Photo by Susan Matthiessen
I’ve tried to write this article about Options trading a number of times now but I have always had to scrap my draft. My goal with these articles is to educate people about highly complex and abstract institutions surrounding our modern financial world, using analogies and fables that the average reality tv viewer would understand.
And the problem is… Options just don’t fit any analogy very well.
Sure, I can talk about people trading corn, like every dry university lecturer out there who secretly wished they had followed their passion, ignored their mother and become a travelling trapeze artist with that Croatian girl Petra they met back in college… But the thought of discussing corn prices is so boring to me that I had to create an imaginary backstory for the imaginary person who would be willing to talk about it.
What analogy could I possibly use to catch the attention of the kind of person that watches the Bachelorette unironically.
…
…
Ok, so you’re the bachelorette.
Your makeup is exquisitely caked on, you have some ridiculously WASP-y name that is spelt wrong like Mykenna, Jayde or Krystale, and you are constantly telling the audience that you are ‘here for the right reasons’.
Now for anyone that doesn’t know the rules to the bachelorette… do you live under a rock?
Each week a number of potential suitors, all named Chad in my head, vie for the chance of dating the bachelorette, and each week the bachelorette is given a number of roses slightly less than the number of suitors to hand out to the Chads. Whichever Chad lacks a rose by the end of the night is eliminated, making the whole farce the most publicly humiliating game of musical chairs imaginable.
Now, you find yourself drawn to a number of the Chads, but there are two special Chads that warrant your attention. Both are funny, are incredibly kind and thoughtful, and seem to be paying attention to you even when the cameraman has to stop filming to duck off to the loo.
But neither are perfect. Chad A is very attractive, but he’s constantly trying to bring up his love of Warhammer figurines and cryptocurrencies.
Chad B is the perfect man… in the body of a tubby child. He pays no attention to how he looks and you can’t have a terrific 10 like yourself dating a turgid 2! The audience at home would riot!
So, what do you do? Neither of them is right for you.
Yet.
You know that this show lasts for another 10 weeks and so you have plenty of time to see if they improve. So, you decide to give them both roses, for now, even though you wouldn’t yet be willing to date either of them.
What you are doing is giving yourself the option of changing your mind and dating either Chad sometime in the future, without having to invest much into them right now.
After all, the only thing you need to do with these guys for the next 9 weeks is give them a single rose. Pretty cheap deal if you ask me, which I know you didn’t.
In investing lingo, these two options would be known as ‘buying call options’.
So, the weeks pass and you keep an eye on the two Chads from a distance whilst dating the other faceless men who work in something to do with real estate development and all sociopathically assure you that they are “at the end of the day, 100% invested in this relationship and you can trust that because I’m always 100%... 100%.”
The final week arrives and there are only 2 men left. Chad A, with his love of Space Marines and Doge coin, and Chad B, with his inverted jawline and his office worker physique.
Chad A has unfortunately not changed a bit. He is still trying to convince you that Uniswap will be the next Shiba of Ethereums, or whatever… so he’s going to have to be a no. No matter, all you have to do is not give the guy another rose and all your interactions with him will be over.
And really, what have you lost? 1 rose a week? Who cares? I can buy a dozen at my local Coles for $15.
You still have the option available to make use of this ‘call’ option, but you have no intention of doing so. Instead, you are more than happy to let that call option ‘expire’.
Next is Chad B and dammmmmmmn that boy be fine. Over the last 10 weeks, Chad B has been hitting the Boxfit classes hard and it shows. My man looks like a Hemsworth brother.
Suddenly you are incredibly thankful that you invested all those roses since week one. If you hadn’t, you’d have had to learn what a Tryanid is… and you really didn’t want to do that.
You still have the option to make use of this ‘call’ option and it looks like a great idea so you ‘exercise’ the option.
Without a second thought you give him the last rose and you get married at first sight or move onto a farm together or something. I don’t know, I’ve never managed to make it to a bachelorette season finale.
Let’s say you thought the stock price of Amazon was going to go up in the next 10 weeks. Maybe you heard a rumour that Jeff Bezos found aliens during his last space trip and is going to employ them in his warehouse for less than minimum wage, like a bald Willy Wonka.
Meanwhile, Boeing has announced that their new jet engines can be run solely on the tears of men’s rights activists. Cunning as you are, you reckon that its going to affect the stock price.
Because math isn’t your strong suit, let’s say that both companies’ shares are $1000 per share.
You could buy $1000 of Amazon and $1000 of Boeing immediately, cross your fingers and hit refresh on finance.yahoo 16 times a day. But you don’t want to risk taking a second mortgage out on a rumour.
Instead, you could buy a call option (betting that the price will increase in the future) for a much cheaper price (let’s say $100 each). Instead of owning the stock, you have paid for the option to buy the stock at $1000 per share at a later date.
This is the equivalent of giving each person a rose but not yet being willing to invest in a date.
10 weeks pass and you check in on the two companies.
Chad A-mazon’s share price has tanked. It turns out the aliens were from a particularly intelligent species of cactus but still could not cope with the harsh conditions of an Amazon warehouse.
The share price is now only $50 a share. Much like Chad A, you could still use your option to buy the shares at $1000 per share, but that would be about as wise as a particularly unintelligent cactus.
You let your option ‘expire’ and you have lost your $100 initial investment.
Next is Chad B-oeing which is actually doing much better. Someone on Reddit posted a photo of a woman achieving something and so, the tears of men’s rights activists are overflowing.
Suddenly Boeings share price is worth $1500 per share.
Much like Chad B, you’re really glad you bought that call option, because now you only have to pay $1000 for something that now costs $1500.
Sure, you still have to pay the fee of $100, but that’s still a saving of $400.
Without worrying about any of the boring maths, what this meant was that if you had just bought both companies, you would have lost $550. If you bought options instead, and bought when the time was right, you made $300.
This is barely scratching the surface of options trading and to be clear I don’t give financial advice, because these things can get very complex… hell, they often use Greek numerals like Theta and Delta, which who even knows… but if you’re ever confused, just think this…
Would the Bachelorette have been better off if she didn’t eliminate any of the contestants and just dated them all?