The Options Market Still Isn't Giving Away Free Money


Yesterday during the commercial breaks on Bloomberg TV, Charles Schwab was showing video from some sort live conference or webinar with the hope that you'd go to Schwab's website to watch more. In one of these infomercials there were two guys talking about the options chain for Nvidia (NVDA). They were looking at pricing for selling a straddle on the stock. A straddle involves buying or selling a call and a put that have the same strike price. They were talking about selling an at the money straddle. Both the put and the call were in the $10 range so with the stock around $200 you could sell the straddle for about $20 and still be profitable so long as the stock didn't drop more than 10% by the close of trading today! Free money!

Yesterday after the close NVDA reported earnings and here is what happened (screenshot taken yesterday afternoon after the report).

As of this morning the stock was up a little from there to $168. There is still a lot of time before the close so anything could happen between now and then but this sort of thing happens quite a bit in the options markets. A trade will set up that looks like free money and then something like this happens. The options market somehow knows what will happen. When you hear the phrase that the "market is pricing in a..." this is what that means. Somehow the market knew that NVDA could move more than 10%, regardless of direction, in pricing that straddle.

Options prey on peoples greed, they often appear to be a means to quick profit and while that can be the case there are many times where they are not. The options market has a lot of moving parts, it is very complex. A great saying about options trading is that "making money on your first options trade is about the worst thing that can happen" because you then are tricked into thinking it is easy.

If your participation in markets is focused on just trying to have enough money for your retirement then you probably don't need to be involved with this market.