Newbie Options Trading

[pz1975]

To add to the discussion of IV changes pre- and post-ER, I just looked up the current IV (day of ER after close) for ATM (200) calls between this week and Jan2016.

Time to expiry - IV
2 days (May 9) - 1.69
1 week (May 17) - 0.90
2 weeks (May 23) - 0.84
3 weeks (May 30) - 0.73
6 weeks (Jun21) - 0.61
4 months (Sept20) - 0.53
8 months (Jan2015) - 0.50
1 year,8 months (Jan2016) - 0.47

I will do this again post-ER tomorrow or Friday and compare the relative IV changes pre- and post-ER.

To follow-up on the above, here were the closing IV values on Friday for ATM (currently 180) calls. I obviously chose 180 instead of 200 to keep the comparison the most valid (ie. as close to ATM as I could get).

Time to expiry - IV
0 days (May 9) - 1.66
1 week (May 17) - 0.48
2 weeks (May 23) - 0.50
3 weeks (May 30) - 0.47
6 weeks (Jun21) - 0.47
4 months (Sept20) - 0.53
8 months (Jan2015) - 0.48
1 year,8 months (Jan2016) - 0.46

These results were pretty interesting. The May 9 calls have a similar IV as pre-ER. My thought here is that immediately after ER (Thursday morning), they probably did drop (sorry I did not check) to levels on the 0.50ish range, but then spiked up again in the last minutes before expiry due to heavy trading as traders sought to offload them.

All the other expiry dates from 1 week out to the farthest out LEAPS dropped post-ER to very similar IV numbers (0.46-0.53), while pre-ER options 4 months out to 1.5 years out had similar IV values pre- and post-ER. Inside 4 months however, is where the big IV drops happen post-ER, with the amount of drop increasing (as expected) as the time to expiry date shortens. What I have learned (and knew intuitively before doing this) is that it is very risky to 'play' an ER using options less than 3-6 weeks out (and especially 2 weeks out or less) since the IV drop alone will result in significant losses (or less gains).

 

[kenliles]

To follow-up on the above, here were the closing IV values on Friday for ATM (currently 180) calls. I obviously chose 180 instead of 200 to keep the comparison the most valid (ie. as close to ATM as I could get).

Time to expiry - IV
0 days (May 9) - 1.66
1 week (May 17) - 0.48
2 weeks (May 23) - 0.50
3 weeks (May 30) - 0.47
6 weeks (Jun21) - 0.47
4 months (Sept20) - 0.53
8 months (Jan2015) - 0.48
1 year,8 months (Jan2016) - 0.46

These results were pretty interesting. The May 9 calls have a similar IV as pre-ER. My thought here is that immediately after ER (Thursday morning), they probably did drop (sorry I did not check) to levels on the 0.50ish range, but then spiked up again in the last minutes before expiry due to heavy trading as traders sought to offload them.

All the other expiry dates from 1 week out to the farthest out LEAPS dropped post-ER to very similar IV numbers (0.46-0.53), while pre-ER options 4 months out to 1.5 years out had similar IV values pre- and post-ER. Inside 4 months however, is where the big IV drops happen post-ER, with the amount of drop increasing (as expected) as the time to expiry date shortens. What I have learned (and knew intuitively before doing this) is that it is very risky to 'play' an ER using options less than 3-6 weeks out (and especially 2 weeks out or less) since the IV drop alone will result in significant losses (or less gains).

Thanks pz1975 for illustrating those numbers. Wanted to take this opportunity to point out the correlation (for those using LEAPS for stock). The IV drops (relative to expiration) correlate closely to the time value drops of the LEAP itself. This is why a firm rule of rollout MUST be followed at less than 3-4 months out from expiration. Otherwise you're automatically converting to a mid term option, not commensurate with the strategy. Also, for that strategy, playing ER trades based on IV compression is pointless since the IV for LEAPS is virtually unchanged (commensurate with the slow time burn). IV, as we've discussed, is highly correlated to time remaining in the option value because it's computed as a function of the time value (large for LEAP) and biased to NEAR term fluctuations in the stock.

 

[Auzie]

Thanks pz1975 for illustrating those numbers. Wanted to take this opportunity to point out the correlation (for those using LEAPS for stock). The IV drops (relative to expiration) correlate closely to the time value drops of the LEAP itself. This is why a firm rule of rollout MUST be followed at less than 3-4 months out from expiration. Otherwise you're automatically converting to a mid term option, not commensurate with the strategy. Also, for that strategy, playing ER trades based on IV compression is pointless since the IV for LEAPS is virtually unchanged (commensurate with the slow time burn). IV, as we've discussed, is highly correlated to time remaining in the option value because it's computed as a function of the time value (large for LEAP) and biased to NEAR term fluctuations in the stock.

So Jan 15s should be rolled in say Aug - Sep? Any recommendation on the best time to roll, ie some coming events?
Is any tax payable if options are rolled? Appreciated, Auzie

 

[kenliles]

So Jan 15s should be rolled in say Aug - Sep? Any recommendation on the best time to roll, ie some coming events?
Is any tax payable if options are rolled? Appreciated, Auzie

Yes tax gains (assuming not IRA) or losses would be applicable.
J15 should be rolled by end of Sep or earlier yes.
Flip of the coin IMO on holding those. I think TSLA will have a hard time between now and October. But it's a tough read because it's so related to market taste for growth stocks again. I see a big range from $150 (lower if ModX delayed again) and $200. Given that, I've rolled all LEAPS-stock to J16 (I do have a very small J15 position only to play a ModX rally late in the year, but that's not part of my LEAPS-stock base)
I did that at about $210. There may be a better place to roll from here, but it's a tough call on those. I played it more conservative given the big sell off by the market on growth-tech. Hard to know when that will reverse for Tesla since it's growth will show in production and sales, but not in profit (and that's what the current market demands) as they are spending for 2015- Whatever you decide based on market predictions, be sure to roll before end of Sept. If you don't think it will go up substantially from here by then, the sooner you roll, the better

 

[Auzie]

Yes tax gains (assuming not IRA) or losses would be applicable.
J15 should be rolled by end of Sep or earlier yes.
Flip of the coin IMO on holding those. I think TSLA will have a hard time between now and October. But it's a tough read because it's so related to market taste for growth stocks again. I see a big range from $150 (lower if ModX delayed again) and $200. Given that, I've rolled all LEAPS-stock to J16 (I do have a very small J15 position only to play a ModX rally late in the year, but that's not part of my LEAPS-stock base)
I did that at about $210. There may be a better place to roll from here, but it's a tough call on those. I played it more conservative given the big sell off by the market on growth-tech. Hard to know when that will reverse for Tesla since it's growth will show in production and sales, but not in profit (and that's what the current market demands) as they are spending for 2015- Whatever you decide based on market predictions, be sure to roll before end of Sept. If you don't think it will go up substantially from here by then, the sooner you roll, the better

Thanks for that kenliles, very useful. I hope we get some news on gigafactories soon, that might be a good time to do it.

 

[The Blue Owl]

There's an interesting note from Goldman that popped up over at Valuewalk: Tesla Motors Inc (TSLA) Ranks Highly On Goldman’s Overwriting List. Goldman seems to have answered in the positive my question earlier in thread about selling covered calls on TSLA for the next few weeks.

The article also shows a chart saying that "since the April expiration [...] overwriting stocks with 10% out-of-the-money 1-month calls outperformed by 44 basis points." The chart is not TSLA-specific, so that's an average.

Yeah, picking pennies in front of the steamroller, but I want every available penny to buy more TSLA shares.

 

[c041v]

Question: Is there any advantage to me offloading my J16's at a major loss, in order to trigger a Capital loss and then buying them right back? I have no intention of actually getting rid of them, but could use the capital loss for next year's taxes.

 

[reddy]

Question: Is there any advantage to me offloading my J16's at a major loss, in order to trigger a Capital loss and then buying them right back? I have no intention of actually getting rid of them, but could use the capital loss for next year's taxes.

That sounds like a wash sale.

"a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so." An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale.

The question would be if you sell your J16 calls with a strike of 230 at a loss, turn around and purchase a J16 with a 225 strike.

Would that be 'substantially identical" ?

 

[c041v]

That sounds like a wash sale.

"a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so." An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale.

The question would be if you sell your J16 calls with a strike of 230 at a loss, turn around and purchase a J16 with a 225 strike.

Would that be 'substantially identical" ?

Thanks for the insight Reddy. FWIW, I'm in Canada. Will check to see if the CRA has as similar rule.

edit: Apaprently our version is called the "Superficial Loss rule". Need to investigate the definition of "identical".

 

[Robert.Boston]

That sounds like a wash sale.

"a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so." An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale.

The question would be if you sell your J16 calls with a strike of 230 at a loss, turn around and purchase a J16 with a 225 strike.

Would that be 'substantially identical" ?

Yes, those two derivatives would be considered "substantially identical" by most auditors. You'd be better off waiting the 30 days ... yes, there's risk that the stock will move a lot, but I'm not seeing a lot of drivers to the stock value in the next month.

 

[aznt1217]

If I wanted to do a long term options play and treat it like a buy sell, what would one do? Which leaps would you buy? Let's discuss!

 

[Auzie]

Number 1 is repare lots of cash that you can loose without blinking.:biggrin:

 

[pz1975]

Update on IV for TSLA calls:

Current IV (which represent future predicted volatility and are a major determinant in option pricing) for ATM calls between next week and Jan16 range between 0.36-0.43.

Historical volatility (HV) over the past 20-180 days range between 0.51-0.61. Thus, the current IV values are very low and reflect the market's belief that TSLA will not move as much (will be less volatile) as it has been in the recent and further off past.

I personally doubt that and see right now as a good time to purchase calls/LEAPS (or puts if you think it will go down) at a discount.

 

[Auzie]

I expect news on gigafactory to push the stock up at least a little bit. Demand also seem to be picking up. If it goes up, I am considering selling some covered calls on the way up. The stock price behaves like a yo yo so it might go back down after it goes up.

 

[hershey101]

So this morning I tried to sell covered calls against my existing stock position (June 1st week $215s for $4). I have 300 shares and thats basically all of my portfolio, and I tried selling 3 calls against it. The order should have gone through however IB kept on giving me a margin error. I contacted their customer service (got through after about 25 minutes!) and they gave me some BS explaination about how I can't trade TSLA on margin or whatever. Anyway according to this page: Margin, the way that they calculate margin requirements is by taking the requirements for the shares I own already, and adding to that the maintanance requirements for the options I'm trying to buy/sell before letting the order goes through. This makes perfect sense in most cases, but not in the case where I'm selling covered calls. There should be no additional requirements for selling covered calls. However, apparently IB has this as additional requirements.
Has anyone else run into this issue before with other brokers? Can someone explain why the calculations are done the way they are, and why existing positions aren't taken into consideration when doing risk checks?

 

[uselesslogin]

So this morning I tried to sell covered calls against my existing stock position (June 1st week $215s for $4). I have 300 shares and thats basically all of my portfolio, and I tried selling 3 calls against it. The order should have gone through however IB kept on giving me a margin error. I contacted their customer service (got through after about 25 minutes!) and they gave me some BS explaination about how I can't trade TSLA on margin or whatever. Anyway according to this page: Margin, the way that they calculate margin requirements is by taking the requirements for the shares I own already, and adding to that the maintanance requirements for the options I'm trying to buy/sell before letting the order goes through. This makes perfect sense in most cases, but not in the case where I'm selling covered calls. There should be no additional requirements for selling covered calls. However, apparently IB has this as additional requirements.
Has anyone else run into this issue before with other brokers? Can someone explain why the calculations are done the way they are, and why existing positions aren't taken into consideration when doing risk checks?

That sounds very strange because on a cash account you can sell calls against shares you own. Selling covered calls should not increase margin requirements. Maybe there is a different way to enter a "covered" call. For example when I sell a call on my cash account it makes me choose the shares that will cover it before I proceed.

 

[hershey101]

That sounds very strange because on a cash account you can sell calls against shares you own. Selling covered calls should not increase margin requirements. Maybe there is a different way to enter a "covered" call. For example when I sell a call on my cash account it makes me choose the shares that will cover it before I proceed.

Here is the IB RegT Margin requirements for Covered calls/puts:

"

Reg T Margin
	Initial/RegT End of Day Margin	Initial Stock Margin Requirement + In the Money Amount 4
	Maintenance Margin	Initial Stock Margin Requirement + In the Money Amount 4

"

 

[CaptainKirk]

That sounds very strange because on a cash account you can sell calls against shares you own. Selling covered calls should not increase margin requirements. Maybe there is a different way to enter a "covered" call. For example when I sell a call on my cash account it makes me choose the shares that will cover it before I proceed.

I'm with TD Waterhouse and when I tried to have options trading enabled I actually needed to convert my cash account into a margin account. This requirement was necessary even though I did not allow any naked positions in the account. I know that when I sell a call though I have to specifically indicate that I'm "selling to open covered" for order entry.

 

[kenliles]

So this morning I tried to sell covered calls against my existing stock position (June 1st week $215s for $4). I have 300 shares and thats basically all of my portfolio, and I tried selling 3 calls against it. The order should have gone through however IB kept on giving me a margin error. I contacted their customer service (got through after about 25 minutes!) and they gave me some BS explaination about how I can't trade TSLA on margin or whatever. Anyway according to this page: Margin, the way that they calculate margin requirements is by taking the requirements for the shares I own already, and adding to that the maintanance requirements for the options I'm trying to buy/sell before letting the order goes through. This makes perfect sense in most cases, but not in the case where I'm selling covered calls. There should be no additional requirements for selling covered calls. However, apparently IB has this as additional requirements.
Has anyone else run into this issue before with other brokers? Can someone explain why the calculations are done the way they are, and why existing positions aren't taken into consideration when doing risk checks?

should be able to sell those calls covered with the stock (maybe they want a margin account for any options as CaptainKirk mentioned). You should also be able to sell calls against any LEAPS you have at no additional margin as long as you sell at (or above) the same strike.

 

[ggr]

So this morning I tried to sell covered calls against my existing stock position (June 1st week $215s for $4). I have 300 shares and thats basically all of my portfolio, and I tried selling 3 calls against it. The order should have gone through however IB kept on giving me a margin error. I contacted their customer service (got through after about 25 minutes!) and they gave me some BS explaination about how I can't trade TSLA on margin or whatever. Anyway according to this page: Margin, the way that they calculate margin requirements is by taking the requirements for the shares I own already, and adding to that the maintanance requirements for the options I'm trying to buy/sell before letting the order goes through. This makes perfect sense in most cases, but not in the case where I'm selling covered calls. There should be no additional requirements for selling covered calls. However, apparently IB has this as additional requirements.
Has anyone else run into this issue before with other brokers? Can someone explain why the calculations are done the way they are, and why existing positions aren't taken into consideration when doing risk checks?

Disclaimer: I'm certainly no expert in this stuff, and I don't use IB so anything specific to them I have no clue. But having said that, you haven't talked about whatever other holdings you have in your account, and whether or not you are actually using your margin loan. I'm guessing you are. So for sake of discussion, let's pretend that your equity percentage is 80% overall, you have $500k worth of stocks but you owe $100k on your margin loan. So, of your 300 shares of TSLA, you really only own 240 of them... the other 60 are security for part of your margin loan. Now if you sell calls against them and the call gets exercised (which you have no control over), sure you get to keep your $4 per share, but this isn't as much as the 60 shares of TSLA were worth. On the other hand, you also get the value of the shares themselves, so I don't see how this could hurt, or drive you into a margin call, or whatever. You could be in trouble in the case of a market crash, but that is independent of the call, and the only way the call gets exercised is if TSLA goes up.

So having typed all this, I'll post it anyway, but the reality is that I haven't explained anything to either of us.