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Comment by tempsy | Hacker News Reader

The person that got $1M has very limited upside though because they sold deep in the money call options on the same stock that they own, Ford ($F). This is known as a covered call e.g. as the price moves up your stock is worth more but the premiums on the call options you sold increase as well, limiting your profit.

On the other hand, if the stock tanks you will still lose, though the premiums from your options you wrote will cushion your downside.

The Youtube guy owned naked puts, which is far riskier than covered calls.

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Selling deep ITM options is one step in the "hack" to create infinite leverage / infinite buying power.

Buying weekly OTM options is the "yolo" they do once they mess up Robinhood's margin into giving them hundreds of thousands of USD of buying power.

Right, but looking at the $1M guy's positions he doesn't own naked calls/puts it's mostly a covered call on $F.

That's actually super smart.

If you ever get such ridiculous margin you should buy things that have high chances of very small profit, such as selling deep OTM options or credit spreads. Wait for expiration, unfold the scheme, collect your profits, disappear.

If you leverage up to $1M a small 2% profit with 95% chances of success is an easy thing to achieve by selling options, and would pay you $20k instantly. In the 5% outcome your margin will just totally blow up, like LTCM in 2000, or the whole idiotic concept of Value-at-Risk in 2008.

This is bad advice. Assuming your plan is not to pay back if your $1m goes bad, your edge comes from that scenario, so you actually want to maximise the chances of it. Much better to "put it all on black" and take a 50% chance of making a 90% profit - also easy to achieve by buying options. For best results, have a friend do the same thing but put it all on red, and agree to split the money.

On the other hand, if you aren't planning on running away from your losses, you shouldn't take the 5% risk of a 100% loss to make just $20k. Liquidate the options and put your money back in index funds.

That’s if you expect to be on the hook for downside risk. If you’re a teenager willing to go bankrupt (and face criminal charges) if the bet goes south then you should maximize your risk.

A 2% profit with a 5% chance of going busto doesn’t sound like a super smart trade, unless I’m missing something.

95% probability of winning 2% of $1mn = $20k

5% probability of losing $4k

Not so bad (if you can get away with it).

The expected value of such a trade is 19.2k. That sounds pretty fucking good to me. Of course, there’s some externalities not accounted for in that math.

Yeah curious what Robinhood does here e.g. if they close his positions right now he's probably made 5 figures or so given the upward move in $F. Do they let him keep it or what?

They may be on a hot meeting with the SEC right now.

He doesn't benefit at all from $F going up because he's written call options on his entire stock position.

Yeah, I think the $1M position in $F is capturing people's attention, but that's not the entire story.

For every share of $F he has, he also has an offsetting deep ITM call option he's written. He doesn't have $1M risk on - or rather, he doesn't have linear risk on.

The payoff for a covered call looks like this (sorry for the paint): https://imgur.com/a/J6vcUty

P is the price where he bought the Ford share. S is the strike price. S << P since he's writting deep ITM calls. The combined payoff is just the sum of the stock payoff and the call payoff.

As you can see, he's fine, as long as F doesn't tank. If it does, he's on the hook for some money. So he didn't lever up a linear payoff in the stock price, he levered up the payoff I showed above.

Really, everything is fine, as long as Ford share price stays above the strikes he wrote. If it goes under, CTN goes bankrupt and RH can't get their money back.

But this is a lot more subtle than getting 2:1 or whatever linear leverage.

Also, I'm salty because I submitted the same story before this was posted, but it died in the "new" queue.

Did you read about the bug? The point of these trades was to trigger the bug. Not to make money on them. Selling options triggered the bug and gave you more margin than you should have had

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