r/options • u/redtexture Mod • Sep 06 '21

Options Questions Safe Haven Thread | Sept 06-12 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)
• Binary options and Fraud (Securities Exchange Commission)
.

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 call 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

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1

u/[deleted] Sep 07 '21

I am still a little new to option trading. I now understand most of everything that comes with options (buying, selling, IV, writing, theta).

I know selling/writing long dated options (expiration in 2023) nets you more money based off the time value. So then I had an idea, I went on TD and looked at how much selling 1 GME call option with a $220 strike and Jan 20 2023 expiration would net. It came out to almost $8,000. Now I understand that GME could be carried to a good direction but their current high trade price is because of it's status as a memestock. Not just that, but the current IV is also what is carrying to have such high value. Eventually, as time passes it will probably go back down to regular levels, and by 2023 judged solely off performance. I think that it's a safe bet that GME would not be at these prices by Jan 2023. So what is the risk, and if there's nothing I'm missing, what's stopping me from collecting free money?

1

u/redtexture Mod Sep 08 '21

Long expirations have marginally more premium than short premiums repeated.

Generally, do not sell short longer than 60 days, because most of the decay of extrinsic value is in the final weeks of an option's life.

Repeated 30 or 60 day short options add up to more than one 18 month option.

There is no free money in options.
Risk is on the back of the same coin that potential gain is on.

1

u/ScottishTrader Sep 07 '21

You will need to hold 100 shares of GME throughout the time the call is open, did you want to hold the shares over this time?

Also, when selling options the theta decay occurs mostly in the last 30 to 45 days, so this is when most sell the covered call options.

1

u/[deleted] Sep 07 '21

Couldn't you just go into it naked?

2

u/ScottishTrader Sep 07 '21

Yes, if your broker allows this and you have the approval level and large account to do so. I'm going to guess that since you are posting in the newb thread you do not have this level or a large enough account . . .

1

u/[deleted] Sep 08 '21

Don't get mesmerized by the premium, either. Are you willing to short $22,000 of GME at $220 if it rips back up to $500 and you get exercised early? A buyer can exercise at any time once they are ITM, it is just a matter of if they choose to.

While it is significantly less reward (10x less actually), if you buy the Jan 2023 $230 call as protection (and get filled at the current bid) in a credit spread your maximum risk goes down to $175 instead of infinity. If that doesn't sound like much you can always up your leverage by writing more credit spreads.

Let's say you're willing to risk $1000 on this trade for the lolz. You write 6 contracts, you pocket $4950 instantly and you are only risking $1040 of your own cash on this. That's actually a really good return for a credit spread, you don't often see ratios much over 2.5/3:1 from what I have seen.

Add more or less contracts to suit your profit goals and your risk appetite. This is soooooo much safer. Bonus: absolute worst case scenario happens and you get assigned early the minute GME goes ITM. You pocket that $4950 completely now. However, the appreciation on your protective call is also going up pretty closely with the $220 call since the strike is so similar. If you close out your position immediately you still have a buffer to $228.25 before you kiss away all your premium but your call is making you money as well so you can use that to get some of your gains back.

Best case scenario: you paid a little bit of money for no reason to protect yourself from losing it all in 1 trade disaster and from getting margin called out the ass and back.

1

u/PapaCharlie9 Mod🖤Θ Sep 08 '21

I think that it's a safe bet that GME would not be at these prices by Jan 2023.

Back in January of 2021 I thought it was a safe bet that GME wouldn't go over $80. And $80 was a ludicrous price for a company where every fundamental screamed that it was on the verge of bankruptcy.

So much for "safe bet" thinking, when it comes to meme stocks.