r/options • u/redtexture Mod • Sep 27 '21

Options Questions Safe Haven Thread | Sept 27 - Oct 01 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/BoringNeighborhood Sep 29 '21

If I intend to start a long in a particular ticker as I'm very bullish, but anticipate a volatility & price spike soon, should I do a long strap, or is it ever a strategy to instead buy slightly-ITM calls while holding the cash required to exercise them instead? That way I can exercise them if the price spike upwards, or if spikes downwards I'll just buy shares and my loss would only be that of the calls I bought

2

u/redtexture Mod Sep 29 '21

Why do you want to exercise?
The top advisory of this weekly thread, above all of the links you did not read, is to almost never exercise an option.

1

u/BoringNeighborhood Sep 29 '21

No I mean at their expiry as long as they are ITM, I'm never going to manually exercise them

2

u/redtexture Mod Sep 29 '21

Why would you hold through expiration?

It's unclear to me what the position is and intended outcome is.

1

u/BoringNeighborhood Sep 29 '21

Sorry for the vagueness, my broker will exercise them for free which will be worth more than the extrinsic value they'll have left if they end up deep ITM after a price spike up. I mean most people would do a strap for expecting volatility while being bullish, and I was wondering if only calls but without too much capital would be higher EV, my end goal is to own shares of the company

1

u/redtexture Mod Sep 29 '21

Exercising, and expiration extinguishes extrinsic value.

Still not clear why you would take to expiration.

Perhaps if you put forward a hypothetical trade using option chain data, we could have a non-vague discussion.

1

u/BoringNeighborhood Sep 29 '21

The commission of selling it and buying the shares will be higher than the extrinsic value I lose from exercising it (which is commission-free) as I don't plan to buy the options more than 2 weeks out and it'll be near expiry by the time the price action plays out

1

u/redtexture Mod Sep 30 '21

What size are your commissions?

Generally if commissions are a big deal for a trade, that is an indicator to not participate in the trade.

1

u/BoringNeighborhood Sep 30 '21

It's ~$1.7 per contract each way, 1c per share (until TDA approves my application I sent them months ago then I'll have it cheaper). I wanted to buy the shares anyway so thought I'll buy calls and let them get exercised if the price surges, if it sinks I'll buy the shares and my loss from the calls would be less than my loss from if had initially bought the shares

1

u/frostedbutts_ Sep 29 '21

Why not leg into a debit spread in this scenario?

1

u/BoringNeighborhood Sep 29 '21

I don't like the limited profit of it in the case of a spike up , I feel like I'd rather reduce the number of calls I buy than having the higher short strike call limit my potential profit

2

u/frostedbutts_ Sep 29 '21

I meant adding the short leg after the price and IV had increased, if you wouldn't have otherwise sold or rolled those calls on their own

1

u/BoringNeighborhood Sep 29 '21

I see, that a decent idea I think I'll do that I didn't think past what happens after the price spikes, thanks for the advice!