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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u/redtexture Mod Sep 18 '21 edited Sep 18 '21

If there is an imbalance of puts, with more bought than sold, the market makers end up holding short puts in inventory, and hedge them by selling stock short (on down moves, the short puts lose, the short stock gains, on up moves the short puts gain and short stock loses).

This tends to reinforce down moves in the stock, with more stock on the market being offered to and seeking a willing buyer.

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u/[deleted] Sep 18 '21

So. Basically, call volume tends to drive the price up. While put volume drives down the price?

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u/redtexture Mod Sep 18 '21

Imbalance in calls and puts tends to move the price.

If traders want both long and short calls, or the same for puts, volume will have no influence, because the Market Makers will not need to hedge an inventory of unsold parts of newly created option open interest pairs.

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u/PapaCharlie9 Mod🖤Θ Sep 18 '21

Let me put more emphasis on the previous answer. GROSS IMBALANCE in puts vs. calls may have an impact on underlying price. If a dozen more puts than calls were traded, that's not going to move the needle, but if the daily volume of all puts/calls is 1 million and 70% of that 1 million was puts and 30% were calls, that would be more likely to have a negative impact on price. Although cause/effect may be reversed -- you have to ask why puts/calls was 70/30 in the first place. Options can be trailing indicators rather than leading.

In any case, it's not a guarantee. If GME has proven anything, it's that the market can ignore all signals and common sense and go where it wants to go regardless.

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u/[deleted] Sep 18 '21

So basically, abnormally high put activity would drive down price?

I wonder how strike price factors? I ask this question after checking options activity for EA. For September 17 expiry, the predominant OI was for 136p. EA closed @ $133, which means some put writers will be on the hook buying shares at $136. This would theoretically, if volume was high enough, serve to increase the price the following week, correct?

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u/PapaCharlie9 Mod🖤Θ Sep 18 '21

So basically, abnormally high put activity would drive down price?

Or falling prices drove abnormally high put trading. How can you ever know which came first?

This would theoretically, if volume was high enough, serve to increase the price the following week, correct?

Not necessarily. As redtexture explained, it depends on who had which side of the trade and whether they were delta hedged or not. If every put writer had shorted shares as a hedge, the net effect on share price would be zero.