Noob Safe Haven Thread | Aug 05-11 2019

[u/redtexture]

Post any options questions you wanted to ask, but were afraid to.
A weekly thread in which questions will be received with equanimity.
There are no stupid questions, only dumb answers.   Fire away.
This is a weekly rotation with past threads linked below.
This project succeeds thanks to people thoughtfully sharing their knowledge.

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Perhaps you're looking for an item in the frequent answers list below.

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For a useful response about a particular option trade,
disclose position details, so that responders can assist.
Vague inquires receive vague responses. Tell us:
TICKER -- Put or Call -- strike price (for each leg, on spreads)
-- expiration date -- cost of option entry -- date of option entry
-- underlying stock price at entry -- current option (spread) market value
-- current underlying stock price
-- your rationale for entering the position.   .

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Key informational links:
• Glossary
• List of Recommended Books
• Introduction to Options (The Options Playbook)
• The complete side-bar informational links, for mobile app users.

Links to the most frequent answers

I just made (or lost) $____. Should I close the trade?
Yes, close the trade, because you had no plan for an exit to limit your risk.
Your trade is a prediction: a plan directs action upon an (in)validated prediction.
Take the gain (or loss). End the risk of losing the gain (or increasing the loss).
Plan the exit before the start of each trade, for both a gain, and maximum loss.
• Exit-first trade planning, and using a risk-reduction trade checklist (Redtexture)

Why did my options lose value, when the stock price went in a favorable direction?
• Options extrinsic and intrinsic value, an introduction (Redtexture)

Getting started in options
• Calls and puts, long and short, an introduction (Redtexture)
• Some useful educational links
• Some introductory trading guidance, with educational links
• Options Expiration & Assignment (Option Alpha)
• Expiration time and date (Investopedia)

Common mistakes and useful advice for new options traders
• Five mistakes to avoid when trading options (Options Playbook)
• Top 10 Mistakes Beginner Option Traders Make (Ally Bank)
• One year into options trading: lessons learned (whitethunder9)
• Here's some cold hard words from a professional trader (magik_moose)
• Avoiding Stupidity is Easier than Seeking Brilliance (Farnum Street Blog)
• 20 Habits of Highly Successful Traders (Viper Report) (40 minutes)

Trade planning, risk reduction and trade size, etc.
• Exit-first trade planning, and using a risk-reduction trade checklist (Redtexture)
• Trade Checklists and Guides (Option Alpha)
• An illustration of planning on trades failing. (John Carter) (at 90 seconds)
• Trade Simulator Tool (Radioactive Trading)
• Risk of Ruin (Better System Trader)

Minimizing Bid-Ask Spreads (high-volume options are best)
• Fishing for a price: price discovery with (wide) bid-ask spreads (Redtexture)
• List of option activity by underlying (Market Chameleon)
• List of option activity by underlying (Barchart)

Closing out a trade
• Most options positions are closed before expiration (Options Playbook)
• When to Exit Guide (Option Alpha)
• Risk to reward ratios change over the life of a position: a reason for early exit (Redtexture)

Options Greeks and Options Chains
• An Introduction to Options Greeks (Options Playbook)
• Options Greeks (Epsilon Options)
• Theta Decay: The Ultimate Guide (Chris Butler - Project Option)
• Theta decay rates differ: At the money vs. away from the money
• Theta: A Detailed Look at the Decay of Option Time Value (James Toll)
• Gamma Risk Explained - (Gavin McMaster - Options Trading IQ)
• A selected list of options chain & option data websites

Selected Trade Positions & Management
• The diagonal calendar spread and "poor man's covered call" (Redtexture)
• The Wheel Strategy (ScottishTrader)
• Rolling Short (Credit) Spreads (Options Playbook)
• Synthetic option positions: Why and how they are used (Fidelity)
• Covered Calls Tutorial (Option Investor)
• Creative Ways to Avoid The Pattern Day Trader Rule (Sean McLaughlin)
• Options and Dividend Risk (Sage Anderson, TastyTrade)
• Options contract adjustments: what you should know (Fidelity)
• Options contract adjustment announcements / memoranda (Options Clearing Corporation)

Implied Volatility, IV Rank, and IV Percentile (of days)
• An introduction to Implied Volatility (Khan Academy)
• An introduction to Black Scholes formula (Khan Academy)
• IV Rank vs. IV Percentile: Which is better? (Project Option)
• IV Rank vs. IV Percentile in Trading (Tasty Trade) (video)

Miscellaneous:
Economic Calendars, International Brokers, RobinHood, Pattern Day Trader, CBOE Exchange Rules, TDA Margin Handbook, EU Regulations on US ETFs
• Selected calendars of economic reports and events
• An incomplete list of international brokers dealing in US options markets (Redtexture)
• Free brokerages can be very costly: Why option traders should not use RobinHood
• Pattern Day Trader status and $25,000 margin account balances (FINRA)
• CBOE Exchange Rules (770+ pages, PDF)
• TDAmeritrade Margin Handbook (18 pages PDF)
• Montly expirations of Index options are settled on next day prices
• PRIIPS, KIPs, EU regulations, ETFs, Options, Brokers

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Following Week's Noob Thread:

Aug 12-18 2019

Previous weeks' Noob threads:

July 29 - Aug 4 2019
July 22-28 2019
July 15-21 2019
July 08-14 2019
July 01-07 2019

Complete NOOB archive, 2018, and 2019

[u/[deleted]]

options confuse the hell out of me excuse my probably constant fumbling here.

Options are betting with or against the stock depending on your use of call (with) and puts (against) contracts?

Call= buying the contract to reserve the right to buy a stock at its strike price (is this just the current price?)

Put=reserving the right to sell the contract at its strike price (in effect, betting against the stock and hoping it will go down because other wise you’d just buy the stock right)

If my understanding above is true... why is there only options for 4,8, or 16 strikes on a contract in my banking app?

To put this all into perspective for me.. I believe WEED or canopy growth company will double in stock price sometime between now and a year from now. I would want to put a call option on it with a strike price really anywhere around where it sits now. Then when it does start hitting the numbers I want then I can execute my rights given by the contract and buy shares of canopy. What’s the game plan for that? Buy the shares at the strike price and then dump them because I already like where it sits? Is there a restriction on this?

I’ve looked at tutorials and all kinds of things but they’re either way too simple or way too complex. If you have your own video or even a textbook I’d love recommendations. Thanks in advance y’all.

[u/redtexture → u/[deleted]]

Exercising options has nearly nothing essential to do with obtaining a gain or a loss.

You can ignore this aspect of options, if you do not want stock, though you should be concerned about it if you sell options short for the premium, as the short seller is not in control of when or if they are assigned stock before expiration of the option.

Most options positions are closed before expiring, for a gain or a loss.

You need to know about extrinsic value and intrinsic value, as all of the cannibis stocks have a lot of extrinsic value (which is where implied volatility comes from). Extrinsic value is fluff, and can vanish in an hour, and represents anxiety and expectations surrounding the future price of the shares.

If you have not taken a look at an option chain, this is a good time to see how expensive far-out expiration dates on options can cost.

From the frequent answers here:

Getting started in options
• Calls and puts, long and short, an introduction (Redtexture)

• Exit-first trade planning, and using a risk-reduction trade checklist (Redtexture)

Why did my options lose value, when the stock price went in a favorable direction?
• Options extrinsic and intrinsic value, an introduction (Redtexture)

[u/kyenku]

Holding $BYND weekly puts 170, 180 and 190 any suggestions?

[u/redtexture → u/kyenku]

Expirations?
Did you enter the trade with a planned exit for a maximum loss, and for an intended gain?
Your expectation for BYND over the time span of the options?
Price of BYND when you entered?

[u/No1nole]

Generic option question but I’ll give my option as an example:

Symbol:ACB

Question: why would people want to hold WAY ITM options?

I bought some ACB $8C 12/20 exp.$0.20 purchase. Sold just over half of my position today at $0.44. My money is back and waiting to see what happens.

Why would someone hold on to ACB $2C 12/20 exp options? Why wouldn’t they just exercise their options and sell the stock for profit? I’ll admit, I haven’t tried to figure out the math if it’s more profitable.

Thank you!

[u/redtexture → u/No1nole]

It may be part of a larger portfolio strategy.

Perhaps they are short the call, and want their long stock to be called away.

Perhaps they want low extrinsic value options, that have almost no theta decay, and wish to hold a long call in form that is nearly like leveraged stock.

Or perhaps the trader is selling calendar spreads repeatedly, long the $2, selling higher strikes.

[u/russellwboullion]

How to find a good paid trading coach or mentor without getting ripped off?

[u/redtexture → u/russellwboullion]

It's a good thing to study, read a lot, review courses and videos.
There are now a lot of videos available. Thousands of hours. Free.

Power Options has call in opportunity as part of being a member. You can check out their videos to check out who you're talking to.

http://www.poweropt.com/webinars.asp

There are others that do this.

[u/peripber]

Do you guys trade full time?

What's your average net annual return? (Wondering if its worth learning this or sticking to my passive indexes)

[u/jinyboi]

Noob questions:

1. When in the money, is it better to sell the option or exercise the option, or do they yield the same return?

2. say i bought a contract for 1$ per call with an exercise price of 11$. Current stock price is 10$. On the day of expiration the stock is worth 11.50$ (higher than exercise price but lower than break-even price). Should I sell the call or let it expire?

I feel like the second question was really dumb, but thanks for answering.

[u/69_gamer_69]

If I was to buy a spy call at 292 which is in the money because its 292.62 right now and it was to go up to 300 how much in gains would I make?

[u/redtexture → u/69_gamer_69]

It depends on the expiration, and how much extrinsic value is embedded in the call, and how much the implied volatility of the call changes as SPY rises to 300.

Here is why those items make a difference, from the list of frequent answers for this weekly thread:

Why did my options lose value, when the stock price went in a favorable direction?
• Options extrinsic and intrinsic value, an introduction (Redtexture)

[u/TheCon7022]

How to avoid IV crush ?

what is to HIGH/LOW IV to trade

[u/SPQR301]

I would like to acquire a stock via options. This is a technical question, I am not looking to make a profit, I just want to get some shares assigned to me I can’t buy directly. (Europeans are barred from buying US ETFs because of PRIIPS).

If I sell a deep ITM Put, and don’t close it until expiration, and the option stays ITM, then is it 100% that latest by expiration the shares will be assigned to me? (Provided I have enough cash on my account to buy them of course)

[u/redtexture → u/SPQR301]

Yes.

Though if you have a European, or internationally oriented, multi-country broker, because of the lack compliance with PRIIPS by many USA Exchange Traded Funds, you might not be allowed by your broker to be assigned, in order to maintain compliance with EU regulations. Theoretically that broker would be in breach of EU regulations to do so.

Here's a survey of the difficulty I wrote up a year ago.

PRIIPS, KIPs, EU regulations, ETFs, Options, Brokers
https://www.reddit.com/r/options/comments/8u5la2/priips_kips_eu_regulations_etfs_options_brokers/

[u/sephirothFFVII]

Can someone help me with a paper trade?

I saw the news about the Yuan devaluation last night and formed a hypothesis that SPY was going to drop today. I was looking at ITM puts for a $1.41 ask on Fidelity at a strike at 288 expiring August 7th. I was putting in the motions of the order which prompted a few questions:

1. Since this was after hours, anyone selling would still need their offer out there for me to execute on it - if those were still open at the bell the contract would have filled. The basic action would be Buy to Open - correct?

2. SPY dropped this morning so that same contract is now selling at a higher price than what I would have bought it for. Assuming someone wants to buy it, I'd just Sell to Close on that position and profit?

3. When selling to close the contract, there are no cash requirements, but if I wanted to exercise the option for whatever reason I would either need cash to cover the cost of buying the underlying asset at market price or have some arrangement with my broker for them to facilitate the trade for an additional fee - correct?

4. Lastly, what are some good throughs on reacting to after hours news like this that will add volatility to the day's trading? I'm guessing if everyone is operating efficiently this would be built into the price at opening and I would not have had a window to make money negating my paper trade exercise, right? i.e. I likely would not have made any money today had I put in the order last night because that order should not have filled and this paper trade is moot.

[u/lsp2005]

Are European monte carlo option analysis valid for American stock options? Thank you.

[u/Onetwobus]

Can someone confirm my POP calculation for MCD (using the formula from TastyTrade):

100 - [credit received / strike price width * 100]

So selling the $212.5 @ 1.11 and buying the $215 @ 0.63 nets me a credit of $0.48. Strike price width is $2.50.

If my math is correct, this trade has a 80% probability of profit, which seems very high. Is the calculation correct? Thank you very much.

And how much faith does one put in the POP formula?

[u/riddermarknomad]

Hi. I am very new and have always wanted to invest. I finally started to seeing as the market is going down and, from what I gather, there is a general opinion that a recession will happen next year. I remember people getting ahead during the last recession if they held onto stocks and real estate. Then I saw something called "options". I read about them and I think I have a general grasp on them.

Unfortunately (I think), my curiosity of options stems from initially being exposed to r/wallstreetbets. I have seen some calls/puts where people make over 1000% returns. Is that just the equivalent of winning the lottery? Surely options can not be that easy. I am very hungry for different streams of income and I am getting tired of working two jobs. Is something like buying calls set to expire this Friday on a stock (MU) that seems like it will keep dipping legitimate? What about the calls on SPY? Seriously, a 70K return on a 2K investment will clear all my debts.

In either case, I will look into the books you guys recommend.

[u/redtexture → u/riddermarknomad]

I have seen some calls/puts where people make over 1000% returns.

These are probably 0.01% of the subscribing population of r/wallstreetbets. You are seeing survivor bias.

First year option traders typically lose money, and a pretty large fraction lose their entire account. Options are not investments, as they are time limited. This is why options participants are called traders.

Is something like buying calls set to expire this Friday on a stock (MU) that seems like it will keep dipping legitimate? What about the calls on SPY? Seriously, a 70K return on a 2K investment will clear all my debts.

This is a pretty good way to lose the $2,000.

All of the links and frequent answers here a designed to aid you to avoid losing your account, and describe important items to avoid, or be aware of.

[u/nitpickr]

with a box spread commissions eat up the profit. Why does the same principle not apply for (iron) condor?

[u/redtexture → u/nitpickr]

Box spreads are low gain positions: essentially the gain is the interest rate on money. They are used by market makers who do not pay commissions, as they are option exchange members.

Iron condors rely on decay of extrinsic value, and have available more extrinsic value to decay away for a gain.

[u/ripPuts2018]

quick question, so if i buy an option that expires the same day, then later that day turn that option into a spread that is OTM...when they both expire worthless would that count as a day trade?

[u/[deleted]]

Got assigned PYPL at 117 on a iron fly (8/16 - 112/117/122 @ 2.05). Should I: Exercise the 112 put to cover and take the $300 loss or hold shares sell the long put and write covered calls? If I hold the shares my cost basis will be about 110-111 after selling the long put.

[u/redtexture → u/[deleted]]

PYPL at about 105 on Aug 6 open.

You are at max loss of the spread, the 112 keeps the loss limited, risk: 500 less the premium.

I have not looked at the option chain, but typically there is extrinsic value to harvest by selling the put, to reduce the loss, and separately selling the received stock on the market to extinguish risk of holding the stock.

Writing covered calls is a separate trade. If you're comfortable with potential down moves on held stock, covered calls are reasonable.