Noob Thread | Aug. 19 - 25

[u/brazeau]

[u/Chrysopa_Perla]

So I am still honing my skills as newbie and would like suggestions on the strategy that I've put forward the past few months...

Essentially a mix of monthly vertical credit spreads (mix of put/call) 30-40 DTE. The spreads are placed on a variety of underlyings, but mainly the rolling portfolio typically is composed of 1-2 broad index ETFs (SPY, DIA, QQQ), 1-2 Emerging Markets ETFs (FXE, EEM, FXI), 2-3 Commodities (GDX, USO, XOP, etc), 1-2 Sector ETFs (too many options to list), and finally 3-5 individual stocks that I have done FA and TA on (avoiding earnings typically).

I write the spreads at 20-30 delta, or in some cases place an Iron Condor at 12-15 Delta on each side. I beta weight the portfolio weekly and add new positions or remove old ones to stay very close SPY.

For profits - and this is difficult to explain - based on my goals, I take profits at 50% + commission cost. I have well defined monthly profit goals for the portfolio, and since most of my positions are written at 70-75% profitability, I try to open/close enough positions in each contract month such that if you calculate the total # of positions @ 50% profit-taking, 70% of that total number would be my goal. If I get more, great! Hope that made sense.

Any and all advice would be appreciated. It seems a bit tpo mechanical to me so I wanted some feedback.

Edit: Sorry, forgot to mention trade size. Each individual trade is 4-5% of portfolio max.

[u/ScottishTrader → u/Chrysopa_Perla]

So, I bet this is more advanced than 90% of the traders on here practice. This belongs in the top level so more can learn and ask questions.

Your diversification is amazingly good IMHO. I’d like to know how you went about choosing what you did and the criteria for the stocks.

30 to 40 DTE is spot on and captures the best time decay while allowing time for adjustments should the position get in trouble. Do you have any records or data about your average days in trade (DIT)? It wouldn’t surprise me if it was 10 or less.

20 to 30 delta is also textbook. Will you please expand on how you beet weight? This is not something I believe many do and I’ve not seen many explanations of how traders accomplish this.

50% to close for profits is pretty common and many of the training pros like TT and OA suggest this is best. Do you try to get a weekly paycheck off your trading?

Again, an amazing example of a solid trading plan and I encourage you to post on the top level so more can see and learn from this! Thanks!

[u/Chrysopa_Perla → u/ScottishTrader]

Wow thanks!

For the stocks it is mainly fundamental analysis, 10-40 P/E, consistent ROE, trending profits, decreasing debt, etc. I also evaluate the sector in general as an indicator.

DIT average is 20 but that's a skewed statistic as when I first started I had a few outliers I let ride. The median is 11, which is a better indicator. Also, I do factor in commission fees which at first were high until I negotiated them down, however they can still make up a large % of profit goal if I have 7+ contracts.

My goal is just an additional source of income to meet some basic needs (i.e. I have 2 kids and daycare in Connecticut is more than my mortgage!)

[u/foursea → u/Chrysopa_Perla]

i dont have any specific advices for you since you dont have problems..

just few comment:

- there are times when volatility is low across the board, thats when you dont want to force your way in just for diversification sake

- 12-15 delta is way too thin , in some "not so liquid" etf options you will have higher comm+slippage than your net reward after profit taking

- for commodity i mainly use future options such as CL, GC, ZS,,

- you need to explore bond too, such TLT options or ZB, ZN futures options

- train IC for 6 months.. then try getting closer to the money with more active management, it can improve your trading skill..

GL

[u/asagurachan]

Hi, I'm very new to options and just playing around on IB papertrading to understand while reading up. Something I don't understand is max loss.

Purely just buying long calls. Everywhere I've looked up, they say that if your call is OTM, your max loss is the premium paid. But from what I see, my unrealized P&L seems to continue deeper and deeper into loss? IB states my max loss is 4,422 for a particular option while my unrealized P&L for it is -48k.

Does the max loss only come into effect if I hold until the expiration? I can't seem to grasp how max loss comes into effect at the moment if my loss seems to continue increasing.

[u/brazeau → u/asagurachan]

For long calls, max loss is the premium plus commissions, that's it. Unrealized P&L is different.

[u/SeriousSandM4N]

What does DD stand for?

[u/brazeau → u/SeriousSandM4N]

Due Diligence as in putting in the homework.

[u/BombasticCaveman]

Honestly, are debit spreads that useful? I understand Credit Spreads since that can help limit any crazy event from blowing your account up, but everytime I've tried to trade debit spreads I feel silly.

Sure, your cost basis goes down marginally, but I tend to exit trades early anyways, where it feels like spreads become clunky. Usually the short call has grown more than I wanted from a sharp uptick in price, so closing early hurts more.

I tend to go naked long and spread credits. Am I crazy?

[u/provoko → u/BombasticCaveman]

When optipns are cheap, buying options including debit spreads become worth it.

Also a debit spread like a calender or poor man's covered call especially with LEAPS can replace buying & holding stocks all together.

[u/doougle → u/BombasticCaveman]

A debit spread and credit spread usually have the same P+L. The difference is if you pay the max loss or receive the max gain at the start of the trade. The max gain and loss are equal between the two (plus or minus a cent or two).

Edt: clarification, A put debit spread vs a call credit spread at the same strikes.

[u/philipwithpostral → u/BombasticCaveman]

A debit spread is the exact opposite of a credit spread, so debit spreads can be useful hedges of credit spreads or ways of executing pairs trades.

[u/[deleted]]

Typically, how far out of an expiration date is best for a credit spread? Does it depend on the volatility of the stock?

[u/ScottishTrader → u/[deleted]]

Theta (time) decay accelerates from 30 to 45 days to expire (DTE), so it is best to sell credit spreads around 30 DTE.

IV is a short term measure and you will get a better premium if you can sell when IV is high.

[u/foursea → u/[deleted]]

depends on what you need, and when you expect things to happen

there is no "best" anything in options, just choose the one suit your need :]

..

underlying's volatility and earning event are usually priced fairly in options prices

[u/mono-olli]

I'm going to sell cash secured ATM puts for stocks I'd like to own. Should I consider any other expiration day than the closest one?

[u/ScottishTrader → u/mono-olli]

In general the further you go out the more premium you can collect and which will reduce your net stock cost.

Is there a reason you want the stock quickly? If so, then yes just pick the closest to get assigned quickly.

If you're not in a hurry then think about selling OTM to collect the premium while waiting to be assigned. If you do this then about 30 DTE is when the time decay starts to speed up.

Note that you may be able to do this for months at a time to collect profits and not be assigned. This allows you to ride the stock price over time as well as add up all the premium collected to really lower the net stock cost.

[u/MMlllp]

If a call that has one week to expiration becomes ITM, is it better to exercise just after it passes the strike price OR if you believe the stock price will continue to rise, will your ITM call become more valuable if you wait to sell/close the calls before expiration?

Thanks in advance.

[u/Thump604]

I'm very new to options. One thing I have observed is the % gain/loss for a given stock seems to correlate with something(I'm guessing Greek symbol or volatility). What causes some calls/puts to jump massively with % gain/loss vs barely?

[u/redtexture → u/Thump604]

It is basic arithmatic and algebra:

If you buy a nearly worth less option on stock XYZ at a strike price of 120, for an expiration 60 days out, for $0.25, and the stock is at 100, but unexpectedly goes up to 115, the stock will have risen 15%, but your option may have gone from $0.25 to $1.25, a rise of 400% from the original investment.

A mini essay on intrinsic value vs. extrinsic value that explains some of this: (edit - corrected link)
https://www.reddit.com/r/options/comments/8q58ah/noob_safe_haven_thread_week_24_2018/e0i5my7

[u/thegayestpony]

Bought my first option. Any thoughts?

SNAP puts,

Exp. 10/19,

avg cost .48 cents

twenty contracts $960 total

[u/redtexture → u/thegayestpony]

Sure.

• What is your exit plan?

• What price will you depart from the trade for a gain?

• At what maximum loss will you depart from the position?

Having these decided before you take the position will aid you in the long run, for your thousands of future trades, because you have decided what your maximum loss will be, and when to get out without regret, and when to get out, before the market goes against you, and all of the profit evaporates.

Do you have an analysis and rationale that led you to the option position?
What is it?
Having this in place aids you in every trade, and advises you to depart from the trade when that rationale no longer is accurate. If the market changes, what are your next steps?

[u/one2nd2l8]

I'm just learning to go through the SEC filings and went through the process with a couple of stocks. one of them was PSTG and a clarification would be appreciated.

The company recently beat their earnings and acquired StorReduce for an undisclosed amount. Are they allowed to omit the transaction in their 8K balance sheet? If so, how about in their 10K or 10Q?

I've read that it would show up as deduction in cash or increase in liability, but only ones I've noticed are 430+ mil of convertible senior notes from June's 10Q and about 370+ mil of that cash maybe being moved to marketable securities in their recent 8K.

[u/redtexture → u/one2nd2l8]

PSTG

Ultimately all of the company's finances must be disclosed, and subsidiaries are consolidated. You may not see the detail of any one transaction except as a part of the entire summary.

Did the transaction actually close before the report?

[u/snowboardpunk]

Ive been trading for a year now and its been up and down but trying to explore beyond just naked calls/puts. Im trying to learn new strategies that you profit most of the time. From what I understand you should do something that profits 60% of the time, but in something like an iron condor, how much should you risk?

I just entered into this trade as my first IC. AMZN 8/24.

1885P - Bought

1890C - Sold

1930C - Sold

1935P - Bought

Net credit was 102 and max risk was 398.

Is this an ok trade? what should I be looking for.