Newbie Options Trading

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Your strategy for "buy another leap and repeat" requires the stock price to go down. If the price keeps on going up, you lost out on potential profit. If you would buy the long leg at the current prices, you're just buying a spread by doing it in conjunction with the short 180 leap.

Sorry for the slow response, busy weekend. I see what you are saying here, remember however that i'm comparing it to just being long a leap. This short leg strike of the spread is way below current share price giving the spread some down side room for protection. In order to keep all my upside, I then simply start over again by going long another leap. To me, this gives me more downside protection then simply holding leaps and shares because I can use that short leap to buy and sell as the share price fluctuates. I'm not concerned about TSLA long term, not looking for an exit, just looking for ways to play the volatility without handcuffing myself on the upside. I've tried the selling calls strategy before and it seemed to backfire every time.

 

[mejojo]

As we approach ER, would you do any immediate (this week, pre and post ER) care and feeding of ITM Jun Calls (I've got 190, 200, 210, 220, 225, 230, 240)?

Is there best time to roll DITM (150, 200) Jan 16 LEAPS to pump up the risk/reward?

 

[mdemetri]

I have a question about selling covered calls and what happens at expiration. Lets say you have 100 shares of TSLA at todays price ($245) and you sell a covered call for May 29th at a strike of $255. On May 29th TSLA closes at $265 and you let the option expire (i.e. you do not 'buy to close' before the end of trading). Is it 100% guaranteed that your shares will be called away? Or is it possible that there are more sellers of the calls than buyers and that only a portion of the written calls will have there shares called away? If your shares are not called away, does this mean the call expired and you get to keep both the shares and the commission from selling the call even though the stock closed above the strike price?

Thanks in advance for any insight.

 

[Jonathan Hewitt]

I have a question about selling covered calls and what happens at expiration. Lets say you have 100 shares of TSLA at todays price ($245) and you sell a covered call for May 29th at a strike of $255. On May 29th TSLA closes at $265 and you let the option expire (i.e. you do not 'buy to close' before the end of trading). Is it 100% guaranteed that your shares will be called away? Or is it possible that there are more sellers of the calls than buyers and that only a portion of the written calls will have there shares called away? If your shares are not called away, does this mean the call expired and you get to keep both the shares and the commission from selling the call even though the stock closed above the strike price?

Thanks in advance for any insight.

If the stock closes $0.01 or more above the strike price on expiration it's almost guaranteed that your shares will be called away. The higher it closes the more guaranteed it is. I won't say 100% because a call option owner CAN call their brokerage and tell them NOT to exercise in your example. This is not likely to happen because if someone didn't want to exercise their calls they should have sold them before expiration.

If you got lucky and got to keep shares then yes, you keep the premium, too.

 

[ggr]

If the stock closes $0.01 or more above the strike price on expiration it's almost guaranteed that your shares will be called away. The higher it closes the more guaranteed it is. I won't say 100% because a call option owner CAN call their brokerage and tell them NOT to exercise in your example. This is not likely to happen because if someone didn't want to exercise their calls they should have sold them before expiration.

If you got lucky and got to keep shares then yes, you keep the premium, too.

What you say is technically correct, but if the difference is measured in more than a handful of cents, the probability of them not being called is very close to zero. In the hypothetical case above (strike 255, closing price 265), there's $10 per share to be made by calling away the stock and instantly re-selling it. That's about 4% overnight (well, over-weekend) expected return on investment.

Or is it possible that there are more sellers of the calls than buyers and that only a portion of the written calls will have there shares called away?

No, this is not possible. The closest thing is that there are "market makers" who, for the right price, will write calls or puts if there are buyers for them, but they especially can be relied upon to either force the market or exercise if there is even a very small profit in it for them. But every open contract has both a buyer and a writer.

You'll notice that the closing price on Fridays is often just barely under a strike price, and rarely just barely over.

 

[Chickenlittle]

I have a question about selling covered calls and what happens at expiration. Lets say you have 100 shares of TSLA at todays price ($245) and you sell a covered call for May 29th at a strike of $255. On May 29th TSLA closes at $265 and you let the option expire (i.e. you do not 'buy to close' before the end of trading). Is it 100% guaranteed that your shares will be called away? Or is it possible that there are more sellers of the calls than buyers and that only a portion of the written calls will have there shares called away? If your shares are not called away, does this mean the call expired and you get to keep both the shares and the commission from selling the call even though the stock closed above the strike price?

Thanks in advance for any insight.

Several issues in your questions
1. If the call you sell is in the money, the owner of it can buy your shares at any time up to the expiration. I have had shares called early and have done that to others
2. I had always thought that one person owned the call I sold but it's more complicated than that. The brokerage is assigned how many calls are exercised and they decide which of their clients options are to be exercised. I am not aware of how the brokerage decides to assign the redemption to. I was told by the brokerage (Schwartz at the time) that there is a small chance an in the money call is not exercised but I strongly suspect you would have a be a very favored customer to get that
3. Yes if you own calls and the stock price is a penny higher than your strike you will own the shares and the price could drop even before the market reopens for a loss

 

[neroden]

I have been disappointed before when the puts I wrote were not exercised (apparently the holder was not on the ball and did not notice that the stock price dropped below the put strike price). And I've been similarly disappointeed when the covered calls I wrote were not exercised, after the stock went above the exercise price.

So frankly there's no guarantee of exercise. It's up to the option holder.

 

[CaptainKirk]

I'm trying to wrap my head around a scenario here to see if it would make sense to exercise an option early. So suppose I own call to Purchase TSLA in Jan 2016 at $225, but I paid $50. Because this is a cash account, I'm thinking that it's actually better to sell a portion of my core holdings to make up the difference in cash that's needed and exercise the option right away, rather than waiting till expiration. My line of thinking is that because the option is now less than 6 months in expiry, the time value will erode faster, and I don't want to be caught in a situation where the options are out of the money. By exercising early, I will own more shares overall at a higher cost basis (these will cost $275/share + commission) than my current holdings, but at last least I can wait things out if I'm long. I'm also thinking that this would be a preferred option if a loss cannot be claimed in this account.

Is my logic flawed?

 

[mmccord]

I'm trying to wrap my head around a scenario here to see if it would make sense to exercise an option early. So suppose I own call to Purchase TSLA in Jan 2016 at $225, but I paid $50. Because this is a cash account, I'm thinking that it's actually better to sell a portion of my core holdings to make up the difference in cash that's needed and exercise the option right away, rather than waiting till expiration. My line of thinking is that because the option is now less than 6 months in expiry, the time value will erode faster, and I don't want to be caught in a situation where the options are out of the money. By exercising early, I will own more shares overall at a higher cost basis (these will cost $275/share + commission) than my current holdings, but at last least I can wait things out if I'm long. I'm also thinking that this would be a preferred option if a loss cannot be claimed in this account.

Is my logic flawed?

Why not just sell the option and collect the time value premium also?. If you exercise today you lose that entirely.

 

[AlMc]

Why not just sell the option and collect the time value premium also?. If you exercise today you lose that entirely.

Agreed. When I first started trading options I tried to do this....luckily, I got a call from the TDAmeritrade desk politely asking if I knew what I was doing .....and advised me to sell the option and buy stock with the proceeds so I would not lose the time premium

 

[Chickenlittle]

Agreed. When I first started trading options I tried to do this....luckily, I got a call from the TDAmeritrade desk politely asking if I knew what I was doing .....and advised me to sell the option and buy stock with the proceeds so I would not lose the time premium

Ran into that once. Refused to sell options and exercised. Time premium less than a dollar and stock rose 4 dollars in less than 5 minutes. Would have cost me more if I sold the option. If a taxable account, need to consider tax implication of profit on option if sold versus exercising without tax consequence

 

[ggr]

Tax definitely comes into the equation. Shares you already hold might be approaching long-term capital gains (or might already be there), whereas exercising the options resets the clock on the resulting shares. Since we don't know how long he has held the existing shares, we can't take that into account. But almost always, exercising the options before expiry works out worse than selling them. Almost always.

 

[mdemetri]

If you have held the option for over 1 year and then exercise, do you maintain long term tax status?

 

[ggr]

If you have held the option for over 1 year and then exercise, do you maintain long term tax status?

No. If you sell the option, any profit is long term capital gains. But if you exercise it, the clock resets and you have to wait another year. This may still be worthwhile, depending on your current and projected incomes, but if you expect to sell sometime soon, it's probably a bad outcome.

 

[CaptainKirk]

This is all in a non-taxable account as I'm a Canadian using a Tax free savings account. At the same time, no capital losses can be claimed either. That's why I was wondering if it made sense to exercise now and lose time premium but not have to worry about the options being out of the money in January. (I know that ending below $225 seems unlikely, just trying a thought experiment)

 

[Jonathan Hewitt]

This is all in a non-taxable account as I'm a Canadian using a Tax free savings account. At the same time, no capital losses can be claimed either. That's why I was wondering if it made sense to exercise now and lose time premium but not have to worry about the options being out of the money in January. (I know that ending below $225 seems unlikely, just trying a thought experiment)

If they are out of the money in January you can then buy the stock cheaper at that time than exercising the calls now.

 

[MitchJi]

Hi,

I've only read the first 80 posts so far. Great thread! Thanks everyone!

I just got word that Vanguard won't approve me to buy calls and puts:frown:.

Can anyone recommend a broker who is likely to approve me to buy calls and puts, has good or excellent customer service, good online options trading tools and reasonable commissions (I said reasonable commissions because I won't be trading a high volume but I don't want to pay through the nose either :wink.

I used to have an account with Schwab with those privileges and we are insured with USAA.

 

[FluxCap]

Hi,

I've only read the first 80 posts so far. Great thread! Thanks everyone!

I just got word that Vanguard won't approve me to buy calls and puts:frown:.

Can anyone recommend a broker who is likely to approve me to buy calls and puts, has good or excellent customer service, good online options trading tools and reasonable commissions (I said reasonable commissions because I won't be trading a high volume but I don't want to pay through the nose either :wink.

I used to have an account with Schwab with those privileges and we are insured with USAA.

A lot of us here that trade options use TD Ameritrade, in part due to the free tool thinkorswim, which was a proprietary trading platform that TD Ameritrade bought. For my money, it is still the best tool available next to a $30k Bloomberg terminal, and it is free.

I would advise you to be very careful getting into options trading -- can lose a lot of money in a hurry if you get carried away. Thinkorswim allows you to practice with "paper money" simulated trades, which can be a great exercise. Might want to read some books and study hard before you make your first trade.

John Carter's videos are interesting, just don't think you can replicate his million dollar TSLA trade your first time out.

 

[InTheShadows]

.
John Carter's videos are interesting, just don't think you can replicate his million dollar TSLA trade your first time out.

You mean it's hard to replicate his trade? I have only tried three times now on a much smaller scale and failed each time.

The thing I learned most about those million dollar trade videos is he bought what I was selling.

The set up for those trades was also a once, maybe twice in a lifetime event.

Be careful, the options waters are littered with many contracts that have expired worthless. Unfortunately a bunch of them are mine. It's much easier to loose money with options than it is to make money with them.

 

[chickensevil]

A lot of us here that trade options use TD Ameritrade, in part due to the free tool thinkorswim, which was a proprietary trading platform that TD Ameritrade bought. For my money, it is still the best tool available next to a $30k Bloomberg terminal, and it is free.

I would advise you to be very careful getting into options trading -- can lose a lot of money in a hurry if you get carried away. Thinkorswim allows you to practice with "paper money" simulated trades, which can be a great exercise. Might want to read some books and study hard before you make your first trade.

John Carter's videos are interesting, just don't think you can replicate his million dollar TSLA trade your first time out.

As the counter point I am using Trademonster (formerly an OptionsHouse account and then they merged) the rates are some of the best around (unless you get into high volume trading such that you can actually warrant negotiating for a better price) and with the merger with TradeMonster they now have both a pretty nice Web Browser platform as well as a really solid phone app.

There is another thread on Brokerages and Trading Tools somewhere around here.