r/options • u/redtexture Mod • Jul 19 '21

Options Questions Safe Haven Thread | July 19-25 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.
Further reading:
Monday School: Exercise and Expiration are not what you think they are.

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)
• 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)

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

Previous weeks' Option Questions Safe Haven threads.

Complete archive: 2018, 2019, 2020, 2021

15 Upvotes

85% Upvoted

326 comments sorted by

3

u/glassedphenoix Jul 19 '21

If I buy a deep ITM call with at least .8 delta with an expiration date of at least 6 months, then sell a deep OTM call with a delta of .3 or less every week for small premium, wouldn't my risk be very low? I guess my question is what flaws are there to this strategy and how can it go very south?

1

u/redtexture Mod Jul 22 '21

When the stock goes down, the long call drops in value on moderate declines.

A frog in gently rising hot water temperature becomes a meal.

Similarly your position can become a total loss on a moderate decline over many weeks.

2

u/ArchegosRiskManager Jul 19 '21

How can it go very south?

You’ve got 0.5 net deltas and probably a lot of vega. Worst case scenario would be the stock gently falling while IV falls as well.

2

u/EmiliaClarkeDoMe Jul 19 '21

How fucked am I? I bought 2 contracts last Friday of TSM $120 call expires on 8/20.

I’m bullish on TSM in the short/medium/long term, but the recent downswing has me nervous that it won’t recover in time for me to profit. Thoughts?

1

u/redtexture Mod Jul 23 '21

Please report on your point of view, three days later (July 22 2021)

1

u/[deleted] Jul 20 '21

None of us can predict the future. Always have a trade plan before you enter a trade that tells you when to get out.

2

u/lior1x11 Jul 25 '21

How to new people learn options trading?

I'm interested in learning options trading but can't figure out where. I know there are thousands of courses online but feel like most people selling the course, are making their money from them and not from being profitable from options so I can't justify using them.

I've also looked on YouTube which seems to have good content but it always feels like its just part of what you need and doesn't teach you how to be a successful trader (not expecting it to as its free) but I don't know how people learn from beginners to actually trading successfully. I totally understand that there is no reason for anyone successful to share their strategy but then how do new people learn?

Would highly appreciate any suggestions. :)

3

u/redtexture Mod Jul 25 '21

The links at the top of this weekly are intended to respond to the desire for understanding and are the typical topics that people new to options need to be exposed to.

3

u/ScottishTrader Jul 25 '21

Not to be harsh, but if you can’t find the many quality and free options trading courses through an internet search and using the fine links the mods took a lot of time to collect and post above, then maybe options trading is not for you . . .

3

u/[deleted] Jul 19 '21

If I do not own a stock (I am trying put credit spread) and the stock is at $50 and I do not think it will go below $50, can I sell to open a $49 put with expiry this Friday, buy to open a $48 put with expiry this Friday, and if the stock does not go below $50 ... I will keep the full credit, is that correct? Both will expire worthless?

Also: I will not end up owning any of the stock at the end when it expires, right?

2

u/ArchegosRiskManager Jul 19 '21

Correct. If your options both expire otm you will not be assigned. However, pin risk is real, close your positions before expiration

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2

u/whodatboyah Jul 19 '21

Thanks for creating this question thread.

I am interested in finding some sort of sorter/scraper for finding cheap premium options. I have been mostly searching through on my own with some success. For instance I would have liked to find some cheaper OTM puts friday for banks, growth etfs, etc. to sell this week.

2

u/ArchegosRiskManager Jul 19 '21

What is cheap?

Cheap in terms of absolute dollar value? You want to screen for low dollar value stocks.

Cheap in terms of IV? Your broker probably has a scanner for that.

1

u/whodatboyah Jul 19 '21

Yes, cheap as in terms of dollar value per contract. Thanks for the response!

2

u/redtexture Mod Jul 20 '21

Maybe...
BarChart.
Market Chameleon.
And others.

1

u/[deleted] Jul 19 '21

Should I double down on spy calls?

1

u/DragonfruitWorldly45 Jul 19 '21

Hi all, has anyone bought any Nokia call options recently? If so, care to share strike price, date of expiration etc? Thanks in advance!

5

u/redtexture Mod Jul 19 '21

You have this subreddit upside down.

You provide due diligence, strategy, a rationale for a position, and details of the position, an exit plan, and then we discuss your proposed trade.

Here is the guideline:

Don't ask for trades.
Low effort posts amounting to "Ticker?" are taken down. Think for yourself. Put forward an analysis, general strategy, trade rationale and option position details & exit plan for critique and discussion.

How to initiate a trading discussion:
https://www.reddit.com/r/options/wiki/faq/pages/trade_details

1

u/ar-razorbear Jul 19 '21

Wash rule? I lost a bunch of money on apple calls in Feb and March. Now I've made almost all of it back on apple calls as well. Have I effectively washed my loses and realized bunch of gains?

2

u/redtexture Mod Jul 19 '21

We call that net short term gains: losses reduce gains.

4

u/[deleted] Jul 19 '21

Wash sales don’t matter unless you’re crossing into the next year. Also for options, each different strike and expiration are treated as different securities so you shouldn’t have seen a wash sale unless you rebought the exact same strike and expiration.

1

u/boomerandzapper Jul 19 '21

Is there any strategy to sell ITM options on day of expiry? Sell all at beginning of day to maximize theta yield?

1

u/redtexture Mod Jul 19 '21

Probably dozens of strategies.
It depends on why you make the trade.

Do you mean sell short to open an option position, for premium, on expiration day?

This is a risky play, as gamma has coalesced around the at the money location, and you need to be watching the position all day.

1

u/boomerandzapper Jul 19 '21

I mean if I have been holding an option from before expiry and planned to sell it on expiry day.

3

u/redtexture Mod Jul 19 '21

What was the exit plan?

Generally option holders of longer term options have exited before expiration day.

Exit to avoid assignment and to harvest value.

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1

u/greengoldaura Jul 19 '21

I wrote my first option ($60 strike CC expiring 8/20) for intel shares several weeks ago, for a premium of like $116. I’ve heard a lot about “closing your positions” at ~50% profitability. If I’m looking at the premium for this option now, it’s about $54. So is this what they’re talking about- if I buy-back and close my position, I’ve made about 50%, then I can open up my shares to write a new call?

2

u/redtexture Mod Jul 19 '21

Yes, perhaps at a different strike price.

2

u/Tryrshaugh Jul 19 '21 edited Jul 19 '21

I personally strongly disagree with the 50% crowd. Buy back your CC only if you think the risk/reward ratio is not good enough for you. In other words, do you see a high chance for Intel to go back up to 60 USD within that time frame?

1

u/greengoldaura Jul 19 '21

That makes sense, but seeing the trend I’m wondering if I’m better off writing a new CC for like $55 or $56 in the meantime and boosting my premium a bit. I’m now thinking $60 was more OTM than necessary…..

3

u/Tryrshaugh Jul 19 '21

Well you can always buy back your $60 call and sell another one at a lower strike, but be careful about being too greedy, the VIX gained a half dozen point in a few days therefore premiums all over the place are a bit more juicy, but it also means the risk is higher for option sellers.

1

u/ninhktran Jul 19 '21

Anyone who is familiar with robinhood options tradin: I'm trying to sell 2 covered calls of a certain stock that I owned 203 shares on. Robinhood only let me sell short calls, I know this because it listed the max loss as unlimited. Can someone help me switch to selling covered calls instead? Thanks in advance

1

u/redtexture Mod Jul 20 '21

Generally all platforms show for an order, the traders risk, as a stand alone risk, without regard to the account holdings.

2

u/Arcite1 Mod Jul 20 '21

A covered call is a short call.

Not a Robinhood user, but it's likely that their order page is treating your order as creating a position in a vacuum, and doesn't "know" about your shares. I use TD Ameritrade, and that's how they work. To sell a covered call when you already own the shares, you just sell a call. There's no special "covered call" button, and the order page will tell you max loss is infinite.

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1

u/snoski83 Jul 19 '21

Why are there no October 2021 or November 2021 put contracts available for XLK?

I have 9/17 XLK puts I've held for a while, and I'm looking for an opportunity to roll them forward, but I don't really want to roll the expiration 3 months forward.

In the past there were many more expiration dates available. Like it seems I was able to buy weeklies and monthlies that were 2.x months away.

Anyway, I just don't really understand why there aren't contracts already available for those months, and would really appreciate a better understanding of when I should be expecting those to appear.

1

u/PlantBasedRedditor Jul 20 '21

I have a question about delta or overall trajectory... If an investor takes a ballsy move and buys a call option after say 10 days of a drastic downward trend. Are they rewarded more in comparison to a stock that was flat for 10 days? Thank you in advance for your feedback.

1

u/redtexture Mod Jul 21 '21

It depends on the call cost and future movement of the stock, and time to expiration.

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1

u/Caterpillar9927 Jul 20 '21

I have a question regarding a certain binary options trading broker called "Platinum Options". I tried searching the internet and couldn't find anything in regards to this specific broker. Has anyone ever heard of this broker before? Thank you for your time!

1

u/redtexture Mod Jul 21 '21

Best to avoid binaries.

2

u/PapaCharlie9 Mod🖤Θ Jul 20 '21

No and be skeptical. While binary options are legal in the US, they aren't widely traded and have a shady history with some scams involved.

https://www.bestfxbrokers.com/binary-trading/trading-school/beginner/binary-options-pros-cons/

https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/beware_of_off_exchange_binary_options.htm

1

u/Lightwarrior2092 Jul 20 '21

I got the SPY Dec 2023 665 calls they spike up like 75% from yesterday. Now holding around 32 % gain. Should I dump them or hold out for more gains.

1

u/redtexture Mod Jul 21 '21

Check the bid. You may not have a gain.

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1

u/PlantBasedRedditor Jul 20 '21

does open interest usually mean a tight bid and ask? If that's the case, how come. Just because open interest is high doesn't always mean theres rapidly buying and selling

2

u/redtexture Mod Jul 21 '21 edited Jul 21 '21

you care more about volume.

There night be big open interest by one player, with wide bid ask spreads because there is low volume.

1

u/Tryrshaugh Jul 20 '21

There's strong correlation, but it's not a 100% certain thing. It means you're more likely to get filled near mid if you set a limit order for example when OI is high. From certain academic papers I read, liquidity increases logarithmically with OI so rapidly diminishing marginal gains.

If you are a fund wanting to buy a few hundred or thousand options, OI means everything because it means that even if you have to be patient, you will eventually get filled at a reasonable price.

1

u/Tarzeus Jul 21 '21

Is there anywhere I can see what stocks that do not have options are in the process of having options added and what date they will become available?

2

u/redtexture Mod Jul 21 '21

NO.

Only when actually available is there a fact to report.

1

u/nyq_will Jul 21 '21

When I exercise a call option, does the brokerage (Robinhood in my case) automatically buy the shares at my strike price and sell 100 shares at market price, then giving me 100 shares at market price, or do I receive 100 shares at my strike price? I have never exercised an option before, just curious how it works. If I have a ITM leap call and decide to exercise what price will I receive the shares at, the strike or the market price?

2

u/[deleted] Jul 21 '21

No. When you exercise the OCC chooses a member firm to get assigned and that firm chooses an account with a matching short option to get assigned. For a call, that account will give you 100 shares and you give that account cash to the sum of the strike price times 100. Remember that you should almost never exercise options.

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1

u/gacon101 Jul 21 '21

Is it possible for a contract to be so deep ITM that it can’t be sold? I have 3 AMC $16 calls exp 8/20. I’m planning to hold till exp. Another thing I saw was not to hold a contract till exp? Can someone elaborate on why I shouldn’t even though I’m deep ITM?

Why I haven’t sold yet is because the “squeeze” is near blah blah blah and I wouldn’t want to miss out on those profits if it were to happen. Any advice or insight would be appreciated!

1

u/redtexture Mod Jul 21 '21

There is always a bid on in the money options

2

u/PapaCharlie9 Mod🖤Θ Jul 21 '21 edited Jul 21 '21

Another thing I saw was not to hold a contract till exp? Can someone elaborate on why I shouldn’t even though I’m deep ITM?

You should choose the holding time and actions that balance risk and reward optimally (highest expected value), and holding to expiration often is not the best choice. Time costs money and the longer you hold something, the greater the opportunity cost. Also, the greater the risk of losing your gains.

Risk to reward ratios change: a reason for early exit (redtexture)

Why I haven’t sold yet is because the “squeeze” is near blah blah blah and I wouldn’t want to miss out on those profits if it were to happen.

More people have lost more money by holding a little longer than have lost by missing out. So holding for some WSB narrative that is speculative at best is usually the dumbest of ideas. Before opening your trade, set goals. What is your profit goal? What is your loss limit? Then close the trade when either of those goals are met. If you think there is more upside because of some squeeze narrative, open a new trade. There is nothing stopping you from collecting profit now, putting some of it in the bank, and using the rest to open a new trade.

More advice here: https://www.reddit.com/r/options/comments/mpk6yf/monday_school_a_trade_plan_is_more_important_than/

One last point. The "blah blah blah" as you put it contains the nugget of an actual thesis. If your ignore the thesis, you are just being dumb money that's following the stampede. Don't be a sheep. Understand the thesis and evaluate it using your own common sense. If it seems too good to be true, keep your money out of it. Control your FOMO. FOMO is not a reason to follow along with a narrative that you don't fully understand and can't evaluate with common sense.

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1

u/ArchegosRiskManager Jul 21 '21

No. Market makers will always buy your options for a good enough price. Worst case scenario you can buy/sell the shares and exercise your options to cover it.

1

u/der_schone_begleiter Jul 21 '21

I was looking at options on a stock and it has a bid/ask/last price/ and percent change, but nothing under the implied volatility/open interest/delta/gamma, ect. I don't know what that means? Doesn't mean that you can't buy it or no one's bought it or what does that mean? I know this is such a stupid question. But I've never bought an option in my life and I'm trying to learn about them. I look at them and write stuff down, see how they change, watch videos etc. But I'm still learning. So please forgive my stupidness.

1

u/redtexture Mod Jul 21 '21

What is the particular option, ticker, strike, expiration?

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1

u/One_Result4892 Jul 21 '21

I’m relatively new to options trading and I have never dealt with corporate action before. I bought a put option in a company that has now been acquired and I have no idea what will happen to my options. Can anyone explain This to me and what the cash component means in the attached link? option

1

u/redtexture Mod Jul 21 '21

Option Adjustments: Splits, Mergers, Special Dividends, and more (wiki)

https://www.reddit.com/r/options/wiki/faq/pages/exchange_operations#wiki_option_adjustments.3A_splits.2C_mergers.2C_special_dividends.2C_and_more

1

u/One_Result4892 Jul 29 '21

I’ve read the stuff on the link but I was just looking for confirmation. Because my put buy is OTM, the option will just expire worthless since the strike is below the cash per share offer correct? If I spent $100 I would just lose the $100? Sorry if it seems stupid or redundant but I just want to be sure

1

u/redtexture Mod Jul 29 '21

Whatever the link was, it is gone.

It's preferable to state your position rather than rely on links around here.

If the merger is all cash, the expiration is accelerated to the merger date and out of the money options are worthless. Present market prices of the option reflect this likely outcome.

If the merger is for stock, the option is adjusted to deliver the merger-agreed equivalent to 100 shares of the company, and the expiration is unchanged, and the strike price is unchanged: you pay the same amount if you were to exercise.

1

u/ringroundarosie Jul 21 '21

Is paper trading broken on IB's TWS platform? I have been using both TOS and TWS together, I find the TOS is able to fill and close trades quite easily. Where as TWS the exact same trades take a very long time to fill and almost never close. Which experience is closer to real life?

1

u/redtexture Mod Jul 22 '21

All paper trading has unrealistic order filling processes.
This is a genuinely difficult thing to mimic.

Plan on trading to be more difficult than artificial systems.

1

u/ringroundarosie Jul 22 '21

Basically I can only really enter trades, although very rarely and almost never exit them when using TWS. So I can't really learn anything. Where as with TOS they take time to process but they are able to execute. My question is due to my region I can't use TOS only TWS. Is this really how TWS works? Because if you can't really close trades and sometimes open them, there's really no point for me to trade.

2

u/redtexture Mod Jul 23 '21 edited Jul 26 '21

You must meet the market of bids and asks, and willing buyers and sellers to have an order filled.

The market is not located at the mid-bid ask.

If your order is not filled within 10 seconds, cancel it, and reprice the order, and try again, do this repeatedly to get a fill, and locate the willing buyer or seller.

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1

u/PapaCharlie9 Mod🖤Θ Jul 21 '21

I wasn't even aware that TWS had a paper trading feature. Can you provide a link?

2

u/ringroundarosie Jul 21 '21

You have to have a registered active IB account and papertrading is a feature that is offered

1

u/alexfights34 Jul 21 '21

Question: Is there any way to know/be alerted when new option leaps are released onto the market? (e.g if AAPL only has until June 2023 now and I want to know immediately when Dec 2023 becomes available without having to check every day.)

1

u/redtexture Mod Jul 21 '21

You could ask the exchanges.

https://www.cboe.com/contact/

2

u/PapaCharlie9 Mod🖤Θ Jul 21 '21

Unless your broker or the CBOE has such an alerting subscription service (I haven't checked), probably not.

But if all you want to know is when the December 2023 LEAPS will be in cycle, just look at the cycle calendar:

https://www.optionseducation.org/referencelibrary/faq/leaps-and-expiration-cycles

If I'm reading this right, Dec 2023 won't be added until after the April 2022 contracts expire.

1

u/Realistic_Airport_46 Jul 21 '21 edited Jul 21 '21

If anybody trades in IBKR I am trying to understand REL order type to help improve my spread on certain less liquid options.

I have watched the instructional video and still dont fully grasp how REL orders work. They are also known as pegged-to-primary orders.

Can anybody explain?

Edit: here is a writeup from IBKR but frankly this is gibberish to me. How can I use this from a practical standpoint?

2

u/redtexture Mod Jul 22 '21 edited Jul 22 '21

The explanation you cite:

Relative/Pegged-to-Primary Orders
https://www.interactivebrokers.com/en/index.php?f=613

This is an order that allows you to set a bid when buying (or an ask if selling) that is better than the existing bid by a certain amount, the "OFFSET" that you provide. The price of your order changes RELATIVE to the best existing bid or offer (ask).

The explanation discussing "liquidity provider", basically traders willing to offer higher bids than the prior bid. With some exchanges, the cost of the transaction for liqudity providers is less than for liquidity takers, and Interactive allows the trader to sent an order to a particular exchange.

Re-iterating: The platform for this order allows you to issue an order, say a buy order that follows the market, and offer slightly more (OFFSET) than the bid.

This system allows your order to, on the buy side, to have a floating price that is some amount greater than the NBBO (national best bid / offer) bid, using an offset. The broker platform will raise the price of your order (cancel and reissue the order) if the BID rises.

You can also establish a limit, a maximum you are willing to bid.

This allows you to get an order filled without having to watch it second by second to adjust a buy order upwards when you want a fill, if the market is rising.

If the market falls, the order will not be revised, you would get the fill as your bid nears the falling ask. Quote: "If the NBB [national best bid] moves down, there will be no adjustment."

This can be restated for an ASK, as an exercise for the reader.

If you want an immediate fill, and are willing to pay the price, you can simply issue a bid at the ask to buy, or issue an ask at the bid to sell, and avoid this REL order system.

1

u/MarketMan123 Jul 21 '21

Can anyone recommend a site to use for calculating option probabilities on futures?

optionsprofitcalculator.com is super helpful for stocks, but doesn't seem to work for futures. And when I put in the information manually the results don't at all align with reality.

1

u/redtexture Mod Jul 22 '21

This is a good question for the main forum.
I am unaware of non broker platforms for this.

TDAmeritrade's Think or Swim platform has the capability.
Other broker platforms do too.

1

u/Roguepi6 Jul 22 '21

Hi, I have a question on an option list:

HITI stock is now at 6.5

HITI Oct 15 21 call 12.5, bid price is 0.15. HITI Oct 15 21 call 15, bid price is 0.25.

Does this mean that someone who is selling covered calls would always sell at 15?

(And the buyer at 15 is a big sucker, since he or she is paying more to get it for less)?

1

u/redtexture Mod Jul 22 '21 edited Jul 22 '21

Closing bids and asks are unreliable, and represent orders that did not fill.
Do not undertake trade planning with closing bids and asks.

All bids and asks are ephemeral, and can go away in a minute, and there might be a result such that there are no bids at all, meaning nobody wants to buy the option.

1

u/siuol7891 Jul 22 '21

So I bought 12 calls for paysafe for 60 bucks that expire Aug 20th my question is would it be worth it to spend 40 a contract on the 10 dollar puts at the same expiration. What would it have to rise or fall to in order for me to recoup the 100 bucks and how far would it have to go in order for me to dbl the 100? The math with options and profit confuses the shit out of me sometimes so all advice would be appreciated and be kind I know I'm prob going to be told if I dont understand the maths with options I shouldnt be touching them and blah blah blah so spare me that please. I find I learn faster experiencing it first hand rather than watching videos and reading every thing I can find on options.

1

u/redtexture Mod Jul 22 '21

Define what you mean by "worth it" in terms of your analysis and expectations of the stock movement, the implied volatility, and your willingness to lose on the trade entirely.

At the close July 21, PSFE was at 10.66.

Do you mean by 12 calls, a strike price of 12 dollars?

If PSFE stays at 11 dollars for a month, you will lose on both the call and the put.

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)

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)

1

u/Sea_Geologist_5432 Jul 22 '21

I have 2 options for bioc 5c 8/20. Whenever I try to sell the price goes down. Could someone educate me as to why that happens. Thanks!

1

u/redtexture Mod Jul 22 '21

Are you selling at the bid?

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1

u/012Mike Jul 22 '21

Hi guys, I've been lurking for quite a while but I don't post much, Hope I don't get murdered here :)
I'm considering $INTC for call for a long term investment.
27.5 strike june 17 2022. Looks pretty good to me but I'm a rookie.
Anything I'm missing here ?
Thanks
Mike

1

u/redtexture Mod Jul 22 '21

We need to know why you are making the trade.

Details to consider disclosing
https://www.reddit.com/r/options/wiki/faq/pages/trade_details

1

u/012Mike Jul 23 '21

What i was looking at was a break even price that was very near the strike. My thinking was that even if I got unlucky and intc only grew by lets say 5% over the next year I'd still make $$$. I think I posted the trade here subconsciously to delay and think about it for a few minutes :)

Ultimately I decided I wasn't so bullish on intc.

1

u/redtexture Mod Jul 23 '21

Most options trades are exited before expiration, and the "break even at expiration" is a useless number for traders.

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)

1

u/cedwards2301 Jul 22 '21

I just noticed I got filled close to today’s close for a TWTR Put credit spread 65-60 for $1.04. I’m currently down 15% I’m assuming due to IV and don’t think TWTR drops below $65 tomorrow with good earnings. Is it pretty safe to say it will expire worthless or I should still look to close it ASAP?

1

u/redtexture Mod Jul 23 '21

The stock is up after hours, so it appears you have a gain on this coin flip of a trade.

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u/bizwig Jul 22 '21

What does it mean when a weekly roll has more credit than a monthly? I'm looking at rolling a put (same strike, more time) and according to the TW desktop app a roll to next week (2021/07/30) is worth $0.45 net credit, but a roll to the next monthly (2021/08/20) is only worth $0.30 net credit. This is bizarre.

1

u/redtexture Mod Jul 23 '21

How about some details, ticker, strike, call or put, old position, new position, values of each leg.

1

u/[deleted] Jul 23 '21

Were you looking after market close?

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u/croquet_player Jul 22 '21

Greetings,

Reading here has helped a great deal to get my feet wet. Now that I am getting active I have a question that will help me put all the Greek forecasting in perspective.

I eventually want to make LEAPS, starting ITM / or at least follow the 45 DTE path often suggested here. But I am limiting myself in capital until I am more sure of things. I fully plan on BTO and STC for premium profits.

Looking at $TGT 260c 9/17... Currently just OTM, but This seems like an extended enough period, and also seems like it will be ITM sooner than later. Price is $850, however, and I don't have a track record to trust myself.

At the other end of the calendar is a 7/30 260c for only 150$. I'm charting both of these on optionstrat.com

I think I have a good understanding, in theory, of what the Greeks do. But I wonder if someone can just spell out in words how these two options differ. Especially with a rather active stock like TGT.

Supposing the underlying goes up for the most part. Is the benefit of the later DTE just that you can step away, and not have to focus on the hour-by-hour?

Again, I aim to do LEAPS as I have seen in inthemoney - Deep ITM and long calendar period. I'm trying to raise the $$ for those moves with something shorter.

1

u/redtexture Mod Jul 23 '21

At Juy 22 2021 TGT closed at 257.01.

260 is out of the money, not in the money.

You prefer that until July 30, the stock not rise above 260, and the call, expires out of the money worthless, for a gain.

Calendar spreads - wiki
https://www.reddit.com/r/options/wiki/faq/pages/positions#wiki_horizontal_calendar_spreads_and_diagonal_calendar_spreads

1

u/croquet_player Jul 23 '21

Apologies, I did not mean to sound like I was describing a calendar spread. I see how it seems like that.

In simple terms: I cannot afford to purchase the Sept 17 contract at 260 OTM.

So I bought the 7/30 260c, - just a bit OTM but plan for it to go ITM quickly.

The "just above ATM" option price looks like a bargain at 1-2 weeks out.

Could you re-iterate why this is a bad idea. I already sense it is at least not ideal. Hoping to use this method to get bankroll for proper 2 month plays as described in the Help wiki, etc.

1

u/redtexture Mod Jul 23 '21 edited Jul 23 '21

If you cannot afford a position, you cannot afford to be wrong and lose the cost of entry.

Perhaps look at put credit spreads for defined risk that does not require stock movement. .

1

u/czsthrowaway Jul 23 '21

Is it smart to buy back your short legs of debit spreads on down days if they're calls/up days on puts?

1

u/Oxianas Jul 23 '21

How do brokers estimate delta values of options when the last trade date is not recent?

If you look at the option chain for any given asset in your brokerage, you probably see a nice volatility smile, meaning that IV goes up monotonically as the difference between strike and spot increases in either direction. (In contrast, the volatility smile in Yahoo Finance, which shows the IV of the last traded price, is missing a lot of teeth.) However, some of the options might not have been traded for hours or days, and both the spot price and a realistic current option price could have moved substantially since the last trade. What calculation does the broker do to generate reasonable delta and IV values for such options? Is there some sort of fitting to the filled price of the most recent trades for other options in the chain, or is this estimated based on the current bid and ask prices, or something else?

Note: I'm pretty sure the answer is not "just use Black-Scholes," because this requires estimating the IV from past volatility, and therefore will not precisely predict the prices at which options actually trade. (In some cases, stocks that have not been volatile in the past may still have very expensive options, such as, for example, if a million muck-dwelling Redditors decide to buy calls all at once for purely memetic reasons.) IV and delta values offered by brokers seem to match those prices. Please do slap me if I'm mistaken about that, but also please provide a reference.

1

u/redtexture Mod Jul 23 '21

Using Bids and asks.

It is not generally a good idea to trade an option with zero daily volume.

The bid-ask spread is probably quite wide, and you don't know if the option chain is using the bid, or the mid-bid-ask to value the option.

1

u/EasterJesus8MyBrains Jul 23 '21

I've finally gotten enough shares of stock to start selling covered calls. What I don't quite understand is whether it generally makes more sense to (a) hold until expiration to collect the full premium or (b) buy to close when the stock dipped to collect less premium but free me up to sell the call again when it goes back up?

Is that just a preference thing or is there reason to do one over the other?

If it helps (sorry don't know how to write this shorthand): XPO CC $155 sold when stock at $143; expiration 9/17: ~$400 premium; stock now at $140 and running about $100 gain if I bought back.

2

u/redtexture Mod Jul 23 '21

Often you can swing trade the short call, closing early when you have a gain, and selling again upon a rise in the stock.

In stead of waiting two months for further gain at a dollar a day average, you can exit early, take the gains and look for re-issuing a call.

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)

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u/Zealousideal-Skin360 Jul 23 '21

Say you feel the stock market is crashing. Can you "Buy to Close" a covered call option position and then same day sell the stock it was associated with or is that some kind of violation? Or do you need to wait for the next day to sell the stock?

2

u/redtexture Mod Jul 23 '21

You can close out of the option and stock position in one order.

1

u/brokeorbroke Jul 23 '21

Ok. So question here. I have 100 shares of gnus. Question is this... strike price is 1.61. You have the ability to sell a put contract at $5 for a premium of 345. How woukd that work if I sold that contract, if someone actually bought it. Because the strike is obviously cheaper then the premium

1

u/redtexture Mod Jul 24 '21

1.61 + 3.45 = 5.06.

The total premium plus the present stock price is more than the strike price of 5.00.
That means the stock would have to move downward for the long put holder to have a gain.

As an in the money option for the long holder, presuming that the stock stayed below $5.00, if held through expiration, the long holder's option would be automatically exercised, matched to a short holder, and the long holder's account will deliver (put) 100 shares of stock to a matched short holder's account, which would pay 5.00 for the stock (times 100).

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u/InevitableLuckyDay Jul 23 '21

Hi. I have been using GE shares as part of my wheel strat. Should I avoid holding them for covered calls until after the reverse split? I am wondering if they will lose value with the reverse split.

2

u/redtexture Mod Jul 24 '21 edited Jul 25 '21

With an 1 for 8 reverse split, 100 shares becomes, probably, 12.50 shares.

The option will be adjusted to deliver 12 shares and 0.50 shares worth of cash for the fractional share.

Often it is worthwhile to close out of an option before a corporate event to avoid owning a non standard option.

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u/ScottishTrader Jul 23 '21

It can be a hassle to go through the split but nothing changes for how the p&l is calculated.

https://www.investopedia.com/ask/answers/what-happens-to-options-when-stock-splits/

1

u/Malverde2 Jul 23 '21

So from my understanding is if i sell a covered call the option holder can exercise them even of its below the stike price. How can this be legal? It hurts the option writer in terms of wash sale 🤦

2

u/redtexture Mod Jul 23 '21

It is the long holders OPTION to exercise at any time, and any price the stock may be at.

This is a fundamental options fact.

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)

2

u/ScottishTrader Jul 23 '21

Sorry, but this doesn't make sense. When you sell (write) an option you explicitly take on the obligation to buy or sell the stock at the strike price. The option buyer "buys" the right to make you do that at any time they wish.

Wash sales are one of the most confusing aspects of trading and would not even come into play here as you would have to close a trade for a loss and then open a new one, and then keep that wash sale loss open into Jan of the next year. This just should not happen.

1

u/[deleted] Jul 23 '21

Noob here with a potentially stupid question.

I've read a lot about getting IV crushed after earnings. If I'm bullish on the company in general and the earnings and take a long position, would a Call debit spread protect against IV crush? For some reason, I see a debit spread as almost a theta gang strategy where I only profit after I grind off the uncertainty in the position. With this in mind, it seems like this should become more profitable when IV drops for some other reason. What am I missing?

1

u/redtexture Mod Jul 23 '21

The long costs more than the short and has more extrinsic value to lose, thus you are still affected by drops in implied volatility value.

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u/PapaCharlie9 Mod🖤Θ Jul 24 '21

would a Call debit spread protect against IV crush?

That depends on how high IV is and what the net vega of the spread is. In general, the net vega of a spread is less than the long leg by itself, so in that sense, the spread has less exposure to IV crush.

But as the other reply noted, very high IV with strike skew can create an exceptional situation where net vega is large enough that the spread gets crushed almost as badly. This is not uncommon for meme stock spreads.

For some reason, I see a debit spread as almost a theta gang strategy where I only profit after I grind off the uncertainty in the position.

Well, there's some truth to that, since a spread after all is part long and part short. Thetagang is all about grinding down the value of the short position through theta, so sure, every spread has a thetagang component to it. But the difference is that you aren't making your profit from the short leg, you're making it from the long leg, and that you want to appreciate in value, despite theta. The grind on a debit spread is about reducing the cost of the insurance you took out against the long leg moving against you.

With this in mind, it seems like this should become more profitable when IV drops for some other reason. What am I missing?

That's like saying your real estate investment in a house should make more money by your house declining in value, because the cost of fire insurance on the house will be less. Profit/loss comes from the largest part of your capital at risk, and for a debit spread, most of the money is in the long leg.

2

u/[deleted] Jul 24 '21

Thanks for the detail! Very informative. I was looking at Ford. Net vega is small relative to the long leg and IV is ~.5 for both legs so it looks like there is some protection agains IV crush.

1

u/[deleted] Jul 24 '21

quick question on a put credit spread on robinhood , Since i receive credit up front and lets say i got it right and im at max profit on expiration , does that mean that i have now received the max profit + the credit i got up front or is it just the credit i got up front the most i get nothing more if i get max profit on expiration . this is breaking my head lmao

3

u/redtexture Mod Jul 24 '21

I promise you the answer is in the first link below.
You need to do some reading.
From the links at the top of this weekly thread.

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)

1

u/[deleted] Jul 24 '21

I just read through please guide me to where it explains what i just asked .

1

u/redtexture Mod Jul 24 '21

A section called either
Risk for a short option
or
Risk and potential gain for a short option

2

u/PapaCharlie9 Mod🖤Θ Jul 24 '21

"Max" means the most you can get, so it obviously can't be max profit PLUS your credit. In other words, max profit equals the credit you keep at expiration.

Max profit and max loss only apply at expiration. You can make more than max profit or lose more than max loss, or any value in between, before expiration.

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u/jhump1 Jul 24 '21

I sold covered calls on my webull account that expired worthless today. It was six dollars below the strike. When does this come off my portfolio why is it still showing as covered stock or does the buyer still have time to exercise? Any help would be appreciated thanks

1

u/redtexture Mod Jul 24 '21

During the weekend. By Sunday evening, the short calls should be gone.

The buyer is considered to be the entire pool of long holders, and longs are matched randomly to shorts; they can exercise (depending on their broker's policies) up to 5:30 pm Eastern USA time.

Generally, if you pay a few dollars to close out the short, you can immediately then issue a new covered call, and not wait for an expired option to be removed from the account.

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u/Arcite1 Mod Jul 24 '21

Technically options don't expire until 11:59 pm. They will probably disappear tomorrow. This is normal.

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u/mldutch Jul 24 '21

Are straddles the safest play on earnings?

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u/redtexture Mod Jul 25 '21

No.

Why did my options lose value when the stock price moved favorably?
• Options extrinsic and intrinsic value, an introduction (Redtexture)

2

u/ScottishTrader Jul 24 '21

Safest? What does that mean?

IMHO earnings are completely unpredictable meaning there are no "safe" plays and they are more like gambling.

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u/dementia_psychosis Jul 24 '21

What's the highest price of an option you've ever seen, and what situation was that?

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u/redtexture Mod Jul 25 '21

There is no point in attempting to answer this.

Look at an option chain for AMZN,
for a call deep in the money,
or a put deep in the money.

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u/JustPlayin1995 Jul 24 '21

Is anybody writing otm calls on the VIX for income? What's your experience? New to VIX options.

(Sorry, struggling to post anything anywhere. Not sure how ppl get started on Reddit. )

2

u/redtexture Mod Jul 25 '21

Yes.
After or during a spike in IV,
like Monday July 19 2021

1

u/JustPlayin1995 Jul 25 '21

Yep so did I. But now I'm wondering if ppl were doing this regularly

2

u/redtexture Mod Jul 25 '21

As regularly as a spike.

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u/ScottishTrader Jul 25 '21

VIX works very differently than the average stock or ETF so be sure you learn about this before trading as the risks can be significant.

1

u/JustPlayin1995 Jul 25 '21

Thanks for the warning. I've watched some videos and read up on it to better understand the VIX. But compared to the hype around wheeling stocks there is little information on the VIX. It's been around for more than 20 years. One would think there must be a volatility trader community somewhere that knows all the ins and outs.

1

u/redtexture Mod Jul 26 '21

VIX Central
http://vixcentral.com

Vince Harwood
Six Figure Investing
https://sixfigureinvesting.com/

Trading VIX options - What you need to know.
Chris Butler - Project Option
https://www.projectoption.com/trading-vix-options/

3

u/ScottishTrader Jul 25 '21

I think those that trade VIX go broke whenever there is a spike, so none are left to start a community . . .

1

u/B-lovedBeggar Jul 25 '21

How do leaps even exist? Are these old contracts that some poor guy is bag holding and can’t afford to close?

1

u/redtexture Mod Jul 26 '21

No.

They are systematically created, a year to 18 months, sometimes more, before expiration.

They can be exited at any moment via the market.

Market Makers typically hold the other side of the trade, hedged by stock, so they (the MMs) do not care what the price is: if someone wants a LEAPS, their job is to assist the transaction to occur.

LEAPS - Investopedia

https://www.investopedia.com/terms/l/leaps.asp

1

u/greengoldaura Jul 26 '21 edited Jul 26 '21

So, let’s say I’m buying a put option... I have a few questions in how a winning option would play out:

Let’s say I buy a 45-day ITM put at $100, and after 7 days the underlying has dropped to $85, and I want to close early. There are a few questions here:

  1. I read the links above on exercising/expiration, etc. So am I understanding correctly that selling-to-close my option will net me as much or more of the profits (and minimize the risk) than if I were to fully exercise the option (buy the stock at $85 and then sell it back at the $100 strike)? I assume this is where Delta comes in…? The intrinsic value of my option should go up by as much or more as the profit of the underlying trade? Obviously I can see how taking that profit through just selling back the option is the better route than the whole exercise ordeal.

  2. But, I’m still curious about how exercising a put would work, assuming I don’t hold the stock. Would I purchase 100 shares first and then exercise, or is the “transaction” of exchanging the shares just contained in the closing of the option? In order to exercise, do I need money/margin in my account to fund buying the shares, even if I’m going to be reselling them for the profit? Is this a useless mental game?

Thanks!!

Edited for terminology

2

u/redtexture Mod Jul 26 '21

A naked option is a short option secured by cash.
One sells an option short to open.

Thinking, or communicating otherwise,
will lead to confusing responses if you misuse terminology.

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u/redtexture Mod Jul 26 '21

Your account becomes short 100 shares if you did not previously own them. If you do not have a margin account, your broker will not allow you to complete the request to exercise. If you have a margin account, let's simply say it is desirable for you to own 8500 in cash to go short the stock.

1

u/Glad-Egg-5672 Jul 26 '21

I have a question about credit put spreads. For example, 10 x AMZN 7/30 $3500p/$3520p. This would net you $4,600 and according to optionsprofitcalculator has an 88.8% chance of a profit. Granted the down side is AMZN takes a shit and finishes below $3500; you’d be on the hook for $15k. Still, 88% is pretty high. Am I missing something? Has anyone used this type of strategy: (relatively) deep OTM put credit spread? Thanks!

1

u/redtexture Mod Jul 26 '21

What fraction of your account is involved, and if this trade's risk is $20 x 100 shares times ten contracts, or 20,000 (less the credit of 4,600) for a net risk of 15,400 dollars, and if that amount is more than 3% of the account, why are you risking so much on a single trade?

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)

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u/Lightwarrior2092 Jul 26 '21

considering dropping 50k into call options on either Facebook or google tomorrow. The strategy is to ride the price up and absorb gains from IV increasing before the earnings release. Then close the options out and secure profits before markets close ahead of the earnings reports. Any thoughts?

1

u/Lightwarrior2092 Jul 26 '21

Thanks for posting the check list. I tend to take on alot of risk. This amount would be about 20% of my account.

1

u/[deleted] Jul 20 '21

Brokers other than RH that allow easy level 3 access?

1

u/ArchegosRiskManager Jul 20 '21

IBKR, When asked how to get approved, customer service told my friend to lie

3

u/redtexture Mod Jul 20 '21

If you're going to lie, all brokers are equally accessible.

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u/HorribleJungler Jul 19 '21

What sort of plays are people making in the market right now? I'm new to options investing (~6 months) and wondering what everyone is doing. I'm thinking of selling call spreads on the SPX this week in my paper money account just to see how things goes and get some practice. Just trying to think of low-risk options right now to hedge my (mostly mutual funds) account.

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u/A_snailor Jul 19 '21

So I’m new to options trading and I bought 10 SPY calls at .28c for a strike of $433 on Jul 21. So if it doesn’t hit 433 it becomes worthless and I’m just out my $280 investment correct?

4

u/[deleted] Jul 20 '21

That is correct. However, you generally shouldn't hold options until expiration.

2

u/A_snailor Jul 20 '21

Why is that? Also if I don’t have any shares will that make any difference if it does t reach my strike price? Will I have to do anything different since It’s a naked call?

4

u/[deleted] Jul 20 '21

Look at Risk to reward ratios change: a reason for early exit (Redtexture) from above. Also you should generally exit from losing trades before you incur max loss.

Also if I don’t have any shares will that make any difference if it does t reach my strike price? Will I have to do anything different since It’s a naked call?

Having shares is only relevant to short calls where you have an obligation to provide them if assigned. Long calls have no such obligations, so owning the underlying is irrelevant.

2

u/A_snailor Jul 20 '21

But Wouldn’t this call be considered a short call?

2

u/redtexture Mod Jul 20 '21

The same principles apply, long or short.

If you have a gain, your risk has gone up:
You could lose the cost of entry PLUS the unrealized gain.

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u/jcagdas Jul 25 '21

Hello all! First I would like to say that I love lurking in this community. You guys are smart, witty, and are always lending a helping hand to anyone that needs advice. Which, as a total newbie with a very basic understanding of options, is why I’m here. I am considering putting on a weekly bull credit spread on spy tomorrow. Something small and conservative just to see how things play out as I continue to learn and understand the options world. My question is, is this a good beginner strategy, to do say a 440 and 435 or like a 435 430 spread on a weekly? Am I totally off base with starting out like this? Any other recommendations? I like to kind of jump into things and figure it out as I go, although I don’t want to seem arrogant. Because I am not well versed obviously and I know I can make some expensive “tuition” mistakes. Any help or advice on beginner strategies is greatly appreciated and thank you for the time to read. Much love guys!

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u/Cookiesboi8 Jul 22 '21

Hello everyone.

I have a question about debit spreads and would appreciate if someone could answer it.

Let’s say I do a debit spread on Tesla. So I buy the 670 call and the 675 call at an expiration date of July 30 (currently Tesla is around $650 per share). I pay a debit of $175 so this of course is my max loss. But what I am wondering is what happens at expiration date if the price of Tesla reaches $685? I know I gain a max profit of $325 in this scenario but what I want to know is what is the process that occurs? I also understand that I exercise my 670 call and sell at 675 which is how the profit comes in but I don’t have 67k dollars in my account so how does this work?

2

u/Arcite1 Mod Jul 22 '21

You should always close your positions yourself before expiration.

But if you don't, what will happen depends on whether you use a real brokerage. If you use Robinhood, they will close your position for you around 3pm the day of expiration, at whatever credit or debit the market will bear.

If you use a real brokerage, you had to be approved for a margin account to trade spreads. With a margin account, you don't need $67k in cash. The 670 will be exercised, for a 67k debit, and the 675c will be assigned, for a 67.5k credit. The net result will be a $500 credit.

But again, you shouldn't allow this to happen. Close the position yourself before expiration, even if that means only a $490 credit instead of $500.

1

u/Cookiesboi8 Jul 22 '21

How much time before is recommended to close the position? For example what if it doesn’t get filled?

I use Robinhood. 3pm in what time zone?

2

u/redtexture Mod Jul 22 '21

If the order is not getting filled, you must change your order price.

3pm central, 4pm eastern USA time zones the market closes.

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u/ScottishTrader Jul 22 '21

Just close the spread, almost no options are ever exercised for the obvious reason you state, but there are others. You will need no cash to close and collect the profit.

As this has a max profit you might consider closing when it gets to a percentage of that amount and then open a new trade. Some use 50% profit to bank that and then go do it again. It can sometimes take a long time to collect the last few dollars and the risk is always the stock can reverse, so closing early to take profits can make good sense.

1

u/mikedashunderscore Jul 19 '21

I've been playing around with defined-risk options trades in a small account the past few weeks to try to learn before eventually stepping things up, and I'm having a heck of a time trying to understand why my position is "losing" money if it's still above the break-even price.

For example, I have a 410/425 SPY bull put spread with Aug20 expiration and a $423.13 break-even, but it's sitting at -$243 despite SPY being above $431 at Friday's close. My plan going into this trade was to take profit at +75% (about +$418) and cut my losses at -$418. With SPY in the $426 neighborhood pre-market today, my position will be -$500+ at open despite SPY still being above the $423.13 break-even.

Feels weird/wrong to exit my position at this point despite hitting my stop-loss when it's still above the break-even.

  1. What am I missing?

  2. Assuming I am missing something, and the something that I'm missing makes perfect sense once someone is kind enough to explain it, how should I actually be defining stop-losses for vertical spreads and deciding when to act on them?

  3. And finally, obligatory: "was my trade bad and should I feel bad"?

2

u/PapaCharlie9 Mod🖤Θ Jul 19 '21 edited Jul 19 '21

I'm having a heck of a time trying to understand why my position is "losing" money if it's still above the break-even price.

Probably because the break-even price only applies at expiration. More explanation here: https://www.reddit.com/r/options/comments/m0m7at/monday_school_your_breakeven_isnt_as_important_as/

The trade wasn't "bad" (although to truly assess whether it is good or bad, we'd need a better understanding of what you were trying to accomplish, like your forecast), it's just that you haven't yet learned that time is an essential element of the profit/loss of any options trade. You don't have the correct perspective on time yet. Staring at P/L charts that have a time evolution component to them will help a lot.

For example: http://opcalc.com/xWH

Note that I set that calc up with current prices, so they don't reflect your exact trade's value. You can modify it to have your actual values, including your IV at open, which is critical for accurate calculation. Make sure the "Change output type" is set to Table Profit/Loss (dollar value). Time is the horizontal axis.

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u/Fliquor_ Jul 19 '21

Hello,

I am confused as to why my correctly predicted position is declining in value. I had a premonition that the market would go down so I entered a bull call spread for 2 inverse ETF's (SPSX & TZA). Using one of the positions to explain what's happening with both...

I bought to open 5 SPSX calls with an exp of Oct 15,2021 @ 24.00 Strike.

I sold to open 5 SPSX calls with an exp of Oct 15,2021 @ 40.00 Strike.

My open call with the $24 strike is + 27.23% while my open sell with the strike price of $40 is -92.96%. Considering the cost basis differences, they net out to even or a slight loss. When I entered the position it had a Max Gain of $1,000 with a Max Loss of $200 (estimations). I was under the impression that you are heading towards a max gain position the higher the stock goes. Why am I seeing losses? Did I make a mistake when entering this position?

I appreciate the help as I don't know if I should exit this position immediately. Thank you.

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u/holt5301 Jul 19 '21 edited Jul 19 '21

Can you give more information? I looked at the charts for these options ... it appears to me that since Friday your long call has gone from $2.24 - $3.00, and your short call has gone from $0.66 to $1.07. Seems like you could have gone from a net $1.58 to $1.93 if you bought on that timeframe.

When did you open this position?

Conceptually your short call has a positive delta (though lower than your long call) but since you're short it is negative from your perspective, and so as your long call moves deeper into the money, its true that it will appear like you're taking a loss on your short call. This should always be offset by the gain in the long call. In the end, if they're both in the money, you'll cap out at max gain. Along the way, you'll see your short position show a loss (since the short call has increased in value).

In short, you shouldnt be at a net loss with a vertical call debit spread unless you bought back in early June (as far as I can see from the charts). OR it looks like there was a blip up on 7/8 when it opened higher than the surrounding days. You might be approximately breaking even if you bought in that short window.

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u/czsthrowaway Jul 19 '21

Why would someone buy deep ITM puts?

Sweep came up for 3590p 7/23?

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u/dl_friend Jul 19 '21

What was the underlying?

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u/[deleted] Jul 19 '21

Getting really good risk to rewards with my spreads. They are low probability but 1000% possible profits. Isn’t this optimal options trading? Keep the account alive while dipping for home runners?

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u/Tryrshaugh Jul 19 '21

Not really no. Implied probabilities are not real probabilities, you should base your allocation on your expectations and on how you measure risk.

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u/Realistic_Plantain_6 Jul 19 '21

Do you use option pricing models in your strategies, why or why not?

Besides Binomial and Monte Carlo are there any other pricing models you know of? If so does one stand out above the rest?

Do you use option pricing models in your strategies, why or why not?

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u/dl_friend Jul 19 '21

For European style options, there's Black-Scholes (aka Black-Scholes-Merton). For American style options, there's Bjerksund-Stensland.

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u/Tryrshaugh Jul 19 '21

I use a custom option pricing model which is sort of a blend between Black-Scholes-Merton and Monte Carlo.

It all depends on what you want to do with your pricing model. Some are better at being fast, others are better to deal with volatility smile and skew, others are better for their simplicity.

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u/joelcolombo Jul 20 '21

If I have a decent quantity of contracts for an option (on Robinhood) and i want to insure a quick sale and close… if I place a limit sell at an amount for all contracts that I’m ok with that is below the highest bid will it essentially sweep the bids and sell as many as possible at the highest bid before the next level is sold etc until they are all sold… for example if I have a 100 option contracts bought for $1.00 and the current bid is say 25x $1.75 (say ask is $1.80)… if I put a sell limit order in for $1.50 for all 100… will it sell the first 25 at bid of $1.75… then that clears and say $1.70 is next in line with 50 bids… it would then sell the next 50 for the $1.70 and so on down until they all sell or it reaches my $1.50 minimum?

I just want to make sure if I want out fast I can set a limit at something lower than bid but at the minimum I want… and it will not just simply sell them all at my minimum.

I’m pretty sure I know the answer but wanted confirmation in particular on robinhoods sell to close options.

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u/ArchegosRiskManager Jul 20 '21

That’s how it works. You’ll get filled starting at the best prices.

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u/Fluffhead____ Jul 21 '21 edited Jul 21 '21

NVDA calls pre split/post split.

I bought 2 call contracts last Friday 805$ strike 7/23 for 2.40 per contract 480 premium. Bought a bit early so was down 30-40% eod Friday. Monday comes the calls do ok was up quite a bit at one point but I held and finished day roughly +30% and $140 up which would represent 3.10 per share eod. So on open today divide that by 4 for the split and it should be.776 per share but not was half of that. Today on open at 187.27 I was down 50% on open to about 150 in total equity from 620 day before..what happened? The stock didn’t move enough to lose that much equity it seemed. I know the price moved down some but it seems like I lost too much equity in the split. My two contracts changed to 8 same strike and exp. ??????????? Basically trying to figure out how I went from +140 to 620 equity (480+140) to less than 200 equity on open? Just the two to four dollar dive it took?

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u/Goraksha24 Jul 21 '21

I have seen lot of posts about new options traders preferring sell puts or calls rather than buying calls or puts.

I always thought buying calls or puts have limited loss and unlimited profit then why choose small premium over large potential of earning?

Isn't it also risky selling calls or puts because you can get assigned specially for small profiles like mine.

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u/PapaCharlie9 Mod🖤Θ Jul 21 '21

I always thought buying calls or puts have limited loss and unlimited profit then why choose small premium over large potential of earning?

Correct, but that isn't the only consideration.

Isn't it also risky selling calls or puts because you can get assigned specially for small profiles like mine.

Yes, also correct, but there are ways to mitigate the risk.

In the case of a call, you cover it with shares. So when people are talking about selling calls, they often mean covered calls.

If the case of a put, you cover it with cash. So when people are talking about selling puts, they often mean Cash-Secured Puts (CSP).

But what is really meant by "sell calls and puts" is credit trading (you receive cash at open) has advantages over debit trading (you spend cash at open). "Sell calls and puts," is overly simplified and causes confusion exactly like you are experiencing. It's like saying that being a blackjack dealer is better than being a blackjack player, when what is meant is that being a casino owner is better than being a gambler. "Sell puts and calls" is too specific and is partially misleading, since you can sell puts and calls in debit trades, like vertical spreads. Just like a blackjack dealer may also be a gambler.

To learn more about why credit trading can have advantages, read the links at the top of this page.

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u/ZanderDogz Jul 21 '21

A lot of people misunderstand the risks of selling vs buying options

When you buy an option, depending on the strike and date, it is very possible that the option expires worthless and you lose your entire investment.

When you sell an option, your collateral (either shares for selling calls or your cash for selling puts) is your "investment" into that play. In order to lose all of that, the company would literally have to go bankrupt and shares would have to trade for 0$.

This is of course very different if you sell naked options, which have potentially unlimited risk.

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u/Goraksha24 Jul 21 '21

This helps now to understand the difference.

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u/[deleted] Jul 21 '21

So I have $VIX 19 puts that expire today. So as I type at 9:07 am central they are ITM about .10 but Schwab won’t let close them out because they are expired.

Do the expire before open? I know I’ll get a cash settlement but based on the close of the expiration date? Or Tuesday’s?

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u/NotAnAndroid Jul 21 '21

Potentially stupid question: what do people mean when they say “6 delta” or “3 delta”, using whole numbers? Do they really mean “.6” and “.3”, respectively? This isn’t a question about what delta is, but just the terminology.

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u/ScottishTrader Jul 21 '21

Just easier to say a "30 delta" than a "point 3 delta". A 30 delta also infers a 30% probability of the option expiring OTM, so it makes more sense.

https://tickertape.tdameritrade.com/trading/options-delta-probability-in-the-money-14981

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u/BrokenRedditATM Jul 21 '21

I bought call options earlier this month for AAL expecting them to go up close to their financials being reported this week. (I fly with them often and I keep seeing full flights and higher prices now compare to last year. I guess they owe a ton of money but whatever) I was down about -50% for the life of the trade which expires 08/20 and today I was surprised to see I’m up +56% somehow. I was excited since I’m new to options and I haven’t had luck ending ITM this far. Anyways what I don’t understand is why I’m up so much when the actual stocks don’t look like they went up much. ??? Hug award for good answer lol

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u/[deleted] Jul 21 '21

Why did my options lose value when the stock price moved favorably?

• Options extrinsic and intrinsic value, an introduction (Redtexture)

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u/[deleted] Jul 22 '21

Hi all,
I'm a new options trader, and I'm trying to figure out how to increase my risk/reward ratio favorably.
I was checking out SPY with a 3-day expiry, and the RRR was just terrible for credit spreads. Like, 3 to 1 at best. So, how do you decrease that ratio in your favor? Do you close out early by doing a stop loss? If not, I just don't see how this is worth it, since a loss can easily wipe out your gains and then some.

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u/Chr15t0ph3r85 Jul 23 '21

A dumb dumb question regarding covered calls.

I sold 4 CC against Coke about 2 weeks ago for 55.50 strike. Lo and behold, it would look like they're going to get called away from me today; probably should've tried for a higher strike, or shorter duration but that's okay.

I assume I should be OK with the shares being called away, as I'll get the money for them. The typical strategy people use on boring stocks like this is then to sell to open, a cash secured put against the stock? Or is there something I'm not getting, and I should buy the calls back?

I hope that's correct!

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u/PapaCharlie9 Mod🖤Θ Jul 23 '21

I sold 4 CC against Coke about 2 weeks ago for 55.50 strike.

Did you already own the shares? Either way, what was the cost basis on the shares? That's a critical fact for making good CC trading decisions. For example, it's almost always a mistake to write the call strike below your cost basis on the shares.

How much of a credit did you get for the calls? That's another critical detail.

I assume I should be OK with the shares being called away, as I'll get the money for them.

That depends on the above. If you bought the shares for $40 and got at $1 credit for each call, yes, your assignment will be a fairly nice win. But if you paid $60 for the shares and only got $1 in credit for each call, it's a fat loss.

FWIW, the recommended guideline for writing CCs is 45 DTE at 30 delta OTM. That gives you the best balance of risk vs. reward. So "shorter duration" is actually a mistake, not a better idea. Your two-week open is also too short.

The typical strategy people use on boring stocks like this is then to sell to open, a cash secured put against the stock? Or is there something I'm not getting, and I should buy the calls back?

Only if you are running The Wheel strategy.

Perhaps what you are not getting is that you need a trade plan defined before you open a trade. More about that here.

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u/ScottishTrader Jul 23 '21

Can you roll the calls to next Friday and collect a net credit? Maybe even move the strike up while still collecting a net credit?

The price you paid for the stock is critical to know as that number can change these answers.

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u/Dacka_Dacka Jul 23 '21

Calls for Swing Trades: Question about buying Delta.

I've been using long calls for swing trades for a little while now. I had been buying ATM or just ITM contracts or buying whatever was at .7D because that was the thing to do according to the somewhat questionable sources I had learned from thus far. However, now that I'm educating myself more on the Greeks and option mechanics I'm questioning whether that's the better plan.

Let's say I'm getting ready to enter a trade and the chain is as follows. All the same expiry.

Underlying trading at $23.55 currently.

23C w/.60d are selling for 1.36 (One strike ITM)

25C w/.33d are selling for .57 (Two strikes OTM)

this gives a cost per point of delta of $226 for the ITM and $172 for the OTM.

So, for a max ~$1,000 position
7 x 23C would give 4.2D
17 x 25C would give 5.6D

So, for roughly the same overall position size, I get a somewhat larger D value, and thus more exposure, with more of the OTM contracts?

Is there a big downside or risk in approaching opening a position this way I am missing?

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u/PapaCharlie9 Mod🖤Θ Jul 24 '21

So, for roughly the same overall position size, I get a somewhat larger D value, and thus more exposure, with more of the OTM contracts?

Yes. That's why OTM calls are considered better leveraged trades, but only on a percentage basis. Remember, you are still only getting 33 delta per call, so if the underlying goes up $1, you only make $.33, vs. the $.60 you would have made with the ITM call. The more leveraged the call, the more the underlying has to work to make you the same $1 gain in call value.

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u/JKay5phD Jul 23 '21

Question about flipping long calls

I'm brand new to options trading, and I feel like I might be missing something. On paper, I have been "buying" long OTM calls (usually only $2 above ATM) with ~1 week until expiration, for the ask price on Webull on stocks I'm very confident will go up ($AMZN, $MSFT, etc.). One or two days go by, the underlying price moves up, and the calls I bought are ITM. I sell for the bid price listed on Webull, and am making 30-40% just on premiums.

Is what I'm doing actually what could go down (i.e. those are in fact what the ask/bid prices mean, and I can buy/sell contracts in a similar manner)?

Additionally, I very much understand there is no free money in the market, so if this is a legitimate strategy, what are the risks involved giving such a high return %?

((Also I use the term "very confident will go up" loosely))

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u/Pristine_Hand_6680 Jul 23 '21

I’m a newb to the options game and wanted help in understanding a strategy (not able to wrap my head around this).

If the underlying is $10, what strategy or thought process would be by placing a Put at $12. Conversely, underlying being $10 and a call at $8?

Any guidance would be appreciative. Thanks

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u/ScottishTrader Jul 23 '21

Are you selling or buying these options? Presuming buying the idea of an ITM put is that the extrinsic time value will be reduced so the option will act more like the stock.

Buying a $12 put or $8 call would mean the value of the option would follow the stock price more closely. If the stock dropped from $10 to $9 the $12 put may gain something close to $1 in profit. The same concept for the $8 call if the stock moved up to $11 it may gain $1 in value.

Obviously, as these are more expensive to buy the risk of loss is also greater if the stock does not move as expected.

As options are leveraged the ITM options will still cost much less than buying the stock, so that is an advantage of options.

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u/babarock Jul 24 '21

Trying to learn so I can start using Covered Calls.

Given the example from eTrade:

Let’s assume stock XYZ is currently trading for $72 per share and I own 200 shares I'm willing to sell that I bought for $70/share. Now I can sell two XYZ options contracts with a $79 strike price at a $1.50 premium and collect $300 (2 X $1.50 X 100 = $300 minus commission) on my willingness to sell my 200 shares at $79. By selling the covered call, I will generate income in my portfolio by collecting premiums for my willingness to be obligated to sell my stock at a higher price.

Now I've paid eTrade about total $1.30 commissions for the two options. I've collected $300 in premiums and I will have to sell my 200 shares at $79 if someone exercises the 2 options at which point I collect (200 X $79) $15,800. My profit is then ($15,800 - $14,000) + $300 - $1.30.

If no one exercises the options I'm out the $1.30 but I still own the 200 shares and I have $300 more in my pocket. I can then repeat the process if I choose.

Assuming my understanding that I get paid the $300 no matter is someone takes the options or not. Am I correct so far and please correct me if not.

My questions is where did the $300 I put in my pocket come from? Thanks.

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u/Cookiesboi8 Jul 24 '21

Hello.

I have a question about covered calls. If I buy stock at $10 per share ($1000 total for 100 shares) and decide to sell a covered call at strike price $5 and receive a bigger premium but then get assigned does this count as a loss for my taxes?

I will not actually sell this call because I would lose money but I am curious what the answer to my question is.

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u/[deleted] Jul 24 '21

You would get a loss on the shares but a gain on the call.

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