Outright Not Right and More TV Stupidity

The option "experts" on financial TV programs drive me crazy sometimes with their misinformation and ignorance. Here's a couple examples: "I'm bullish on X so I bought calls" or "I'm bearish on Z so I bought puts".  Haven't they ever heard of time decay?

The single greatest complaint I hear from people new to options goes along the lines of "I thought Q was going higher, I bought calls, Q went higher and I still lost money. How did that happen?"

Because options are a wasting asset, they decay over time. And time decay happens whether the market is open or closed, 24/7. Don't forget, the 100 call is still worthless with the stock at 100.

Also, you must consider implied volatility . If option volatility declines the option loses value even if the direction is correct. So, let the (option) buyer beware!

What then to do? Spread 'em! If you you're' bullish, buy a vertical call spread. If  you're bearish, buy a vertical put spread. Yes, you cap your profit potential, but you also help offset time decay and volatility risk.

Another piece of talking head stupidity goes like this: "Someone bought 1000 puts on X, they must be very bearish on the stock"  Wrong!! They might be very bullish on the stock, bought a block of 100,000 shares and bought the options as downside insurance.

Or, "A fund bought 1000 calls on D they must think the stock will roar higher" Wrong! Maybe a hedge fund sold a block of 100,000 shares short and bought the calls as upside protection.

You cannot draw easy conclusions from large option trades. Don't let these idiots mislead you. Why the networks give them air time is often a mystery to me.


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