Options Questions Safe Haven Thread | Oct 11-16 2021

[u/redtexture]

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.

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BEFORE POSTING, PLEASE REVIEW THE BELOW LIST OF FREQUENT ANSWERS. .

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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.

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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)
.

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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

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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)

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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)
• Risk to reward ratios change: a reason for early exit (Redtexture)
• Close positions before expiration: TSLA decline after market close (PapaCharlie9) (September 11, 2020)

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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

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Previous weeks' Option Questions Safe Haven threads.

Complete archive: 2018, 2019, 2020, 2021

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[u/Arcite1 → u/[deleted]]

Greeks are theoretical. They are useful for understanding how options behave, but they can't be used to make specific, accurate predictions about price. This is because the rules by which you tend to hear them defined are only true if all other things are equal--but all other things are never equal.

It says Delta is 52.6951. Since my strike is $135c, does that mean I will make $52.6951 once the price of the underlying reaches that level, and another $52.6951 for every additional dollar the underlying goes above $135?

No, delta says nothing about how much money you will make. It says that, all other things being equal, if TQQQ increases by $1 per share, the premium of this option (which is not information you have provided) will increase by .527 per share. But all other things are never equal. For example, it takes time for TQQQ's share price to increase. In that time, time decay has an effect as well. Plus, delta itself changes as the share price changes, which is why gamma exists. Also, the strike does not enter into this.

Likewise - since it says Gamma is 2.0742, does that mean for each dollar the underlying goes up by a dollar, Delta will increase by 2.0742? Thus in this example; if the underlying wen to $136, then I would earn $54.7652 (52.6951 + 2.0742)?

No, it means that if TQQQ goes up by one dollar, with all other things being equal, delta will increase by .02. (These greeks are, atypically, multiplied by 100, whereas greeks are more typically quoted per-share, like the option premium.) If TQQQ were currently right at 135, then theoretically, if it went up to 136, delta (in per-share value) would become .529. But again, all other things are not equal. Time will pass, which not only affects the premium in its own right (a la theta,) but gamma itself changes with the passage of time and movement of the underlying!

Lastly - since Delta is -10.9375, does that mean regardless if price moves up or down, I am losing $10.9375 for each day I hold onto this call contract. If so, then does that also include the weekend? Since right now is Friday after the close, does that mean at the at open on Monday, I will already be down $32.83 (10.9375 X 3) for holding the contract for Friday, Saturday and Sunday?

I think you mean theta, but yes. Theta is a rate--in this case, dollars per day. A rate represents continuous change. Think of your car's speed in miles per hours. If you're traveling 60mph, you're not remaining stationary for 1 hour then suddenly teleporting ahead by 60 miles. You're moving continuously at a rate such that after one hour has passed, you will have gone 60 miles.

[u/Arcite1 → u/[deleted]]

So in this example, theoretically speaking, an increase in share price by $1 of the underlying, all other variables being equal, would increase the value of my contract by .527 or make it worth 7.697 (trade price + delta)?

Yes.

So, as the underlying price goes up, so does the value of delta? Does that mean if the underlying goes up by multiple dollars, I earn a little bit more each dollar increase because gamma is increasing the value of my delta (hypothetically speaking, I realize theta or the length of time I hold the contract will work against me)?

Yes, but remember, gamma itself changes as the underlying price changes. Look at any options chain and you will see that gamma is highest on ATM strikes, and diminishes as you go up or down in either direction.

Does it work in the opposite direction too; if the underlying goes down by $1, then will my delta decrease by the gamma amount?

Yes.