Newbie Options Trading

[Chickenlittle]

This statement shows an ignorance of when you should sell puts. But then you're in energy, not finance, right?

If you have a pile of capital (I did), and you aren't really sure how high you trust Tesla to go (it might be overpriced), but you're sure that it *won't collapse*, and if it does, you're happy to buy the stock at that price...

...well, let's just say that earning the option premium on selling deep-out-of-the-money puts was the equivalent of earning 12% interest last year. And basically zero-risk. What was the worst-case scenario? I buy a lot of Tesla stock at less than its fundamental value? Go ahead, throw me in that briar patch.

Selling deep-out-of-the-money puts is a conservative choice if you think the stock may be somewhat overvalued, but the other fools in the market think it is extremely overvalued. It doesn't work on most companies because the option premium is usually low, but there were *so many people betting against Tesla* that the option premium was pretty huge.

Sure, it's capital intensive, but it's much much safer than buying the stock. I've been using it as an alternative to bonds or cash, frankly. I have a separate bundle which is actually invested in the stock.

Now, if everyone starts doing this, the option premium will shrink and it will stop working, of course.

Fundamental philosophy of investing note: most people buying calls are doing so to magnify their gains, and are taking extra risk as a result. People selling puts are doing so to have a *more conservative* investment, to minimize risk, and are sacrificing potential gains to do so. Both bullish, but very different risk profiles, suitable for different personalities and different investment goals.

Your statement of basically zero risk is an ignorant statement when it comes to the stock market and especially options. I get brokers trying to sell me products all the time with that statement who refuse to put it on paper

 

[dmunjal]

Your statement of basically zero risk is an ignorant statement when it comes to the stock market and especially options. I get brokers trying to sell me products all the time with that statement who refuse to put it on paper

It is a bit more risky shorting TSLA puts than other low beta stocks. But it works well in this bull market with zero percent interest rates.

I like to choose strike prices that provide good support: 225, 180, 140. I've been doing it for two years and has worked well to create some income in my conservative account. My core account stays long the actual stock.

It works really well for high dividend paying stocks like T or VZ, too. Worst case, you are put the stock and earn 6%. Better than cash.

I'd rethink this strategy if interest rates rise appreciably.

 

[Chickenlittle]

It is a bit more risky shorting TSLA puts than other low beta stocks. But it works well in this bull market with zero percent interest rates.

I like to choose strike prices that provide good support: 225, 180, 140. I've been doing it for two years and has worked well to create some income in my conservative account. My core account stays long the actual stock.

It works really well for high dividend paying stocks like T or VZ, too. Worst case, you are put the stock and earn 6%. Better than cash.

I'd rethink this strategy if interest rates rise appreciably.

Didn't mean to say it doesn't work, I have sold puts as well. However it's important to realize that NOTHING about options is zero risk, especially in newbie options trading thread

 

[chickensevil]

Didn't mean to say it doesn't work, I have sold puts as well. However it's important to realize that NOTHING about options is zero risk, especially in newbie options trading thread

Well nothing about investing is zero risk... If someone is doing options I would hope that they are aware of this already. I'm sure his point about being of no risk is framed within his impression of risk. It is likely a semantics issue. But I never trust those brokers who try to tell me that they have a sure bet... I will take my money to the horses before I go with a brokers "sure bet"...

 

[ckessel]

I've sold puts in lieu of a buy limit order. I'll sell a $220 TSLA put instead of a $220 market limit buy. If the stock doesn't make it that far down, I pocket it. If the stock does dip that far, I buy at a slight discount (e.g. the $5 I got for selling the put).

It's zero additional risk in the sense I would have bought anyway at $220. The key there is "additional"

(numbers made up for the sake of example, I didn't actually do this with TSLA, but a solar stock)

 

[chickensevil]

Since it was asked, I don't know how much help it would be, but I thought I would put out there what I had done leading up to the explosion yesterday.

semi-Full disclosure my TSLA options play money in not very large, I started all this with very little seed money just to get into options. In about 2 months I managed to double my position, and then I dumped out my original investment to just sit on house money, and now 2 weeks later I have managed to basically double the position again. So all in all, I am up around 200% over top of my original investment.

I am by no means an expert options trader, and real return money wise I would likely be a super ameteur, so stake your money at your own risk... I am not a millionaire here.

So coming off my initial 100% return 2 weeks ago after all the D event stuff (I made good money when it shot up and then good money coming back down... this week and one day made about 2 weeks of trading look like child's play) I had backed out my investment and wanted to take a small break so I threw 1/3 of the money into a December 260 strike, 1/3 of my money into a Jan 280 strike, and 1/3 into some stock. Just so I had money in the game in case the stock shot back up, but I wouldn't have to sit on the account 24/7 (I am a rather busy guy at work).

So come yesterday I was actually down rather hard as the price was sitting around 222 and I was deciding what to do... sitting on almost no cash in the account and the above stated positions. As was talked about around the short term thread we all knew this was crap that the price was down and was a major bear attack, and I figured we would go one of two ways:

1: Bears would be repelled as the real information came to the surface and their lies were revealed. (95% likelihood)
2: Bears would trigger a real panic and noone would come out to correct their falsehood and it would cause a catastrophic failure in the shareprice (5% likelihood)

Note that both of these were looking short term corrections here with an expiration of a this friday... that is the timeframe of these thoughts.

So I decided I would have until Thursday to get the price recovered (or fall dramatically below the 200DMA as panic kicked in) and decided to sell off the shares I was holding to free up cash and continue to hold on to the Dec/Jan calls because by then whatever had happened would be recovered anyway. I then took that cash knowing I was now stuck in whatever I bought for the 3 days to settle before I can sell willing to let this play out.

Of the available cash, about 5/6th's of it was from the stock sale and the rest was cash I was still just sitting on previously (so not restricted funds). So I took the restricted funds and bought what I could of the 232.50 strike call because I was reasonably confident in it getting basically back to where we were before all of this. And took the unrestricted cash to buy a little 237.50 strike call and still had enough in the account to buy some puts @ 170 strike (which were basically pennies at the time) just in case I was wrong and that 5% catastrophe kicked in, I could hopefully regain some of my cash... not going for a profit on that, but just trying not to lose everything.

Of course noone (that I am aware of) really expected Elon to rectify the situation which made this all the better, but I was reasonably happy with the expectation of a recovery and then threw out a token high and a token low just in cash the REALLY crazy happens.

What made yesterday's events cascade into the sky for me was because everything in my portfolio went into the deep green for me minus my 170 strike which is worthless. So my Dec/Jan went from being red into a decent 20-30% gain, my 232.50's went up into a 400% gain, and my 232.70 went even higher, but I sold it in the afternoon since it wasn't restricted cash. I am now stuck with my fingers crossed hoping the stock is in the 240s come Thursday when I try to sell, just so I don't lose all my gains because of being in restricted cash, but had I not been restricted I would have sold off yesterday likely around the 300% return levels.

So my lesson learned here is be careful about restricted cash, because I may still get bit by that. I am down 20% today because of not being able to touch anything.

Did I get really lucky? Sure. I won't deny this. There is always a bit of luck involved in some of this. But the thesis was sound, everything pointed to this being a desparate play and that the stock should rebound upon realizing this. You make your decisions based on what you think is realistic because you can't plan for those Elon tweets and random comments (I got burned by the "stock is too high" comment... so this goes both ways)

 

[mejojo]

Thanks for that, much appreciated. Can you provide a little detail on the transactions?

What were the prices of the 232.50 and 237.50 calls and why did you pick those in particular? Purely on strike or cost factored in?

What was the sale price of the 237.50?

 

[chickensevil]

Little bit of both. The 232.50 was more based on strike which was paid for by the higher initial cost which was around $2.00 at the time. The 237.50 was picked more because of the cost since I had less than 100$ to balance out that I could have the freedom from being restricted on the funds.

I think I tend to be a bit more risky in some of my trades since I don't have a ton of capital to float the higher premiums... Like the people who tend to buy things deep ITM. But I think being forced to eat the risk has caused me to pick the ropes up a little faster.

As for the sale of the 237.50 I had a cost of around .90 and sold around 3.50. I don't feel like sifting back through my transactions to get the right numbers because I don't think that is as important as the thesis behind why you make trades and building in some allowance to being wrong.

I hear all the time that you need to be right at least 60% of the time in order for options to pan out for you. TSLA makes it easy enough to be right since we have a wealth of knowledge here in the forums about everything happening and why. If Elon skips workout and goes to IHOP instead someone is going to post it to these forums. The second benefit behind trading TSLA is that the stock is VERY volatile. So if you can guess the direction right it is hard not to make money. Hopefully by the time TSLA stabilizes we will all have a greater understanding in order to make better calls about options.

 

[tdiggity]

Any opinions about using ETrade to do my options trading? Is there a better place for the casual options trader?

 

[chickensevil]

Any opinions about using ETrade to do my options trading? Is there a better place for the casual options trader?

There is a thread about platforms. I would compare the commission fees. I personally use option house mostly because it was cheap enough and getting an account with basic trading is super easy. I had a non-margin account active in a day and funded in about a week. Took a couple days to verify my bank account to transfer in funds and then they make you wait until the money transfer settles before they let you start trading with it.

From my understanding getting a margin account with them is just as easy but I didn't want that added risk

 

[InTheShadows]

There is a thread about platforms. I would compare the commission fees. I personally use option house mostly because it was cheap enough and getting an account with basic trading is super easy. I had a non-margin account active in a day and funded in about a week. Took a couple days to verify my bank account to transfer in funds and then they make you wait until the money transfer settles before they let you start trading with it.

From my understanding getting a margin account with them is just as easy but I didn't want that added risk

I like optionshouse and I have a margin account with them. Unfortunately I missed trading in that account the past few days because I had a margin call and I was restricted. Not the normal kind, it was triggered because I did 4 day trades in one week, I thought I was allowed 5. Unfortunately I am only allowed 3. They unlocked it for me but it took 2 days to unlock it. It is unlocked now but I missed trading in it the other day. When I called about it they said if I wanted to remove the margin then I wouldn't have that restriction. I kept the margin. I like the fact that since I do hold a little common stock in that account even if I am 100% fully invested I can still day trade because the margin gives me more than $2000 trading power each day, which is needed to even place day trades. Sometimes I like to be 100% fully invested. And other times I have used a bit of margin for a day trade. Since its a small amount and if it goes bad, I sell some other option I am not liking to get out of margin or I will sell a share of common to get out of margin. You don't get charged for using margin unless you are using margin when the market closes.

I pay $5 for each option trade up to 5 contracts then $1 for each additional contract. Set your fees to the number of contracts you trade the most. If you trade 11 or more contracts regularly then the other fee structure is better. I'm still small time options trader so most of my trades are under 10 contracts.

 

[chickensevil]

You of course clear any of those margin restrictions if you have more than 20k in the account. At least I think that was the amount. Then you can day trade as much as you want on a margin as much as you want without worrying about it. I think it is some kind of SEC rules that is forcing those restrictions. Because of this that is another reason I won't activate the margin because I find myself doing more than 3 day trades on very active weeks and would blow that in an instant. So I guess it is a trade off. But thank you for giving your perspective on it since us small time traders do have to worry about these things.

Of course at the rate I am going I will be blowing past the minimum limit restrictions in just a few short months all on house money.

 

[InTheShadows]

You of course clear any of those margin restrictions if you have more than 20k in the account. At least I think that was the amount. Then you can day trade as much as you want on a margin as much as you want without worrying about it. I think it is some kind of SEC rules that is forcing those restrictions. Because of this that is another reason I won't activate the margin because I find myself doing more than 3 day trades on very active weeks and would blow that in an instant. So I guess it is a trade off. But thank you for giving your perspective on it since us small time traders do have to worry about these things.

Of course at the rate I am going I will be blowing past the minimum limit restrictions in just a few short months all on house money.

I think it might be 25k. I pulled some money out of that account and also lost a pile. There is a newbie tip for you. Easy come, easy go. . I'm still solvent and learning more with each trade, and that's what matters.

 

[FluxCap]

Hey guys, yes there is a thread with some useful info here:

Brokerages Trading Tools

FWIW, Curt, myself and many others on this site use TD Ameritrade largely because they offer the award-winning, previously subscription-based tool Thinkorswim for free with any account. IMO, Thinkorswim is easy to jump into, and is extremely powerful and intuitive once you take a few tutorials. It's the next best thing to a $30k/year Bloomberg terminal, I think. You can chart, trade, analyze and graph to your heart's content, with built-in "studies" that chart moving averages and other TA drawings. You can dig into Level II quotes (NASDAQ order book) if you want to. And you can even watch a live CNBC feed from within the tool.

TSLAOpt can tell you more about Interactive Brokers if you wish, too.

Good luck.

 

[chickensevil]

I think it might be 25k. I pulled some money out of that account and also lost a pile. There is a newbie tip for you. Easy come, easy go. . I'm still solvent and learning more with each trade, and that's what matters.

I have learned that a couple times already, I just make sure to set things up so I can't possibly lose everything because then the fun would be over with no recovery.

Or rather "almost" impossible to lose everything. But I have experienced the 50% loss just as quick as the 100% gain and it really does shock you.

- - - Updated - - -

Hey guys, yes there is a thread with some useful info here:

Brokerages Trading Tools

FWIW, Curt, myself and many others on this site use TD Ameritrade largely because they offer the award-winning, previously subscription-based tool Thinkorswim for free with any account. IMO, Thinkorswim is easy to jump into, and is extremely powerful and intuitive once you take a few tutorials. It's the next best thing to a $30k/year Bloomberg terminal, I think. You can chart, trade, analyze and graph to your heart's content, with built-in "studies" that chart moving averages and other TA drawings. You can dig into Level II quotes (NASDAQ order book) if you want to. And you can even watch a live CNBC feed from within the tool.

TSLAOpt can tell you more about Interactive Brokers if you wish, too.

Good luck.

Yeah when I grow out of my diapers and start wearing big boy pants this is what I want to move into because I have heard good things.

 

[FluxCap]

Yeah when I grow out of my diapers and start wearing big boy pants this is what I want to move into because I have heard good things.

Well, you could open a free account with a few bucks and try the tool out! You can even trade with "paper money" to practice. Worth a shot, I don't think you need to wait to check it out given your interest / experience.

 

[Chickenlittle]

I've sold puts in lieu of a buy limit order. I'll sell a $220 TSLA put instead of a $220 market limit buy. If the stock doesn't make it that far down, I pocket it. If the stock does dip that far, I buy at a slight discount (e.g. the $5 I got for selling the put).

It's zero additional risk in the sense I would have bought anyway at $220. The key there is "additional"

(numbers made up for the sake of example, I didn't actually do this with TSLA, but a solar stock)

Sorry but your wrong. If the price reaches 219, you don't immediately buy it. Your choices are to hold on to expiration to obtain it or to buy back the put. Depending on the expiration date, it will cost more to buy it back especially if expiration months away. If, as tesla does it can suddenly gap down and cost a heck of a lot more to buy back. If your caught with the put on expiration date price could be a lot lower. You will not enjoy buying your stock at 220 with the current price 180. There is more than trivial risk in your strategy

 

[tdiggity]

Well, you could open a free account with a few bucks and try the tool out! You can even trade with "paper money" to practice. Worth a shot, I don't think you need to wait to check it out given your interest / experience.

I downloaded the papermoney version. Gonna take some time to learn this platform.

For fun, I did a thinkBack analysis and went back to jan 1 2013. There were Calls for Jan 2015@$50 strike for only $4. I want to believe that someone here has a ton of them and feeling pretty good right about now.

 

[ckessel]

Sorry but your wrong. If the price reaches 219, you don't immediately buy it. Your choices are to hold on to expiration to obtain it or to buy back the put.

I think it's more nuanced than simply right or wrong. As I noted, the sold PUT is instead of a limit buy order.

It's true you don't buy immediately with a sold put and thus you won't catch a falling knife, but you will buy at a discount versus a limit buy order on a stock that stays below the PUT level until expiry. If you failed to catch the knife, you pocket the put premium.

Note, I'm talking about the case where the stock is at $250 and you think it's worth $220, so you put in a $220 limit buy (or sell a PUT) and forget about it barring some massive change in market/company circumstances. I'm not talking about a trick for day traders that base their trades over daily/hourly market movements (such folks generally wouldn't fall into the "newbie" thread).

If, as tesla does it can suddenly gap down and cost a heck of a lot more to buy back.

As I said, this was in lieu of a limit buy order. I wouldn't be buying back the sold put.

If your caught with the put on expiration date price could be a lot lower. You will not enjoy buying your stock at 220 with the current price 180.

That's equally true with a limit buy order if your limit was at $220 and the stock was marching down towards an eventual $180.

Again, this is in lieu of a limit buy order. I did make that point in the very first sentence of the original post... At least in this case, you pocket the PUT premium compared to the limit buy.

There is more than trivial risk in your strategy

As compare to a limit buy? No, not much that I can see. The worst case is you miss out on a falling knife and pocket the premium. If the stock was going on an extended drop, you're screwed whether you sold a put or your limit buy order fired.

 

[Chickenlittle]

I think it's more nuanced than simply right or wrong. As I noted, the sold PUT is instead of a limit buy order.

It's true you don't buy immediately with a sold put and thus you won't catch a falling knife, but you will buy at a discount versus a limit buy order on a stock that stays below the PUT level until expiry. If you failed to catch the knife, you pocket the put premium.

Note, I'm talking about the case where the stock is at $250 and you think it's worth $220, so you put in a $220 limit buy (or sell a PUT) and forget about it barring some massive change in market/company circumstances. I'm not talking about a trick for day traders that base their trades over daily/hourly market movements (such folks generally wouldn't fall into the "newbie" thread).


As I said, this was in lieu of a limit buy order. I wouldn't be buying back the sold put.


That's equally true with a limit buy order if your limit was at $220 and the stock was marching down towards an eventual $180.

Again, this is in lieu of a limit buy order. I did make that point in the very first sentence of the original post... At least in this case, you pocket the PUT premium compared to the limit buy.


As compare to a limit buy? No, not much that I can see. The worst case is you miss out on a falling knife and pocket the premium. If the stock was going on an extended drop, you're screwed whether you sold a put or your limit buy order fired.

Good luck