I’m much more comfortable talking cricket than stocks, so I’ve been trying to understand option trading through cricket analogies.
I think I finally get why option traders have to get more than just the direction right.
Say India are 100/2 and I’m convinced they’ll reach 300, I could simply back India to get there. But an option is more like having a deadline attached to that prediction, say India has to reach 300 before the end of Day 2. India can still eventually get to 300, but if they take too long, my option can expire worthless.
That’s what I find interesting about options, you can be right about the direction and still lose because of when the move happens (and how big the move is). So I guess option traders are basically trying to predict the score, the margin and the deadline