Newbie Options Trading

[ckessel]

Is there much value lost in the conversion of Leaps to shares and vice versa? Just using this as an example not a recommended strategy, if one were to convert shares to leaps then convert back a week later? I'm assuming where the leaps are at (ITM or OTM) matters some as well.

There's typically a fairly large difference in bid/ask on LEAPS the deeper OTM you go, so you'd be eating that cost. Same with all options.

For example, TSLA J2016 $510 bid/ask is 10.25/12.90. If you bought at the $12.90 ask price, you'd immediately have nearly 25% loss if you turned around and sold at the bid price. Now, you can set your buy/sell prices such that you can do better than that full gap, but you'd be looking at a big loss regardless.

 

[sub]

yeah your right, good point. I didn't look at the bid/ask, I was just thinking in terms of gained and lost value over a few days to 1-2 weeks. I definitely wouldn't want to take that hit if I could avoid it. I'm constantly looking at different ways to play TSLA.

 

[ckessel]

yeah your right, good point. I didn't look at the bid/ask, I was just thinking in terms of gained and lost value over a few days to 1-2 weeks. I definitely wouldn't want to take that hit if I could avoid it. I'm constantly looking at different ways to play TSLA.

Folks here have talked about LEAPS as stock replacement, which I think works well if you're planning on holding for a very long time. If you're fairly deep ITM, you can double or triple your leverage for a "reasonable" cost. Another example:

The stock right now is $240-ish. If you sold your stock and bought $140 strike price J2016 LEAPS for $120, you could double your shares and only pay $20 per share for that privilege (your break even point is $280 vs. $240 being today's price, see below). It all depends on where you think the stock is going to go, but it seems pretty darn likely we'll see $280 by Jan 2016 . On the other hand, I'm skeptical we'll see $510 by Jan 2016. That'd give TSLA a market cap beyond GM, but we'd still be well before Gen3 shipping and the Gigafactory being finished, which seems an overly generous valuation without actually having a mass market car.

If you're mathematically inclined, you can create a spreadsheet with all the bid/asks and plug in what you think the stock will be in Jan2016 and have the calculation pop out the best option to buy.

Edit: I didn't really tell the break even story correctly, now amended. To be a good buy, you not only do you have to break even on the premium you paid for the LEAP, but also you need to make up for the gain you don't have on the original underlying stock. Again, as an example:

100 shares, cost $240, sold $280 = $4000 gain
200 $140 LEAPS, cost $120, sold $280 = $4000 gain ($120 to buy the LEAP, $140 to exercise the strike, $20 profit per share)

Now, for every dollar past $280, you're making 2:1 versus just holding the stock. So, at $300 per share you're $2000 ahead of having just held stock.

 

[sub]

My understanding on the deep ITM leaps is to look at the delta. If I bought two leaps with a .8 delta to replace 100 shares, won't I be making more profit from day 1 if stock rises?

 

[ckessel]

My understanding on the deep ITM leaps is to look at the delta. If I bought two leaps with a .8 delta to replace 100 shares, won't I be making more profit from day 1 if stock rises?

Probably, since the time premium barely moves on a LEAPS in a short period of time. In one of the threads here someone went into great detail on a constantly rolling LEAPS strategy, I think specifically for this sort of purpose: higher leverage, but getting out before time decay kicked in.

 

[ajax]

Hi all, total noob question here. Can you roll out LEAPS to achieve long term capital gains? For example, can I buy a January 2015 $350 call today (March 2014), roll it out to an April 2015 $350 call once they are available, then sell in April 2015 for long term gains? My Google-fu failed me on this one :smile:.

 

[sub]

Probably, since the time premium barely moves on a LEAPS in a short period of time. In one of the threads here someone went into great detail on a constantly rolling LEAPS strategy, I think specifically for this sort of purpose: higher leverage, but getting out before time decay kicked in.

Thanks. I think it was Kenliles (sp) that went into depth in rolling leaps and keeping leverage high. Does anyone know when the time decay would really start to kick in on J16 leaps? Is it at about 1 year out?

i can't help on the tax question above, but I would like to see the answer if anyone knows.

 

[ggr]

Hi all, total noob question here. Can you roll out LEAPS to achieve long term capital gains? For example, can I buy a January 2015 $350 call today (March 2014), roll it out to an April 2015 $350 call once they are available, then sell in April 2015 for long term gains? My Google-fu failed me on this one :smile:.

No. The IRS doesn't care about "rolling" if it helps you. They're separate transactions.

 

[InTheShadows]

Just to share the reality of options. I had an awesome week this week with my weeklies. Awesome for lowering the amount of taxes I owe. . This is the risk not many people like to hear about. I tried catching the falling knife twice early this week with short term options. Looking back I should have sold everything on Wednesday for a 25% loss. I thought we would have a recovery though and didn't expect the macro economic issues to have this much effect. So, 100% weekly loss it is. I am still a noob and learning as I go. This weeks lesson was a tough pill to swallow. I broke my 2% weekly rule trying to catch the knife. 2.8% of our taxable portfolio, poof, gone like that.

Easy come, easy go.

 

[kenliles]

Thanks. I think it was Kenliles (sp) that went into depth in rolling leaps and keeping leverage high. Does anyone know when the time decay would really start to kick in on J16 leaps? Is it at about 1 year out?

i can't help on the tax question above, but I would like to see the answer if anyone knows.

The time value loss is small and linear to approximately 6 months out from expiration. Still fairly reasonable (for the LEAP stock replacement program) until 3-4 months out where loss rate really picks up speed beyond comfort for that strategy. I roll mine 3-6 months out regardless of most other consideration. Depending on underlying price relative to strike, I'll often start a phased rollout 9 months out that completes 4-5 months out, with occasional exceptions based on anticipated events. For those without time to do this (preferring a more buy and forget approach), I'd recommend a rollout at 5-6 months, earlier if it's reached your strike, later if not
Keep in mind these recommendations are contextualized to the LEAPS used as a stock replacement strategy and part of that is a lower risk relative to time value issues which also leads to a hold pattern that although suffers downside losses, also avoids missing upside gains (like stock position) on balance for bull position in the company, giving a more stress free steady gain tuned to the company's growth goals for the next few years

 

[bsd]

With this recent plunge in TSLA, I was looking at possibly selling some puts: I'd be happy to pick up some stock, especially if I'm paid for it! The price for $195 Jan 2016 was $50/share today — should this option be exercised, that's a net buy at $145/share, which seems pretty good price. Assuming TSLA goes back up, I could buy the option back at a later point and lock in profit. It looks like there's volume, so it's likely to sell.

What am I missing? The only downside I see is that the return isn't great if I hold to expiration, but that's not too likely.

 

[ckessel]

What am I missing? The only downside I see is that the return isn't great if I hold to expiration, but that's not too likely.

Just that selling a PUT locks down a lot of capital (or margin).

 

[pz1975]

Just that selling a PUT locks down a lot of capital (or margin).

Agree - unless you cover it by buying an equivalent number of lower-priced put contracts, selling naked puts eats up a huge amount of margin.

 

[772]

Like pz1975 said, unless you are OK with tying up a lot of margin, you could buy an equivalent amount of puts at lower strikes (for the same expiration) to lower your margin cost. You essentially create a credit spread called a bull put spread. Your max gain is the amount you received on the sale of the higher strike put, minus the cost of the lower strike put you purchased. The max pain is the difference in the strike prices, minus the credit you received.

 

[ckessel]

This probably isn't a newbie question, but who knows.

Given the equations behind stock price, options, time value, etc it seems like there should be a formula where I can figure out the optimal option to buy under a given set of assumptions. For example, if I put on my Nostradamus hat and feel like TSLA will be $303 in Jan 2015, then I should be able to look at all of the options available and pick the optimum option that'd net me the most profit given current stock price, option price, and expected stock price of $303.

Now, obviously no one can predict market timing and value that well, but this morning when I was trying to pick a LEAPS I found myself basically doing this sort of calculation by rough approximation. The $250 strike would net me $X, the $275 would be $Y, etc.

Is there such a calculator out there already?

 

[The Blue Owl]

This probably isn't a newbie question, but who knows.

Given the equations behind stock price, options, time value, etc it seems like there should be a formula where I can figure out the optimal option to buy under a given set of assumptions. For example, if I put on my Nostradamus hat and feel like TSLA will be $303 in Jan 2015, then I should be able to look at all of the options available and pick the optimum option that'd net me the most profit given current stock price, option price, and expected stock price of $303.

Now, obviously no one can predict market timing and value that well, but this morning when I was trying to pick a LEAPS I found myself basically doing this sort of calculation by rough approximation. The $250 strike would net me $X, the $275 would be $Y, etc.

Is there such a calculator out there already?

This site won't select the optimal options for you, but it might help you get a better sense of what the alternatives are. I find it useful.

 

[longtrader]

I am new over the past month or so to options and was looking for advice on time decay for weeklies. I understand the strategies being discussed for longer term options, but how is the best way to play the weeklies. Specifically, on a whim very first thing this morning, I purchased some April 4 $227 calls yesterday and am obviously pleased with how they are doing today and am looking to exit. However, I think the stock Monday will be up from today. How do I factor in time decay over the weekend? It seems like the value plunges over the last couple of days, but I am not familiar with how to calculate how much the stock price will need to climb to offset the decay. Any advice?

 

[The Blue Owl]

I am new over the past month or so to options and was looking for advice on time decay for weeklies. I understand the strategies being discussed for longer term options, but how is the best way to play the weeklies. Specifically, on a whim very first thing this morning, I purchased some April 4 $227 calls yesterday and am obviously pleased with how they are doing today and am looking to exit. However, I think the stock Monday will be up from today. How do I factor in time decay over the weekend? It seems like the value plunges over the last couple of days, but I am not familiar with how to calculate how much the stock price will need to climb to offset the decay. Any advice?

Check out this site (I posted it before.) It answers that exact question in a very intuitive way.

 

[longtrader]

Exactly what I was looking for. Thanks!

 

[Auzie]

This probably isn't a newbie question, but who knows.

Given the equations behind stock price, options, time value, etc it seems like there should be a formula where I can figure out the optimal option to buy under a given set of assumptions. For example, if I put on my Nostradamus hat and feel like TSLA will be $303 in Jan 2015, then I should be able to look at all of the options available and pick the optimum option that'd net me the most profit given current stock price, option price, and expected stock price of $303.

Now, obviously no one can predict market timing and value that well, but this morning when I was trying to pick a LEAPS I found myself basically doing this sort of calculation by rough approximation. The $250 strike would net me $X, the $275 would be $Y, etc.

Is there such a calculator out there already?

Disclaimer: I am not an options trader. My very limited experience in options is selling covered calls and buying leaps, not very successfully.

Since no one answered your question, I tried to find out using the options calculator. I hope that someone with more knowledge and experience will provide some insight into this very interesting question.


Test trade: Buy TSLA 10 calls, all calls expiry Jan15, strikes as below.

2 scenarios:
1. Tsla reaches 300 in June, calls closed; 2. Tsla reaches 300 in Jan15, calls closed;

Payoffs for call holder, scenarios 1&2, according to op.calc.:

Strike______ Cost __________Payoff Jun14 Tsla 300 Payoff Jan15 Tsla 300

200	45,250	63,000	54,750
210	40,700	59,670	49,300
220	36,600	56,290	48,400
230	32,850	52,910	37,150
240	29,450	49,560	30,550
250	26,250	46,260	23,750
260	23,400	43,050	16,600
270	20,900	39,910	9,100
280
290	16,600	28,070	-6,600
300	14,100	30,000	-14,100
310	13,150	28,750	-13,150
320	11,750	26,330	-11,750