6/ For options with strikes that are far from the current price, this idea is taken even further. Rather than just betting on volatility, it's likely a bet on skew or kurtosis, which reflect the shape of the future price distribution.
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7/ This sounds complicated, but in simplified plain language, it means that it's a bet that the if the asset rallies, it's likely to rally a lot.
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8/ For example, Microsoft calls have little kurtosis, because while we may think it's likely that Microsoft stock will go up 50% in a year, it's probably very, very unlikely that it goes up 150%, less than 1/3 as likely as the 50% rally.
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9/ But commodities often have a lot of kurtosis, meaning that a really big move to the upside is less unlikely than in stocks. This is true even if the commodity and stock have the same volatility.
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10/ a way to think about this: volatility is how the thing moves around its current price, skew and kurtosis are how the thing may move once it gets far from its current price.
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11/ So buying a $100,000 strike call is not necessarily a bet that Bitcoin will ever exceed $100,000. It's a bet that *if* Bitcoin rallies, it might rally by a whole lot.
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12/ I suggest that you *do not* trade options, unless you are very knowledgeable and experienced. You will likely either pay a bad price, misunderstand the mechanics, or take on more risk than you want by selling an option.
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13/ My explanation here contains a lot of gross oversimplifications, I know, so stand down options geeks.
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Replying to @AriDavidPaul
Sounds interesting. Any recommended books for an ECON grad?
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Have been looking at that one as well as “Options as a Strategic Investment”
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Admittedly shilling
@nntaleb books, but highly recommend "Black Swan" and "Antifragile" as well. The mental models I've developed from his books have been highly profitable.0 replies 0 retweets 1 likeThanks. Twitter will use this to make your timeline better. UndoUndo
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