Bay area rent prices have come down a bit in the last 6 months - doesn’t necessarily mean housing will follow as rent goes before owning but it’s at least a strong sign that housing won’t continue to chugg up creating the disparity of rent/mortgage prices that it had 15 years ago.
Just to put some numbers to it: Let’s say you own a stock currently trading for $50 and you want to sell it for $70. The two choices you’re laying out are:
A) Sell a call with a strike price of $70, say for a premium of $4.
B) Set a sell order for $70.
It seems reasonable to think that option (ha!) A would dominate. Because if the option is exercised, you get the $70 per share exercise price plus the $4 per share premium. And if the option is exercised, you know the stock must have been trading at least $70 (otherwise it wouldn’t have been exercised). So if you had chosen option B, your sell order would have been triggered, but you’d only walk away with $70 (and no premium).
A couple of reasons why that’s not true:
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The stock price could hit $70 prior to option expiration, but subsequently decline so that it’s only worth $60 at expiration date. If you had chosen option A, you’d be left with a share of stock ($60) plus the premium ($4). But if you had chosen option B, the sell order would have been triggered and you’d have $70 in cash.
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The stock could gap up on really good news. (Remember you think this is somewhat likely because you’re anticipating the stock could go up as much as 40%.) Say it closes one day at $68, the firm announces quarterly earnings, and it opens the next day at $75. The next day, your sell order is going to get triggered. But it’s not going to result in selling at $70. Instead, it’s going to result in selling at the market price conditional on the market price being at least $70. So in this case, your limit sell order would result in you getting $75 in cash, but your covered call scenario (assuming it gets exercised) results in you getting the $70 exercise price plus the $4 premium.
There are a lot of different ways to structure options transactions that sound like super free money:
- Instead of setting a limit sell order, sell a covered call!
- Instead of setting a limit buy order, sell a put!
But there’s no free money in the option market, and it’s always useful to think about exactly what your payoff function is under different price assumptions.
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There are 2 kinds of options, American and European. A European option can only be exercised on the expiration date. An American option can be exercised at any point up until the expiration date. So it’s possible that if you wrote an option (because you would be writing an American option), that the option holder would exercise if the stock price hit $70 at any time before the expiration date. But in practice, it’s ~never optimal to exercise an option prior to expiration - you’re ~always better off selling the option on the open market. So you should assume that any option you write will be open until the expiration date regardless of the price movement of the underlying stock. Which gives rise to the point in my earlier post - that it’s very possible to have a stock breach your target price and yet have an option at that target price go unexercised.
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As a side note, think about how terrible this strategy would be:
- Buy a call option with a strike price of $X.
- If the stock price even momentarily touches $X, exercise the option immediately.
The only two possible outcomes here are:
- The stock price never hits the strike price, so you lose the premium paid to purchase the call option.
- The stock price does hit the strike price, but you exercised as soon as it did so. So you paid the premium amount for the privilege of buying the stock at exactly the market price.
The only possible way that this strategy can ever be profitable is if the stock price gaps up at the exercise price, so you end up paying slightly less than market value at that point.
But it’s an obviously money-losing strategy overall. Which is why you should never expect an option to be exercised immediately upon the stock touching the strike price.
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Is there any fundamental reason not to short ZM?
Other than it dropping nearly 40% from its highs 8 months ago, nothing would personally convince me at this point to buy it now.
Did cruising get outlawed today or something?
Depends if it’s outside the high school or not, and whether or not you’re in Florida.
apparently travel/reopening got crushed across the board due to SE Asia lockdowns (?)
tech is going wild too
Unpopular opinion: we are incredibly fortunate to be able to invest in US companies at close to zero cost. As much as we rail on the SEC, disclosure mostly works. Stock market returns are comparable to anything else, with instant liquidity. I’m legitimately thankful for the opportunity to invest in these companies, as messed up as they obviously are.
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Fantastic article here about yet another rich failson (in this case faildaughter) MBA startup that imploded.
The greatest part was definitely Burnenko outlining the basics of the business as below.
What this points to is something so dismally familiar in the world of consumer goods that it scarcely warrants mentioning in Insider’s exegesis of Great Jones’s season of turmoil, since not only is it not unique to this particular company, it’s standard for virtually anything you might buy for yourself or your home in 2021. Great Jones doesn’t make cookware. It was founded by a digital media veteran and a business-school graduate. Great Jones doesn’t make anything . None of its employees make tea towels or Dutch ovens or bakeware. Making cookware and kitchen goods was never even part of Great Jones’s business.
What Great Jones does is, it contracts some other, less glamorous company, one likely without a slick social-media presence, to make cookware and other products bearing Great Jones branding. In effect, it buys cheap consumer goods, and then sells them at a markup to people shopping for cookware that will make them feel like they are pals with Alison Roman. Given that Great Jones operates out of an office in the Flatiron district of Manhattan, and that it does not have a physical retail shop, and that the products it sells are manufactured by factories in places like Guangdong and Tianjin, it’s something of a stretch to say that Great Jones even sells the cookware, insofar as someone might take that statement to mean that Great Jones ever meaningfully possesses the tea towels and cookware. Great Jones does not even ship the cookware, not even in the lesser sense in which the schmo who physically boxes a Dutch oven and puts packing tape and a shipping label on it and drops it off at UPS or wherever can be said to be involved in shipping it. It’s very probable that no one in the direct employ of Great Jones even so much as touches or even sees the overwhelming majority of the goods off whose transfer from the people who made them to the people who used them to cook roast chickens its founders profited and grew famous.
The absolute most generous true description you can apply to Great Jones is that it conducts arbitrage on cheap pastel-colored cookware with flimsy enamel cladding, made by other companies with less robust brands. But the truest thing you can say is that Great Jones, like so many other companies, is a skimming operation: It launders somebody else’s actual manufacture through its own aggressive branding, and takes a cut of the proceeds. The company can have the best quarter of its existence despite having no full-time employees, despite having literally no capacity to do anything other than exist as a legal fiction , because it never actually did anything. Anything! It never did anything .
It has this in common with the companies whose brand names adorn probably a healthy majority of the goods in your home. In this respect Great Jones’s operators are not uniquely scummy frauds; in fact they’re incredibly mundane in their scummy fraudulence, just a two more rich kids who learned how the global economy sluices money toward money, one of the many ways to make the world pay them for having been born on a pile of cash. They needn’t have bothered.
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In my lifetime, people used to buy actively managed mutual funds for 300 bps.
Before that people used to have to buy stocks from lolbrokers for what would be, at minimum, roughly $100 per trade in 2021 dollars.
It is, indeed, a much better world for retail investors.
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Although this is good in a vacuum, think of how much of a boon this is for the “traditional” financial services industry to have these techbros come along and move the Overton window on advisor/dealer securities law compliance. Two years ago the debate was about whether securities regulators needed to dramatically increase the obligation on financial advisors to put the interests of their clients first and basically stop ripping off the retail investor market. Now Robinhood has changed to target back to basic compliance stuff. Regulators get to say “look at all we did to protect investors, biggest fine EVER!” and leave all the problems with the advisor/dealer industry circa 2018 totally untouched.
The wealth management industry is truly an outrage. Their business model is quite obviously to rip off their own customers, it is outrageous. Putting a client in an S&P 500 fund with a 1% expense ratio should be jailable, to say nothing of front end loads.
Edward Jones is a freaking RICO organization, just pure evil.
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I know its easy to just handwave this away with “lol, the olds”, but who actually gives those places money? Why would you possibly engage with a “wealth manager”, what is the product here? Like a special rich people only index fund? I don’t get it at all.
My first real financial professional will probably be a tax attorney.
Right, and now a bunch of poorly informed investors are going to think “Thank goodness I’ve got all my money with that nice fellow Fred down at EJ, not with these bad people on the computer!”
Isn’t this basically how the entire mutual fund industry works?
A nice white male who asks you about your grandkids and gives you “peace of mind”.