the option or trade to bet on the unlikely event is considered 'cheap', akin to a 'long shot' in sports betting.
Here's what i'm getting at:
[*]If it's truly 'black swan', then backing your idea in the options markets should be very cheap and won't eat through your capital
[*]If it's contrarian, but the market thinks it could well happen e.g. a market correction, then it will be more expensive and will quickly eat through your capital 
As an example of this, i thought Tesla was very expensive in 2017. It had been on a complete rampage up in price and had a ridiculous valuation. So i investigated put options. Long story short, they were very expensive. To break even Tesla would have needed to get to $290 by Jan/Feb time and i didn't think it would fall much further than that for me to actually get into profit.
It was a good idea, but the market had priced in that possibility and made it prohibitively expensive to pursue that idea.
I could have shorted it instead, but the beauty of options is that paying the premium is your maximum loss, whereas the way Tesla was going i could have easily been stopped out of a short position.
To affect a Black Swan trade, you need to find something that's priced really cheaply (because the market doesn't think it will happen) and then you need your idea to be right!

If I read Taleb correctly, it's black swan investing if and only if there's no way to lose money apart from your initial investment.

Do you know what the transaction costs are in Ireland? I am looking for practical information, if anyone is privy to it?

Do brokers charge a flat fee per trade, or a percentage, or a bit of both? I presume that there is a minimum sum that you need to pay to buy any options at all. If you know what that is, that'd be brilliant.

Mr_Roger_Bongos

erudec wrote: »

Mr_Roger_Bongos wrote: »

but the beauty of options is that paying the premium is your maximum loss,

If I read Taleb correctly, it's black swan investing if and only if there's no way to lose money apart from your initial investment.

That initial investment is the 'premium' i mentionned above. This is nothing to do with Black Swan, it's basic options theory.
The premise of Black Swan is that everybody thought the statement 'All Swans are white' was a fact. Until they found a Black Swan in Austrailia.
Employing a Black Swan investment approach involves finding events that people think are extremely unlikely to happen (and so are cheap to buy - Like the CDS buyers in 'The Big Short') and trading that idea. Options are an easy way to employ that strategy.

erudec

Mr_Roger_Bongos wrote: »

That initial investment is the 'premium' i mentionned above. This is nothing to do with Black Swan, it's basic options theory.
The premise of Black Swan is that everybody thought the statement 'All Swans are white' was a fact. Until they found a Black Swan in Austrailia.
Employing a Black Swan investment approach involves finding events that people think are extremely unlikely to happen (and so are cheap to buy - Like the CDS buyers in 'The Big Short') and trading that idea. Options are an easy way to employ that strategy.

Do you have any information about the OP?

That's what I started the thread for. All that other stuff is interesting but really irrelevant until I know the initial investment needed.

dude_abided

I'm sure it doesn't need to be said, but when employing the use of options outside of a hedging capacity, you'll want to have done your research. 50x so if you want to use margin to gain a greater exposure.

Can be extremely useful, but also extremely risky for uncovered.

erudec

dude_abided wrote: »

I'm sure it doesn't need to be said, but when employing the use of options outside of a hedging capacity, you'll want to have done your research. 50x so if you want to use margin to gain a greater exposure.

Can be extremely useful, but also extremely risky for uncovered.

That's what I am doing. It would be fantastic if people who don't know or don't want to answer wouldn't post on the thread.

Mr_Roger_Bongos

erudec wrote: »

It would be fantastic if people who don't know or don't want to answer wouldn't post on the thread.

lol you're in the wrong place to avoid that.
Answer - As far as i know there are no options brokers in Ireland. For US listed shares there are plenty of companies - E-Trade, Charles Schwab, Tradestation. For global - Interactive Brokers (takes $10k to open account with them)
Options transaction costs are based on the broker fee (usually less than $10 dollars a trade) + the premium on the option which can vary from $100 to $5000 and beyond depending on the price of the stock and the strike price you want. The cheaper the share, the cheaper the option usually.