Newbie Options Trading

[Clemsons2k]

That's because nobody wants to buy that junk.

Seriously, they are worthless. Why would anyone pay anything for them.

Just set a limit price of $0.05 as a "good to cancel" order and if CSIQ falls below $17 tomorrow it will get executed. Otherwise it will expire worthless. In either case, you will not be "put" the stock.

lol thanks for your candor It was a worst case scenario play. I didn't sink much money into it so it doesn't matter if I get anything back out, just don't want the shares. Something seriously nasty would have to happen for CSIQ to hit $17 by the end of tomorrow.

 

[sleepyhead]

lol thanks for your candor It was a worst case scenario play. I didn't sink much money into it so it doesn't matter if I get anything back out, just don't want the shares. Something seriously nasty would have to happen for CSIQ to hit $17 by the end of tomorrow.

Aka black swan event.

You can see that the bid/ask spread is $0.00/$0.05 which means that nobody wants to buy them. I have a few calls like that too in my portfolio that will expire tomorrow worthless. I need a miracle too.

But be careful, because with options if you are not paying attention then you just might be put the stock and forced to sell it. That's why I recommend putting in that limit order.

 

[ckessel]

Say it's early to mid week and you knew or suspect some particular movement in the stock in the next couple days (hypothetical, I don't), does it make more sense to buy options for that week or the next? It's cheaper for the current week, but the time decay you're paying for the day or two you're hoping for that move is really fierce. If you buy the following week's options, it's a bit more expensive, but you won't suffer nearly as much time decay.

I suppose that might be too abstract to answer, but I'm trying to get some feeling of when/why you'd buy a weekly option vs 2-weeks (or a month).

 

[sleepyhead]

Say it's early to mid week and you knew or suspect some particular movement in the stock in the next couple days (hypothetical, I don't), does it make more sense to buy options for that week or the next? It's cheaper for the current week, but the time decay you're paying for the day or two you're hoping for that move is really fierce. If you buy the following week's options, it's a bit more expensive, but you won't suffer nearly as much time decay.

I suppose that might be too abstract to answer, but I'm trying to get some feeling of when/why you'd buy a weekly option vs 2-weeks (or a month).

I would recommend finding a stock that moved a lot, such as SCTY today. Take a look at the options today. Look at this week and next week options. Look at day high and day low, and you should get a pretty good answer.

Problem is that if their is not a lot of volume then your research will be skewed and unreliable. But I would expect high volume in SCTY options today.

- - - Updated - - -

Better yet compare to yesterday's closing price.

That is how I learn options, and not by reading books.

 

[TD1]

Does anybody here uses OptionVue or does have an opinion on that?
I'm looking for a good Options front end for Interactive brokers, since Think or Swim is ridiculously expensive.

 

[sub]

From what ive vie read here and on the net elsewhere they don't allow anyone to sell puts, but I may be wrong. I will call them today and find out, I will report back. Would love to sell some puts right now. When I attempted to sell them the message I received is that they don't allow it at all, not just for me specifically.

quoting myself here so everyone knows what i'm referencing. Scottrade does allow options trading but it's through a separate account called "options first". I'm sending in my application and will take a look at it. If they can get it opened quickly then I will use it short term until there is a good time to move else where. I'm set up for level 2 and Margin already, would need to confirm with knew brokerage that I can have access to everything before moving.

 

[mershaw2001]

lol thanks for your candor It was a worst case scenario play. I didn't sink much money into it so it doesn't matter if I get anything back out, just don't want the shares. Something seriously nasty would have to happen for CSIQ to hit $17 by the end of tomorrow.

I disagree with sleepyhead here. I'd let them expire without an open order. I've held a good number of biotech companies with small volume intraday and sometimes, rarely, they tank on option expiration as someone tries to manipulate the shares.

My take is that if CSIQ is going to fall far enough to make your option worth something, it's most likely going to fall further than just the amount to make your option worth 0.5. For instance, if a black swan event came along and it made the stock fall by 4 dollars, the stock probably wouldn't just fall by 4 dollars, it would fall by 5 or 6 or 7 dollars or may 10. In those cases, you were better off with your lottery tickets open and not closed at 0.05. In essence, you only get your 0.05 back if the stock falls 2-3 dollars, if it fell farther than that you were better off keeping the option open.

 

[NStar]

From what ive vie read here and on the net elsewhere they don't allow anyone to sell puts, but I may be wrong. I will call them today and find out, I will report back. Would love to sell some puts right now. When I attempted to sell them the message I received is that they don't allow it at all, not just for me specifically.

One of my IRA accounts is with TD Ameritrade. It has my option trading level set at "Tier 2 Standard Margin" which seems to be the highest allowed for my account. At this level I cannot sell put either but I'm allowed to trade spread. Yesterday I sold a Nov16th $175 Put, bought a Nov16th $155 Put and received about $6.20 credit. I see that if I had bought another put say Nov16th 50 Put, which is basically worthless, instead of the 155 Put, then it would be effectively just like selling a 175 Put directly. I have not tried it this way, but I think it should be allowed as long as I have enough margin. so this might be a trick to get around the option level limitation and be able to sell put.

This thing does take a lot of margin though. For the $620 I received I think it reduced my margin by $2000, the max. possible loss from that trade. It would be much bigger margin reqirement if it was something like $50 put that I bought in that spread trade.

 

[kcveins]

One of my IRA accounts is with TD Ameritrade. It has my option trading level set at "Tier 2 Standard Margin" which seems to be the highest allowed for my account. At this level I cannot sell put either but I'm allowed to trade spread. Yesterday I sold a Nov16th $175 Put, bought a Nov16th $155 Put and received about $6.20 credit. I see that if I had bought another put say Nov16th 50 Put, which is basically worthless, instead of the 155 Put, then it would be effectively just like selling a 175 Put directly. I have not tried it this way, but I think it should be allowed as long as I have enough margin. so this might be a trick to get around the option level limitation and be able to sell put.

This thing does take a lot of margin though. For the $620 I received I think it reduced my margin by $2000, the max. possible loss from that trade. It would be much bigger margin reqirement if it was something like $50 put that I bought in that spread trade.

How do they let you use margin in an IRA account? I'm not allowed to do this at Schwab.

 

[wayno]

How do they let you use margin in an IRA account? I'm not allowed to do this at Schwab.

I recently rolled over an IRA into Fidelity and applied for options trading as well. I got approved for a similar level 2. I then had to fill out another form and physically mail it in to them for approval to do spreads, but that is as far as the margin is allowed in that account.

Thanks,
Wayne

 

[Larken]

I have a questions when it comes to IV volatility and playing the TSLA Q3 ER. I have read posts on the forum about IV that sometimes it collapses the day after the ER and people usually sell their options the day before. What I am assuming is that this applies more to short term options rather than long term ones, is this so? The thing is that I want to keep holding on to the option at least one week after the ER and not be too suseptible to IV volatility.
Thanks

 

[kenliles]

I have a questions when it comes to IV volatility and playing the TSLA Q3 ER. I have read posts on the forum about IV that sometimes it collapses the day after the ER and people usually sell their options the day before. What I am assuming is that this applies more to short term options rather than long term ones, is this so? The thing is that I want to keep holding on to the option at least one week after the ER and not be too suseptible to IV volatility.
Thanks

When does your option expire?

 

[sub]

One of my IRA accounts is with TD Ameritrade. It has my option trading level set at "Tier 2 Standard Margin" which seems to be the highest allowed for my account. At this level I cannot sell put either but I'm allowed to trade spread. Yesterday I sold a Nov16th $175 Put, bought a Nov16th $155 Put and received about $6.20 credit. I see that if I had bought another put say Nov16th 50 Put, which is basically worthless, instead of the 155 Put, then it would be effectively just like selling a 175 Put directly. I have not tried it this way, but I think it should be allowed as long as I have enough margin. so this might be a trick to get around the option level limitation and be able to sell put.

This thing does take a lot of margin though. For the $620 I received I think it reduced my margin by $2000, the max. possible loss from that trade. It would be much bigger margin reqirement if it was something like $50 put that I bought in that spread trade.

I see what your saying, does add to the broker fees though. I got more info on Scottrade, the transfer over into their "options first" account is the same process as moving to another broker so why bother, their fees are way higher. I'm going to look around and setup an alternate account so that when I can I will transfer over either my positions or cash.

 

[Mario Kadastik]

I have a questions when it comes to IV volatility and playing the TSLA Q3 ER. I have read posts on the forum about IV that sometimes it collapses the day after the ER and people usually sell their options the day before. What I am assuming is that this applies more to short term options rather than long term ones, is this so? The thing is that I want to keep holding on to the option at least one week after the ER and not be too suseptible to IV volatility.
Thanks

The closer to expiration the higher the IV collapse yes. Keep in mind that options prices are made up of mostly three components:

1. closeness to money. If the option is ITM, then that has a large component of the options price and also the movement with price is higher. If the option is OTM, then there's no money component.

2. time value. The further out the expiration, the bigger the time value. It's relatively simple to understand as the longer there is to expiration the more the stock can move in theory or has more time to get to the target price.

3. implied volatility. It basically means what kind of movement in the stock is expected. As an ER usually means a strong move based on the results, then the implied volatility goes up before earnings. After the earnings are announced and the stock makes its move (in after-hours and pre-market trade) there is no longer a huge move in planning and therefore the IV will drop significantly. If there is strong momentum still in the morning for the stock to keep moving, then there's a chance the IV is still highish in the first half-hour to an hour, but only if there is strong movement and it will not be as high as the day before.

So using this information you can piece together how the options prices will change with the ER. All options have an IV component and that will always spike pre-earnings and collapse post-earnings. Its impact however depends on where the options are strike wise. Deep ITM options will have little impact from the IV collapse because they have a high money component. Far out options (i.e. LEAPS etc) have small impact because they have high time value component. The biggest impact is on the weekly options of reporting week and the effect starts to drop the further out you go with the expiration dates.

Now remember, IV spikes because there is an implied move of the stock. If you have 210 calls and the IV spikes pre-earnings, then you have a few choices:

1. sell the call the evening of earnings release when the IV is at its maximum and net the profit from price movement + IV increase.
2. hedge your position by selling higher strike calls to cover your lower strike calls. If you acquired the lower strike calls at a discount during one of the tips, then it's likely you can set up a delayed construct that is risk free or close to it.
3. gamble that the stock moves enough to bring your options ITM thereby offsetting the IV drop (i.e. the precise reason IV spikes). However don't be surprised if your option is just worth the same or even less than the day before even though TSLA jumps from say $190 -> $215. The difference comes from the IV drop.

My plan is to probably do #2 and #3. The November options I'll hedge and the December, March options I'll run naked through the ER with the plan of catching as much upside as I can get from a possible run that may very well start only in late november once people have digested the ER and Elon's tweeted a bit

 

[Larken]

When does your option expire?

I have TSLA OctWk4 190 (Was expecting a rally after the politicians agreed)
Also have Nov13 195 - To play the ER
And Dec 220 - To play ER

The closer to expiration the higher the IV collapse yes. Keep in mind that options prices are made up of mostly three components:

1. closeness to money. If the option is ITM, then that has a large component of the options price and also the movement with price is higher. If the option is OTM, then there's no money component.

2. time value. The further out the expiration, the bigger the time value. It's relatively simple to understand as the longer there is to expiration the more the stock can move in theory or has more time to get to the target price.

3. implied volatility. It basically means what kind of movement in the stock is expected. As an ER usually means a strong move based on the results, then the implied volatility goes up before earnings. After the earnings are announced and the stock makes its move (in after-hours and pre-market trade) there is no longer a huge move in planning and therefore the IV will drop significantly. If there is strong momentum still in the morning for the stock to keep moving, then there's a chance the IV is still highish in the first half-hour to an hour, but only if there is strong movement and it will not be as high as the day before.

So using this information you can piece together how the options prices will change with the ER. All options have an IV component and that will always spike pre-earnings and collapse post-earnings. Its impact however depends on where the options are strike wise. Deep ITM options will have little impact from the IV collapse because they have a high money component. Far out options (i.e. LEAPS etc) have small impact because they have high time value component. The biggest impact is on the weekly options of reporting week and the effect starts to drop the further out you go with the expiration dates.

Now remember, IV spikes because there is an implied move of the stock. If you have 210 calls and the IV spikes pre-earnings, then you have a few choices:

1. sell the call the evening of earnings release when the IV is at its maximum and net the profit from price movement + IV increase.
2. hedge your position by selling higher strike calls to cover your lower strike calls. If you acquired the lower strike calls at a discount during one of the tips, then it's likely you can set up a delayed construct that is risk free or close to it.
3. gamble that the stock moves enough to bring your options ITM thereby offsetting the IV drop (i.e. the precise reason IV spikes). However don't be surprised if your option is just worth the same or even less than the day before even though TSLA jumps from say $190 -> $215. The difference comes from the IV drop.

My plan is to probably do #2 and #3. The November options I'll hedge and the December, March options I'll run naked through the ER with the plan of catching as much upside as I can get from a possible run that may very well start only in late november once people have digested the ER and Elon's tweeted a bit

Thanks for your extensive answer Mario, it makes much more sense now :smile: So, if I have understood it right, to avoid being affected by IV fluctuations, I will roll my options to Jan or March and as close to ITM as possible. (I'm still too new to options to deal with short terms calls I have realized) Can I ask you, you said you will hedge your Nov and Dec ones but not the March one. What about Jan, is that to close to just have them run naked comfortably? I am trying to find a suitable option to run naked since I am not yet familiar with how to set up hedges properly.

 

[Mario Kadastik]

Thanks for your extensive answer Mario, it makes much more sense now :smile: So, if I have understood it right, to avoid being affected by IV fluctuations, I will roll my options to Jan or March and as close to ITM as possible. (I'm still too new to options to deal with short terms calls I have realized) Can I ask you, you said you will hedge your Nov and Dec ones but not the March one. What about Jan, is that to close to just have them run naked comfortably? I am trying to find a suitable option to run naked since I am not yet familiar with how to set up hedges properly.

I actually mentioned that I will only hedge the November ones The December ones are ~6 weeks after ER so enough time value that the IV collapse will not be that huge and also I picked the Dec 180's up from the bottom of the fire crash at $168 So they're already about 60-70% in the profit and part of them (the $180's) are ITM meaning the impact is small. I do have December $190's as well, with those I'll probably run naked as well unless there's some serious run-up and the options spike high enough that it'll give ma a $215-230 range hedge with no risk. Then I'll take it as I'm running the $180's without hedge anyway.

So January should be very safe from the IV collapse. However picking up the January ones will be tough, we did have some consolidation last week in the lower $180s so the IV wasn't too extreme, but I think it was still around 60-70% which is high already and I can only see it rising now towards the earnings reaching ~150-200% the day of earnings. So rolling your options might be expensive. Out of the ones you have I'd probably keep the December 220's (though depends at what price you got them) and hedge the rest or indeed if you find a good strike point roll them over. The January options are not that much better than December ones as they capture only one more month of time without any significant events in there. My March $200 options are there for capturing both Q3 and Q4 ERs. Also I've started to pick up a long position in 2015 January options with a $190 call (it's quite expensive, but I seriously think Tesla will be north of $230 in 2015 so it's not a bad investment in my mind).

Also, never underestimate sudden positive moves. If TSLA break $200 pre-earnings you might be well in a good position to also hedge the December ones for risk-free call spreads with enough strike difference to be well worth it. Never try to catch the maximum win as that's a tough one to do. If you can lock in a 50+% profit option, then why not take it especially if you can run it risk free.

 

[Larken]

I actually mentioned that I will only hedge the November ones The December ones are ~6 weeks after ER so enough time value that the IV collapse will not be that huge and also I picked the Dec 180's up from the bottom of the fire crash at $168 So they're already about 60-70% in the profit and part of them (the $180's) are ITM meaning the impact is small. I do have December $190's as well, with those I'll probably run naked as well unless there's some serious run-up and the options spike high enough that it'll give ma a $215-230 range hedge with no risk. Then I'll take it as I'm running the $180's without hedge anyway.

So January should be very safe from the IV collapse. However picking up the January ones will be tough, we did have some consolidation last week in the lower $180s so the IV wasn't too extreme, but I think it was still around 60-70% which is high already and I can only see it rising now towards the earnings reaching ~150-200% the day of earnings. So rolling your options might be expensive. Out of the ones you have I'd probably keep the December 220's (though depends at what price you got them) and hedge the rest or indeed if you find a good strike point roll them over. The January options are not that much better than December ones as they capture only one more month of time without any significant events in there. My March $200 options are there for capturing both Q3 and Q4 ERs. Also I've started to pick up a long position in 2015 January options with a $190 call (it's quite expensive, but I seriously think Tesla will be north of $230 in 2015 so it's not a bad investment in my mind).

Also, never underestimate sudden positive moves. If TSLA break $200 pre-earnings you might be well in a good position to also hedge the December ones for risk-free call spreads with enough strike difference to be well worth it. Never try to catch the maximum win as that's a tough one to do. If you can lock in a 50+% profit option, then why not take it especially if you can run it risk free.

Alright, thanks Mario. I got the Dec220 ones at 9.65 and am down roughly 30% on them already, but I'm thinking of holding onto them in anticipation of a blowout Q3. The rest I will roll into March and as close to ITM as possible. I like your strategy with the March options and Jan15 also.

 

[Mario Kadastik]

Alright, thanks Mario. I got the Dec220 ones at 9.65 and am down roughly 30% on them already, but I'm thinking of holding onto them in anticipation of a blowout Q3. The rest I will roll into March and as close to ITM as possible. I like your strategy with the March options and Jan15 also.

You have to be careful though with those Dec 220's. If Tesla doesn't start going up in anticipation the 220's will lose quite a lot in time value and that time value loss might be bigger than IV loss. If your trading platform has a way to see greeks, then you can try to assess how the moves are going to happen as vega shows how the options price increases/decreases with change in IV, theta shows the time decay per day. It's non trivial to assess like this, but you can try to use tools like Option Price Calculator to see how the pricing might change in varying conditions. Remember your current break-even is ~$230, that's 25% above current market price meaning that it's quite some ways OTM and will time decay relatively fast, which will only be compensated if TSLA starts moving up and IV continues to climb.

 

[Larken]

You have to be careful though with those Dec 220's. If Tesla doesn't start going up in anticipation the 220's will lose quite a lot in time value and that time value loss might be bigger than IV loss. If your trading platform has a way to see greeks, then you can try to assess how the moves are going to happen as vega shows how the options price increases/decreases with change in IV, theta shows the time decay per day. It's non trivial to assess like this, but you can try to use tools like Option Price Calculator to see how the pricing might change in varying conditions. Remember your current break-even is ~$230, that's 25% above current market price meaning that it's quite some ways OTM and will time decay relatively fast, which will only be compensated if TSLA starts moving up and IV continues to climb.

Yes, you are right, thanks for pointing that out. I will contemplate how to reposition myself for the Q3.

 

[ckessel]

The rules on wash sales and options seem a bit impenetrable to me. I've sold stock, bought LEAPS, bought puts, bought and closed various options, all in TSLA. Near as I can tell, must of that qualifies as a wash sale.

Do folks that do significant trading simply hire CPAs at tax time?