Today I read a post by 
Today, I noticed the Smart Money buying a boat load of call options that expire in January. In particular, I'm talking about the Smart Money buying over 200,000 call options at the $53 strike price.
January Options Prices
Chart of this ETF
So for fun I want to add my comments to this post. I am a options spread trader turned cryptocurrency trader. So I share my analysis of this trade here.
First of all buying and selling call options is the most popular form of options trading, buy low and sell high with lots of leverage.
In the option trading world, buying a call options is like a lottery ticket with much, much better odds of success. A lottery ticket sometimes has a one in a hundred million or 20 million chance of success. That’s like small as a Satoshi. The odds of losing are 19,999,999 with 1 chance of winning. Winning at option buying is somewhere between 5-95%, so with much better odds then lottery tickets it’s popular.
Trade
When I look at this trade, I see this:
This is phenomenal with 200,000 plus contracts!! Crazy, even Apple, which has huge contract numbers traded daily doesn't hit those numbers....
Crunch some numbers
To enter this trade:
You buy at 53$ calls for 0.49 USD or 49 cents a option or $49.00 per contract, controls 100 shares. = 49$/c
Next look at the strike price $53 and the price of the underlying is at 50.33,
To Win:
The price of the underlying has to rise from current price 50.33 to above $53 the strike price. Or $53.01 to be above the strike price and win
How to Calculate Profit
First: You subtract minimal winning price from current price if you win:
Minimal winning price minus current price equals $53.01-$50.33 = $2.68 rise in price.
Second : Add current price of option to minimal price rise to win= 0.49+2.68 is $3.17 the new price of your $53 dollar option.
How leverage affects option price:
The option cost you 49 cents or 0.49
If the underlying rises in price $2.68 as above the option price will rise close to $2.68.
0.49+2.68 is $3.17 the new price of your $53 dollar option.
In the same way 0.49 per share = $49 per contract of 100, the new price of $3.17 per share equals $317.00 per contract.
More Multiples
You invested $49/contract and earned $317/contract
If you invest 10 times as much, you win 10 times as much.
10 contracts cost 490$, so potential loss is $490 and potential gain $2660 or 2680-490/490=446.94% ROI
Pretty crazy ROI
But this is important stuff below
Probability of Success or wining
If you invest options you need to learn to read the charts and do the math.
The probability of this ETF 53 dollar strike call option finishing in the money, meaning it’s price being above the strike price of $53.00 or at least $53.01 appears to be 21%.
That means the chance of success is 21%...
But the chance of failure is 100-21 or 79%
OR A 79% chance of being out of the money and losing all your investment.
I don't know the underlying and haven't studied the chart, but you are basically risking 49$ to win 266$ with a 21% probability of success.
But lots of options traders will take this bet with small trades of 1-10 contracts.
Because the odds of winning 21% are basically 1 in 5, but the profit margin is 4.5:1.
You risk 1$ to win 4.5$, thus is much better then the Lottery where you risk one dollar but your odds are one out of 20 million.
The tricky part
As you can see the math says 4 times out of 5 you loose. But the math or probability of success also says 1 time out of 5 you win. That’s where your research, called due diligence and your experience comes into play.
You don’t have to stay in options until the end, you can exit early for partial profit. Many traders exit when they have reached a certain percentage of profit because prices fluctuate. Something which is a winner one week could be a loser next week. Options don’t convey ownership like stocks, they convey control for periods of time, afterwards those time periods they are worthless. It’s fun and exciting, but like all investments they have risk.
When you see unusual options activity like this: 200,000 contracts, you know something motivated those people who bought 200,000 contracts!
But for every buyer there is a seller. So there is an equal amount of people who think it won’t close above 53.00.
Final Words
This article and Rollands article are not investment advice. We are not financial advisors. You should do your own research and only invest money you can afford to lose.
This type of trading commentary is an experiment to see if it would be educational to piggyback on
Let me know if you think it’s valuable. This is Leofinance a place to share our insights and expertise.
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