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Newbie Options Trading

Discussion in 'TSLA Investor Discussions' started by Jonathan Hewitt, Apr 21, 2013.

  1. Jonathan Hewitt

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    First, before anyone laughs, I understand the title is an oxymoron. In my defense, everyone has to start somewhere and either get burned and quit or get better and keep going.

    The reason I am starting this thread is I've noticed lots of newbies asking questions in several other threads about options, how they work, basic strategies, etc. Rather than clutter up those threads with newbie questions I thought it would be good to have them all in this thread. Pros who have time and desire to help newbies out can contribute to this thread by answering questions or leaving advice!

    BTW, I am one of such newbies as I have not played with the fire yet but am thinking about getting in soon (starting small first, of course!) Up until now I've just held the stock.

    To other options newbies out there, I found this article very informative:
    http://www.investopedia.com/university/options/
     
  2. Jonathan Hewitt

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    I'll start off with a question! If my point of buying a call option is purely speculation, is there any motivation to not buy out of the money calls for a long out time period, say the JAN 14 calls? I made a spread sheet to analyze value at expiration (all time value decayed) to compare different strike prices, and as an example if the stock value goes up to $60 come January, the $50 call and the $45 call provide about the same % gain off original premium paid. If it goes up anymore than $60 the $50 call starts to provide a much better % gain! This is assuming no time value come December/January time frame to be conservative. Obviously the more out of the money the more risk there is but I think there is enough chance it will go up that much to make the small premium worth such a gamble?

    I also see buying calls as more protection than just being long common in some chance that they bankrupt or something. I would obviously only buy calls with money that I can afford to lose (heck, I consider my whole TSLA investment that way!)

    I am mulling this all over now as it appears I need to submit an application to get options trading enabled on my brokerage account. I will call them tomorrow and hopefully the "approval based on experience" doesn't have them deny me as I obviously have no experience.
     
  3. cwerdna

    cwerdna Active Member

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    #3 cwerdna, Apr 21, 2013
    Last edited: Apr 21, 2013
    Yep, everybody has to be a newbie at some point. I still consider myself to be a novice/amateur even though I've been dabbling w/options for about 2 years now. (I normally don't buy calls and hardly buy puts... I made a few bearish bets on FB by buying puts and lost $. :()

    I'll have to think about your questions more. One problem w/buying options that are closer to at the money is that the time decay (negative theta) is greater.

    Depending on your brokerage, they might not approve you (yet) to buy calls. I'm w/TD Ameritrade and they have 3 levels of approval. The lowest (tier 1) doesn't allow you to buy calls or puts. For IB (Interactive Brokers), if you have under a certain # of years of options trading experience, they require you to take a test about options! I had to take it and was able to pass. A newbie would probably have trouble.

    As for "more protection", well, you're risking less $ up-front than buying the stock (you pay less $ to control a given # of shares) but unlike stock, there's time decay, as you've discovered. If you buy a TSLA call and come options expiration in Jan 2014, if TSLA stays flat, you've lost all the time value (extrinsic value). If it's OTM, it'll be worthless at expiration.

    You should watch IV. I noticed that IV seems elevated even for TSLA for Jan 2014. Earnings are in a few weeks, and normally that leads to IV collapsing for front month (nearer dated) options but not so much (IIRC) for ones further out. Just be careful about paying too much. Right now, from an IV point of view, TSLA options look a bit expensive. If IV comes down, you'll suddenly find your call being worth less $.

    Look at Optionistics - TSLA Price and Volatility History.

    Right now, Thinkorswim tells me the IV for Jan '14 options is 59.42%. On 4/1/13, it was only 50.87%. In glancing thru Thnkorswim's Analyze > Thinkback, it seems like Jan '14 options IV typically (in the past few months) was in the high 40s% or low 50s%.

    BTW, what's your time horizon in terms of holding the calls? Are you planning to sell once their values go up by a certain % or $ amount? You planning to hold for months or to/near expiration? You plan to exercise the calls?
     
  4. Nicu.Mihalache

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    Just a quick advice. No pro here, but doing option trading since early 2009.

    I see most beginners want to buy calls. And that because they seem magic in those times of new all time highs every day. Chasing a stock on the rise like TSLA is just like trying to catch a falling knife. Chasing calls in this situation is like skydiving to catch a 20lb sharp sword.

    While there is a small chance that the short squeeze will start soon with no trip back to $40 of below, I do not see it significant enough to jump off the cliff right now (to catch that sword). Buy (long term) calls when everybody thinks TSLA will tank and the price is languishing.

    As always, try to buy from pessimists and sell to optimists. Avoid being on the other side of that trade!
     
  5. cwerdna

    cwerdna Active Member

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    #5 cwerdna, Apr 21, 2013
    Last edited: Apr 21, 2013
    I currently have no positions in TSLA of any sort and don't think I ever have (memory foggy).

    For me, I consider myself to be an amateur and I started w/covered calls on stocks I owned, since that I what I was introduced to, at first. I have an inherent bias (right or wrong) against buying calls and puts because of the time decay. I prefer to be on the other side where time decay is my friend (and no, I don't sell naked calls).

    I do sell way OTM naked puts though on days a stock is down, to collect premium. I try to look for strikes that are at least 1 or 2 levels of support below current support and avoid expiration that's after an earnings event. (Wait until earnings event has passed, as some stocks move big time, after earnings.) I also usually avoid selling puts on stocks where they're below their 200 D SMA. I usually buy back the short puts when they've hit $0.05 or less, as TD AM lets me do that for no commission. Just food for thought as another way for the OP to make a bullish bet.

    Problem is that your max loss when you sell a put is much larger and lots of buying power can be tied up. (Example: If I sell May '13 32 strike put on TSLA for $0.20, I'll collect $20 minus commissions. But, my max loss is $3180, which happens if TSLA goes to $0. Hopefully one is monitoring and doesn't let that happen. Buying back the put after a certain profit level locks in the gain, eliminates the risk from that point and frees up buying power.)

    TSLA not been a stock on my list that I've sold puts on but I might consider it after the earnings announcement.
     
  6. c041v

    c041v Member

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    Thanks for starting this thread, Jonathan. Although I have been trading a few years and done quite well just buying and selling TSLA, I must say I am intrigued by options. That said, I know nothing and have spent the last few weeks reading and reading some more. The threads in this sub-forum are slowly beginning to make more sense. I think the most important thing I've learned so far is that this sort of thing is definitely not for the faint of heart.

    Any and all wisdom from the options gurus around here is much appreciated.
     
  7. cwerdna

    cwerdna Active Member

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    #7 cwerdna, Apr 21, 2013
    Last edited: Apr 22, 2013
    On the bolded part, which are you referring to? TSLA stock? Options on TSLA? Both? Options in general?

    What people say re: making a lot or losing a lot of $ w/options is kinda true (esp. if you don't know what you're doing), but it depends on how you play it, which underlying securities/stocks, how much of risk you take and your position size.

    My main options strat (w/selling OTM naked puts) bring in a little money ($900 to $1000 each month in total) and the w/stocks I use, don't seem incredibly risky. I don't lose any $ most of the time but a lot of buying power is tied up.

    However, if I sold puts and then the stocks and/or market dive and are on a prolonged downtrend (or at least one that lasts until my options expire), I could be a world of hurt and rack up big losses.
     
  8. DonPedro

    DonPedro Member

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    One thing (among very many) to know about options is that the market for a given option is typically much less liquid than for the underlying shares. Lack of liquidity means that you cannot be sure of getting a "fair market value" if you just place a market order at an arbitrary point in time.

    This is always a factor, but particularly so when you want to trade on some recent event. In a liquid share, you can get out (or in) at market value in seconds, but with less liquid papers (e.g. many options) that is not assured.
     
  9. Jonathan Hewitt

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    Thanks everybody for the tips and advice so far! I didn't know if this thread was a good idea but it's looking like it wasn't a bad one (until newbies start losing lots of money ;) )
    Excellent analogy! Let it be a warning to all us newbies!

    Any advice on how to get in and out of options based on this info? That's one thing I'm a little squemish about (having a good option but botching the sell). I've heard you should only trade during the day and not put in after hours orders. Obviously limits for normal stock is a good way to control the price you pay but it sounds like that isn't sufficient for options.
     
  10. Nicu.Mihalache

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    Unfortunately I'm talking from personal experience, I was feeling like a wizard with AAPL calls until September 2012. Since then I lost the equivalent of three Performance+ Model S with those (slightly different error: not realizing nearly enough profits to protect myself from what happened).

    - - - Updated - - -

    Always use limit orders with options (be it buy, sell or spreads). I have experienced a bit with stops, but most of the time they are worse than market orders.
     
  11. mulder1231

    mulder1231 Active Member

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    Ok, another newbie question, do you ever buy or sell calls or puts that are out of the money? And if so, what are those scenarios?
     
  12. smorgasbord

    smorgasbord Active Member

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    If you're new to options, then you're mostly limited to selling Covered Calls. See ETrade's levels here: https://us.etrade.com/e/t/estation/help?id=1304010000#View

    A Covered Call is a Call that you sell on which you own the stock. As long as you choose a strike price greater than the price at which you bought the stock, you can only make money. That safety is what makes it the only level 1 options play you have. However, many people feel that is boring, or at best leaves money on the table. But, you need to build up a track record of trading in order to get to higher level trading. Levels 3 and 4 require a margin account, which means the ability to borrow money. Losing borrowed money is not fun.

    Level 2 trading lets you buy Calls or buy Puts, among other things. When you buy an option, you have the option of exercising it or not. When you buy an option, the most you can lose is what you spent on that option. While that sounds no more risky than buying stocks, it's important to note that stocks rarely go to zero while options often go to zero.

    With options, you get larger percentage movements than the underlying stock. That's great when you're right, and bad when you're wrong. Add in the limited time during which the options are active and things can go from bad to worse quickly.

    Buy Apple stock at $500 and when it goes down to $400, it's a bummer, but you can wait a year or two if you believe in the company. Buy an Apple $520 Call that expires in 3 months and when the stock goes to $400 it's virtually worthless until expiration comes near, and then it's literally worthless. Apple can shoot up to $100 a month later and you won't get a dime. So, with options you not only have to be right on what the stock is going to do, you have to be right on when it's going to do it.

    There are lots of plays in TSLA right now, but all of them involve advanced strategies not suitable for a option newbie thread. The one thing newbie can do, that is sell Covered Calls, isn't a particularly good way to play Tesla right now.
     
  13. luvb2b

    luvb2b Member

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    my quick contribution to this thread. 99%+ of option trades i have done in about 20 years are simple buying calls and puts. i pretty much never sell options because you end up in situations where you sell something for $1 that eventually ends up being worth $50. despite time erosion, i always want to be on the other side of that, where i risk $1 and i have a shot to make $50, 100, or whatever. the other thing when you sell options is you have to be much more aware of your short options being exercised, so there's a heightened level of diligence involved and more unusual things that can go wrong due to early or unexpected exercises.

    i would say most people will be well served to avoid any strategies that involve selling options (including spreads, butterflies, etc. etc.). just learn how & when to buy a call or put option and how & when to sell it and you will do very well.

    tesla was the first time in years i sold options, and it was done only as a substitute for owning shares. the high cost of shorting skews the regular put-call arbitrage, and provides longs a unique opportunity to sell shares and exchange for an options conversion. here's how that trade works:

    assuming you own long shares, the conversion from stock to options is a position that should get you shares back at expiration at a lower price than you sell them today. this is not supposed to be possible, in tesla it's a function of the high cost of shorting. the trade if you own 1000 tesla:


    sell 1000 tesla @ 49.80 collect $49,800 cash
    buy 10 may 55 calls @ 1.25 pay $1,250 cash
    sell 10 may 55 puts @ 7.90 collect $7,900 cash


    net inflow of cash opening the trade: $56,450


    at expiration, make sure to get assigned on the 55 put or exercise the 55 call. important not to end up in a situation where both events happen.


    assuming one or the other (assigned on put or exercise call), at expiration:


    buy 1000 tesla at $55 pay $55,000 cash
    remaining options have been assigned/exercised or expired/closed out.


    total cash credit = $56,450 - $55,000 = $1,450 for about 26 days.
    implied yield: ($1450 / $49,800) x (365 / 26 days) = 41% annual yield


    of course if the stock goes up or down, you still make or lose money as if you owned 1000 shares during the entire time. it's just that your shares won't come back until the expiration.



    options trading is very dangerous and addictive. it's pretty much gambling that's legalized with sometimes better odds than vegas, but most of the times worse odds than vegas. many traders i knew traded for years and were completely wiped out by being short options at the wrong time. others got too aggressive buying options and lost huge amounts that way. so don't be in a rush to get into this dangerous world. take your time, understand the risks, and use very small amounts of capital starting out. or... paper trade.

    good luck and be very careful.
     
  14. gregincal

    gregincal Active Member

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    Note that options can also be used in conjunction with owning stock as a way to reduce risk. An example:

    You have a bunch of Tesla stock and are bullish, but are scared about something really bad happening (earthquake at the factory, huge recall). I hate stop orders, because they are guaranteed to lock in losses if the stock is just temporarily dipping. Instead you buy Put options with the strike at whatever you would have set the stop order for (basically the amount of money you are willing to risk) and the expiration at whatever period of time you want to protect. If it dips below that price you are protected and can wait until the option expiry to determine whether to stay in the stock or not. If stays even or goes up you think of the cost of the option as insurance.
     
  15. luvb2b

    luvb2b Member

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    in a normal stock you would be correct.

    tesla is no ordinary stock, because the high cost of shorting makes the puts insanely expensive.

    better is substitute long call for long stock + long put.

    compare for example, buying the jun 42 call vs. owning shares and buying the jun 42 put. you get almost a $2 advantage using the call instead of the stock + put.
     
  16. Johan

    Johan Took a TSLA bear test. Came back negative.

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    So after being interested in options for a long time I recently got an account and did my first trades. I am long the stock since way back and have held a core position and a "trading position" that I've tried to trade in and out of with very much a net positive effect however I recently found my "trading position" being at 0 shares and no good re-entry point in sight. Hence options. The alternative would have been to start selling (with very nice profits) stock from my core long position but not knowing if and when I might be able to buy in again below my exit price and risking having fewer share than I wanted in case of a squeeze situation.

    Since it took more time than I wanted for my account (with optionsxpress.com) to open properly, getting cleared for trading and transferring funds I was not able to buy calls as I had planned when the stock was trading in the low 40's. Instead I found that the first day I could trade the stock has risen sharply to around $46. I believed there would be a correction, so my first trade was actually buying some Jun13 $45 puts. Over the next two days it became obvious that I was wrong and that the stock was moving higher on huge volume. So I cut my losses and sold those puts at a loss (about 20% loss on the trade). Maybe a very good experience to make a loss on my first trade? (I think so). Instead I bought Sep13 $50 calls and Jan14 $55 calls - these are now up quite a lot more percentage wise than I lost on the first trade. Today I sold a portion of the Sep13 calls with about 16% profit, and held on to a portion of them.

    What have I learned so far: Everything that has been said about how options can be addictive is true. The way I've been trying to trade this far, a bearish in-the-money put buy when I though the stock would move a little back and then bullish bets with some pretty out-of-the-money calls (with longer time value) when I realized things were really starting to take off, means that percentage wise both the losses and the gains are multiples of any losses/gains I would have made just trading the stock. This is OK as this was what I wanted with the options. Also the ammount I've set aside for options trading is less than 10% of my TSLA position value. Also I think that with options it's even more important to cut your losses and take profit along the way and not be too lured in by that potential 1000% gain or whatever. Or maybe do what I did today and sell out of call positions that have seen big gains over a short period of time, but keep a little bit of the position open for that x10 gain... Anyway it's fun!
     
  17. blakegallagher

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    I have been trading in options for one year now and I concur they are very addictive :). I cashed out half my position today which is 5x my original investment! This simply would not have been possible with stocks. I feel like the stock will still go higher but had to take some profits in case I am wrong (again) I try to have the patience to wait until there is an unwarranted pull back on the stock. When you pick up options after one of these I have found my success rate to be much higher than when I am buying on the way up :). I would also Like to echo Citizen T here and say don't try and wait till the top of the peak to take any profits.... buy on the way down and sell on the way up and split up the buys and sells if your worrying about getting the highest or lowest price when selling or buying.
     
  18. cwerdna

    cwerdna Active Member

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    Personally, as a habit, I don't buy protective puts. I don't think I've done it once. Problem is that doing so can be a "waste" of money and erodes your profits (if you have any). And (unless there are mini options), you need 100+ shares to accompany it. For TSLA, that's no problem (but I have 0 shares). For high priced stocks like AAPL, there's no way I'd hold positions that large.

    And yes, w/the high IV of TSLA, buying protection is very expensive. And as I said earlier, for many stocks, the IV of the front month options tends to rise before earnings and then collapse right after. So, if you buy protective puts right before earnings, there's a good chance you're overpaying.

    I've read that some folks have the attitude re: protective puts of don't buy them, waste of money (see above). If you think a stock is going to get into trouble, just sell it or sell some.

    - - - Updated - - -

    Agree. For the strats I've been using, I always use limit orders.
    I personally would never sell naked calls. I'm not nuts.

    As I mentioned earlier, my primary way of collecting options income is sell way out of the money puts to collect premium (on down days but on generally uptrending stocks, where they are above their 200 D SMA) and hope they expire worthless or that I get a decent profit. I usually close them out when they get to a nickel or less.
    Yep on all of the above. I'm not sure if you mentioned ETrade because they're your brokerage or because they just happened to have the levels listed openly. FWIW, from looking at https://us.etrade.com/e/t/estation/pricing?id=1206010000, I'd say their publicly listed options commissions are bad, and would be horrible for the trading I do.

    Re: your AAPL example, yep. I've been burned more than once on simple long call/put positions where I got the direction right but the timing wrong. :(

    I agree. I probably wouldn't sell covered calls on TSLA.
    Interesting. Re: the bolded part, yep, that could happen, but the stocks on which I sell naked puts on for premium are generally pretty stable (and almost always above their 200 D SMA) and I always avoid having them expire after earnings. Most of them are stocks that I wouldn't mind owning anyway and at that price level.

    As for short options being exercised, well, the naked puts I sell are usually way OTM. I don't let it get so bad that they become ITM.

    As I said earlier, I don't sell naked calls though.

    I like strats where time is on my side. In the past, I had sold iron condors in certain stocks, ETFs and along w/RUT and SPX.

    I agree on your last paragraph. Start out small, don't take massive aggressive positions.
     
  19. PureAmps

    PureAmps Model S P85 (#2817)

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    Book Recommendations

    If you are new to options, but at least have a basic understanding I recommend this book:
    It is not a "beginners" book, but it contains practical advice about how options trade in the real world and how to structure trades.

    The second book I recommend to anyone who is interested in understanding options and has a strong mathematical background is:
    This is *the* textbook for derivatives. It is very well written and I find it to be a very easy read for such a technical subject matter. In fact, I think you could read the book and ignore all of the equations and still get a lot out of this book. But it is a textbook, it is full of complex equations, and it is not cheap. :) I have created my own proprietary stock modeling tools using this book, and I base many of my trades off of those tools.

    Options Advice

    I don't like to give investment advice in general and on the Internet especially. But I will say that time is your biggest enemy when trading options. When I'm bullish on a stock and want to go long with options I prefer deep in-the-money LEAPs with 18+ months of expiration remaining. That extra time has saved my trade more times than I can count, and you still get 2-3x leverage using in-the-money LEAPs. I often use LEAPs to augment my long stock positions.

    You can also turn time to your advantage by selling short term calls/puts. Selling short-term calls in the form of covered calls is a good way to earn income when you believe a stock is range bound. Likewise selling short-term puts, can allow you to enter a position at a cheaper price or collect a premium when a stock is running higher. Given Tesla's current volatility I would probably stay away from these strategies for the time being. If you write a covered call, you may miss out on any short squeeze, or you may end up buying too high if you were to write an at-the-money put if there is a short term pullback.

    As others have said, only play with money you are willing to lose completely.
     
  20. blakegallagher

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    Thanks for the book recommendations I definitely would like to learn a lot more about options and I do not love the free resources I have found on the internet so far. That being said... anyone have good online references? Would love to see any other members who are very familiar with options weigh in with their own recommended "study guides". It is much appreciated all.
     

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