I’m old enough to remember the TV show “Love American Style“.
But that’s not the American style I’m talking about. I’m referencing the exercise characteristics of options.
American style options can be exercised at any time. European style options, on the other hand, can only be exercised at expiration.
In most instances, it’s not an issue. But when options go so deep in the money that time value disappears, it can create a problem for anyone who has sold American style options.
And thus, the legend of perfectly named 1R0NYMAN. Who turned a trade he thought had zero risk into a trade that lost -$58,000.
Most of the article is accurate, although no one seems to have the details on the prices of the initial trade, which would help.
And let’s not be too harsh on the 1R0NYMAN. Because we have this gem… The author of the MarketWatch article quoted a supposedly “serious” commenter on the reddit forum. The commenter begins by saying “He bought 4 different types of options that gave him a $300k credit.”
First, you never get a credit by buying an option. That’s a warning flag anyone with knowledge about options should have easily spotted without breaking a sweat.
The other error also involved the description of the transaction as all buys. Are you kidding? The article even posts the picture of the guy’s account showing there are 1,000 option sells.
The trade 1R0NYMAN put on is called a box spread. You don’t buy 4 different types of options. You buy some and sell some.
It also should have been obvious to the reporter that had 1R0NYMAN bought the options, early exercise would have been up to 1R0NYMAN, not someone else.
Kind of 1R0NIC that there’s an article making fun of the newbie who put on a spread that didn’t do what he thought it would, and yet the article itself had an error that described the trade inaccurately.
Meanwhile, in what is perhaps one of the most deliciously timed coincidences ever, there is this article in the Wall Street Journal (sorry, it’s behind a paywall for subscribers only) about millenials and investing. The title?
Apparently millenials like trading with real money… before they understand what it is that they’re actually doing.
Original post on reddit: I don’t know when to stop..