Newbie Options Trading

[DonPedro]

Oh my gosh, I just got approved to buy Calls, Puts, and sell Covered Calls. This is the worst timing ever, a day where it just went up 3% and a day before Elon's next announcement and the market is already closed so I can't do anything today. Smartest thing is for me to stay out but the temptation to get in is so strong...Maybe just buying one contract can't hurt too much, right?

Sooner or later, this will end in tears.

 

[Jonathan Hewitt]

Sooner or later, this will end in tears.

I figure as long as I understand that if I buy options that the money should be considered gone forever at that point (aka cry then) I am taking the right approach. If I make any money past that point it should be considered a plus. I actually have a knot in my stomach thinking about trying this whole thing out which I think is a good thing. In my career field there are many things that I have to take the mindset of "this can get me fired, killed, or something worse" and as long as you keep that mindset you don't get fired, killed, or worse.

It's once you get complacent or overconfident that you get in the worst messes.

 

[brianman]

I figure as long as I understand that if I buy options that the money should be considered gone forever at that point

When buying, yes. When selling, it's worse than that. Be careful out there.

 

[cwerdna]

I figure as long as I understand that if I buy options that the money should be considered gone forever at that point (aka cry then) I am taking the right approach. If I make any money past that point it should be considered a plus.

I'm not sure if I'm misreading your statement.

Let's say you buy a call for $380 and you consider it "gone forever at that point". If you sell it for $100, well, you've lost $280. That's a pretty poor investing strategy and not a plus to me.

I think you need to think things like when to take profits, your profit target, or when you can take some risk off the table (e.g. selling part of your position or a bunch of other possibilities). Complacency or wanting to hold out for potentially more (which may never come) could turn a paper gain into a loss, esp. when time decay is not on your side and a probable IV collapse after the earnings event.

 

[Jonathan Hewitt]

I'm not sure if I'm misreading your statement.

I think you are misreading it? I was talking mostly about the emotional standpoint when buying, not the way you should actually conduct your trades. Obviously considering the money gone mentally at the point of buying and ACTING the same would be the same as flushing money down the toilet (like you pointed out). What I was trying to say is if you can tell yourself the money is gone emotionally and you are still able to pull the trigger when buying you are already prepared for the worst case scenario happening (losing it all). If you decide not to pull the trigger after telling yourself the worst possible case scenario is could possibly happen then obviously buying those options may not be the best idea.

Hopefully that makes more sense? If it doesn't maybe I just think weird. I do agree with what you said, everyone should have a strategy and a plan as far as when enough is enough, whether it's a certain amount of profit or losses, or at a certain date, and only adjust that plan for good reasons. Without a good plan options will cause you to lose more money than going to your local casino.

 

[deonb]

What I was trying to say is if you can tell yourself the money is gone emotionally and you are still able to pull the trigger when buying you are already prepared for the worst case scenario happening (losing it all).

That's not the worse case scenario (emotionally). The worst case scenario is selling after you made a small profit and then watching the option go up 1000% the next day.

Even with a small amount, let's say you buy 10 $65 calls for $0.60 and it goes to $1.2, so you sell. You made a hansom profit (well, $600, but still - it's 100%). Now imagine that call goes up to $6.00 the next day (i.e. TSLA goes up to $71, which isn't beyond the stretch of the imagination with some good news - e.g. Elon announcing he is deleting his Twitter account). You won't feel like you made $600. You'll feel like you lost $6000.

I'm not saying don't do it - I'm just saying that the emotional connection may be at a different point than where you think it is.

 

[Jonathan Hewitt]

That's not the worse case scenario (emotionally). The worst case scenario is selling after you made a small profit and then watching the option go up 1000% the next day.

Haha, good point! I never thought of it that way...I kind of know the feeling as I almost bought SCTY when it was $18 and am definitely feeling like I've lost a lot of money (I put the money in a mutual fund instead as I thought my portfolio was too risky at the time >:O ). The difference is with the increased leverage of options the feeling is super amplified as the gains can be super amplified.

 

[luvb2b]

That's not the worse case scenario (emotionally). The worst case scenario is selling after you made a small profit and then watching the option go up 1000% the next day.

+1.

in my experience the worst feeling in the world was when i had a belief, had the conviction to put my money behind the idea, and then for whatever reason i sold too early.

the pain of watching something run away without me, when i knew that i should have been on it... wow. it's much worse than riding something to the top and giving up some of the gains on the way down. and it's much worse than the pain of losing money because i was wrong to begin with.

 

[ShortSlaver]

Haha, good point! I never thought of it that way...I kind of know the feeling as I almost bought SCTY when it was $18 and am definitely feeling like I've lost a lot of money (I put the money in a mutual fund instead as I thought my portfolio was too risky at the time >:O ). The difference is with the increased leverage of options the feeling is super amplified as the gains can be super amplified.

I was fortunate enough to some some SCTY at $16 and then up the stakes at $18.20. I have to say the temptation to see it is there and play it like a swing but I have a number in my mind I'd like to see and it isn't there yet. Discipline is hard. Creating a plan is tough. Actually sticking to it, even when everything is unfolding like you thought it may (and no need to adjust), is really tough!

 

[kenliles]

Discipline is hard. Creating a plan is tough. Actually sticking to it, even when everything is unfolding like you thought it may (and no need to adjust), is really tough!

Agree with that and others above. Although I will say it can work the other way too. When a plan isn't working you need to change it. I've had the discipline to stick to a losing plan too long, watching made profits disappear (APPL in this case). Those really hurt, but still a close second to the pain of believing but not being in on a rising star as luv described

 

[DonPedro]

Anyone dare giving advice on the actual buying and selling? Let's say you decide that the right strategy is to buy some June13 65 calls. You see that bid/ask is at 0.75/0.85. First of all: Can you assume that this means that 0.80 is approximately the current "fair market value" (taking into account the share price, IV of options trading at the moment and so forth).

Second: Do you place a market order? Or a limit order at the ask price? Or try to buy somewhere closer to the bid price?

 

[ShortSlaver]

Anyone dare giving advice on the actual buying and selling? Let's say you decide that the right strategy is to buy some June13 65 calls. You see that bid/ask is at 0.75/0.85. First of all: Can you assume that this means that 0.80 is approximately the current "fair market value" (taking into account the share price, IV of options trading at the moment and so forth).

Second: Do you place a market order? Or a limit order at the ask price? Or try to buy somewhere closer to the bid price?

Never place a market order with options. Even if you see an ask price you agree with, put in a limit at that price. I like to put it somewhere a bit less than the ask as often you get your way.

Options have the ability to change, dramatically, within seconds. When there's a big spike up or down anyways.

Figure out what seems right to you. If you think TSLA stock + Option Premium + Broker Fee < TSLA stock @ Option Expiration (or within that time) then have at it if you fee comfortable.

Lastly, pay attention to catalysts. For instance, TSLA reports before the May option expires. It might be a better value than a June option as they are cheaper at the same strike due to time premium. However, a June option might fit your strategy so play accordingly.

 

[kenliles]

agree with all above by ShortSlaver. For options- never buy a market order; Especially true for a wide bid/ask spread low volume name like TSLA. I've done them on occasion with an AAPL where the volumes are huge; But as a rule, if you like the ask price and want it immediately put in a limit order at that price as advised. But even better for TSLA put in a limit at the midpoint and move up in increments. My experience with the TSLA option spreads by the MM (market maker), that buys occur about 25% under the ask and sells about 25% above it. However if you're buying a very short term (May), I've actually had buys fill below the bid (much less ask) due primarily to the volatility as ShortSlaver mentioned.

One more item to consider relative to expiration vs catalyst- remember that the time value of the option decreases at a very accelerated rate starting about 3 weeks out from expiration; Currently I have a few May $65 Calls I picked up for 45c- without a good short squeeze into or due to earnings these will go bye-bye

 

[CyberDutchie]

agree with all above by ShortSlaver. For options- never buy a market order; Especially true for a wide bid/ask spread low volume name like TSLA. I've done them on occasion with an AAPL where the volumes are huge; But as a rule, if you like the ask price and want it immediately put in a limit order at that price as advised. But even better for TSLA put in a limit at the midpoint and move up in increments. My experience with the TSLA option spreads by the MM (market maker), that buys occur about 25% under the ask and sells about 25% above it. However if you're buying a very short term (May), I've actually had buys fill below the bid (much less ask) due primarily to the volatility as ShortSlaver mentioned.

Oops, I just bought some Jan 18 '14 $40 calls at market. Newbie mistake. :redface:

Impulse buy, during the conference call. Bid was at 12.20 and ask was at 12.80 if I remember correctly. Got filled at 12.90. Those pennies difference don't really matter though with the quantities I bought (2). Still getting my feet wet...

 

[luvb2b]

Oops, I just bought some Jan 18 '14 $40 calls at market. Newbie mistake. :redface:

Impulse buy, during the conference call. Bid was at 12.20 and ask was at 12.80 if I remember correctly. Got filled at 12.90. Those pennies difference don't really matter though with the quantities I bought (2). Still getting my feet wet...

you probably would have gotten filled right away with a 12.60 limit, or for sure 12.70 limit. the market is "tighter" than they show when it is that wide.

 

[kenliles]

you probably would have gotten filled right away with a 12.60 limit, or for sure 12.70 limit. the market is "tighter" than they show when it is that wide.

yep agreed- $12.60 would have been likely for those; cost you $60 so no biggie - that's a cheap lesson; I know blew a lot more than that learning the same lesson.
Also note, during the conference call news announcements the volatility goes way up as quick traders buy and sell on the news. when you're buying LEAPS during those periods, you can sometimes pick up some good buys as the price dips in seconds. I wouldn't advise large buys during this period, but if you want to tweak up your long position, sometime putting in a limit order on a contract or 2 well below the bid going in gets filled on the quick dip down- just a thought- has worked for me from time to time and if it doesn't fill, no harm done. I think your (2) J14 $40 C is a perfect place to dip the toes. Be prepared to see some scary drops in the option value assuming TSLA pulls back (as I think might be likely given the run). It'll come right back in the money though when TSLA moves to new highs expect by year end. I carried a bunch of LEAPS last year that showed big losses for a long time, all recently rolled for a nice profit.

 

[DonPedro]

By the way, what happens to LEAPS (and other options) if all the shares in the company are acquired by someone before the expiry?

 

[kenliles]

By the way, what happens to LEAPS (and other options) if all the shares in the company are acquired by someone before the expiry?

they'll reflect the offer price per the underlying stock price accordingly; normally the stock price goes up to the offer price per share- your LEAPS(or any option) will price up accordingly at which time you can sell to close and take your booty or allow them to expire and exercise the call taking your profit that way.
Generally not a concern any more than owning the stock itself. Of course the options will amplify the price change as normal (up or down)

 

[DonPedro]

they'll reflect the offer price per the underlying stock price accordingly; normally the stock price goes up to the offer price per share- your LEAPS(or any option) will price up accordingly at which time you can sell to close and take your booty or allow them to expire and exercise the call taking your profit that way.
Generally not a concern any more than owning the stock itself. Of course the options will amplify the price change as normal (up or down)

This is a downside of LEAPS, then, especially those that are far out of the money. If there is significant potential for a company to either hit a ten-bagger or bust, then LEAPS at 2-3 times the current market value can still be worth quite a bit. However, if someone buys the company before the uncertainty is resolved, then the LEAPS lose all that upside value. The company may still hit the ten-bagger before the initial expiration of the options, but that upside will no longer accrue to the owner of the LEAPS.

 

[kenliles]

I'm not sure I follow Don. Granted, I've never been a holder of options at the time of buy out, so can't speak with authority on it, but on the typical buy out, much of the forward value is priced in to the offer, clarifying the uncertainty, so the underlying stock price moves up commensurately - earlier than otherwise expected by the long investor. The value of the Call option LEAP or otherwise would move up to its new intrinsic level plus remaining time value.

I think the scenario you are painting is one where the LEAP expiration is beyond the value included in the buyout premium, so its potentially lost? I'd say buyouts look at least 1-2 years out in premium (otherwise the owner won't sell). If the purchase acquires all of the forward value contained in the LEAP then thats all the LEAP holder was going to get anyway, so sell them and profit early. If the buyout produces new value (as would often be the case) then the LEAP holder

Now I would agree that if you had all that investment $ in an earlier short dated option, you would do much better. But at e cost of much higher risk. And maybe this is the point you are making. But Playing the timing on a buyout is even more difficult than a short squeeze IMO.

Generally I think LEAPS are good at stock replacement type investment, netting similar returns for reduced money in (or higher returns for same money in), carry less risk for long option newbies, allow the experience of seeing the leverage in action without having to 'panic' against expiration deadlines - in other words lets you learn about option leverage dangers first without worrying about much about time, mirroring closest to current experience with owning stock; then pull in the time frame learning with small plays that try to predict shorter term events, now knowing at you highly leveraged, with the caution that knowledge has provided.