Understanding "the positive carry paid for your option"

External question — Personal Finance Stack Exchange Author: daisy Original post: https://money.stackexchange.com/questions/164294 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I'm reading Hedge Fund Market Wizards and there's an interview talking about how to trade when you know you're in the bubbled stock market. Q: How then did you position yourself during 2006 and 2007? A: We recognized that we would underperform the bulls by quite a bit because in a bubble the true believers will always win. That’s fine. You just need to make decent returns and wait until the market turns. Then you can make great returns. What I believe in is compounding and not losing money. We were quite happy to be part of the bubble, but to do it in positions that were highly liquid, so that we could exit the market quickly if we wanted to. One of the biggest mistakes people made was to join in the bubble, but to do it in positions for which there was no exit. All markets look liquid during the bubble, but it’s the liquidity after the bubble ends that matters. We did a lot of our trades through options—positions like buying calls in currencies with a carry because the positive carry paid for your option. My questions, The interviewee claims the stock options are more liquid than stock itself, so that he can exit the market quickly, but is that still true when the market crashes? By because the positive carry paid for your option , how could the interest rate difference pay for the option? I don't see the connection between a carry trade and the option trade here, so I couldn't understand it.

External answer — Personal Finance Stack Exchange Author: 0xFEE1DEAD Original post: https://money.stackexchange.com/a/165133 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The interviewee claims the stock options are more liquid than stock itself, so that he can exit the market quickly, but is that still true when the market crashes? The way I read it, the interviewee is saying that some stocks (and options thereon) are more liquid than others (think top S&P 500/NASDAQ 100 constituents rather than Russell 2000, for example), not that options are inherently more liquid than the underlying stock. I don't see the connection between a carry trade and the option trade here, so I couldn't understand it. Options have the advantage of built-in leverage (100 shares per options contract usually). So instead of buying the stock outright, you can buy calls and place the cash in high-yielding currencies for positive carry, i.e. earning interest. The interest earned on your cash position could pay for (part of) the option premium. So instead of buying options denominated in currencies with low interest rates (e.g. CHF, EUR, JPY, etc.) you can do it in currencies with relatively higher rates (e.g. AUD, GBP, USD, etc. or even some emerging markets currencies).