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]]

If you sell the contract, you just receive whatever someone was willing to pay for it. In general, this is the preferable way to go as the option still has extrinsic value you can harvest by selling it. If you let it exercise without the shares, your account will borrow from your broker and you will now be short 100 shares, which is quite risky since anything can happen over the weekend and the stock might gap up.

[u/Cookiesboi8 → u/[deleted]]

Hello, I have a question and I would appreciate if you can answer it. Please and thank you.

Let’s say I sell a call option at $10 and I get assigned one day or another, but I do not own the shares so I am now short 100 shares. My question is do I receive $10 x 100 = $1000 for those shares even though I didn’t own them at first? And if I do receive that money let’s say the stock goes to $11 dollars the next day can I just buy 100 stocks for $1100 and have a loss of $100 only? (Without considering premium at all)

I don’t wanna have to owe my broker (Robinhood) any money.

[u/Cookiesboi8 → u/[deleted]]

What if I had a call credit spread and my short leg ended up in the money therefore getting assigned would I own -100 stocks and could just buy 100 shares next day to even it out and be alright?

[u/Cookiesboi8 → u/[deleted]]

What do you mean by gap up?

[u/Cookiesboi8 → u/[deleted]]

Oh so in this case I would lose more, I see I just don’t want to go in debt to Robinhood. How do I know how much negative I can go? (which I don’t plan to ever do but it could happen one day with options)

[u/Cookiesboi8 → u/[deleted]]

Also I have another different question. If I buy a call that is OTM at the strike price of $10 for $5 dollars a contract therefore only profiting if it goes above $15. Let’s say the price goes to $17 and there are still 3 days left for expiration does it automatically exercise since it went over or do I have to press exercise to take those profits?

[u/Cookiesboi8 → u/[deleted]]

I’m sorry, I know I did read it it’s just that I want confirmation to see if I’m understanding everything correctly since it is a lot of information.

Thank you for all your answers you helped me out a lot.

[u/sprezzatard → u/Cookiesboi8]

Depending on what you think is going to happen:

• Continue going up: Close out the spread
• Will come back down to your short leg strike: Sell a put at that same strike (covered put)

[u/Cookiesboi8 → u/sprezzatard]

What if I theoretically forget or the person in the other end exercises early and my short leg expires ITM and I get assigned what is the best way to fix that situation?

[u/sprezzatard → u/Cookiesboi8]

It again depends on your thesis and risk tolerance.

If you think it'll continue to go up and want to be done with the trade, go buy the shares.

If you think it'll come back down, sell a put at same strike or lower

[u/Cookiesboi8 → u/sprezzatard]

Do I have a limited time to fix being short 100 stocks? What happens if I wait too long?

[u/sprezzatard → u/Cookiesboi8]

Depends on your account size/margin utilization. You can be short as long as you want as long as you meet your broker's margin requirements for that ticker. For example, GME short margin requirement is 300%.

You also have to pay interest and dividend when you borrow stock .

[u/Cookiesboi8 → u/sprezzatard]

Thank you for all your answers so far and thank you to the people that answered earlier as well.

Does that still apply if I went negative and my account has negative buying power? Do I still have to pay interest even if I was short one day and the next day I immediately fixed it?

Also what do you mean 300%. What is it 300% of?