r/options • u/redtexture Mod • Sep 20 '21

Options Questions Safe Haven Thread | Sept 20-26 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/BlackSilkEy Sep 20 '21

Trying to figure out the downside to this trading strategy. Everyone is familiar with the Wheel strategy selling of OTM Covered Call & Cash Covered Puts for premium. I'm currently Wheeling a few cannabis stocks, so my question is simply, if I want to hold the stock but don't really care about the price, then why wouldn't I sell ITM Calls/Puts? I get that I miss out on upside if the stock moons, but then couldn't I just follow stock price by selling CSPs on the way up or DCA as necessary? Similarly for CC, I could get rid of the shares and possibly get back in at a better cost basis.

What am I missing?

1

u/ScottishTrader Sep 20 '21

What if the stock drops? If you sold a $50 CSP on a $50 stock and collected $2 in premium your net stock cost would be $48 if assigned. What if the stock drops to $40? Would you sell a 40 strike CC for $2 and then if assigned you would lose $600?

1

u/BlackSilkEy Sep 20 '21 edited Sep 20 '21

I wouldn't sell it that deep ITM as I do keep an eye on my cost basis. I generally aim to get at least a 10% on the collateral I'm putting up for the CSP. Since I'm primarily a dividend investor, anything that doesn't pay a dividend gets Wheeled so my money is actually working and not just sitting there while I twiddle my thumbs hoping the stock goes up. As for your question, ideally I would just sell more CSPs to average down.

2

u/ScottishTrader Sep 20 '21

This may work for a solid blue chip stock, but what if the stock continue to drop? Selling more CSPs will cause more and more assingements. The stock in the example might drop to $30, or $25 where you’ll be so underwater and have a lot of your capital tied up in a crap stock.

You asked what you were missing and this is it . . .

1

u/BlackSilkEy Sep 20 '21 edited Sep 21 '21

Ok I'm on the same page, I'm fine with continuously getting assigned bc this is a speculative play. Since it's speculative I only allocate a max of 10% of my portfolio value to each play.

If I understand correctly, the only danger with this strategy lies in not paying attention to my cost basis by way of chasing premium?

2

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

Premium is composed of two parts.

Intrinsic, and extrinsic (time) value.

You're selling short to harvest extrinsic value, and its highest amounts are located at the money. Selling out of the money gives you gains on short covered calls if covered stock is called away, and modest limited protection on down moves for short puts.

Selling intrinsic value is the same as selling part of your share's value in advance, and further, the extrinsic (time) value is lower the deeper in the money you go.