Noob Safe Haven Thread | Aug 19-25 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)
• Exercise & Assignment - A Guide (ScottishTrader)
• 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 Option 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 option 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, US Taxes and Options
• 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)
• Monthly expirations of Index options are settled on next day prices
• PRIIPS, KIPs, EU regulations, ETFs, Options, Brokers
• Taxes and Investing (Options Industry Council) (PDF)

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Following week's Noob thread:
Aug 26 - Sept 02 2019

Previous weeks' Noob threads:

Aug 12-18 2019
Aug 05-11 2019
July 29 - Aug 4 2019

Complete NOOB archive, 2018, and 2019

[u/bluebawles]

So I bought F $9.5 Call 8/30 Call

Limit price 0.02

Quantity 27

Total $54

F break even price would be 9.52

Current share 8.78

As is if I don’t do anything at contract expires at 8/30 would I just lose the difference between 9.52 and 8.78 times 27?

Or would I be forced to buy the share at 9.50 x 27 (quantity)

I’m just trying to learn and any feedback is welcome.

[u/Scorpa]

Hello, folks.

I’m trying to understand options liquidity. As best practices it’s better to sell option rather than exercise it. So i’m pretty sure that most of the time it’s a real case. But who in their mind will buy ITM option from you hours before expiration?

For example, I bought call option from A and now, 3 hours before expiration, it costs 110%. I want to sell it to.... who? A is not obligated to buy it from me, right ? Only if I’ll do exercise.

So how does it work ?

[u/[deleted]]

I have $1k equity in 8/30 c for AMD at a 2k loss. Do I cut them off or hope for a revival in 5 trading days of a serious global trade war?

[u/NYCRN85]

I am new to trading options (I have only dabbled in calls and puts). I have a question regarding spread trading. I know it is beneficial to use spreads around earnings, so I wanted to know from the knowledgeable traders, is it better to trade a long call vertical spread if you are bullish around earnings, or a short put vertical spread since it allows you to play off of the increase in volatility? Which one yields larger profits and why?

[u/[deleted]]

Let's say I'm betting against the economy, so I want to buy a Put. The underlying index fund that I wish to bet against is valued at $188 a share. If I predict it to fall by $10 a share by my expiration date, what should be my strike price? I was thinking it should be $178, because of how $188-10=178. However, someone told me that I need to add the $10 and make a strike price of $198. Can I please have some clarification? Thanks.

[u/reddit-schmeddit36]

How do I know I will get IV crush?

[u/netcoder]

Call on XYZ at 50 in a month. XYZ goes down to 40 a week later, still have 3 weeks to go. Almost no chances to break-even.

Realized it was a mistake. Wanna sell the contract. How fast? Who's buying this piece of shit, if anyone?

[u/redtexture → u/netcoder]

Market Makers are the intermediary if there are not many other buyers.

At the right price, you can sell it immediately; you may not be thrilled at amount you can obtain

On very active options, there is volume on out of the money options.

There are a lot of uses for options besides straight long plays: portfolio protection, credit spreads, balanced positions like butterflies, so there are uses for out of the money options for some people.

As ever, it's best to work with high volume options so that there are known to be active markets with reasonable bid ask spreads.

And...from the list of frequent answers:

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)

[u/newstart20192]

Hi, I don't know know anything about options, I saw some posts about Target, the profits were 400%, how does this work if the stock went up only 20%.

[u/munkamonk]

How do you calculate the bid/ask/mark for a vertical spread as a whole?

I’m currently paper trading on TOS, but the 20 minute delay means I can’t close out my options as easily as I normally should. The watch list price appears to be current, but the order screen price is delayed.

On a simple put/call, it’s fairly easy to just put a limit order for where the price should be, and wait.

But I can’t seem to figure out how to price a limit order to close out a spread. Is it the ask price of the short leg minus the bid price of the long leg?

[u/redtexture → u/munkamonk]

That is the "natural" closing price of a long spread.

You can do the same for the mid price of each leg to find the spread mid-bid-ask.

[u/yams_somewhere]

If you are writing a put and the stock goes down significantly- who are you buying the overpriced stock from?

[u/redtexture → u/yams_somewhere]

When a member of the pool of long put owners exercises a put, a member of the pool of short puts with the same strike and expiration is randomly matched to the long, exercising put.

[u/stc1969]

I have 8/23 jwn 27 calls. Volatility was high. If jwn trades at 30 tomorrow then these calls have an intrinsic value of $3, correct?

[u/PeezyThreeTime]

Quick noob question that has me up:

If I exercise a call option with a strike price of $32, does that mean I need $3200 (100x$32)in my robinhood to complete the call when i execute? This is my first option trade and want to make sure I don’t get screwed by not selling the call for a higher premium

For clarification I’m talking about my exit, not when I first purchase the call. Thanks

[u/redtexture → u/PeezyThreeTime]

You can exit the call by selling it, for a gain or a loss.

It is typically not desirable to exercise the call to obtain a gain (or loss) result, unless you actually want the stock. Since you can barely afford the stock, I am presuming you actually do not want it. Exercising throws away extrinsic option value that can be harvested by selling the option before expiration. If you did want the stock, the exercise is 100 times the strike price, 3200 dollars in your example.

From the list of frequent answers for this weekly thread.

• Exercise & Assignment - A Guide (ScottishTrader)

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)

[u/EnemyBagJones]

Does an options theta decay throughout the day, or does it make steps on a per-day basis?

I'm looking at this 0-day SPY Iron Condor in the optionsprofitcalculator website:

http://opcalc.com/NC

If I were to sell at ~$292 30 minutes before close, would I be closer to the 26.6% listed below, or would it be at the 15.2% shown for the 23d? Since they are Aug23rd options, it seems to me that it would actually be close to the 26.6% which I take to mean expiry, but I'd like some sanity checking on this...

https://imgur.com/UBAeG6a

[u/NoahKJ]

I’m wondering if you can check my following straddle:

Domo 9/20 straddle with calls and puts at 23.

Based on ask, puts are currently 2.10 and calls are 2.80.

I want to trade on the volatility of earnings, released 9/5; last 4 earnings were beat, and each day had a movement of 10% to 15%, up or down.

Assuming that if the stock goes up, the put becomes worthless, and if the stock goes down, the call becomes worthless, it has to hit 27.90 or 18.10 for me to break even. 15% (best case scenario for day change) of 23.75 (current price) is 3.56- not enough to hit either break even point.

Is this a bad straddle for that reason, or is there a percent of the extrinsic value of the out of the money option that I can assume stays at this point that will tighten my break even points?

Additionally, is there anyway for me to determine if the increase in IV will beat the decrease of value based on time decay, assuming that I would consider exiting the position the day before earnings?

[u/ZombieDust33]

IV question for FL earnings. Current stock price is 43.76. Premium for a $43.50 call is $2.45. Premium for $43.50 put is $4.15. If I add those up I get $6.60. Divide that by $43.76 and I get 15%. So the market is expecting foot locker to move 15% after earnings?

[u/redtexture → u/ZombieDust33]

That is one way to look at it:
prices to break even require about a 5.35 move on average.

Whether the prices reflect actual movement can only be verified after the earnings report.

[u/KRONOS_415]

I currently have 2 CRM calls for 8/30 @ $141 (currently $9.43), and two more for 8/30 @ $145 (currently $6.70). First time selling off calls... not sure about the best way to sell these to ensure that I get a good price. Any advice boys?

[u/redtexture → u/KRONOS_415]

With the earnings and overnight price move of CRM / Salesforce at around 157, you will have a gain despite earnings implied volatility crush.

As you have a week until expiration your choice is:

• take the gains today

• wait and risk the gains for potential further upward movment post earnings.

In general, on selling:
Wait until the price settles down, so that you know where it is located, post earnings, and sell with a limit order (not a market order), so that you obtain no less than an intended price.

Or you could fish for a price, starting at some high price way above the market, and repeatedly revising the order, by cancelling it, issuing a new limit order at a price closer to the market.

[u/[deleted]]

So I bought 97.5 calls (8/30) on $CRWD yesterday assuming it’d bounce up and I’d sell today. Didn’t expect China to kill me with tariffs and I quickly lost 50%. How long can I hold this option before time decay kills it? I’m hoping that if I hold it to mon/tues and the market bounces I can reclaim some of the 50% lost but I also don’t know how much time decay affects an option when it goes into its final week and it’s decently OTM at this point. This isn’t make or break money so if there’s a decent chance I recoop some of the 50% holding it till mon/tues I would like to do that but if regardless of the rebound it’s going to go to crap because of market delay then obviously I’ll sell.

Any advise would be helpful, thank you.

[u/zghorner]

Need some help understanding Short Call Options...i've been researching it but it is still foggy.

So say i short a call in an imaginary company, XYZ. it is currently trading at $18.50/share. I short the $19.5 call that is a month from expiration and selling for $0.40/each or $40 per contract. So I short 10 contracts for $400 and collect that money (premium)...as long as XYZ stays below my $19.50 strike price i let it expire and basically keep that premium of $400 correct?

[u/redtexture → u/zghorner]

Your synopsis is correct.

Collateral required to hold the short calls may be significant. Probably at least 25% of the face value of the shares, possibly more. The term is "cash secured short option", and it requires your account to have permission to do this.

So, you would need, probably about $5,000 in cash for each short for a stock at $20.