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#393 - The Basic Business Model Behind Options Trading As A Professional: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the basic business model behind options trading as a professional. Here's the thing. Every business has a definable...

#393 - The Basic Business Model Behind Options Trading As A Professional: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the basic business model behind options trading as a professional. Here's the thing. Every business has a definable...

FromThe "Daily Call" From Option Alpha


#393 - The Basic Business Model Behind Options Trading As A Professional: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the basic business model behind options trading as a professional. Here's the thing. Every business has a definable...

FromThe "Daily Call" From Option Alpha

ratings:
Length:
6 minutes
Released:
Oct 20, 2018
Format:
Podcast Episode

Description

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the basic business model behind options trading as a professional. Here's the thing. Every business has a definable profit or edge that they are going after and all it comes down to is effectively spread. You can think about every single business, every single possible business out there and what they’re all going after is some conceivable spread between cost and revenue, so somewhere where they can make money as a profit. In case of trading, specifically as options traders and option sellers, what we are going after, our primary advantage is implied volatility and the edge that is derived between the expectation and the actual volatility of underlying prices. We have no discernible edge in market direction, so that’s something that people oftentimes don't understand, is that we’re not trying to go after a directional edge in the market, we’re trying to go after an implied volatility edge in option pricing. Now, fundamental stock investors are trying to go after an edge that is different between market price and the fundamental value of the company. It's no different. They’re just going after it potentially a different way and they're not necessarily going after it all in a directional fashion of like only the stock could go up. Sometimes they might sell stock that is overpriced compared to its fundamental value which could be much lower. That's where most trading happens, is within this edge. Now, I just want to give you some other examples, so that you understand that it's all the same thing. It's all just trying to go after the spread or this edge in many businesses. Now, a service-based business like a painter or homebuilder is trying to go after an edge between the cost of labor and tools and supplies and how much somebody would pay to have their house built or their house painted. It's all the same thing. They’re just trying to go after that spread. In e-commerce, if you're selling towels or chairs or jeans or something online, you’re trying to capture a spread between how much you have to manufacture or buy or build a product and how much you can sell it for in the market. In restaurants, the food and the service and the experience allows you to charge a premium or a spread above and beyond the actual cost or raw ingredients of the food and the actual entertainment or whatever is associated with the restaurant, like the napkins and the silverware. Restaurants are just trying to charge a premium compared to what it actually cost to prepare the meal. In insurance, we see the same thing with policy pricing. Insurance companies will price an insurance policy at a likelihood that you're going to get in a car accident or your house is going to burn down and you’re going to die sooner than it might actually end up happening. That edge in pricing comes from the expectation that you have an event happen sooner than what they know might actually happen in the long run. Casinos do the same thing where they have an odds edge in the game. They have some sort of mechanism in all of the games that gives the casino a slight edge in pricing or a slight edge in the win rate or the payout, something that allows them to create a spread between you and them and allows them to generate a profit long-term. Now, what you can see in all of these things if you really look at all of these disciplines, every type of business out there, is that no business is based on one transaction, no business is based on one particular person making a transaction and then causing a huge profit. It's all based on repetition, selling a lot of homes, selling a lot of chairs or towels if you're in e-commerce, feeding a lot of people if you’re in the restaurant business, writing a lot of insurance policies if you’re in insurance, getting a lot of people to play games if you're in the casino business. It's all based on probabilities and n
Released:
Oct 20, 2018
Format:
Podcast Episode