wishing_for_S
Member
Thanks Mario! I won't be surprised if I lose everything. This is a new thing for me, but I appreciate your perspective.
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Newbie Options Trading
- Thread starter Jonathan Hewitt
- Start date
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- investing options TSLA tsla stock
Thanks Mario! I won't be surprised if I lose everything. This is a new thing for me, but I appreciate your perspective.
smorgasbord
Active Member
Here we are, the day before earnings, and I was wondering how other people are setting themselves up? Are you buying Calls? Bull Call Spreads or just buying stock? Or, maybe you're buying protective Puts to lock in your gains.
Anyway, if you've just made or are about to make any moves, let's hear about them!
Anyway, if you've just made or are about to make any moves, let's hear about them!
Mario Kadastik
Active Member
Well if you are setting up for Q3 moves today instead of last week when we were in $150's, then you are probably a bit worse off. If you however are doing it now in comparison to starting a month ago you might be ahead 
IV is starting to go up already, the Nov 16th calls are already at ~93%. When I bought them it was around 60%, but TSLA was also trading around $180 so the same options are cheaper now mostly due to TSLA itself dropping a lot. At such an IV buying pure calls or puts is expensive and most likely the only one winning is the call writer. Then again, Nov 16th $170 calls are worth $9.3 meaning that Tesla has to exceed $179.3 for break even, which in case of a blowout quarter is relatively easy with ATH at $194.5. So one might even go with ATM or just OTM calls. If you want to have some more safety go with spreads. The $180/$185 calls are $5.7/$4.5 so doing a $170-$180/$185 spread you put in $3-$4 with a max profit $7-$11. That's not too bad with TSLA trading around $167 so the options are relatively close to the money. I think most people here are already committed to options plays and therefore not likely to extend them, but who knows, not too bad options spreads out there...
IV is starting to go up already, the Nov 16th calls are already at ~93%. When I bought them it was around 60%, but TSLA was also trading around $180 so the same options are cheaper now mostly due to TSLA itself dropping a lot. At such an IV buying pure calls or puts is expensive and most likely the only one winning is the call writer. Then again, Nov 16th $170 calls are worth $9.3 meaning that Tesla has to exceed $179.3 for break even, which in case of a blowout quarter is relatively easy with ATH at $194.5. So one might even go with ATM or just OTM calls. If you want to have some more safety go with spreads. The $180/$185 calls are $5.7/$4.5 so doing a $170-$180/$185 spread you put in $3-$4 with a max profit $7-$11. That's not too bad with TSLA trading around $167 so the options are relatively close to the money. I think most people here are already committed to options plays and therefore not likely to extend them, but who knows, not too bad options spreads out there...Nov 16 $170's up to nearly $10. I'm debating whether it's worth the risk temporarily offload my SPWR (Up 40%) for a few days to grab some of these calls. I'd be working in my tax-free account, so the idea of juicy gains from this short term play is pretty appealing. I'm also okay holding these to near expiration if we don't exceed ~$180 before the 16th., but I'd likely just offload them first thing Wednesday morning. I've got other option plays lined up, but I like the idea of $170 Calls going into tomorrow.
Any thoughts?
Any thoughts?
pz1975
Active Member
Can someone explain how they calculate the break-even point for multiple options? I have 8-10 different options going for TSLA and am trying to figure out a way to see globally what the stock price needs to be on a certain day for them to break even. Maybe there is an online calculator for this? I understand how to do it for an individual option, but what I need to do is pool them all together.
So I still have one terribly bad play in my porfolio. Jan '14 $190s that I bought for $18... I guess I should really roll them down right now, but then again, TSLA may go above $200 on Wed. so...
Causalien
Prime 8 ball Oracle
Some big applause to Mario for answering all the newbie questions. One of the good things as a result of Tesla entering Europe
I don't know the formula for calculating option price (and haven't gone digging just yet), and that's kind of required to be helpful here. I think. Hopefully someone with more experience will chime in.
So the easiest (and most widely used) calculation for prices is the Black-Scholes-Merton formula (described here: http://en.wikipedia.org/wiki/Black-Scholes).
But their initial assumption was that stock prices follow a log-normal return, giving them a Normal Distribution on their pricing formula. But we know from experience ('08-'09 crash, dot-com bubble, 1980 crash etc.) that the black-scholes formula has a kurtosis that is too low (a constant).
Therefore there have been extensions for the formula that use a variable kurtosis to model options pricing (extensions and references for this at the bottom of the wiki are pretty good). But for all intensive purposes, you can use the BSM formula, and adjust the prices upward a little bit (by increasing the IV) to take into account the "heavy tail" nature of the distribution.
Of course, if you really want to understand the pricing mechanism behind options, you should read up on Brownian Motion, the Binomial Model, and understand the interaction between put/call prices at a certain strike/expiration.
Here are some good books:
http://www.amazon.com/Stochastic-Ca...nancial+engineering+and+stochastic+calculus+2 (You should reference the first part of this book as well if this is completely new to you. Also, this book offers some more in-depth analysis of various other exotic options such as Asian options, European options, Binary options etc. to help you understand the intricacies of how the models work).
http://www.amazon.com/Financial-Eng...ling-Probability/dp/0387004513/ref=pd_sim_b_3 (This one is also really good, but I haven't finished reading it yet. It's more dense than Shreve in my opnion).
Just as a heads-up. These involve a lot of math. Knowledge of PDEs and physics background is very useful (heat equation ~= options pricing model)... If you aren't into that/don't understand it, or don't want to deal with it. I recommend getting a trading application which allows you to price options by putting in various parameters and learning that way, or using existing libraries to calculate these formulas for Python etc., doing some quick computations based on assumptions and graphing the prices of calls/puts so you understand how they change according to different input parameters for each of the variables.
I use OptionsXpress for quick calculations of how my P&L will look like when I have multiple options plays and also if I want to calculate theoretical values of my options based upon different input parameters. I'm sure other brokerages offer this (I think ThinkorSwim with TDAmeritrade does, but I just opened an account there and haven't played much with the platform so I'm not sure how to do it there yet).
Mario Kadastik
Active Member
Well as someone who holds those calls I'd be all for it obviously
I too think that a move above $180 is pretty much guaranteed if the ER is at least positive. You might now consider the Nov $175's after we moved up a lot, but if you did get into the Nov $170's at $10, then good for you I was seriously contemplating on Friday to add more to the Nov $170 when they were at $7.2, but having committed already 2/3 of my portfolio to TSLA I wanted to hedge out the risk more than add more to the position. In retrospect of course that would have been an excellent move as TSLA gained 8% yesterday and the options went from $7.2 to $14 netting a 100% gain.- - - Updated - - -
Well I've not found a good calculator that allows you to enter multiple options contracts and then play with them to see how it goes. If they are all the same expiration date it's pretty simple to work out, for example just make an excel sheet and compute what they'd be worth at expiration at various stock prices.
However if they are various expirations, then it indeed becomes a tougher ordeal. Now you could go and learn the BS formula that is referenced above and add correction factors to it, but I'd do a simpler thing. Calculate your delta today (most trading tools show the greeks for options somewhere, I have delta alongside pricing always). Now just multiply the delta by number of contracts and add them all up this way to get to your total delta. This then tells you how much you gain/lose * 100 per TSLA move of $1. Now this is not a fixed amount. If we're talking about calls only for example, then if the stock moves up and the calls get closer to being in the money or going deeper in the money, then delta increases for all of them (at a different pace). However as a rule of thumb if you want to calculate break even take the delta and add to it some 10-20% to get your average upwards move delta per $1.
Now to compute the break even add up total money invested in the options and then calculate their current market value. Let's say you've invested $22k in the options and your current market value is $15k. That means you need to gain $7k to break even. Let's assume your delta is $5 and we'll use an averaged delta of $5.5-$6 with the +10%-+20% rule of thumb. $7000 / $550 = 12.7. $7000 / $600 = 11.7. So you need TSLA to move up about $11-$13 to break even. If the move is big that is needed (i.e. let's say your remaining value was $2000 only), then the small variation in delta no longer works because such a big move changes your delta a lot. You could go more precise and look for the second derivative of the formula that gives you the speed of change in delta per option, but I think that's not something we should discuss in the Newbie thread
This method works for <10% moves quite well as the delta usually doesn't change that strongly. I think my delta increased yesterday by about 10-15% from the Tesla upswing of 8%, but I didn't calculate it fully so can't say precisely. So this is not a perfect nor a very accurate method, but it gives you a ballpark measure where you need to look for the break even point and is usually something you can compute relatively easily even from head. Hope it helps.
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I'm holding Dec $175's (was holding a week or so ago $180 and $190 calls, but rolled them all down to $175 when TSLA was around $158). I had planned to enter earnings with half of the calls I have right now so planning to hedge the others with higher strikes. I already sold one Dec $205 at $5.6 20s before market close yesterday
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I'd not be too worried about those. January is 2 months away and $210 isn't too unlikely. If you are really worried I'd recommend hedging with a higher strike today just before market close or if there is a strong rally at the open that boosts the price of those higher strike options. The IV in those longer out options won't collapse as terribly post-ER so I'd ride them out and see what the ER brings, but hedging with say $215-230 range wouldn't be too bad if you can get a decent price and lower your cost basis as it still leaves you with plenty of upside...
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Haha, well when I do something I do it extensively. It's a boon and a curse as I hardly get anything else done when concentrating on something and right now that one thing is Tesla
With regards to newbie questions I've always liked to help if I can in any way and could have used a lot of such feedback ~2 years ago when I started trading options. It's not that long ago, but I've made plenty of plunders in the start that cost me some serious money that I'd rather have had some coaching or forum to ask questions, but sadly didn't know of TMC at the time So if my answers are of any use, then I'm happy to provide, the TMC community has already given me tons and tons of useful information including for trading that has made me quite some money so if there's anything I can give back I'm doing it happily.I ended up hedging with the $205s for $7.50 yesterday. I still have a net positive delta, ~700 so I'm too worried about missing out on the rally. But its easy for emotion to switch on this stock, just 3 days ago people were acting like the sky was falling when we were at $154, and now we are at $180 and people are acting as if $200+ is in the bag. I'm not so sure, I think a lot more people are onto this thread than we think, and therefore expectations are much more in-line with reality. I see a modest pop which will hopefully take us at/near ATH but I'm not sure breaking $200 is that easy. I mean that puts TSLA at above 24B market cap, and thats where I get a bit unsure about the valuation myself. A $25B company that produces 20K-40K cars is quite hefty especially when we are relying on 100%+ YoY growth for 5+ years.. Anything can happen in that time, and I think people need to understand that before getting into bubble mode.
I realise I'm nervous because of these last two-three weeks during wich I couldn't do much, appart from seeing my portfolio schrink, then now I see it getting closer and closer to breakeven (eh finally...) but the most important, the most exciting part for me, is going to be when we get the letter to shareholders from EM and his fantastic team! I'm really looking forward reading what they've done these last couple of months.
I think I will go long again mostly with stock io options as from now on. I went the options way to boost my portfolio and be able to catch what I missed when I sold in July, before going on long vacation. But it's not going exactly as I wanted it. I didn't do too bad, but stresswise, long is cooler.
That leaves me with how to set it up for this evening. Considering the irrational way market can react, I was thinking about writing a Putt on a 160 JAN 15 Nice premium in my pocket and if ever exercised, I like it. Then buy a weekly Nov put not too far OTM and I would get rid as well of most of my calls, to keep only a not too far OTM Nov Call. Not too much money involved, limited losses...Does it sound like a decent plan?
I think I will go long again mostly with stock io options as from now on. I went the options way to boost my portfolio and be able to catch what I missed when I sold in July, before going on long vacation. But it's not going exactly as I wanted it. I didn't do too bad, but stresswise, long is cooler.
That leaves me with how to set it up for this evening. Considering the irrational way market can react, I was thinking about writing a Putt on a 160 JAN 15 Nice premium in my pocket and if ever exercised, I like it. Then buy a weekly Nov put not too far OTM and I would get rid as well of most of my calls, to keep only a not too far OTM Nov Call. Not too much money involved, limited losses...Does it sound like a decent plan?
NuclearPowered
Member
Quick question. I am holding Dec 200 calls that I bought a while back and am a little under water on.
Should I be rolling these to something like DEC 185s that have a higher delta and the same IV right now before we close? I intend to take the risks through this afternoon.
Should I be rolling these to something like DEC 185s that have a higher delta and the same IV right now before we close? I intend to take the risks through this afternoon.
smorgasbord
Active Member
Here's the thinking there:
2013: 21K cars
2014: 40K cars
2015: 85K cars
2016: 200K cars, although more than half are lower profit Model E's
Now it's just a small matter of design and execution. :smile:
So you are saying give the company a $25B+ mkt cap because the downside risk of ^^^ is ~0%?
Mario Kadastik
Active Member
Do the math. If the new break even point is lower, then I'd recommend doing it. $200 is risky even for December.
I give myself a kind of a Darwin award... that plan would have been okay I guess and would have made me this storm a walk in the park. But no, instead, silly me, I kept more than one call, although the price yesterday was like so good I should have kept almost nothing, and toad shame to pain, I didn't buy the put that would have been a darling...
Positive, I sold a few of those Calls, I wrote a Put that was bought a lot of money and I don't mind, still, if it is exercised. It's bad, stupid, but it could have been worse if I had kept all of my calls and didn't write that put...
Well, a few lessons learnt again...( at least new lessons!)
Still holding the December Calls which are not worth much. There are 8 weeks until they expire. Though its not likley we will see $180-$190 before then which is where i need them to go. I do think a slow recovery will take place and they will regain some value.
What are you all planning for December calls if yo have them?
What are you all planning for December calls if yo have them?
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