You have considered a very simplified case where the investor waits for expiration. But if he doesn't, he may be surprised to see the option price changing in a not so simple way) Even if we don't talk about Greeks, it would be nice to draw the payout schedule as a curve that converges to this flat line over time. At least that's not all what one should know ) by the way, the chart is looking like ReLU activation function, just noted)
Hi Ritvik, Can you please make a video on how to use one time series to predict another? That is, if two time series show great results on Granger causality test, how to predict the first time series using the second? It would be great if you used two stocks or other instruments as example. I am new to this and absolutely love your videos. Hope to keep learning from you.
You may want to mention that you can't really buy an option on a single share - a contract is almost always on a lot (100 shares). so that $18 is really $1800. when you excercise you have to have enough cash or margin(credit) to pay $20,000 to purchase 100 shares of Tesla. ps i 16:01 cannot wait for the second part of this video when you talk about pricing and why it's almost never worth to exercise early.
Yup this is a great point. I did go back and forth on including it in the video but decided to stick to the theory for now and bring up the logistics in future vids. Thanks for raising this!
technically that's not why options are so risky even though what has been explained is indeed the cons of using leverage (options). The reason why options are so risky is almost always related to the other greeks with the most important one being related to time. Options are risky because they are time gated, meaning not only you have to be right on the price of the underlying but also on the timing. This doesnt happen to stocks. Other risk also involve not understanding payoff structures and being on the wrong side of an option trade with potential unlimited gains or loss on assignment.
I have a question, for the 2nd page. The return on investment for the call option should be (p-218/218), as I pay the premium and for the stock price, no?!😅
That's a great point. You are right that if you act on the call option, there are two payments, the premium and then the amount you pay for the shares. But we assume in this case that the shares you buy are immediately sold so the amount paid for these shares are not part of the "investment" in this whole process. It's just the premium that is "invested".
In our scenario, would the investor have been -100% from the start? If all $18 was spent on the premium, and the price of TSLA rises to where they want to exercise their right, they would need additional funds but they spent it all on the premium? I’m not sure if I’m overthinking this or missing something.
You’re making a valid point. We do assume that the investor has sufficient funds to actually act on the call option. In terms of return on investment, however, the buying and assumed immediate selling of the stock is considered an instantaneous transaction so the only funds “invested” are those used to cover the premium.
