You don't just need to decide that Nvidia is overvalued by the market and will crash in price to make money on a short position.
You need to time the crash. If you're off, it could still crash and you could spend more money sustaining the position than you'd make. Or you could end up getting margin called, not just by semi-impotent private investors as Michael Burry was, but by the platform you're trading on itself. "You've lost too much money so far based on the current valuation, so we're going to seize this option and you'll owe us the balance". Trading at high leverages with Daddy's money, people on /r/wallstreetbets sometimes get margin called and end up owing much, much more money than they put in.
Before putting any money in, make damn sure you're able to write at least a 101-level summary of the different types of trades.
I did this in February 2020, and then bet a modest amount on the proposition "People keep saying that COVID isn't going to be a big deal, and I think they're very wrong". I still managed to lose out because I didn't foresee the Federal Reserve bombing the market with freshly printed cash. I lost it all. But what I didn't do, is end up owing millions of dollars I don't have to the brokerage, because I stuck to buying put options rather than selling call options or shorting stocks outright.
Timing aside? To what extent the Federal Reserve would intervene in an NVDA price collapse is an open question, because at this point a collapse in AI investment would threaten the solvency of entirely unrelated financial institutions.
These are puts, you buy them, they have a fixed expiration date at which point they will be worthless if the price is above the strike price.
Fixed down side, upside is $100 per contract per dollar the stock is below the strike at expiry. You can also sell them before then, and price depends on time to expiry, volatility, and distance to the strike price. See Black-Scholes model for more info.
> If you're off, it could still crash and you could spend more money sustaining the position than you'd make.
And in Black Scholes this is called Theta Decay. In any form of short, there are maintenance costs, and maintenance costs roughly scale with the risk-free interest rate (usually assumed to be roughly the Federal Reserve's overnight lending rate)
Theta Decay is above-and-beyond the risk-free rate because you're also losing time-value. So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose.
> So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose.
I think the idea is, as a put buyer (market taker), this has already been baked into the option premium. The only "maintenance cost" in the sense of a cost that adds to an open position is from interest on margin loans.
There would be a maintenance cost from rolling the position into a later expiry, but I think the impression is that this is a precise single bet.
EDIT: You're spot on about opening a position being a sort of cost too, due to missing out on risk-free returns. This is especially important for hedging. Less so for a directional bet.
If you want to minimize loss of time value, you buy 2 year LEAPs, and then as their 1-year approaches, you sell the LEAPs and roll them back into 2-year LEAPs. Theta rapidly changes as you grow closer to expiration.
No one should be buying and holding just one option. Anyone who understands Black Scholes will be selling/buying and exchanging options as time goes on.
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Buying puts is a bull-bet on Volatility and bear-trade on the underlying stock, while losing Theta (largely based on expectation date. Longer means less Theta decay).
Selling calls is a bear bet on volatility, bear bet on underlying while gaining Theta in value each day.
And then there are the many combination trades that are available.
In any case, I don't think any sophisticated trader does the strategy you are assuming here. The sophisticated strategies involve selling and renewing your options as time moves forward / and or the stock price changes (to keep Delta withing appropriate levels).
No, but everybody here is some random guy, being tempted to mirror trades by the superhero investor they saw in that movie. And that movie depicts Burry trying to outlast the market in this sort of situation, resorting to quasi-fraudulent ideas like taking the phone off the hook; Those ideas are not available to us at all, because the online broker would just seize the account.
You are right about timing being key when buying put options but...
> Or you could end up getting margin called
Completely false
Buying puts is a short position and does not require any further maintenance costs
Yes, theta decay is a thing but stating you can get margin called or there is any level of maintenance required is completely wrong and shows a total lack of understanding of the very basics of options
You can make a lot of money on options even if the price doesn't collapse completely. Options dramatically amplify movements of the underlying price. Even if the market swoons a little bit, he can cash out for a big profit, as long as it happens before his positions expire, even if it doesn't hit his strike price.
You need to time the crash. If you're off, it could still crash and you could spend more money sustaining the position than you'd make. Or you could end up getting margin called, not just by semi-impotent private investors as Michael Burry was, but by the platform you're trading on itself. "You've lost too much money so far based on the current valuation, so we're going to seize this option and you'll owe us the balance". Trading at high leverages with Daddy's money, people on /r/wallstreetbets sometimes get margin called and end up owing much, much more money than they put in.
Before putting any money in, make damn sure you're able to write at least a 101-level summary of the different types of trades.
I did this in February 2020, and then bet a modest amount on the proposition "People keep saying that COVID isn't going to be a big deal, and I think they're very wrong". I still managed to lose out because I didn't foresee the Federal Reserve bombing the market with freshly printed cash. I lost it all. But what I didn't do, is end up owing millions of dollars I don't have to the brokerage, because I stuck to buying put options rather than selling call options or shorting stocks outright.
Timing aside? To what extent the Federal Reserve would intervene in an NVDA price collapse is an open question, because at this point a collapse in AI investment would threaten the solvency of entirely unrelated financial institutions.