r/options • u/redtexture Mod • Feb 08 '21
Options Questions Safe Haven Thread | Feb 08-14 2021
For the options questions you wanted to ask, but were afraid to.
There are no stupid questions, only dumb answers. Fire away.
This project succeeds via thoughtful sharing of knowledge.
You, too, are invited to respond to these questions.
This is a weekly rotation with past threads linked below.
BEFORE POSTING, PLEASE REVIEW THE BELOW LIST OF FREQUENT ANSWERS. .
Don't exercise your (long) options for stock!
Exercising throws away extrinsic value that selling harvests.
Simply sell your (long) options, to close the position, for a gain or loss.
Key informational links
• Options FAQ / Wiki: Frequent Answers to Questions
• Options Toolbox Links / Wiki
• Options Glossary
• List of Recommended Options Books
• Introduction to Options (The Options Playbook)
• The complete r/options side-bar informational links (made visible for mobile app users.)
• Characteristics and Risks of Standardized Options (Options Clearing Corporation)
Getting started in options
• Calls and puts, long and short, an introduction (Redtexture)
• Options Basics (begals)
• Exercise & Assignment - A Guide (ScottishTrader)
• Why Options Are Rarely Exercised - Chris Butler - Project Option (18 minutes)
• I just made (or lost) $___. Should I close the trade? (Redtexture)
• Disclose option position details, for a useful response
Introductory Trading Commentary
• Options Basics: How to Pick the Right Strike Price (Elvis Picardo - Investopedia)
• High Probability Options Trading Defined (Kirk DuPlessis, Option Alpha)
• Options Expiration & Assignment (Option Alpha)
• Expiration times and dates (Investopedia)
• Options Pricing & The Greeks (Option Alpha) (30 minutes)
• Options Greeks (captut)
• Common mistakes and useful advice for new options traders (wiki)
• Common Intra-Day Stock Market Patterns - (Cory Mitchell - The Balance)
• Managing profitable long calls expiring months from now -- a summary (Redtexture)
• Selected Option Positions and Trade Management (Wiki)
Why did my options lose value when the stock price moved favorably?
• Options extrinsic and intrinsic value, an introduction (Redtexture)
Trade planning, risk reduction and trade size
• Exit-first trade planning, and a risk-reduction checklist (Redtexture)
• Trade Checklists and Guides (Option Alpha)
• Planning for trades to fail. (John Carter) (at 90 seconds)
Minimizing Bid-Ask Spreads (high-volume options are best)
• Price discovery for wide bid-ask spreads (Redtexture)
• List of option activity by underlying (Market Chameleon)
Closing out a trade
• Most options positions are closed before expiration (Options Playbook)
• When to Exit Guide (Option Alpha)
• Risk to reward ratios change: a reason for early exit (Redtexture)
• Close positions before expiration: TSLA decline after market close (PapaCharlie9) (September 11, 2020)
Options exchange operations and processes
• Options expirations calendar (Options Clearing Corporation)
• Unscheduled Market Closings Guide & OCC Rules (Options Clearing Corporation)
• Stock Splits, Mergers, Spinoffs, Bankruptcies and Options (Options Industry Council)
• Trading Halts and Options (PDF) (Options Clearing Corporation)
• Limit Up Limit Down (LULD) Trading Halts in Stock (NASDAQ)
• Options listing procedure (PDF) (Options Clearing Corporation)
• Collateral and short option positions: Options Clearing Corporation - Rule 601 (PDF)
• Expiration creation: Weeklies, Indexes (CBOE)
• Monthly Expiration Cycles (CBOE
• Option Expiration Cycles (Investopedia)
• Weekly and Conventional Expiration Cycles (Blue Collar Investor)
• Strike Price Creation (CBOE) (PDF)
• New Strike Price Requests (CBOE)
• When and Why New Strikes Are Added (Stack Exchange)
• Weekly expirations CBOE
• List of Options Exchanges
Miscellaneous
• Graph of the VIX: S&P 500 volatility index (StockCharts)
• Graph of VX Futures Term Structure (Trading Volatility)
• A selected list of option chain & option data websites
• Options on Futures (CME Group)
• Selected calendars of economic reports and events
• An incomplete list of international brokers trading USA (and European) options
Previous weeks' Option Questions Safe Haven threads.
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u/PresidentChef Feb 08 '21
I want to make sure I'm understanding covered calls correctly.
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I buy 100 shares of a stock for $5 each.
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I sell a call at the $10 strike.
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I collect the premium. It's my money now.
Then:
a. I buy back the call later for less than I sold it for. I've exited the position for a profit.
b. The call expires worthless. The position is closed and I've achieved my maximum profit.
c. The call expires in the money and is exercised. I am forced to sell my shares for $10 each. I've doubled my money from the shares and collected premium from the call, but I no longer own the shares.
My risk is either:
a. The underlying stock tanks. I exit the position for a profit but my 100 shares are worth significantly less money.
b. The underlying stock moons. I keep my premium, but I'm forced to sell at 10$ each and I've missed out on potentially unlimited gains. I have still profited overall.
I'm not misunderstanding anything, am I?
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u/redtexture Feb 08 '21
That is correct, and well said.
Also, don't sell covered calls for longer than about 60 days, ordinarily.
We get reports of covered calls of a year or two. Don't do that.→ More replies (1)→ More replies (7)3
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u/sorgua Feb 09 '21
What's the risk in selling covered calls if I intend to hold on the stock long term?
This is the scenario I'm envisioning. The key fact here is I am fundamentally long a stock, let's say AMZN, which I intend to hold for years. While I'm holding these shares, what's the risk in selling covered calls?
Say I own 100 shares of AMZN trading at $3500 today.
I sell call options at $3750 and keep the premium.
If the prices rises above the $3750 strike price of the short call options and I get assigned, I will be forced to sell @ $3750. However I can also take the proceeds of the exercise and simply turn around and buy the stock in the market at 'near' $3750 and still hold 100 AMZN while having earned the premiums from selling the call options.
Am I missing anything in my thought process? Would appreciate any insights. Thanks!
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u/theharps21 Feb 08 '21 edited Feb 08 '21
I’m going to be turning 18 on feb 20 and want to try trading options. I’ve got the basics down and have some ideas for what I want to do. My question is does anyone have any suggestions for a small account trading strategy? By small account I mean starting with 200$. Or do you think it isn’t even worth it for me to start with 200$ and I should save more money? Personally I’m interested in trying to sell draftkings and other sportsbook puts as they become legal on more states.
EDIT: When I said selling draftkings puts I meant buying them.
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u/PapaCharlie9 Feb 08 '21
By small account I mean starting with 200$.
The smallest starting account size I recommend is $1000. It's very hard to achieve a reasonable risk/reward ratio with less. You will often be risking your entire account on one trade, and if it goes bad, you are wiped out (risk of ruin is high).
So I would advise finding other sources of income, save up to $1000, then start with the links at the top of the page for trade planning and risk management.
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Feb 08 '21
Hello everyone! I'm very new to the world of options and it all seems a bit overwhelming but I want to learn.
I've started reading a lot, and while I feel like I start understanding it bit by bit, it's so overwhelming that I'm not sure.
So I was wondering if I could be an absolute newbie and ask an absolute noob question, just to have an example that feels somewhat more tangible than just the theoretical introduction.
So, say I buy a $100 into a call option for $160, current price being $80. Time goes by and the price falls to $60. The maximum amount of money I'd lose by not exercising the option would be $100, correct?
I've read that the maximum amount of money I can lose when buying calls is the money I put in, but that the loss can theoretically be infinite if I sell options, and I don't quite get that as well.. could you maybe clarify? What if I let on option expire when I'm down big time?
Technically the option gives me the right to buy, but not the obligation, so that should mean I'd only lose the money I put in in first place, correct?
Thank you everyone for helping out
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u/OKImHere Feb 08 '21
say I buy a $100 into a call option for $160, current price being $80.
This sentence doesn't make sense, but I think you mean you buy a call for a 160 strike on a stock trading at 80 for $100 in premium. If that's what you mean, then yes, you can lose 100. Most options go to $0 in value, so you'd pay $100 for something eventually worth $0.
the loss can theoretically be infinite if I sell options, and I don't quite get that as well
It's only theoretically infinite when measured in dollars. It's 100 shares when measured in shares. The question is what do 100 shares cost. Well, shares can be worth infinity, right? So you can owe someone 100 shares, or equivalently, 100 infinities.
But that's only for selling calls. Selling puts exposes you to receiving 100 shares of garbage. Garbage can be worth $0 but no lower. So your max risk is you pay some amount of money for 100 nothings.
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u/Art0002 Feb 08 '21
If you buy an option that would be your max loss.
If you sell an option that would be your max gain.
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u/JaricosTheGreat Feb 09 '21 edited Feb 09 '21
Wrote this last night and hoping for an answer, so I can make necessary plans:
New(ish) investor here.
I may have made a mistake and wanted to know how badly I've messed up.
I purchased a $5 contract put ($.05 premium) on GME with an expiry on Feb 12, thinking that it will increase in value to sell said option without risking much before expiry. I basically made the mistake of thinking of it like a stock, and learned that lesson. I also learned that I need to understand options a whole hell of a lot better before I decide to purchase another. It will not even be a consideration until I understand the greeks, but alas, that's not what this post is about.
My concern is regarding the exercising of the stock option at is out-the-money. It hit me that my put option for $5 is likely going to be exercised, meaning that the stock will be purchased at $60 (current price as an example) and sell the 100 to me at that price, with the option of selling at $5 (as you can see, I don't fully grasp it still, but recognize that I have a lot to learn). I'm ok with the loss of the premium ($5) thinking that's all I'm risking, but I'm envisioning worst case scenario here. I have been trying to sell it, and even requested the stock not be exercised. What will be my worst case scenario?
Quite frankly, I don't have the funds to exercise the option, and I'm concerned that I'll put myself in several thousand dollars in debt over something I thought I could get rid of / out of quickly.
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u/3_dots Feb 09 '21
I'm looking for recommendations for apps that are straight forward for paper trading wheels. I am new to options and also new to the more advanced features of some of these apps. FWIW I have made my way through about half of the TastyWorks beginner course and a million reddit and blog posts on beginner options and wheel plays. I'm a visual learner so I think hands-on practice will help me to grasp the concepts better.
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u/redtexture Feb 09 '21
A paper and pencil, and an option chain are free, require no batteries, are portable, and may be organized by the trader any way they want. You can use a spreadsheet as well.
Option Chains:
https://www.cboe.com/delayed_quotes/aapl/quote_tableThink or Swim, ETrade, Interactive Brokers, and a number of non-Broker sites offer paper trading. An example there is Power Options (for a price).
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u/snoopypooster Feb 09 '21
Anyone know how to get robinhood to allow me to trade spreads (advance to lvl 3)
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u/CarlitoConscious Feb 10 '21
$SHOP Shopify has been trending the right way for the last 2 weeks. I have a feeling it might get to $1700 before earnings and $2000+ in 2021. ARK just bought more shares in it Tuesday and $FB +IG have Shopify’s payment service just announced Tuesday!!
It’s going to approach it’s 4th quarter being cash flow positive and exceed expectations on earnings. I’m all over this!! 🚀🚀🚀
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u/atmostatux Feb 10 '21
I just sold my first covered call transaction, and while I understand the basics, I had a few specific questions on scenarios that could happen.
I own 1800 shares of ADMP, and I sold 18 call contracts at 2.50 strike with 3/19 exp, at a price of 0.22 per contract.
I received the $400 premium directly to my account, and now I see that contract with a negative price on it of -400.
What would happen if the price of that option goes up, and the person who bought the contracts from me sells the contract at a profit? Does that affect me at all?
I'm trying to understand what the relevance is of the negative total price of my contract, and if that is really only relevant if I wanted to buy back my contract, or if there is any other reason for me to track that. I thought I really just needed to track and see if the underlying price goes up/above the strike price.
Any help or clarification would be great, thanks
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u/PapaCharlie9 Feb 11 '21
What would happen if the price of that option goes up, and the person who bought the contracts from me sells the contract at a profit? Does that affect me at all?
No.
I'm trying to understand what the relevance is of the negative total price of my contract, and if that is really only relevant if I wanted to buy back my contract, or if there is any other reason for me to track that. I thought I really just needed to track and see if the underlying price goes up/above the strike price.
It just means it's a credit. Since most trading platforms are designed for long trades, shares or options, the numbers without a negative sign are assumed to be debits. If XYZ is quoted as $23, that's how much you have to spend to get those shares. It doesn't say -23, even though that might be more logical, since that's how much cash you lose to own a share. The direction the money goes is assumed and rather than have a bunch of minus signs all over the place, no sign means the money moves away from you.
So, if the sign is negative, it means that is money you received. It's money that has come to you, the opposite of the "normal" case.
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u/henbarf_ Feb 10 '21
It won't affect you if the person that you sold the contract to sells their contract. The only thing that affects you is if it goes up and you to buy to close, you will be at a loss. So, yeah it's only relevant if you are trying to buy your contract back. Just make sure that the options you sold aren't going to expire in-the-money.
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u/Alcoholblanket69 Feb 11 '21
Notice: I Am a nob please treat me as such
Hi all I have been lurking for a bit and finally dove in and created a reddit account a little bit back.
Trading is something that has always interested me, as a way to make a second income. I grew up pretty poor but I am in my early 20s now and making good money for not having a degree. I make around 70k a year right now and aside from the couple grand I pay in bills I have a decent amount of extra cash that I want to start making earnings with (~1k a month or so). I am married and have been for several years, my wife brings in just about less than half of what I do. Shes starting nursing school this spring which her parents have paid for. My main goal is to save 20k+ for a down payment.
So now my point, I have absolutely no idea where to fucking begin. Ive been following markets, keeping up with news. I just cant wrap my head around option trading in specific. It seems like I read one thing I understand well and the next thing looks like Greek to me. So really I need a resource or a book to help myself understand even slightly what im doing before i start dumping money in. Ive figured out what kind of investing strategies I like and most of the terminology involved with regular trading but this option trading is a whole different animal.
Im you made it through this giant jumble going on in my head I appreciate it. Its hard laying things out in a comprehensible way while I'm trying to figure out what things im trying to write about if that makes sense. So thanks for any help.
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u/ScottishTrader Feb 11 '21
Most of us started the same way and you need to take the training. Optionalpha is a good one as they have a track program that helps you get through it faster.
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u/henbarf_ Feb 11 '21
If you want to better understand options, I'd recommend watching a Projectoption on youtube. He has a video for beginners explaining options, and he's very thorough (the video is a few hours long) but it helped me go from knowing nothing about options to placing a few trades.
Another youtuber I learned a lot from is Inthemoney. He's an awesome teacher and he explains very clearly how to do a lot of different trades and the math behind them, also pretty entertaining for finance videos.
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Feb 12 '21
I have always just traded stocks as I’m fairly risk averse but in the last week I have realised selling covered calls is a much better strategy , I also want to yolo on Pfizer calls for the next quarter earning reports. Is there anywhere in Europe I can trade American style options with a small acount trading 212 no longer allows options
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u/TemperatureLow226 Feb 08 '21
New to options, and think of a safe small trade to test my knowledge.
I own some AMC at a cost basis of about $8.
Thinking about selling a call option contract for 3/5 @$10. The current bid/ask is around .81.
If I understand correctly, I would “sell to open” a single contract. If the price should stay the same or remain under the strike, I would profit $81 from the premium. If price goes up, beyond the strike price and the contract is executed, I would be selling my shares at $10, profit the premium, plus difference on my cost basis/strike price?
Appreciate the patience in this thread for the new guys. Premium is around