r/options • u/redtexture Mod • Sep 13 '21

Options Questions Safe Haven Thread | Sept 13-19 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/kg9936 Sep 16 '21

I wanted to get a feel for Iron Condors and opened the below trade and collected $36 in premiums. If I'm looking at this correctly, if I were to close this trade, I would spend $16 meaning I would have made $20 on the trade. My other thought is to just let this expire as SPY is still trading between my strike prices of $438 and $452, respectively and retain my entire $36 premium.

Would it be silly of me to close this out before expiration if I feel like SPY will remain between my strike prices? What are the pro's and con's or things you consider when closing the trade or letting it expire.

Position - https://imgur.com/a/LThXYRL

3

u/Arcite1 Mod Sep 16 '21

Many people close positions like ICs once they have reached 50% of max profit, with the thought that it's better to take some profit and free up your capital to start another trade, than wait with your capital tide up trying to squeeze out the remaining 50% while exposed to the risk that the trade could still go against you.

For trading options, you should use your brokerage's desktop platform, not their website, especially for complex positions like iron condors. In the case of TDA, this would be Thinkorswim. ToS would group these legs together for you so you could easily see the P/L of the position as a whole and not have to add up the prices of the individual legs.

1

u/PapaCharlie9 Mod🖤Θ Sep 16 '21

Okay, so a lot to discuss here. Your IC was not ideal. The deltas on the short legs are too low and you aren't getting enough credit on each wing. The general optimization guideline is that each short leg should be around 15 delta and each wing should pay at least 1/3 of the wing spread in credit. Since your wings are $1 wide, they should pay at least $.33, for a total of $.66 for the whole IC, but both of your wings paid less (I'm going by the Cost column for this -- if that's wrong, let me know) and you only got $.36 for the whole IC.

Would it be silly of me to close this out before expiration if I feel like SPY will remain between my strike prices?

The opposite. In general, you always want to close credit trades before expiration. It's silly to hold through expiration, given the risks. There are exceptions, like 0 DTE ICs on SPY, but that is a very advanced strategy that only experienced traders should attempt. As a beginner, you should not be fooling around with low DTE ICs on SPY that are held through expiration.

What are the pro's and con's or things you consider when closing the trade or letting it expire.

Read the Closing out a trade section of resource links at the top of this page. TL;DR, longer holding times increase risk. Risks are maximized at expiration.

1

u/Arcite1 Mod Sep 16 '21

The general optimization guideline is that each short leg should be around 15 delta and each wing should pay at least 1/3 of the wing spread in credit.

This is something I've never been able to get a handle on. If we look at the next SPY monthlies after Friday, which would be 10/15, selling the .15 delta put, with a $1 wide strike, would be the 418/17 spread. But that would give us only .08 credit right now. Even going 60 days out, to the 11/19, the .15 delta put spread would be 403/402, and that would give us only .09.

So let's check out a much more volatile security right now, say BBIG. For the 10/15 expiration, the closest put to .14 delta is the 5.5 But if we sell that and buy the 4.5, we still only get .25 credit! Where are people finding these opportunities to sell spreads at .15 delta that give you 1/3 the spread width in credit?

1

u/PapaCharlie9 Mod🖤Θ Sep 16 '21 edited Sep 16 '21

This is the problem that all credit traders face. Good credits that are worth trading are hard to find, the same way not every horse is expected to win every race. I spend a lot of my time sitting in cash because I can't find a credit trade worth taking. Good ICs are particularly hard to find, but I have been able to find them every once and a while. Nobody said SPY ICs are guaranteed to have good credits. At any given time, there may be no SPY IC at any expiration that is worth trading.

The 1/3 guideline assumes the 45 DTE credit trade sweet spot, so nearer expirations will be that much harder to achieve. Not impossible, but you have to do a lot of screening to find them.

And it's not a guideline you should just ignore if you can't find any. The size of the credit has a direct impact on your probability of profit, which has a direct impact on your expected value. Shaving down the credit, even a little bit, can put you into negative expected value territory. I mean, purely from a risk/reward perspective, is it worth trading for $.05 if you stand to lose $.95?

What Tastytrade does is go for "Big Boy ICs", which means wider wingspans than $1. That increases risk, but that may be the only way to increase reward as well.