Newbie Options Trading

[vikings123]

Need some clarification here. I thought a weekly option was something that lasted a week? But came across this:

View attachment 611607

Can someone explain to me how this weekly works if it expires in december? Appreciate any info.

There are weekly and monthly options. A monthly option is one that expires on the third Friday of the month. Weekly options are options that expire every week. I think weekly options are released for 6 weeks out. So as you see below for TSLA the latest weekly option you will see are the Dec 31st ones. When you buy long term puts or calls you are essentially buying monthly options.

Edit: looks like @ReddyLeaf just beat me to it!

 

[mickificki]

No, they don’t just last a week, they are named for the Friday of the week that they expire. Weekly’s expire on Friday of every week, except the 3rd Friday (which is called a monthly). If you pick an option way, way far out, say January 2023, you are only allowed options on the monthly, which expires Friday January 20, 2023. Eventually, as we get closer to 2023 the options market eventually provides the ability to trade on the individual weeks of January 2023. The point being that 2023 is so far away that January only needs one date option to trade currently. Does that help?

Thank you @ReddyLeaf and @vikings123 ! Appreciate the help. Dipped my toes in a few calls, appreciate all the info people have been posting on the various threads.

 

[Open Interest]

Do any of you have experience with wash sales? I have incurred some options losses and lack of clarity as to how to handle these is causing me to miss out on this rally.

Say I incurred a loss on Oct 20 (#1), and another loss on Nov 11 (#2). These are similar option contracts. If I buy an option tomorrow, does it automatically trigger a wash sale because of the #2 sale, or can I match it with the #1 sale and let #2 ride until the 30 day period is up?

Also, if what I earn on the replacement option does not wipe out the original loss but only reduces it, does that conclude the transaction or does it start another 30 day wash sale period?

I have managed to completely confuse myself and am busy chasing my tail tonight. Any help would be greatly appreciated.

 

[ReddyLeaf]

Do any of you have experience with wash sales? I have incurred some options losses and lack of clarity as to how to handle these is causing me to miss out on this rally.

Say I incurred a loss on Oct 20 (#1), and another loss on Nov 11 (#2). These are similar option contracts. If I buy an option tomorrow, does it automatically trigger a wash sale because of the #2 sale, or can I match it with the #1 sale and let #2 ride until the 30 day period is up?

Also, if what I earn on the replacement option does not wipe out the original loss but only reduces it, does that conclude the transaction or does it start another 30 day wash sale period?

I have managed to completely confuse myself and am busy chasing my tail tonight. Any help would be greatly appreciated.

Short summary, no I can’t help. But.... there are some posts on this or other investment threads discussing this very topic. Be careful and get an expert involved. If the same option date are bought/sold for losses and gains, then yes, it’s obvious. If you can make a case to the IRS that they are “essentially” the same, then they are probably a wash. For example, you might be able to justify offsetting losses/gains from options that are all out two weeks. Fortunately for me all of my options (and currently all stocks) are being traded in an IRA. I’ve done my own taxes forever and I never want to deal with filling out all of those stupid short/long term capital gains forms ever again. Edit: do a search for something like this: Advanced TSLA Options Trading

 

[Open Interest]

Short summary, no I can’t help. But.... there are some posts on this or other investment threads discussing this very topic. Be careful and get an expert involved. If the same option date are bought/sold for losses and gains, then yes, it’s obvious. If you can make a case to the IRS that they are “essentially” the same, then they are probably a wash. For example, you might be able to justify offsetting losses/gains from options that are all out two weeks. Fortunately for me all of my options (and currently all stocks) are being traded in an IRA. I’ve done my own taxes forever and I never want to deal with filling out all of those stupid short/long term capital gains forms ever again. Edit: do a search for something like this: Advanced TSLA Options Trading

Thank you Reddy, I appreciate the link.

 

[ggr]

Short summary, no I can’t help. But.... there are some posts on this or other investment threads discussing this very topic. Be careful and get an expert involved. If the same option date are bought/sold for losses and gains, then yes, it’s obvious. If you can make a case to the IRS that they are “essentially” the same, then they are probably a wash. For example, you might be able to justify offsetting losses/gains from options that are all out two weeks. Fortunately for me all of my options (and currently all stocks) are being traded in an IRA. I’ve done my own taxes forever and I never want to deal with filling out all of those stupid short/long term capital gains forms ever again. Edit: do a search for something like this: Advanced TSLA Options Trading

On the other hand, the brokers are on the hook for figuring out the wash sales for you. (I think this is relatively new.)

 

[BabyBull]

It might be time to bump this thread again. Does anyone have questions?

I am a options noob but want to gain few shares by trading options. I have a IRA with 100k and 143 shares of TSLA and few other small positions with 500$ cash balance.

I have bought 1 contract of OTM $580 at $29.43 and it has increased to $33.50.
Also, the current stock price is 555 as of today and I suspect the stock will hit $580+ in 2 days. Will my call increase in price after stock price crosses the strike price? I believe I can sell this before expiry.

But, a hypothetical case, if I forget the expiry date, what happens on the day of expiry and next if the stock price is above the strike? Will it get exercised automatically or do I have to tell Ameritrade not to exercise? Since I don't have cash my shares will be sold randomly?

I am planning to buy a 15 Jan 21 $680 at $29.35 or whatever at the open tomorrow? That seems expensive? Any other better choices?

Appreciate any help.

 

[FS_FRA]

I am a options noob but want to gain few shares by trading options. I have a IRA with 100k and 143 shares of TSLA and few other small positions with 500$ cash balance.

I have bought 1 contract of OTM $580 at $29.43 and it has increased to $33.50.
Also, the current stock price is 555 as of today and I suspect the stock will hit $580+ in 2 days. Will my call increase in price after stock price crosses the strike price? I believe I can sell this before expiry.

But, a hypothetical case, if I forget the expiry date, what happens on the day of expiry and next if the stock price is above the strike? Will it get exercised automatically or do I have to tell Ameritrade not to exercise? Since I don't have cash my shares will be sold randomly?

I am planning to buy a 15 Jan 21 $680 at $29.35 or whatever at the open tomorrow? That seems expensive? Any other better choices?

Appreciate any help.

Go here: Long call calculator: Purchase call options

Enter your variables, and check out the chart.

Looking at your 15 JAN 21 680c - if say on 12/15 the SP is 700, your call will be worth $76.

 

[ggr]

Also, the current stock price is 555 as of today and I suspect the stock will hit $580+ in 2 days. Will my call increase in price after stock price crosses the strike price? I believe I can sell this before expiry.

Your call has two opposing trends in play. One is the "time value" (greek Theta), which takes into account the possible movements in the stock price, which decays away to zero as expiry approaches. The other is the value of the underlying stock; as that increases the price of the option also increases. Once the option is in-the-money (its strike price is lower than the stock price) the effect of this increase is roughly one to one, but when out of the money it will be less by some factor (called greek Delta). In any case, the sum of these two effects can be either negative or positive, depending. Yes, you can sell (close) the contract before expiry.

But, a hypothetical case, if I forget the expiry date, what happens on the day of expiry and next if the stock price is above the strike? Will it get exercised automatically or do I have to tell Ameritrade not to exercise? Since I don't have cash my shares will be sold randomly?

It depends whether your account has margin trading or not (you didn't say). If you have margin they'll automatically execute the purchase and then issue a margin call, and you will have time on Monday to figure out what to do. If you don't have margin trading and don't have enough purchasing power, I think they exercise the contract but then sell enough of the stock to cover the exercise, and leave you with the rest. (But having said that I've never been in this position, I could be wrong here.)

 

[ReddyLeaf]

Great answers. Thanks @ggr & @FS_FRA . Another thing to remember @BabyBull is that most options are never exercised or reach the expiration date because people buy back or sell to close, often on the Thursday or Friday before expiration. In the wheel options thread, especially when selling an option, people often close when 60-80% of the value has decayed away. For example, say you sold a weekly covered call for $10 and the stock price remains constant but the time decay causes the option to be worth only $2 on Thursday. Since you sold it for 10 , buying it back for 2 means you get to keep 8/10=80% of the value and you’ve closed the position and your options risk is zero.

Here’s a personal example (don’t remember the exact numbers). I sold a call two weeks before the S&P inclusion announcement for somewhere near $5/share. The next week, the value was somewhere near $2, and I decided (luckily) to buy it back. A few days later, that same option spiked back over $10 because of the SP announcement. I got really lucky on my first “safe” covered call option sale, pocketing a whopping $350 total or so. If I had missed closing it early, I would have lost more than $1000, potentially my 100 shares and all the current and future price appreciation. I got lucky, “picking up pennies in front of the steamroller“ as many people say on TMC. It’s a lesson that I think about every time I trade.

 

[BabyBull]

Great answers. Thanks @ggr & @FS_FRA . Another thing to remember @BabyBull is that most options are never exercised or reach the expiration date because people buy back or sell to close, often on the Thursday or Friday before expiration. In the wheel options thread, especially when selling an option, people often close when 60-80% of the value has decayed away. For example, say you sold a weekly covered call for $10 and the stock price remains constant but the time decay causes the option to be worth only $2 on Thursday. Since you sold it for 10 , buying it back for 2 means you get to keep 8/10=80% of the value and you’ve closed the position and your options risk is zero.

Here’s a personal example (don’t remember the exact numbers). I sold a call two weeks before the S&P inclusion announcement for somewhere near $5/share. The next week, the value was somewhere near $2, and I decided (luckily) to buy it back. A few days later, that same option spiked back over $10 because of the SP announcement. I got really lucky on my first “safe” covered call option sale, pocketing a whopping $350 total or so. If I had missed closing it early, I would have lost more than $1000, potentially my 100 shares and all the current and future price appreciation. I got lucky, “picking up pennies in front of the steamroller“ as many people say on TMC. It’s a lesson that I think about every time I trade.

Thank you all for your responses. Now it feels ok to be able to make some money. I will buy few more contracts and will keep my fingers crossed. Hope the market makers do not play some game in the meanwhile. $TSLA to $1000.

2 more questions...
1. What affects the option bid/ask prices the most? Is this the longer term IV or the IV right now?
2. Is there any site that shows a chart of option bid/ask prices over time similar to the stock charts?

 

[ggr]

Thank you all for your responses. Now it feels ok to be able to make some money. I will buy few more contracts and will keep my fingers crossed. Hope the market makers do not play some game in the meanwhile. $TSLA to $1000.

2 more questions...
1. What affects the option bid/ask prices the most? Is this the longer term IV or the IV right now?
2. Is there any site that shows a chart of option bid/ask prices over time similar to the stock charts?

1. Right now
2. Not that I'm aware of.

 

[ReddyLeaf]

Thank you all for your responses. Now it feels ok to be able to make some money. I will buy few more contracts and will keep my fingers crossed. Hope the market makers do not play some game in the meanwhile. $TSLA to $1000.

2 more questions...
1. What affects the option bid/ask prices the most? Is this the longer term IV or the IV right now?
2. Is there any site that shows a chart of option bid/ask prices over time similar to the stock charts?

1) Multivariate quadratic algebraic formulas. I have no idea what the exact computational model looks like, but I’d love to get my head and computer around it. I’m guessing it includes weighted historical 10-30 day stock prices (IV), variance of those SP, time decay to expiration, distance of strike price from current SP, put/call ratio or some other investor sentiment, phase of the moon, etc. to;dr It’s complicated man. From what I’ve gathered from others, IV is continuously calculated and updated from historical data (last 10, 20, 30 days SP variations). Therefore, during a transition from a relatively stable SP, like we saw for the past 3 months, to this week’s crazy run, the calculated IV is actually lower than it should be. current IV, say from the last 5 days, is higher because those older, more stable prices aren’t included. For this reason, it’s a good time to be buying calls (lower IV) because future IV will be higher with 100% mathematical certainty. Higher IV means higher options prices and lower IV means lower prices if the SP is constant. Conversely, after a large SP change as stability returns, the IV remains higher for a few days/weeks until the peak/trough has been removed from the calculated IV. Therefore, selling calls or puts during this timeframe yields larger premiums. Of course, the absolute best time for buying calls was right before the S&P announcement (IV was low and SP was stable), but it’s difficult to nearly impossible to predict SP or announcements with absolute certainty.

2). I use the nasdaq option chain website, though it’s clunky and difficult for me. Just pick an option, and you can see 5-day, 1-mo, 3-m, 1-yr graphs of what you missed. I also use cnbc and maximum-pain for more insight.
Stock Option Max Pain
TSLA: Tesla Inc - Stock Price, Quote and News - CNBC
(TSLA) Call Put Options

I’m still working on my trading skills and plans, but so far I’ve been successfully buying shares or calls during the 9-11 am EST morning dip, or sometimes in the afternoon fade, especially late in the week, often Fridays. Monday’s tend to have significant price spikes and were better times to sell calls (not now). I don’t have access to real-time prices, and can only put in a limit bid, thereby guessing on the daily peak or trough. I usually bid outside the bid/ask spread hoping for the stock to come to my price rather than chasing it (though lately I’ve been chasing more for fear of missing out). I bought some calls today, paying more than I wanted, but the SP just kept melting up. I was planning to wait until Friday to buy (expecting a pullback), but FOMO took over. I still have some cash for another buy on Friday if that dip returns. Then I’m done, just watching my options like a hawk ready to sell to close if things go south (which I certainly don’t expect until after December 25th).

 

[Chenkers]

1. What affects the option bid/ask prices the most? Is this the longer term IV or the IV right now?

As noted previously the IV now is what impacts the option price. Theoretical option prices can be estimated using the Black Scholes formula:

You can look up what everything means but the important point is that σ represents volatility and is squared in the equation and so has an outsized impact on the option pricing. If you want to play around with theoretical option pricing scenarios you can use a black scholes calculator to test option prices under various criteria. I use this one (Option Price Calculator) a lot in addition to options price calculator (Options profit calculator).

 

[mickificki]

I’m assuming a lot of this is subjective, but when do you decide to sell your call options? I have several purchased Monday and Tuesday, expiration in December, Jan, feb and March. Hoping to hear from several people on their different scenarios.

 

[ReddyLeaf]

I’m assuming a lot of this is subjective, but when do you decide to sell your call options? I have several purchased Monday and Tuesday, expiration in December, Jan, feb and March. Hoping to hear from several people on their different scenarios.

Great question. I’ve got some ITM 12/11, 12/24, sep22, Jan23 calls. I expect that the S&P induced buying will drive the SP up until 12/24. I’m up nearly 100% on the first two and plan to ride those close to the Wednesday before expiration. I might be tempted to book the profits now, except I really believe there will be continued SP rise. I bought them OTM, but the rise has put them ITM. The longer ones are also ITM and aren’t moving as much, so I may sell, take out some profits and buy a higher strike (still deciding on those since I have >1yr to expiration. Edit: your Jan, Feb Mar options should be held through the end of year sales report if you think it will be good. You might close out before the final financial results come out in January just to reduce risk, but again it’s your choice how much risk you can bear.

 

[ammulder]

I’m assuming a lot of this is subjective, but when do you decide to sell your call options? I have several purchased Monday and Tuesday, expiration in December, Jan, feb and March. Hoping to hear from several people on their different scenarios.

I have some Jan 15 '21 800s from immediately following the S&P announcement. I put in sell orders for 1/3 when the price tripled to cover my purchase (already done), 1/3 at roughly a stock price of 800 when they go ITM, and 1/3 at roughly a stock price of 900. I picked those numbers because the profit looked amazing and I didn't want to miss that if there was an S&P spike when I wasn't paying attention. That said, I hope to be paying attention and cancel those latter two orders and handle things manually. If the actual inclusion doesn't drive the stock price over $650, I'll probably sell there on the 18th or 21st. If it rockets past $900, I'll set a higher limit order. So hard to know the effect of the inclusion buying!

In terms of the possibilities, according to the call calculator and assuming not much change in IV, the stock price will have to go to $650 by Dec 18 to do better than they are doing today (on account of time decay). But I think that's a pretty reasonable expectation, given all the mandatory fund buying. If for some reason the price stays at $574, the profits will go from ~500% to ~100%, which would be a bummer, but I don't think I'd get much sympathy complaining about 100% profit in a month. If IV goes up, so much the better, though I've been surprised at how modestly it's reacted so far.

I don't picture a scenario where I hold these past 12/21. Even if delivery numbers look to be amazing, I think the time decay and a possible post-inclusion drop would kill the possibility of waiting another two weeks.

I don't personally have the bandwidth to try to manage four or more strikes / expiration dates at the same time, which is why I only have the one. Thankfully it has worked out so far.

 

[mickificki]

I have some Jan 15 '21 800s from immediately following the S&P announcement. I put in sell orders for 1/3 when the price tripled to cover my purchase (already done), 1/3 at roughly a stock price of 800 when they go ITM, and 1/3 at roughly a stock price of 900. I picked those numbers because the profit looked amazing and I didn't want to miss that if there was an S&P spike when I wasn't paying attention. That said, I hope to be paying attention and cancel those latter two orders and handle things manually. If the actual inclusion doesn't drive the stock price over $650, I'll probably sell there on the 18th or 21st. If it rockets past $900, I'll set a higher limit order. So hard to know the effect of the inclusion buying!

In terms of the possibilities, according to the call calculator and assuming not much change in IV, the stock price will have to go to $650 by Dec 18 to do better than they are doing today (on account of time decay). But I think that's a pretty reasonable expectation, given all the mandatory fund buying. If for some reason the price stays at $574, the profits will go from ~500% to ~100%, which would be a bummer, but I don't think I'd get much sympathy complaining about 100% profit in a month. If IV goes up, so much the better, though I've been surprised at how modestly it's reacted so far.

I don't picture a scenario where I hold these past 12/21. Even if delivery numbers look to be amazing, I think the time decay and a possible post-inclusion drop would kill the possibility of waiting another two weeks.

I don't personally have the bandwidth to try to manage four or more strikes / expiration dates at the same time, which is why I only have the one. Thankfully it has worked out so far.

Thanks for sharing your views. Didn't even think about the complexity of managing calls at various strikes and expirations until after i had purchased them.

Which call calculator do you use?

To be honest I'm a little overwhelmed but felt like this was an opportunity that couldn't be passed up. Here's what I have so far, purchased on monday and tuesday:

 

[ammulder]

Thanks for sharing your views. Didn't even think about the complexity of managing calls at various strikes and expirations until after i had purchased them.

Which call calculator do you use?

To be honest I'm a little overwhelmed but felt like this was an opportunity that couldn't be passed up.

I use the one posted farther up the page: Long call calculator: Purchase call options

This is just me, but if I had those first 7 options all expiring between now and Jan 15, I'd sell some when the price today was between 596-600 and buy more of the others, just as a sanity measure to have fewer separate things to deal with. Because I think there's likely to be a short-ish peak when I'd want to sell them virtually all at once.

If, on the other hand, you're going to stick with the variety pack... So far, I've never managed to sell options "at the peak". I'm OK with that -- I did plenty well, and just had to convince myself not to check the price again in the following days or weeks. I don't think you necessarily need to lock in the very best price -- if you get 10x or whatever your goal is, that's doing great and you've certainly taken advantage of the opportunity. Don't beat yourself up if you don't make 20x by selling at the "perfect moment." So I'd go in one by one and set limit sell orders for a price I'd be happy to have. Then if things change over the days between now and 12/21, I'd adjust my sell orders. Having that on autopilot makes me a lot less stressed about whether I'm in front of the ticker every single moment.

And I do believe in selling some portion early to cover the initial cost of the lot. If anything goes wrong, I feel much better with my maximum loss being $0. Again, I know I "could have done better" by holding that portion, but it was my plan going in to "overbuy" in order to sell some early and cover the purchase price.

I guess the bottom line is, though this is a fantastic opportunity, and probably everyone with call options is going to make some money, I take measures to make the whole operation less stressful, because I don't like the alternative.

 

[Criscmt]

As noted previously the IV now is what impacts the option price. Theoretical option prices can be estimated using the Black Scholes formula:

You can look up what everything means but the important point is that σ represents volatility and is squared in the equation and so has an outsized impact on the option pricing. If you want to play around with theoretical option pricing scenarios you can use a black scholes calculator to test option prices under various criteria. I use this one (Option Price Calculator) a lot in addition to options price calculator (Options profit calculator).

Did you happen to get this formula working on an MS Excel, or Google Sheets? If yes, can you share the steps?