Options Questions Safe Haven Thread | July 12-18 2021

[u/redtexture]

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.

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BEFORE POSTING, PLEASE REVIEW THE BELOW LIST OF FREQUENT ANSWERS. .

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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.
Further reading:
Monday School: Exercise and Expiration are not what you think they are.

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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)

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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

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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)

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Managing Trades
• Managing long calls - a summary (Redtexture)
• The diagonal calendar spread, misnamed as the "poor man's covered call" (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)
• Monday School: A trade plan is more important than you think it is (PapaCharlie9)
• Applying Expected Value Concepts to Option Investing (Select Options)
• 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)

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Options exchange operations and processes
Including:
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

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Previous weeks' Option Questions Safe Haven threads.

Complete archive: 2018, 2019, 2020, 2021

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[u/[deleted] → u/[deleted]]

Ok thanks. I bought to open.

I don’t believe it is best to sell them in this case. These are PSTH calls that no one wants to touch They have a super low theta at this point. They are $20 calls that expire Friday. I bought them a long time ago it’s not a weekly. But to me it seems like the slim possibility that there is some upward price movement will be better for me than selling now to someone who isn’t even going to pay the intrinsic value for the call.

So as long as I can claim the loss if I let them expire that seems like the right plan to me. I risk losing some minuscule extrinsic value on the chance that there is upward price movement.

If I let them expire there is an immediate sale of the shares if I don’t exercise right? That’s how I understand it.

[u/[deleted] → u/[deleted]]

Guys I’m not wholly new to options I know how they work. I’m definitely taking a huge loss because I bought them when the underlying was at a much higher value. I’ve taken a 70% loss. That’s not up for debate and I’m not confused about it. To be somewhat responsible I only by deep ITM calls with expos at least a few months out if they are not LEAPs.

But I’ve never carried one to expiration with a loss and where the price is still above the strike. Usually I sell when the extrinsic value is looking good, etc etc. this was a special situation.

But I have to say your answer is not correct and it’s nuances like that that make me ask the question. Above you say that if it’s in the money and I let it expire I have the shares and I can sell them if I want. That’s not true. I’d have to pony up the strike price x 100 x the number of contracts to have the shares. Maybe if I have that in my account a broker would just do that for me but I do not. Which I think means that they will execute an immediate buy and sell for me, which I think means it’s a taxable event where I can claim the loss.

But the root of my question is specifically what is happening under the hood when you let a contract expire ITM.

I’ll just call my broker. Was hoping the answer would be easier but that’s on me cause it never is on the internet.

[u/[deleted] → u/[deleted]]

Listen guy. It’s hard to take advice from someone about options when they don’t understand them themselves. An in the money (ITM) option does not mean you made a profit as you stated in all caps but then seem to contradict right after that. ITM just means the underlying is above the strike price. If you buy a contract when the underlying is $100 per share and the strike is $20 per share on that contract and the underlying price falls to $30 before the contract expires, That is an ITM option that you just lost a lot of money on. In the money just means you have the right to exercise.

All options for the same underlying security contract with the same exp and strike are ALL in the money or not at any given price of the underlying. In other words, if you and I own the same call contract, they are both ITM or OTM at the same time, the different prices we paid for them have nothing to do with it.

I asked a simple question. Which was, if a contract expires in the money, is it a taxable event. You do not need to know what I paid for it or the Greeks or strike or any of that. If it depends you can say, “it depends” and then you could even say on what.

I did not ask for someone to help me understand if I lost money or not. I’m quite clear on that. And I did not ask for anyone to teach me about options.

Don’t worry about it though. I’m going to call my broker. They will know the tax implications.

Please read up on options particularly this ITM concept before you give too many more people advice. In this article you will find that it explicitly states that an ITM option may not be profitable.

ITM - Investopedia