Newbie Options Trading

[mershaw2001]

gym, starting with today, it's impossible to be certain you can enter into a zero cost delayed construct spread. See our conversation above. You can buy the long leg, but you might be screwed by never entering the short leg if tesla doesn't go above 170. I don't think it's possible to enter into a 5 or 10 dollar spread any day at all without the stock moving over 10 dollars. You essentially have to enter a long leg, wait two weeks and be correct in the movement of the stock, and enter the short leg when the stock is up 20 dollars.

 

[gym7rjm]

gym, starting with today, it's impossible to be certain you can enter into a zero cost delayed construct spread. See our conversation above. You can buy the long leg, but you might be screwed by never entering the short leg if tesla doesn't go above 170. I don't think it's possible to enter into a 5 or 10 dollar spread any day at all without the stock moving over 10 dollars. You essentially have to enter a long leg, wait two weeks and be correct in the movement of the stock, and enter the short leg when the stock is up 20 dollars.

Looking at Jan 15 leaps it appears as though the low 200s the call prices are swinging quite a lot, 3-5% on modest movement of the stock. Premium differences between most strikes, 210 to 215 for example, are less than 5%. So I don't think underlying stock would need to move $20 to enter that spread? Unless I'm missing something.

I understand that it may be impossible to enter the short leg if the stock goes down. However, if I were already planning to buy leaps with a chunk of money, then entering into a spread, if the opportunity presented itself, would lower my risk? I could also use that same money to go for another spread. In theory a set amount of money could enter into infinite zero cost bull call spreads if the timing were correct and the volatility high?

 

[mershaw2001]

Interesting. Yeah. I suppose that could be a good trade then if you can manage to swing it. You're right. Color me purple, 15 dollars of profit for free if you can get into the trade, and then tesla pops.

 

[bsd]

Is there a site that provides option price history? On my TDWaterhouse account I can see day range, but I'd like to see more.

 

[ongba]

Looking at Jan 15 leaps it appears as though the low 200s the call prices are swinging quite a lot, 3-5% on modest movement of the stock. Premium differences between most strikes, 210 to 215 for example, are less than 5%. So I don't think underlying stock would need to move $20 to enter that spread? Unless I'm missing something.

I understand that it may be impossible to enter the short leg if the stock goes down. However, if I were already planning to buy leaps with a chunk of money, then entering into a spread, if the opportunity presented itself, would lower my risk? I could also use that same money to go for another spread. In theory a set amount of money could enter into infinite zero cost bull call spreads if the timing were correct and the volatility high?

Gym,

Yes, in theory one could recycle a set amount of money into "infinite" zero cost bull call spreads. See a trader by the name of "Gregg Thurman" in the aapl pdf. Read his posts on how he took about 10k to multi 7 figures and bought a bunch of colllectible cars using delayed construct spreads! Also, read how he lost a million dollars trading weekly bull call spreads.

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gym, starting with today, it's impossible to be certain you can enter into a zero cost delayed construct spread. See our conversation above. You can buy the long leg, but you might be screwed by never entering the short leg if tesla doesn't go above 170. I don't think it's possible to enter into a 5 or 10 dollar spread any day at all without the stock moving over 10 dollars. You essentially have to enter a long leg, wait two weeks and be correct in the movement of the stock, and enter the short leg when the stock is up 20 dollars.

+1000. No guarantees when it comes to the markets, especially with trading options. The delayed construct spread is a good strategy, and limits risk if one is lucky enough to complete the upper leg for a free trade, but it does require a bullish stock/environment. In the aapl pdf, it details the stories of successful traders as well as those that went broke. Please give appropriate attention to the latter as well, and always, know your risk and ascertain if you would be ok in the worse case scenario (ie tsla crashing back down into the 50s, similar to aapl going from 200 to 80 back in 2007/2008). That was unthinkable, but yet, it occurred.

 

[ggr]

thanks guys. I was out cycling since my last post and that is usually when I do most of thinking and came up with some thoughts. Is it correct, that if I buy a leap and write a call, If It is arranged with my broker, if my shares are called I can then call the shares that I control with my leap at the same time so I don't have to have the cash/shares to cover my leap?

If you exercise the LEAP call, you are buying shares, albeit at a reduced price, and need the cash/margin to do that. As someone else pointed out you may well be better off just selling the LEAP and buying shares, but that probably takes cash too. Getting assigned on an uncovered call can be very unpleasant, especially since you can't figure out when it might happen, and is definitely not something that should be in a newbie options thread.

 

[sub]

I do not want to take the chance of getting caught with my pants down as far as being uncovered and getting a call. I'm approaching this from the "worst case scenario" point of view and deciding from that perspective if it can be done.

So, I am incorrect that if I own a leap, say $110 Jan 15 and I sell either an OTM Jan 15 Leap or a short term call, if my "shares" are called, I can't immediately call the shares that are owed to me and basically pass them through to whoever called mine without having to have cash to purchase them and pass them on? I thought I read somewhere this is possible, but maybe it takes a special relationship with the broker? That is something I would discuss with them first for sure first!

 

[ongba]

I do not want to take the chance of getting caught with my pants down as far as being uncovered and getting a call. I'm approaching this from the "worst case scenario" point of view and deciding from that perspective if it can be done.

So, I am incorrect that if I own a leap, say $110 Jan 15 and I sell either an OTM Jan 15 Leap or a short term call, if my "shares" are called, I can't immediately call the shares that are owed to me and basically pass them through to whoever called mine without having to have cash to purchase them and pass them on? I thought I read somewhere this is possible, but maybe it takes a special relationship with the broker? That is something I would discuss with them first for sure first!

Sub,

Using your example of Jan 15 $110 LEAP, currently trading for about $71.75 with Tsla trading about $164.50 about a couple hours ago. This LEAP has a delta of 0.82. The time premium of this option is $17.75 ($110+$71.75-$164.50) so effectively, you are buying TSLA today at $181.75 ($110+$71.75). If you exercise this option early, you will lose this time premium of $17.75 which represents 11% of the current stock price. If you were using an ATM Jan 15 LEAP, lets say Jan 15 $165 LEAP trading for $45.55 with prob delta around 0.50, the time premium of this option is $46.05, so effectively buying TSLA today at $210.55, with the time premium of $46.05 representing 28% of the current price of TSLA. So in essence, for the most part, one should only exercise an option once the time premium has nearly evaporated, or with a dividend stock, once the time premium is less than the dividend. So, basically, I am trying to say that with a call calendar spread (long DITM LEAP, short OTM monthly call), you really don’t want to exercise. Either close the spread for a profit, or buy shares at market price to cover the obligation of the short call, should the stock rise above the strike of the short call sold.

 

[mershaw2001]

you totally can call your broker and exercise your own leap to get shares and satisfy your short position. here is what will happen.
1) you are holding a short leap and a long leap.
2) you check your bank account one day and notice the short leap is gone and you are short 100 shares of tesla. You also made significant cash because the time premium in the short leap was just handed to you on a silver platter.
3) you need to find shares to satisfy your short position. Buy on the open market or exercise your option. Assuming you have enough margin and your brokerage allows shorting, you're not really in a hurry.
4) you look at shares today. they are 165 dollars. You look at your leap. Let's say it's a 100 strike 2015 contract worth 77 dollars. You could exercise and buy those shares for 100 dollars. that would cost you $100 per share. Or you could sell the leap for 77, and then buy the shares for 165, so -77+166=$89 dollars per share, because you sold the time premium. Thus it's better to not exercise an option that has time premium, rather it's better to sell it on the open market and then buy the shares to satisfy the short position. You can do either. One is better for you.

 

[ckessel]

Stupid newb question, but how do you decide what a good LEAP delta is for TSLA? What little reading I've found suggests at least .80 for LEAPS but the ones available (at least on Ameritrade) are way lower than that. Presumably because TSLA is volatile?

 

[sleepyhead]

Stupid newb question, but how do you decide what a good LEAP delta is for TSLA? What little reading I've found suggests at least .80 for LEAPS but the ones available (at least on Ameritrade) are way lower than that. Presumably because TSLA is volatile?

This may not be of much help to you but I don't ever look at Delta. I come up with a price target in my mind, adjusted it to be cautious and then buy my options according to which one will give me the best risk/reward ratio.

On second thought, I don't even do that much. I just kind of wing it and buy options with strike prices all over the place to ladder them.

edit: investing is an art and not science, once you figure this out you can spend a lot less time focusing on numbers and a lot more time on the qualitative characteristics of companies and industries.

 

[ckessel]

Hmm, ok, followup question. My shares are all long term at this point. Whatever I sell, I'll have to hold some back for taxes and the rest I can put into LEAPS. Does it make any sense to even do that, to sell some of those shares to take advantage of the leverage of LEAPs, given I'll have to withhold probably ~20% for taxes (10% Fed, 8% or so state I think)?

I'm going to be running pretty much flat on income/expense for the next few years with kids in college, so what I've got in TSLA is all I've got to play with, there's no option to add more funds just to buy LEAPs.

 

[mershaw2001]

Hahah I felt bad for admitting it too, but I don't ever look at delta either. I tend to try to buy calls when i think people are expecting the stock to go down, and get a few calls that are otm at a reasonable price. Then I sell calls when people are excited about the stock and it's running up. Usually there's not so much time to calculate stuff like delta.

 

[sub]

you totally can call your broker and exercise your own leap to get shares and satisfy your short position. here is what will happen.
1) you are holding a short leap and a long leap.
2) you check your bank account one day and notice the short leap is gone and you are short 100 shares of tesla. You also made significant cash because the time premium in the short leap was just handed to you on a silver platter.
3) you need to find shares to satisfy your short position. Buy on the open market or exercise your option. Assuming you have enough margin and your brokerage allows shorting, you're not really in a hurry.
4) you look at shares today. they are 165 dollars. You look at your leap. Let's say it's a 100 strike 2015 contract worth 77 dollars. You could exercise and buy those shares for 100 dollars. that would cost you $100 per share. Or you could sell the leap for 77, and then buy the shares for 165, so -77+166=$89 dollars per share, because you sold the time premium. Thus it's better to not exercise an option that has time premium, rather it's better to sell it on the open market and then buy the shares to satisfy the short position. You can do either. One is better for you.

Thanks for the help. I see what the better option is, however, I would like the option to be able to buy a leap and write calls off of it without the need to have enough cash or margin sitting in my account to back up buying those shares only to sell them 10 seconds later. If I had the cash then it makes sense to sell the leap, buy the shares and pass them along.

I ordered the book on leaps from the link posted previously. I'm hoping that will help with a lot of these questions and then I can be the one answering some questions rather than always asking.

 

[InTheShadows]

Protective puts

what is the best way to hedge with protective puts? How many do you buy?

If I have 200 common shares but my delta for tesla is 600, would I buy 2 contracts, 6 contracts or some other number if I wanted to be 100% protected?

also how far out do you usually get them? The length of time you think there might be a possible pull back?

 

[mershaw2001]

Buy them when the stock is moving up and put a bit order in that is lower that the current bid and ask. Don't aggressively buy them. If the stock is moving up, you'll naturally have someone climb up the bid ask spread and take your bid. Buy them for longer than you think is necessary by about a month or two. I went out two months last time i bought puts. I also don't buy puts for all my shares, just half or a third.

 

[Jonathan Hewitt]

Buy them for longer than you think is necessary by about a month or two. I went out two months last time i bought puts. I also don't buy puts for all my shares, just half or a third.

Agreed. "Protective puts" should be such, protective! View them as insurance. Don't buy more insurance than you need, aka if you're ok with losing all your paper gains then you shouldn't get any as buying these puts will severely reduce your paper gains if the stock doesn't go down. I personally always like to have a couple Deep out of the money that would really only do something if we had a 2008 like event or TSLA goes bankrupt or something. They're super cheap if you buy them just a couple months out but if something like that were to happen it would keep me from losing it all (which would really suck). I could afford to lose it all, though, so mainly just have them to make myself feel better than if the stock were to crash I could dampen it a teeny bit. So to answer your question it depends on your risk profile.

If you're looking at puts to make money then the strategy is completely different.

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Oh, and there's other ways to hedge like buying puts for these type of events like buying puts on QQQ or SPY but I don't know much about that strategy (I'm a newbie myself, really) so...yeah.

 

[justdoit]

Hahah I felt bad for admitting it too, but I don't ever look at delta either. I tend to try to buy calls when i think people are expecting the stock to go down, and get a few calls that are otm at a reasonable price. Then I sell calls when people are excited about the stock and it's running up. Usually there's not so much time to calculate stuff like delta.

Same here. Don't really look at delta. One of the biggest lessons I've learned is to buy when volatility is low and sell when it's high. I've noticed volatility has a huge impact on the option prices.

 

[InTheShadows]

So what is currently low volitility and high for tsla? I just learned about it a few days ago. Do you use any volitility charts? The ones I looked at show it as kinda low right now.

edit: well kinda low Friday am.

 

[Johan]

So what is currently low volitility and high for tsla? I just learned about it a few days ago. Do you use any volitility charts? The ones I looked at show it as kinda low right now.

Yup. Since the stock has been trading more or less flat for days. Volatility has nothing to do with the actual price but everything to do with price swings.