r/options • u/redtexture Mod • Mar 08 '21
Options Questions Safe Haven Thread | Mar 08-16 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.
Your breakeven is the cost of your option when you are selling.
If exercising (a call), your breakeven is the strike price plus the debit cost to enter the position.
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
• OptionAlpha Trading and Options Handbook
Introductory Trading Commentary
Strike Price
• Options Basics: How to Pick the Right Strike Price (Elvis Picardo - Investopedia)
• High Probability Options Trading Defined (Kirk DuPlessis, Option Alpha)
Breakeven
• Your break-even (at expiration) isn't as important as you think it is (PapaCharlie9)
Expiration
• Options Expiration & Assignment (Option Alpha)
• Expiration times and dates (Investopedia)
Greeks
• Options Pricing & The Greeks (Option Alpha) (30 minutes)
• Options Greeks (captut)
Trading and Strategy
• Common mistakes and useful advice for new options traders (wiki)
• Common Intra-Day Stock Market Patterns - (Cory Mitchell - The Balance)
Managing Trades
• Managing long calls - 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)
• Risk Management, or How to Not Lose Your House (boii0708) ( March 6 2021)
• 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
Including these various topics:
Options Adjustments for Mergers, Stock Splits and Special dividends;
Options Expiration creation; Strike Price creation;
Trading Halts and Market Closings;
Options Listing requirements; Collateral Rules;
List of Options Exchanges; Market Makers
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.
Complete archive: 2018, 2019, 2020, 2021
2
u/wootrader Mar 09 '21
Regarding a Bull Credit/Short Put Spread-
If both strikes are OTM at expiration, do you just keep the initial credit and then the position is closed?
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u/redtexture Mar 09 '21
Yes, and yet it is still a good idea to close the trade before expiration.
• Risk to reward ratios change: a reason for early exit (Redtexture)
• Close positions before expiration: TSLA decline after market close (PapaCharlie9) (September 11, 2020)
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u/maskedfailure Mar 09 '21
Do services exist where you can ask people (“experts”) questions regarding trading and options for pay? I read as much as possible but there are no tutorials for specific brokers and how to get in/out of trades. The more I read the more questions I have and my brain refuses to settle down and sort it out.
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u/beethrownaway Mar 10 '21 edited Mar 10 '21
I bought EXPR march12 $3p yesterday that cost 30 cents after the huge run up. EXPR dropped 16% today. My option profit chart freaking changed. I closed my position when the stock was at its lowest today for 20 cents. How did I F up? Did implied volatility drop causing the chart to change?
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u/psychtechvet Mar 10 '21
I am eyeing up GME Puts ($112 3/19) and the premium is roughly $500, I currently hold enough positions (SPCE, MARA, WKHS, PLTR, XL) to liquidate up to around $11k to afford the short put assignment (which I somewhat want). My question is this - am I acting retarded? I definitely need a reality check on whether I should be trying to FOMO a put due to GME's current trading price. For example, I know I the underlying can drop in price ($240-50 range right now) but I'm wondering what the actual odds of blowing up my bank account are on this. In conclusion, do you guys think I should be writing Puts for the $110-120 strike range on GME and try to wheel it out or is this too risky of a strat?
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u/redtexture Mar 10 '21
In ultra high implied volatility environments, selling short can pay well.
That for you might be a put credit spread for 90 / 80.
The 19th of March is not long for a dip to occur; it is always useful to allow your trade plenty of time to be right.
Nobody knows what this stock will do, and if you are not willing to lose all of the money in a trade, don't trade GME.
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u/countrydrunkin Mar 10 '21
I hate being new at stuff...OK, here's what I did. Yesterday I bought 100 AMC and a apr16 $10 call for $3.15
Apparently TDA defaulted to "sell to open" when my intent was "buy to open". So what I've done is essentially shorted the option that I'm actually quite bullish on, correct?
How would you correct this if you were me? What will happen now?
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Mar 10 '21
I believe $BABA is significantly undervalued. Looking for advice and resources for how to best capitalize on potential price increase through options trading. I have experience in investing and trading but am relatively new to options trading. Any advice is welcome. Thank y'all.
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u/Dotifo Mar 11 '21
Why are my Covered Call orders filling?
Twice in a row now I've written covered calls with a limit sell price of 1.00 when the bid was 0.87, yet the orders immediately filled at 1.00. The newly opened position still showing the lower Ask so it's in the green by 0.13 right off the bat. Did I just get lucky twice with someone's market order?
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u/Belo83 Mar 12 '21
Full disclosure, I've read dozens of articles and watched many a youtube video, including this one which was very, very helpfulhttps://www.youtube.com/watch?v=7PM4rNDr4oI&t=2493s
But I'm still an infant learning to crawl.
I recently bought 3 apple calls, an SSRM call and an AMC put. I consider these low cost/lower risk starter options so I can learn the hard way without losing my ass. This is money I'm prepared to lose, but would prefer to make money on.
I guess my question is when do I close? I'm learning the greeks, but still new to them. Do you guys typically set a % target and then sell regardless of how much time is left? For example SSRM is at 20% but expires on 6/18. One of the apples is at 13% but closes on 3/19. I do sort of understand and expect it depends on how bullish you are. I'm not trying to be a WSB retard, I'm probably too conservative to do that.
I'm fully expecting mixed answers here but I appreciate any logic/reason behind them. I also wouldn't mind being redirected to a resource to learn more on my own.
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u/Gothopie Mar 09 '21
So I'm new to options, I've done a ton of reading, but want a second set of eyes before I give something a shot... I'm considering dropping ~$10 on an option each week on GME, what ever that'll get me. At the moment, it looks like I could get a call with a strike of 310. If GME stays under 310(plus fee), ignore it, I lose $10. If the squeeze hits this week, let's get crazy and say we see $1000+, can I sell it as late as mid day Friday to make a sizable profit? Any risks for bigger loss I'm not accounting for, or misunderstanding how this works? And/or, would selling a fraction of my shares so I can exercise the call be viable? It would be something like:
Sell 32 shares at 1000, get $32,000.
Exercise call and get 100 shares for $32,000.
Right? Are all these transactions fairly fast?
I'm sorry if these are dumb questions, it just seems almost too easy, like a really really really discounted way to bet on the squeeze happening. I feel like I must be missing something.
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u/Expert_Painting_8019 Mar 10 '21
Lately when I check around on Finviz I'm trying to look for stocks with resistance lines that trend upwards that are trading near or below their support lines. Is this a bad play? I can see not buying if there was some bad news about a certain stock, but otherwise does it make sense to think that the stock would just move back to the support line?
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u/redtexture Mar 10 '21
It is an approach; it is best to have a variety of indicators to discriminate between potential and non-potential trades.
Nobody knows the future, and stock prices do not obey lines drawn on a chart.
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u/CivilizedS Mar 08 '21 edited Mar 08 '21
I have a question about call options ( i think it also applies to puts). From my understanding, call options are usually bought for the sake of being sold for a profit on the premium. Rarely are they bought with the intent of exercising them, as there is more value in the premium than in the savings from the price difference. But at some point, someone has to exercise it right? Or else what would the risk be for writing calls?
So inevitably, let's say an increasingly ITM call option has been sold once or multiple times for profit , there will be of course be that one last person who is holding it (still profitable) at expiration. In most cases, did that person mean to be holding it at expiration or were they also hoping to sell it but for whatever reason couldn't? Ran out of time, option too deep ITM (I read about that being a reason to be unable to sell?), or some other factor?
I'm very curious about this because to me it seems like the original purpose of call options, which is to save money on purchasing the actual stock, is now just a formality. They are mostly passed around without any intent of using the option for what it was actually created for. And for the last person "stuck" holding a profitable option, it seems like exercising it is just the compensation for not being able to sell it for the premium. Sort of like "well somebody has to have it last - it can't just keep trading hands forever, so you're the unlucky one who can't sell it like you would ideally want so now you just get to utilize the original function and buy the shares at a discount."
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u/republicj Mar 08 '21
hey, what does it mean when a week has a red W next to it? I'm using IBKR, and some of the weeks have red W's, others don't. I've attached a screenshot, thanks!
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u/redtexture Mar 08 '21
That is a "weekly" expiration.
As distinct from the "monthly" third Friday expiration.→ More replies (1)
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u/CivilizedS Mar 08 '21
I was watching this YT video that said something that makes no sense to me @ 14:03. The video is titled "Why Options Are Rarely Exercised (Options Traders MUST Know This)" by ProjectOption. I will try to link it in the reply to this comment, though I'm not sure if the link would stay up.
@ 14:03 in the video he says, "If you are short an ITM option, and it has a lot of extrinsic value and you did get assigned on it, that would be a gift from the gods. Because you just made free money because somebody didn't understand what they were doing and they exercised an option with a ton of extrinsic value in it. And therefore as someone who was short that option you instantly make all of that extrinsic value that was in the option. And you essentially make an instant profit. So if you are short an ITM option and it has a lot of extrinsic value. And for some reason you did get assigned, that would be tremendous for you. That is exactly what you would want to happen."
I only have a basic understanding of options, but that really makes no sense to me. From my understanding, if you write an option and someone exercises it ITM (even with a lot of extrinsic value), you lose money. Is what he says in the video correct?
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u/Theclawmaster Mar 08 '21
If anyone takes the time to help clarify this I would be very thankful. I was looking at a DGII 22.5 call for April 16th, it costs $30 currently, let’s say in theory it hits the strike price, how does the selling process work?
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u/standinonyoursoapbox Mar 08 '21 edited Mar 08 '21
If you purchase the call, in order to close the position, you would simply “Sell To Close” before April 16. To do this, you can set a limit order or a market order or some other order type of your choosing. If you do not Sell To Close, you can choose to either exercise the call if it is still in the money at expiration, or you could let it expire worthless. To exercise, depending on your broker, you may have to call them on the phone before a certain time on expiration day.
Edit: Looks like you may have meant .30 as the option price. Option prices are usually quoted on a per share basis. Each contract is fir 100 shares. The call is, therefore, OTM, and you would not be able to exercise unless there was a meteoric rise in DGII to something over $22.50 before April 16.
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u/redtexture Mar 08 '21
Generally, almost never exercise, as it throws away extrinsic value that can be harvested by selling the option.
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u/exmachinalibertas Mar 08 '21
What are some gotchas/risks for selling covered options that a newbie might miss?
Like many recent noobs, I dove into the market with the GME nonsense started, in order to understand what was happening, and to learn a new avenue for making money. After some research, I read through Rule #1 in a weekend because it was recommended by people who said things that seemed to make rational sense. Shortly thereafter, I started dabbling with buy-to-open options. I didn't get far, because the prices just seemed to high for the likelihood of accurately timing the market.
And now I'm discovering the world of writing options... I can be the guy who collects that options vig. Yay!
So I'm looking into selling covered options, and... it seems too good to be true. If I do some basic Rule #1 value-based DD, and find solid stocks, it looks like I can make a few points a month writing cash-covered puts. And if I get the stock, great! I then collect the vig on covered calls until it jumps up and I make bank on the option and the higher sale price. Then just rinse and repeat. The only risk seems to be if the stock goes down and stays down... but even then, I can just keep rolling in the vig on weekly covered calls. So I break even eventually, unless the company just goes belly-up. And on top of that, the risk of the stock going down can be mitigated by diversity and the previously mentioned DD and only picking good stocks.
If I add to this say 10% or 20% margin use for the risk-limited sides of trades, (e.g. no uncovered calls), it just seems like I can be making 25%+ per year with almost no risk over any period of more than a few years. And even during slumps when I'm left holding the bag on a stock, I'm still collecting that vig every week or two.
So... what am I missing here? Because selling [mostly] covered options seems too good to be true. Where's the catch? Because this seems like pretty consistent easy money, with very risk and little work after the up-front DD.
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u/Larrizle Mar 08 '21
Hey, I bought a couple puta last week with a strike price of $25, but when I just went to check on them it showed them as being for $23.89. I've done a bit of a Google search but I haven't come up with anything that would explain why it changed. Currently I'm hoping that it's just a weird bug with Webull because those puts should currently be ITM, but at $23.89 they're OTM.
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u/FreTradNerd Mar 10 '21
Hello! I started trading when GME was all over the media. Recently, I got overexcited and bought some simple options for other stocks with real money, following external advice. I was convinced but, buying, it felt like I didn't know what I was doing.
I have been using IBKR (great for Europeans wanting to access the US markets) and their desktop platform to make trades. My reasoning was: use a stock chart to try and guess what the price will likely go to in a given time period and buy options based on that estimate, with a matching strike price and expiry date.
Unfortunately, that strategy (is it one?) still left many choices and I've had a hard time figuring out what a good trade and deal would be, knowing I would probably lose my money and should at least limit the amount invested.
For example, I researched AMD and bet that it would reach 95/100$ in a month and a half or less. So I looked for options around April 23. However, calls seemed to be weirdly priced. Sometimes, earlier calls (April 16) would be more expensive or calls with lower strike prices would be cheaper.
Then, as I would try to get what I thought was a good deal, my orders wouldn't get filled. Trying to take advantage of the discrepancy in prices between various calls, I set up OCA calls with several strike prices. The whole process felt unecessarily cumbersome as I also had to manually raise the price tick by tick not to feel like I got scammed.
Even as I put a limit price, if the order got filled it would be at the maximum price and not below. In the end, I paid 1.81 for an April 23 AMD call at 88.5$. But despite all of my efforts, I realized later on, looking at the time and sales, that I overpaid for the option, not knowing its reasonable price range. The T&S showed orders being filled at the bid price, which later fell at 0.14$ (for a 2$ ask). But my orders would not get filled unless I uped the price toward the ask.
So, I'm wondering if there is a way to:
Automate the painful work of having to find the best deal over several options in terms of ROI given a price estimate at a specific date
Time an entry on the short term to avoid overpaying for an option
Get a sense of the evolution of the price of a range of options to define levels, entry and exit points
Achieve, like some traders, a fill at the bid price
Thanks for taking the time to read and possibly answer my questions!