pz1975
Active Member
No it's good what you are doing and learning the best way IMO - with smaller value real trades!
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Newbie Options Trading
- Thread starter Jonathan Hewitt
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- investing options TSLA tsla stock
Muskol
Member
This is good advice. I am trying to do this but it's soo hard to stay on the sidelines. I sold all my LEAPS yesterday and have no position for the first time since October, something I didn't do at the March high, trying to apply lessons learned from that experience.
Thought that having no position would be a nice breather, but I find it nerve racking!
I actually sold all mine as well! I'm long via a small lot of shares and it's definitely easier mentally to stick with the common shares. LEAPs I may consider again if the stock price drops significantly such as the last drop to $180. Anything nearterm makes me uneasy. I now have some cash sitting on the sidelines, and if TSLA so happens to drop again Q3, I'll be ready.
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Question about short term options and time decay.
Being new to options, (basically trading ITM with months before expiration) I thought I would put this question to our group :
How does time decay work with weekly options? I would think that each day passing would have a big effect on the price of the option. So are you better off to take a small profit right away instead of waiting a day or 2 hoping for a bigger share price increase. Wouldn't the time decay in a day or 2 nullify any benefit of a stock price increase?
Thanks for any feedback.
Being new to options, (basically trading ITM with months before expiration) I thought I would put this question to our group :
How does time decay work with weekly options? I would think that each day passing would have a big effect on the price of the option. So are you better off to take a small profit right away instead of waiting a day or 2 hoping for a bigger share price increase. Wouldn't the time decay in a day or 2 nullify any benefit of a stock price increase?
Thanks for any feedback.
With weeklies, the decay is rapid--hourly, really. It's purely a judgment call as to whether the stock price will rise enough to offset the time decay. If you're OTM but in the green, I'd be inclined to sell as a general matter. Depends this week on how you see the press conference today playing out tomorrow.
It's really best to play around with numbers on a spreadsheet to see how much the price needs to rise to offset the time decay. You can compute prices using this little calculator: I Volatility - Options Calculator
chickensevil
Active Member
Someone else pointed out this calculator to me, which gives you a good idea of time decay graphically:
Long call (bullish) calculator
Here is an example output:
So this is for the 12 Sep @ 300.00 Weekly (next weeks weekly) with a purchase price at .68 based on the current pricing and such. Note that because IV can change pretty quickly and these calculators are based on a previous volatility, they are not perfect... IV has been rising for a little bit now if I am not mistaken so the trade price is a little bit inflated vs the calculator, but still gives a great idea all the same.
As you can see time value on a weekly is a cruel mistress...
Long call (bullish) calculator
Here is an example output:
So this is for the 12 Sep @ 300.00 Weekly (next weeks weekly) with a purchase price at .68 based on the current pricing and such. Note that because IV can change pretty quickly and these calculators are based on a previous volatility, they are not perfect... IV has been rising for a little bit now if I am not mistaken so the trade price is a little bit inflated vs the calculator, but still gives a great idea all the same.
As you can see time value on a weekly is a cruel mistress...
mershaw2001
I'm short the short sellers
I think that one of the things to add about weekly options and time decay is that decay doesn't always occur in ticks of the clock, it sometimes occurs in leaps and bounds. For instance, you might think that for an option that is dated 2 days away, 15 trading hours away, it would decay by 1/15th every hour or some approximation to that. This can happen sometimes. However, other times the time decay occurs in leaps and bounds, so if the underlying equity is moving up in value slowly toward the strike price of the option, the price of the option may trend up even as time is decaying, and then suddenly the underlying stock will have a change in momentum and the price of that option will drop like a rock to the expected (or lower than expected) value.
Appreciate you starting this thread which certainly applies to me. Purchased 200 shares long recently, but would like to have a less capital-intensive alternative.
Hi there,
I would love to gather some input. Unfortunately recently I lost a big chunk of my portfolio (GTAT, uggh), and do not want to screw up one of the lone bright spots. I bought some calls a while back in TSLA which have done very well. All are for Jan 2016 expiration. I have one contract for strike of 130, and 3 for strikes of 140. They are up approx 180% and 350% respectively. I really would like to accumulate shares, and always thought I would convert/excise them, when I got the cash to pay for them. ie. get 400 shares of TSLA. I want maxiimum amount of shares, as i really think in the next 5 years, shares will double and maybe even do better. However it would seem, whether the stock is at 260, or 150 I would pay the same for those shares. The "problem" if I sold the options and bought shares is i would gather around half of that, ie. 200 shares. Of course I would be able to buy the other half with the cash I need to buy the contracts out in the first place ($55 000).
I am worried over short term setbacks ie. market goes down for whatever reason, but beleive in the long run, so was looking to do something to protect some profits.
Any advice on how to play this would be appreciated.
Thanks.
I would love to gather some input. Unfortunately recently I lost a big chunk of my portfolio (GTAT, uggh), and do not want to screw up one of the lone bright spots. I bought some calls a while back in TSLA which have done very well. All are for Jan 2016 expiration. I have one contract for strike of 130, and 3 for strikes of 140. They are up approx 180% and 350% respectively. I really would like to accumulate shares, and always thought I would convert/excise them, when I got the cash to pay for them. ie. get 400 shares of TSLA. I want maxiimum amount of shares, as i really think in the next 5 years, shares will double and maybe even do better. However it would seem, whether the stock is at 260, or 150 I would pay the same for those shares. The "problem" if I sold the options and bought shares is i would gather around half of that, ie. 200 shares. Of course I would be able to buy the other half with the cash I need to buy the contracts out in the first place ($55 000).
I am worried over short term setbacks ie. market goes down for whatever reason, but beleive in the long run, so was looking to do something to protect some profits.
Any advice on how to play this would be appreciated.
Thanks.
Congrats on your 200 shares you recently purchased! If you are new to options I would suggest the longest term options available. Currently I believe that is the Jan 2016 Calls. I tend to buy these for a strike price near the current share price but there is a lot of advocates for buying them deep in the money so you pay less of a premium for the value of time.
Sorry for your GTAT losses. One potential option would be to pick up 2-4 more Leaps and then use the rest of proceeds to get the safer stock. If there is a market correction and TSLA tanks more than it can recover (+pay for the time value) Then you will lose the LEAP value. If on the other hand TSLA value continues to rise you could convert more of the shares later.
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mershaw2001
I'm short the short sellers
Hi Ocelot.
Let me see if I can summarize what I think you are saying. You have 4 option contracts that are deep in the money, and they have a 2016 expiration date. You believe in the long term prospects of Tesla, yet you would like to eliminate some of the short term volatility associated with the stock.
Here are my thoughts.
1) do not exercise those options until the very last week before they expire. You paid a premium over the stock for the option, and you are rewarded by not having to put money in until 2016. This reduces your risk and reduces your capital requirements.
2) you can reduce volatility by switching to shares. If you would rather have shares prior to the time that these options expire, sell the options on the open market rather than exercise the option, and then buy the shares- the sale of the options captures the remaining time-value (extrinsic value) of the options.
3) in the meantime, if you have cash that you would like to use to acquire more tesla, buy additional shares.
4) if you would like to reduce the volatility of the position, hedge your investment by creating a "spread": do this by selling a higher-strike option that has a date of the same as your options, 2016. For instance, sell a 2016 400 strike call. You will receive money for this option, but it will limit your upside (in case tesla goes up over 400 dollar by 2016).
It seems like you know your options with regard to these options already, you just needed someone to confirm it: selling your options and then buying shares appears consistent with what you believe tesla will do in the future and appears to be the best option, with one caveat: It creates a tax obligation this year. If you exercise the options in jan 2016, no tax burden is created then. The only tax burden that is created is when you sell the shares.
Hi Mershaw,
That is some great advice. I like number 4. I have never done a spread...but hey maybe its time to step up my game! That way as you say i can reduce volatility, yet still have some good gains to make on the options, then still do your number one suggestion. Thanks for taking the time to write that out. much appreciated.
I realize buying protective puts now is coming a little late to the party, but I was looking at getting deep out of the money puts for October 31, which may or may not be after the quarterly report comes out. It seems like there are no strikes available below 240 - will those phase in soon?
chickensevil
Active Member
Yeah, that might be the lowest you can trade at right now for that far out. I would try the Oct monthlies since it dives all the way down to 120 and there are active trades happening at 150 (not that I expect it to go THAT low...)
Johan
Ex got M3 in the divorce, waiting for EU Model Y!
A thought: since there are probably a lot of people running a LEAPs stock replacement strategy I'm guessing when the Jan17 calls become tradable a lot of people will want to roll Mar15s and especially Jan16s up to Jan17s, right? Could that create "selling pressure" on the Jan16s and create a good buying oportunity there? Or would this kind of "arbitrage" be snatched up instantaneously by the Market makers?
I don't think such an oppertunity exists. You will probably get cheaper Jan 16's from the fact that the stock is consolidating at such a low price...
Johan
Ex got M3 in the divorce, waiting for EU Model Y!
So no chance that, all else being equal, prices (time value, not intrinsic value) of Jan16 calls fall a bit on the day Jan17 options start trading?
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