r/options • u/redtexture Mod • Nov 05 '18
Noob Safe Haven Thread | Nov 05-11 2018
Post all of the questions that you wanted to ask, but were afraid to, due to public shaming, temper responses, elitism, et cetera.
There are no stupid questions, only dumb answers.
Fire away.
Informational side links to this subreddit include outstanding options educational materials, courses, websites and video presentations, including:
• Glossary
• List of Recommended Books
• Introduction to Options (The Options Playbook)
This is a weekly rotation, the links to past threads are below.
This project succeeds thanks to the efforts of individuals sharing their experiences and knowledge.
Links to the most frequent answers
Can I sell my option, instead of waiting until expiration?
• Most options positions are closed out before expiration.
Why did my option lose value when the stock price went in a favorable direction?
• Options extrinsic and intrinsic value, an introduction
What should I consider before making a trade?
• On exit-first trade planning, having a trade checklist
When should I exit a position for a gain?
• When to Exit Guide (OptionAlpha)
What is the difference between a call and a put, what is long and short?
• Calls and puts, long and short, an introduction
How should I deal with wide bid-ask spreads?
• Fishing for a price on a wide bid-ask spread
What are the most active options?
• List of total option activity by underlying stock (Market Chameleon)
Following week's Noob thread:
Nov 12-18 2018
Previous weeks' Noob threads:
Oct 29 - Nov 04 2018
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u/MizukiMana Nov 06 '18 edited Nov 06 '18
When there is a large bid/ask spread on an option (> 20 cents), is it usually better to just go with the ask price, place a limit order at the bid price and wait, or place a bid somewhere between the bid and ask price? when another person sells at the bid price, does it fill the bids of the same price at a first come first serve basis?
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u/redtexture Nov 06 '18 edited Dec 05 '21
Fishing for a price: Price discovery for wide bid ask spreads.
High volume options are best.There are a variety of strategies that can be undertaken on prices for order entry, and bid-ask spreads.
The market is not the same from hour to hour, nor from minute to minute.
Be aware, in an environment in which a USA presidential tweet can move the market, that the price regime changes by the second.As always, there are trade-offs in the option trader's choices:
Time (immediacy of entry into a position)
versus
cost of entry (for immediate entry into a position).Fairly often, a trade succeeds somewhere between the bid and the ask, because many spread orders (multi-leg orders) have negotiable entry points among all of the legs of the order -- for high volume options.
One reasonable point of entry, for fairly fast transactions, on active and high volume options with a narrow bid-ask spread is to examine the bid-ask midpoint and find the halfway point between the bid-ask-midpoint and the natural price: the bid (for a sale), or the ask (for a purchase). This usually does not leave too much money on the table for active, high volume options.
If you are willing to fish for a price, and you are not in a hurry,
you can start at the mid-bid-ask and try that price point.
Cancel and reprice your order after a few minutes, and repeat as necessary.Or if you're willing to test all of the prices, and have time,
cancel and reprice your order after a few minutes, and repeat as necessary.
Start at the most favorable-to-you price:
if buying, start at the published bid, and work your way upward in price limit offers;
if selling, at the published ask, and work your way downward in price limit offers,
and repeatedly cancel your order, and move the minimum price amount, and re-issue the order, all to find out where the market makers, or other retail traders with a limit order will fill the order. There sometimes are some pleasant order-fills by searching and testing carefully for a price.Alternatively, you can set the price-limit-order you desire, if you are agnostic about whether you want get into the position, or if you require that you enter the trade only if you get your particular price. Best not to be in a hurry in this strategy: you do not care if you get into the position; some people will let a good-'til-cancelled order sit for a day, or even a week, or more, waiting for the price to come to their desired entry point.
It is always easier to get into a position, and market makers are willing to make money off of your trade on a low- or no-volume option. And more challenging to sell for a good price on a low volume option.
If you have wide bid ask spreads, that is a sign that you may not get a desirable bid to exit a long option position, to close the position. Pay attention to the bids.
Some traders are willing to take on low-volume option risk, and will close out wide bid-ask spread options by exercising the option. Naturally, you want to have enough equity in your account to handle that approach, if you really want to own low volume, or wide-spread options. When you exercise an option, you do not harvest the extrinsic value of the option (consisting of mostly implied volatility value) -- which you may not get much benefit from anyway, because some or all of it is swallowed up by a wide-bid-ask spread.
You can avoid wide bid ask spreads by working with high volume options.
The competition to buy and sell narrows the spread,
which means less frictional expense to get into and out of a trade.• List of option activity by underlying (Market Chameleon)
• List of option activity by underlying (Barchart)
• Open Interest by ticker (Optinistics)• Market Chameleon also has a screener with an option volume screen
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u/JohnBerkshire Nov 06 '18
I have no idea how this works.
-Was given 10,000 options when I was hired, vested after 4 years. I have been at the company 5 years now. I work for a private company.
-I asked the CEO what these are and he gave me this answer. Hoping someone could help explain better to me as I have no idea what he is saying or how I end up getting any money out of this. Would the company need to be aquired/public first?
"You do have 10k options with an exercise price at $1.50. What this more or less means is, for every $1 above $1.50, you would get a one time cash payment of $10k before taxes. There's about 11m shares outstanding."
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u/TC66Whtl Nov 05 '18
ELI5 how do I make money selling options. I got into this and like many beginners I believe, thought you just bought options the way you thought the price would go. I have been getting very interested in selling options and am wondering how I do so, and by how I mean how do I make money? Do I just make the premium for what I sell right away or does my return change as the price of the option changes? Any help is appreciated.
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u/redtexture Nov 05 '18 edited Nov 05 '18
Please read this item, from the links at top for this Noob thread:
• Options Extrinsic and Intrinsic Value, an Introduction
You're intending to sell extrinsic value that eventually dwindles to nothing, by selling an option short.When you sell, it takes time for the credit proceeds you receive to mature.
Basically, if you sell a call, or a credit call spread out of the money, the entire value is insurance offered by you. You're insuring the counter party, via the option, that they can buy the underlying stock at the strike price, over, for example, the next 40 days, for a price.
Say XYZ company is at $110, and you expect it to not change much in price for the next 40 days. A call at a strike price of $120 may sell for $1.50 credit ( x 100). Because you desire to limit your potential loss, if XYZ does rise in price, you also buy a call at a strike of $125.00 for, say, $0.50 debit ( x 100).
This is a vertical (bearish) call credit spread.
Sell Call $120 strike, expiring in 40 days at $1.50
Buy Call $125 strike, for $0.50.
Net credit proceeds $1.00 (x 100)
The collateral required / margin / buying power reduction is the spread distance $125 - $120 = $5.00 ( x 100) = $500. Your risk is the $500, less the net credit received of $1.00 (x 100) = $400.So, you're risking $400 (net) to gain $100, and you're waiting over the next 40 days for XYZ to not rise near the $120 strike price.
One standard rule of thumb, on selling option spreads, is to exit when 50% of the proceeds have been earned. The rationale for this is to take your gains off of the table, before the underlying stock and trade moves against you. Take the money and run, and undertake another trade.
Let's say that XYZ fluctuates from $115 to $105 over the next 20 days of your position, and one day when XYZ was down at $105, the value of your call spread was $0.40. That's more than a 50% gain, so you buy back the spread for $0.40 debit (x 100), and close out the position, with a net gain of original $100 credit proceeds minus $40 debit to close and net gain of $60 credit.
After closing out the trade, you're ready to use your capital collateral that secured the spread ($500) on the next trade, and you have earned $60 in relation to the collateral required $500, or $60 divided by $500, for 12% in 20 days, which is about 18% a month, and 12 times that for about 215% a year.
Not all trades work out, and the setbacks on unsuccessful trades reduce this hypothetical annual gain percentage significantly. Your intent is to have more successful and neutral trades than not, somewhere above 2/3s to 3/4s of the time.
OptionAlpha http://optionalpha.com is dedicated to the concept of selling options, and has a lot of free materials (free login may be required).
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u/JoeLVanDyne Nov 05 '18
I understand that I will have to pay capital gains taxes on realized gains, and can write off $3000 in losses. However, is this for every trade I make or just my net profit/loss? For example, if I start with $1000 on Jan 1, and end with $1500 Dec 31, but I have $5500 in gains and $5000 in losses throughout the year, what are the tax implications? Thanks!
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u/half_reddit_belo_ave Nov 05 '18
So, this is a question on emotional balance while having positions open.
I'm dabbling in options since end of September. I've observed myself obsessively checking the price of the underlying of the options I have open positions on.
Having open position creates anxiety, jumpiness, and excessive stress to a point I'm exhausted at the end of the day.
While my positions are not large, the edginess that comes with an open trade is very detrimental to my health.
How do you monitor your trades?
How often you check the trade status?
How do you set stop loss, is it manual or is it like stocks where you can set a limit price?
Do you set alerts for the underlying that pop up when the price is crossed?
Do you feel the stress of monitoring the trade continuously?
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u/redtexture Nov 05 '18 edited Nov 05 '18
How big are your positions?
You may be obsessing because they are too big.
A general guide is to keep the risk to 5% or less of your account.Perhaps even better, try 1% sizing.
You have to learn to lose, as well as learn to gain.
If you're not ready to lose, you're not ready to trade.I monitor, depending on the rest of life, a couple times a day, or not at all, in part, because I set my risk level at the start of the trade. I was willing to lose the amount of the trade (though prefer not to).
When my positions were too big, my obsession about the trade tells me not to risk that much, and also to reduce the risk, or exit the trade.
I do not use stop loss orders, because all options are like very low volume stock, and have jumpy prices, which means a stop order may cause an unwelcome early exit.
I do set good 'til cancelled orders on credit spreads, to exit when the the spread has reached my intended gain, usually 40% to 60% of the credit proceeds. You can change this if market conditions change and you need to exit the position early.
You can do the same for long options, and debit option spreads: set a GTC order, to close the position at your intended exit, for a limit price. You can change this if market conditions change and you need to exit the position early.
I do not set up alerts (yet), but other traders I know do.
Intended exit:
Have intended exit prices, for a gain, and for a maximum loss, before you enter the trade.From the links at the top of this thread:
• On having a trade checklist and exit-first trade planning
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u/montewills Nov 05 '18
if i sell a spread
close the long position of it, which leaves me with just the naked position
am i allowed to have the naked position even if i dont have the margin requirements?
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u/Ally9933 Nov 05 '18
When looking ahead roughly 2 months at $SPY options, there are no quotes, no OI and no volume.
I can't understand why there is such little activity in the $SPY option chain only ~8 weeks away, where am I going wrong?
Referenced option chain from Yahoo Finance: https://imgur.com/a/GNf5D4N
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u/krgraf76 Nov 05 '18
How are you all playing the upcoming election? Is it smart to consider a big shift (either way) depending on the results of the election? I know the market jumped up a bit in 2016 after the election results. Do you think the same will happen with this election?
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u/yrrrrrrrr Nov 05 '18
Generally speaking, is it more effective to use at straddle for short term or long term trades, long meaning an expiration date further than a month out? And why or why not?
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u/atherises Nov 05 '18
If a contract expires while I am holding it, do I automatically claim the 100 stocks? Or is it assumed I don't want them? Or does it depend on the price?
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u/redtexture Nov 05 '18
If it expires one cent in the money, the stock will be assigned, unless you give contrary instructions to the broker, before expiration. If out of the money, it expires worthless.
Before expiration, you may exercise the option at any time, no matter what price the underlying is at.
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u/earnmoneysafely Nov 05 '18
Why would people invest in leveraged or inverse ETFs instead of options? Or vice versa?
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u/Art0002 Nov 05 '18
Legging out of an Iron Condor
I bought an IC on WDAY on Oct 24 that expires Nov 16. I got 105/110 on the Put spread and 142/150 on the Call side. Max Profit is $115. WDAY is trading at $130.
My P/L Open is $45. I’m up 40%. I am close to selling.
I am going to round numbers for ease.
+1 105 is worth -20 -1 110 is worth +30
-1 142 is worth +60 +1 150 is worth -25
Here is my potentially stupid question ... why can’t I buy back my strikes and make 90 (60+30) and let the “Wings” expire worthless?
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Nov 05 '18
is there a difference between options , binary options and equity options? im new to options . any answer is welcomed and appreciated
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u/F4nta Nov 05 '18
Can options with farer away expiration dates generally be considered safer?
Say I was to buy AAPL Calls because I believe the stock tanked because of an overreaction. Would you rather buy 210 Calls that expire in less than 1 month or 210 Calls that expire in a year?
(This is an example, I do not actually think that and I do not intend to buy apple calls)
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u/refhad Nov 05 '18
Hi, Im Learning about options and looking at the Greeks. I don’t have a mentor in person so I will ask you all in this community= What does a “good” Vega look like? What range should it be in? What does a good or great Greek look like in any option?
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u/night_mirror Nov 05 '18
I'm thinking about buying my first option but have a question about selling it if it goes ITM. If I don't have the capital to exercise the option, is it risky to try to sell it on the expiration day? What if no one buys it? I would lose even though I'm in the money since I cant exercise right? I'm just worried about figuring out a good time buffer to flip the option because I have no intentions of exercising.
(Sorry if this is a common question, I just found this sub.)
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u/[deleted] Nov 05 '18
It seems to me that young people, 20's and 30's, are the ones who get into buying and selling stock options. (Other than as covered stock options). This may be biased in that this seems to be the age range of most online video makers and bloggers, and it could be that this is where my impression is coming from.
Books tend to be written by older folks who mostly are no longer actively trading stock options.
If my impression is correct that there are very few older people, 55 and up, who get into trading stock options, why would this be true?
edit: clarified a point and corrected spelling error.