People on wallstreetbets are buying deep out-of-the-money options, that are priced way too high (due to IV - Implied volatility. An option price is affected by the volatility of the underlying stock) and treating them like lottery tickets. The people that are making the money are the people writing those options.
Options have such a fundamental purpose of the market it’s how market makers remain delta neutral and keep an orderly market.
So I’ll break down what a cash secured put is. Say I have $65k and I want to buy WHC at $6.5. There’s two ways I can do this:
1. I can wait till the price gets there, and buy them for $65k so I’ll own 10,000 units at $6.50, or,
2. I write “cash secured puts’ that expires next month which says “I will buy 10,000 units of WHC at $6.50 anytime between now and next month’
here’s an example
some of these sold for $0.20 today. An option (American style) represents 100 shares so that’s $20. If you sell 100 of these (Representing 10,000) that’s $2000 you get.
now if they expire at a price higher than 6.50 they become worthless and you’ve made $2000. If they go below 6.50 they get exercised and you buy them at 6.50. But remember you already made $2000 so your true cost base on the shares you bought is $6.30.
there’s a lot that goes into the pricing of options. Particularly the Greeks. Delta, Gamma, Theta, Vega etc but that’s something you’ll need to read about.
I’d say what I do is rather prudent and has enabled me to retire at 32, not have to stare at the markets all day and hang with my kids. Something a lot of young fathers seldom get to do.
(20min delay)