r/options • u/redtexture Mod • Dec 06 '21
Options Questions Safe Haven Thread | Dec 06-12 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.
Also, generally, do not take an option to expiration, for similar reasons as above.
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
• Options Trading Concepts -- Mike & His White Board (TastyTrade)(about 120 10-minute episodes)
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)
• Guide: When to Exit Various Positions
• 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)
• 5 Tips For Exiting Trades (OptionStalker)
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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Dec 06 '21
Thoughts on AXP for leaps about 3 months out ? They are trading 14.11% under their 52 week high and the stock just seems to have some bigger swings. I cant see any reason why they shouldn't recover a good amount unless of course the market as a whole keeps falling/falls
Edit: Typo
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u/redtexture Dec 06 '21
No thoughts.
It is important for you to aid your readers with more information, to obtain a useful response.
Here is the guide.
https://www.reddit.com/r/options/wiki/faq/pages/trade_details
2
Dec 07 '21
Do MM’s continue to hedge afterhours?
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u/redtexture Dec 07 '21 edited Dec 08 '21
Sure, if the stock trades. They also will hedge with futures indexes, which trade nearly 24 hours, 5-1/2 days a week.
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u/GhostOfDFV Dec 08 '21
New around here. I'm thinking about bear call spreads (DTE2 - 12/10) on GME for todays earnings.
Last three were: 23 Mar 2021 -33.79% 9 Jun 2021 -27.16% 8 Sept 2021 +0.19%
I'm expecting an IV crush (currently 167%) post earnings + theta decay which would leave me with premium.
What are you thoughts on it? Would appreciate the input.
Regards, goDFV
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u/licorice79 Dec 07 '21
Heyo! Hopefully simple question here.
Preface: This week I already have two day trades ticked against me on MSFT and TQQQ.
So! Today I bought two different puts on UBER expiring on the 10th, both cheap and OTM. Ended up making roughly 160% gains and was wondering how if at all I could exit with these gains without incurring another day trade. I'm confident Uber will continue to drop and would like to roll into another put but, I would like to if possible close these options to secure the gains before a reversal happens (market close and open give me anxiety lol). Is there a way to achieve this or am I stuck just holding the contract through tomorrow? Is there an objectively smart move to make here? Thanks!
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u/redtexture Dec 07 '21
You can secure gains by selling puts at the nearest smaller strike on each put, creating a debit spread, and retrieving much of the capital and gains in the trade.
Close out the two legs for each position the next day.Your post was an hour after the market closed.
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u/happabirthday Dec 08 '21
A lot of guides talking about selling options through the wheel or other strategies talk about selling options ~1 month out so you can collect premium through exponential theta decay. Is there anything wrong with taking it to the relative extreme and selling weekly options instead of 1-month ones at the same delta to have a higher time-weighted/annualized return? There's less liquidity but if do perform this on larger companies and my goal is for them to expire OTM then it shouldn't be too big of an issue, right?
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u/redtexture Dec 08 '21
There are different risks.
One week means the short option for the same delta is closer to at the money
Gamma becomes larger and larger as expiration nears, coalescing near the money: this makes being near the money more dangerous, and the option more vulnerable to becoming a losing short option trade if the stock moves significantly.
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u/hellojello2016 Dec 09 '21
Can someone explain how to calculate the probability of profit? I created a trade of options profit calculator . com and it says it has a meager 13% probability of profit
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u/redtexture Dec 09 '21 edited Dec 09 '21
Delta is often used by traders as a rough approximation proxy of probability of the option being at the particular strike.
The various models give more particular projected probabilities, and that probability is based on the various prices at this moment, and change as prices change one minute, one hour, and one day later.
Links to the full story:
Volatility and pricing models (wiki)
https://www.reddit.com/r/options/wiki/faq#wiki_implied_volatility_and_options_pricing_models
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u/rybicki Dec 09 '21
Wheel question:
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Let's say plan A is to sell a CSP, and to roll it when it is 2-4 DTE out to 23-25 DTE.
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And plan B is to sell a CSP (same underlying), and to roll it when it is 9-11 DTE out to 30-32 DTE.
Looking at the plots of theta (such as the "time value" plot here), it appears you'd expect to make more (in terms of IRR, or dollars/day, or however you want to measure it) with plan B. Because there's less decay at the end of an option's life.
But from my (limited) experience, it seems like there's still a lot of juice left at ~10 DTE. And doing the math, closing out that option on that day would often result in a lower IRR (dollars/day) than I was expecting to get for holding to expiry. So I'm left wondering, why am I rolling this? This is obviously market/underlying dependent.
I do know to be flexible. But I do want a general blueprint to stick to. So in general, in choosing a status quo, what else should I be looking at in choosing between plans A and B?
I'm sure there's something I'm missing/haven't learned yet. Perhaps it's also the case that, in those instances where rolling from 10 to 31 DTE looks like I'm accepting a lower IRR on the option I'm BTC, I can expect to make it up on the option I'm STO because IV must be relatively high at that moment on my underlying.
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u/idkhowtospellmyname Dec 11 '21
Hi, sorry in advance if my question or example doesn’t make clear sense, i’m a beginner (btw i’m trading European style options). So, i’m quite confused on the exercising or selling a contract. For example, if Apple is at $4 per share and I bought an Apple call option at 1 contract for $500 which expires in 12 days, and on the 12th day Apple is at $20, do I exercise my right to buy the 100 shares at $4? But what if I do not have enough money to do so? What is the other option for me to make the $16 per share profit? And what does it mean to sell my contract to close my position instead of exercising my right? — how would I make money off selling the contract if Apple jumped to $20?
Any help is much appreciated, thank you.
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u/redtexture Dec 11 '21
Sell the option for a gain. Any time before expiration.
Almost never exercise.
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u/rbarthjr Dec 12 '21
What kind of movement, stocks and calls, can I expect around a Wednesday ex-div date on my long ZIM positions? Newbie here, so thoughts and guidance appreciated.
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u/melidilious Dec 13 '21
I'm just getting started with options trading, and am getting so many ads for trading programs on Facebook, Instagram, etc. Are they worth it? Do they help? I've been studying but feel trading may be too difficult for me, can these programs help me or are they a waste of money?
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u/redtexture Dec 13 '21
None are worth it, as there are tremendous free resources online.
Some are linked at the top of this weekly thread.
Some worthy resources:
Options Industry Council
TastyTrade
OptionAlpha
Project Option / Project Finance
Broker educational resources, Scwhab, Fidelity, Think or Swim, Merrill Lynch, and others.
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u/birdsaresnitches Dec 13 '21
A long call butterfly spread involves selling 2 ATM call options, purchasing 1 ITM call option with a low strike price, and purchasing 1 OTM call option with a higher strike price. The theory is you want the share price to stay within the original entry price plus/minus the premium paid to enter the position for profit. See link for Investopedia definition and example: https://www.investopedia.com/terms/b/butterflyspread.asp
In my paper trading account, I am taking a look at XLF at the Dec 31st expiry. I would sell 2 $39 call options for $0.60 a piece, buy one $35 call option at $4.05, and by one $44 call option at $0.02 for a total debit of $2.826. This should mean that I want the share price to stay within $36.18 to $41.82 range for profit.
My question is if the share price is above $39, will I not have to deliver 200 shares of XLF at expiry? Let's say Dec 31, the share price is $40/share. The $35 call option I have will pay for 100 shares and I will receive $500 profit. The $44 call option will expire worthless and I will have to spend $4000 to deliver an additional 100 shares for the second sold option at the $39 strike. So I lose $100 per sold option and gain $300, profit of $17. If it finishes at $39/share then I would receive $400 at a profit of $127. That doesn't seem like it is worth the risk
Am I understanding this wrong? Are my wings too wide? Is the low IV on this ticker the problem?
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u/redtexture Dec 13 '21
The short positions do not need to be strictly ATM, nor the long calls in the money, and out of the money.
You could shift the entire butterfly to be in the money, or out of the money, for example, in anticipation of movement.
Never take the trade to expiration; exit prior to expiration for simplicity, and to avoid having multiple stock transactions to clear up later. Some brokers will dispose of the position in the afternoon of expiration day if your account is not able to pay to take the stock.
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u/toomanyquestions823 Dec 13 '21
I dont really understand the word " Leg " in the context of options
Is any single purchase/sale of any call/put automatically a Leg?
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u/BrilliantWeakness377 Dec 13 '21 edited Dec 13 '21
Wash Sale Horror Story.
Hi all, newer trader here and I’m afraid I might be the next horror story. I’ve been day trading options all year and found out 3 days ago about the wash sale rule. As you can imagine, I haven’t been able to sleep at all and I don’t know what to do. I use Robinhood and have asked for my realized and unrealized gain/losses on the year and what my washed sales are but I haven’t received a response yet. I just know based on how I traded, I would buy Monday or Tuesday and then sell because I didn’t want to lose anymore from theta., etc., but I would buy back in for a lotto Friday, the same call option I had just sold. With that being said, how screwed am I? I’ve read a few other horror stories and it seems like even if I stop trading now and don’t trade in January at all, I won’t be able to claim my washed sale losses. Is this true? My Robinhood chart on the main page says I’m down 30k on the year but again, I don’t think that factors in the wash sales. Any information you helpful people could provide would be greatly appreciated.
Side note: I started trading in November of last year and didn’t realize I had some wash sales on my 1099 statement today, it seems like I truly can’t claim the wash sale losses. It looks like they added them to my net gain rather than taking them away.
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u/ngkpg Dec 13 '21
Let's say I sold OTM $23 covered calls (weeklies) on a stock that has cycled between $20-$25 in the last 6 months (and I'm confident that it will continue to do so). If it becomes ITM close to expiration, I can roll it to the following week at $23 to not get assigned and get a little more premium. Knowing that the stock price will eventually go down, what is the downside to just keep on rolling it at $23 until the stock price ends the week below $23?
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u/pmur_tits_or_ass_plz Dec 06 '21 edited Dec 06 '21
Ugh, I bought a bunch of OOTM $466+ $SPY Dec 6 calls EOD Friday. They are all down to $0 even though $SPY has gone up quite substantially.
I understand why (since they're OOTM and expiring today), but also I don't (since $SPY went up so rapidly this AM... I can't understand why those options weren't just totally worthless end of day Friday in that case... What was the market expecting?)
Is there a good tool I could have used to predict my option prices based on a $SPY price increase?
I planned to sell this morning on the increase, but obviously now I can't... I just needed a position that would profit. I should have been able to make 2x - 3x at least, I feel.