Newbie Options Trading

[Jonathan Hewitt]

That's called a bull call spread.

However, you generally can't do one in an ordinary options account - you need to have naked call writing capabilities for that. Do you have that available?

Alternatively do you have the shares in your account for the coverage? I wouldn't recommend a true covered call against TSLA though, the shorts are really depressing the call prices, so you get very little premium against having all that downside risk (won't be able to put in a stop loss order against your shares).

I can sell covered calls and I own several hundred shares. I planned on holding onto my shares through the CC so I wasn't concerned about not being able to sell them. My idea in this scenerio is little to no loss if it goes down (as far as my options) but still able to profit if it goes up from 55-65, with my profit maxing out if it goes to $65.

 

[deonb]

I can sell covered calls and I own several hundred shares. I planned on holding onto my shares through the CC so I wasn't concerned about not being able to sell them. My idea in this scenerio is little to no loss if it goes down (as far as my options) but still able to profit if it goes up from 55-65, with my profit maxing out if it goes to $65.

That's not a terrible idea - and you'd actually get a pretty decent price on writing the $65's right now as a way of locking in some profit on your call.

Actually you may be able to sell off a $57.50 right now, which will lock in that $3.20 profit from Friday already (though it's $4.30 today), taking out all risk and still leave you with another $2.50 of potential upside.

 

[Jonathan Hewitt]

Actually you may be able to sell off a $57.50 right now, which will lock in that $3.20 profit from Friday already (though it's $4.30 today), taking out all risk and still leave you with another $2.50 of potential upside.

That's a good idea. Though now I'm feeling like selling off all 3 of the calls again for the gauranteed profit. Maybe I'll see how today treats the share price and hope it doesn't tank before tomorrow. Thanks for your help!

 

[kenliles]

I think deonb suggestion to just sell (partial or otherwise) at the $57 print is a better choice. Just too many unknowns on reaction to report and you lock in your profits. I did this a short while ago sell-to-close 75% of my May $65 Calls guaranteeing a profit of more than 100% on all of them regardless of future events. I'll keep the remaining 25% thru the call just in case, but they could go to zero at this point by locking in. This is a good example of risking less money by using OTM (out of the money) Calls ($65 in this case) with no intention of ever letting them try to be covered by the stock price by expiration.

Still maintain my minimum level of LEAP J15 $40 Calls (as a stock holding). If the price moves solidly higher and holds firm, say to $60 support, these can be rolled up to higher strikes, taking the profit (reinvested or otherwise) while staying long. Another advantage of using LEAPS as a stock holding

 

[avatar]

I think deonb suggestion to just sell (partial or otherwise) at the $57 print is a better choice. Just too many unknowns on reaction to report and you lock in your profits. I did this a short while ago sell-to-close 75% of my May $65 Calls guaranteeing a profit of more than 100% on all of them regardless of future events. I'll keep the remaining 25% thru the call just in case, but they could go to zero at this point by locking in. This is a good example of risking less money by using OTM (out of the money) Calls ($65 in this case) with no intention of ever letting them try to be covered by the stock price by expiration.

Still maintain my minimum level of LEAP J15 $40 Calls (as a stock holding). If the price moves solidly higher and holds firm, say to $60 support, these can be rolled up to higher strikes, taking the profit (reinvested or otherwise) while staying long. Another advantage of using LEAPS as a stock holding

Just a word of caution. Netflix was in a similar position a few months ago and the price jumped 40% after hours after earnings were announced. There is a not so small chance something like this will happen tomorrow. How much is anyone's guess. I'm pretty bullish so I expect a pretty strong jump. I also don't really care if the jump doesn't happen because I am quite confident in my analysis of the long term fundamentals. Whether the price reaches its intrinsic value in a week or 1 year is not so important to me.

 

[kenliles]

Just a word of caution. Netflix was in a similar position a few months ago and the price jumped 40% after hours after earnings were announced. There is a not so small chance something like this will happen tomorrow.

Yep, good point. Very possible and a good reason to always keep a healthy long position in TSLA. Wouldn't argue with that one!

 

[Jonathan Hewitt]

I think deonb suggestion to just sell (partial or otherwise) at the $57 print is a better choice. Just too many unknowns on reaction to report and you lock in your profits. I did this a short while ago sell-to-close 75% of my May $65 Calls guaranteeing a profit of more than 100% on all of them regardless of future events. I'll keep the remaining 25% thru the call just in case, but they could go to zero at this point by locking in. This is a good example of risking less money by using OTM (out of the money) Calls ($65 in this case) with no intention of ever letting them try to be covered by the stock price by expiration.

Yeah, I'm thinking now that I may just sell 2 or sell all three here. If I can sell at this price I still make a profit selling just two but the guaranteed profit of selling all three is tempting.

 

[ShortSlaver]

Yeah, I'm thinking now that I may just sell 2 or sell all three here. If I can sell at this price I still make a profit selling just two but the guaranteed profit of selling all three is tempting.

Never feel bad for taking profits. If it's too hot for you then take the money and run.

Why not sell them all and roll it into a $60.00 call? This way you keep some money in your pocket and get a new option play. I like to keep rolling options forward, especially with a bull like TSLA. Take some profits and reinvest the principal in a new call and often walk away with money in my pocket and more contracts. Or invest less principal and get the same number of contracts on a higher call if I want to expose myself to even less risk.

 

[CyberDutchie]

It has been said here that as you get close to expiration the call loses it's time value and you should sell or roll-over. Can someone explain that?

As an example, I bought Jun 22 '13 $40 calls for $7.60 a little over three weeks ago. Since then I've just seen them go up. They're now at $17. I don't mind keeping them till expiration and owning the stock outright. I expect TSLA to be at around $60 come June $22 in which case the call option should be worth at least $20 on that day, correct?

 

[ShortSlaver]

It has been said here that as you get close to expiration the call loses it's time value and you should sell or roll-over. Can someone explain that?

As an example, I bought Jun 22 '13 $40 calls for $7.60 a little over three weeks ago. Since then I've just seen them go up. They're now at $17. I don't mind keeping them till expiration and owning the stock outright. I expect TSLA to be at around $60 come June $22 in which case the call option should be worth at least $20 on that day, correct?

An option derives its value from 2 things: Time and intrinsic value. That is, how much time until it expires and if it has any actual value. An option has actual value when the strike price is lower than the stock price, in terms of a call option.

So, as the option expiration date nears, the time value of the option decreases and this is known as "time decay". Time decay increases the closer you get to the expiration date.

As an option gets deep in the money the time value actually becomes less. That is, an option contract approaches the intrinsic value of the stock. So movements in the stock are reflected in the option identically. Often people sell their deep in the money options and roll them up to a new option that is just in the money or just out of the money or way out of the money if you think the contract will go in the money by the time it expires.

 

[kenliles]

It has been said here that as you get close to expiration the call loses it's time value and you should sell or roll-over. Can someone explain that?

As an example, I bought Jun 22 '13 $40 calls for $7.60 a little over three weeks ago. Since then I've just seen them go up. They're now at $17. I don't mind keeping them till expiration and owning the stock outright. I expect TSLA to be at around $60 come June $22 in which case the call option should be worth at least $20 on that day, correct?

As a holder of the Call, you currently benefit from the option price time value remaining in the option, but the time value of the option decreases every day (if TSLA stayed constant, value of option would reduce each day). This time value reduces the option value (your potential sell to close price) each day from the time you purchased. The TSLA stock value has increased much more than that reduction, so you haven't seen it. As you get closer to expiration, RATE of decline due to time value reduction INCREASES. 3-4 weeks out, it starts to really ramp up, requiring the stock price to gain more to compensate. It might be a good idea to leverage the remaining time value here and buy the stock. Your risk reward from this point forward is higher. In other words, if the stock goes down, all those gains accelerate downward vs owning the stock

- - - Updated - - -

A good way to play your profits as well if you think it's going up from here (similar to ShortSlaver post) is to take the profits now on those calls, then reinvest a portion of them in higher strike calls ( like $55-$60). You book a bunch of profit, but still benefit if your belief is correct, lowering you risk if wrong. Another way to put it, is you've already won the time value part of the battle in that the stock puts your options deep in e money now, you only stand to lose this battle going forward at an accelerated risk curve, so you MIT as well make the bet on a higher strike (albeit with less money I would recommend by taking most of your profits). Sometimes this is a hard concept to quantify until you see the option value come way down with time (one that is out of the money but close to expiration)

 

[Jonathan Hewitt]

I had to go teach my class so didn't get around to selling my three MAY 18th '13 $55 calls (thank goodness!). I get done teaching and WOW they have gone up 138% from purchase price, just over a week ago. I can sell one and that would almost cover the other 2 now, ridiculously awesome. I feel really greedy not having sold them yet, but if this is a short squeeze then there is just so much more room for them to go...I'm thinking tomorrow I sell 2 of them and just be happy with whatever I get for the third one after the CC.

 

[Jeff Miller]

One question I always ask when evaluating trading strategies (and I hear lots of pitches) is what's the source of the edge.
Markets are pretty efficient; generally speaking, to make money in excess of the risk adjusted market return,
you need to know something that the market does not and usually you must also be able to execute more
efficiently, at lower cost, than the best players in the market. Retail investors typically do not
have advantages in either of these areas and this makes it very unlikely, in my view, that they can
make money (on average) in any kind of active trading strategy, and indeed the literature
on the subject shows a very strong, very consistent, anti-correlation between trading frequency and returns.
With options especially, transaction costs are quite high.
Obviously if you trade because you enjoy gambling that's totally fine, just keep in mind that your
expected returns, after transaction costs, are likely to be negative. I say this as someone who for the last
13 years has been a principal in a successful prop trading firm. We have traded a lot of options. It's quite
hard to do it professionally - with a staff of PhDs and computer scientists working every
day on the problem - and make money. I think your chances of dabbling in the area and making money
(I mean consistently make money; by pure chance, some people will make money, even in a casino) are
very slim indeed.

 

[Robert.Boston]

@Jeff Miller: very fair points, and the reason why most of my money is in mutual funds. With Tesla, though, I don't think the efficient markets hypothesis holds up--there are too many people using TSLA as a proxy for a personal POV about any number of factors, including (a) whether small public car companies can succeed, (b) whether the public is ready for EVs, (c) whether public policy will blow for or against EVs, and (d) whether Tesla management will stumble.

I think it's informative how few analysts have every touched a Model S, let alone driven one. More importantly, few of them have talked personally to anyone on the Tesla management team. There is, therefore, a large gap between the information (and credibility of the information) that those of us who follow TMC obsessively have and that which the typical institutional or retail investor has. This gap creates an opportunity for trading advantage that doesn't violate normal financial theory.

Summary: as I told my financial guy, "No one's ever lost money betting on Elon Musk."

 

[K Hall]

@Jeff Miller: very fair points, and the reason why most of my money is in mutual funds. With Tesla, though, I don't think the efficient markets hypothesis holds up--there are too many people using TSLA as a proxy for a personal POV about any number of factors, including (a) whether small public car companies can succeed, (b) whether the public is ready for EVs, (c) whether public policy will blow for or against EVs, and (d) whether Tesla management will stumble.

I think it's informative how few analysts have every touched a Model S, let alone driven one. More importantly, few of them have talked personally to anyone on the Tesla management team. There is, therefore, a large gap between the information (and credibility of the information) that those of us who follow TMC obsessively have and that which the typical institutional or retail investor has. This gap creates an opportunity for trading advantage that doesn't violate normal financial theory.

Summary: as I told my financial guy, "No one's ever lost money betting on Elon Musk."

.

Well said +1

 

[kenliles]

@Jeff Miller: very fair points, and the reason why most of my money is in mutual funds. With Tesla, though, I don't think the efficient markets hypothesis holds up--there are too many people using TSLA as a proxy for a personal POV about any number of factors, including (a) whether small public car companies can succeed, (b) whether the public is ready for EVs, (c) whether public policy will blow for or against EVs, and (d) whether Tesla management will stumble.

I think it's informative how few analysts have every touched a Model S, let alone driven one. More importantly, few of them have talked personally to anyone on the Tesla management team. There is, therefore, a large gap between the information (and credibility of the information) that those of us who follow TMC obsessively have and that which the typical institutional or retail investor has. This gap creates an opportunity for trading advantage that doesn't violate normal financial theory.

Summary: as I told my financial guy, "No one's ever lost money betting on Elon Musk."

Yeah, reminds me of the earlier days of Apple. Was the same scenario. They just couldn't get it

 

[DonPedro]

One question I always ask when evaluating trading strategies (and I hear lots of pitches) is what's the source of the edge.
Markets are pretty efficient; generally speaking, to make money in excess of the risk adjusted market return,
you need to know something that the market does not and usually you must also be able to execute more
efficiently, at lower cost, than the best players in the market. Retail investors typically do not
have advantages in either of these areas and this makes it very unlikely, in my view, that they can
make money (on average) in any kind of active trading strategy, and indeed the literature
on the subject shows a very strong, very consistent, anti-correlation between trading frequency and returns.
With options especially, transaction costs are quite high.
Obviously if you trade because you enjoy gambling that's totally fine, just keep in mind that your
expected returns, after transaction costs, are likely to be negative. I say this as someone who for the last
13 years has been a principal in a successful prop trading firm. We have traded a lot of options. It's quite
hard to do it professionally - with a staff of PhDs and computer scientists working every
day on the problem - and make money. I think your chances of dabbling in the area and making money
(I mean consistently make money; by pure chance, some people will make money, even in a casino) are
very slim indeed.

There is this story of a world-leading finance professor and his student strolling around the Ivy League university campus, the professor pouring from his well of knowledge and the student eagerly absorbing. While the prof is in the middle of a particularly interesting nuance of asymmetrical, non-normal risk distributions, the student looks down and explaims: "Look, professor, there is a 100 dollar bill lying on the ground!". The professor looks at him perplexed and says: "Huh? Impossible. If that were the case, someone would have picked it up already!".

 

[Johan]

[...]you need to know something that the market does not [...]

This part right has has been, until now, my basis for not only carring a major long position in TSLA but also for doing some trading in the stock as well as options. But I do agree though, that it's easy to make money trading when the stock doubles in 6 months, you'd have to be almost stupid not to make money in those circumstances. As analysts and financial institutions understand TSLA better and better the chances of any of us outperforming them get slimmer and slimmer. But we are not there yet, as demonstrated by the still (probably) hughe short interest.

 

[Jeff Miller]

@Jeff Miller: very fair points, and the reason why most of my money is in mutual funds. With Tesla, though, I don't think the efficient markets hypothesis holds up--there are too many people using TSLA as a proxy for a personal POV about any number of factors, including (a) whether small public car companies can succeed, (b) whether the public is ready for EVs, (c) whether public policy will blow for or against EVs, and (d) whether Tesla management will stumble.

I think it's informative how few analysts have every touched a Model S, let alone driven one. More importantly, few of them have talked personally to anyone on the Tesla management team. There is, therefore, a large gap between the information (and credibility of the information) that those of us who follow TMC obsessively have and that which the typical institutional or retail investor has. This gap creates an opportunity for trading advantage that doesn't violate normal financial theory.

Summary: as I told my financial guy, "No one's ever lost money betting on Elon Musk."

Yeah, almost all my money is in low cost Vanguard index funds. I didn't start out investing this way, but that's where I have ended up.

I think there can, occasionally, be some inefficiencies in the market when it comes to small companies that are not heavily followed, so there may be some excess return
from investing in one of them that you have studied and know particularly well. But given the high transaction costs associated with options, given the substantial
tax disadvantages of short term capital gains (top marginal rates of around 50% these days in most states, when you add up the federal, state and health care taxes),
and given that with options, you must also know not only "what" but "when", I'm somewhat doubtful that active trading is the way to go. If I were taking a bet on
Tesla (other than buying their cars), I'd buy the stock and then try to forget about it. The idea that it's possible to actively trade in and out with a profit (aside from one gained by chance) without having any special knowledge I find extremely implausible. It would mean that you have the ability to forecast the price of the stock and to value options
on short time scales (say months), better than the market - a skill that I don't believe exists. Even if you are a company insider and know everything that can be known about the company, there are many factors that are essentially unknowable - such as aggregate opinions on the topics on your above, not to mention
overall market movements - which will strongly affect the price of the stock and its options.

 

[DonPedro]

@Jeff Miller: I agree with you.

I've actually only traded heavily (meaning large % of portfolio) in single stocks three times in my life: (1) Palm/3Com arbitrage in 2000, when I put in all my savings, my tuition money and whatever I could borrow (incl E*trade margin), (2) a boring stock here in Norway that was offered at IPO at a 20% discount to retail investors and (3) TSLA. I typically invest by paying off my mortgage, or in index funds. But when you see something that the market does not see - in this case the excellence of the Model S, of TSLA's execution and the underestimated probability of an all-EV future - then you have to go all-in. (In this case I am not throwing in the kitchen sink, because even though it is a rare investment opportunity, there is still a non-zero probability of this thing going to hell - one safety recall is all it would take for the situation to obtain a pear-like geometry).