Newbie Options Trading

[Mario Kadastik]

For example, JKS Dec 21 for $27 has nothing yet today (most options for Dec 21st have little activity). The Google option chain lists a price, but Ameritrade is badly out of date, so maybe Google extrapolates?

So I looked what I see on IB. You didn't say call or put, but JKS Dec $27 call is 2.85-3.10 and put is 4.40 - 4.70. Ask sizes are ~1100-1400 and bids 120-450 contracts. It's not traded today, but the ask and bid are there and pretty solid too. Maybe you need a new platform.

 

[c041v]

I got adventurous with my tax-free account this morning and picked up;

5 x Call TSLA'13 25OC@175 for $0.58
1 x Call TSLA'13 16NV@170 for $13.52

It converts the transactions to Cdn funds so the actual price was a bit lower. The weeklies have nearly doubled so far, not sure if it's going to be worth it to hold them through tomorrow. This is strictly me thinking I can make something more of the excess cash in this account.

edit:

Sold the calls for $1.25. I don't normally play weeklies and there still might be some upside left to today and tomorrow (Maybe I just made a huge mistake) but I figured this was a good exit point.

 

[Ryo]

I got adventurous with my tax-free account this morning and picked up;

5 x Call TSLA'13 25OC@175 for $0.58
1 x Call TSLA'13 16NV@170 for $13.52

It converts the transactions to Cdn funds so the actual price was a bit lower. The weeklies have nearly doubled so far, not sure if it's going to be worth it to hold them through tomorrow. This is strictly me thinking I can make something more of the excess cash in this account.

edit:

Sold the calls for $1.25. I don't normally play weeklies and there still might be some upside left to today and tomorrow (Maybe I just made a huge mistake) but I figured this was a good exit point.

I don't think taking profits could ever be considered a 'huge mistake'. Some of the best trades I've made are the ones I've sold too early.
If it were me I would have been tempted to sell 3 of them and ride the remaining 2 options risk free.

Congrats on the trade.

 

[pz1975]

I've seen a lot of talk on here (not this thread) about "averaging down" call options. I'm hoping someone can explain this. From what I understand, it means converting higher-strike calls to lower-strike calls that are more likely to be ITM.

Let's say I have Nov16 220 strike calls that were bought for $3,000 and are now worth $2,000 (hypothetical). Does averaging down mean to sell them for $2,000 and then buy $2,000 worth of, say, 180 strike calls for Nov16?

Is the advantage of this play that the odds of them going up between now and expiration are higher?

Thanks.

 

[InTheShadows]

I've seen a lot of talk on here (not this thread) about "averaging down" call options. I'm hoping someone can explain this. From what I understand, it means converting higher-strike calls to lower-strike calls that are more likely to be ITM.

Let's say I have Nov16 220 strike calls that were bought for $3,000 and are now worth $2,000 (hypothetical). Does averaging down mean to sell them for $2,000 and then buy $2,000 worth of, say, 180 strike calls for Nov16?

Is the advantage of this play that the odds of them going up between now and expiration are higher?

Thanks.

Averaging down means taking a larger position by buying the same item at a lower price.

For example (theoretical numbers to make the math easy)

You bought 10 nov 16 220's for $3 each.

Now they are worth $2 like in your example. So you average down by buying 5 more contracts.

Original 10 contracts cost $3000 + 5 more contracts for $1000, now you have 15 contracts for an outlay of $4000, or $2.67, which is your new averaged down price. This also applies to common stock too. (Anything for that matter, could even be candy bars).

 

[mershaw2001]

Averaging down means taking a larger position by buying the same item at a lower price.

For example (theoretical numbers to make the math easy)

You bought 10 nov 16 220's for $3 each.

Now they are worth $2 like in your example. So you average down by buying 5 more contracts.

Original 10 contracts cost $3000 + 5 more contracts for $1000, now you have 15 contracts for an outlay of $4000, or $2.67, which is your new averaged down price. This also applies to common stock too. (Anything for that matter, could even be candy bars).

I just want to add that averaging down a stock can be good, but averaging an option down more than once is a bad time. If its not going your way, and you've averaged once, you prob misread the stock and the timing. You're better off going with a different strike, closer to the money or farther out in time

 

[gym7rjm]

Crazy last few weeks. I've been building up a position of Nov. 200's starting on 10/2 and averaging down on the dips. It has been quite a test on each dip to buy more and stick to my plan.

It is interesting how much psychology goes into trading. Every time the stock is riding high you wish you could have doubled up on those options that you bought earlier; you also say that you will be smart and take advantage of the dips. Then when the dips happen everyone starts talking doom and gloom and its easy to be scared.

On this previous dip over the last few days I forwent adding to my Nov. 200 position even though I was tempted to pull the trigger when they were in the low $3.00's. I started to question if all the recent bad events might keep the stock depressed and that the November options might be too tight for the recovery, even on an outstanding q3 release. Instead of averaging down, I purchased Nov. 170's because I was nearly certain we would recapture that price. Although we are not out of the water, I think there has been a lot of positive events (munich, London, ZEV) that will help the stock rally into earnings. I will sell the 170's pre-earnings and use the profits as a sort of hedge for my 200's that I will let ride. Obviously that plan depends on how the climate changes in the next week or so.

Hoping to see a good recovery tomorrow. Breaking back into the 180s would be a great start to a good pre-earnings rally.

- - - Updated - - -

I just want to add that averaging down a stock can be good, but averaging an option down more than once is a bad time. If its not going your way, and you've averaged once, you prob misread the stock and the timing. You're better off going with a different strike, closer to the money or farther out in time

Agree, averaging down is like doubling down when gambling. It's what gambling addicts do when they think they will be able to win their money back to break even, but then leave bankrupt.

Its something I don't do often, but the negative events over the last few weeks seemed like the best opportunity to start initiating a Q3 play. It was, however, difficult to predict the whirlwind of negative news items that would all hit at once on top of the US government issues. Averaging down seemed like the best play here.

 

[brianman]

Its something I don't do often, but the negative events over the last few weeks seemed like the best opportunity to start initiating a Q3 play. It was, however, difficult to predict the whirlwind of negative news items that would all hit at once on top of the US government issues. Averaging down seemed like the best play here.

Unless I'm misunderstanding your terminology, I did this 4 times this week (after an initial call purchase). I "sold to close" the 4 today (with the initial remaining active) for a net of ~28% profit. Sometimes it works out well.

 

[mershaw2001]

hi brian. I agree, sometimes it works well- with tesla. Rarely is there a stock that recovers 100 % of the loss it incurred the day before within 48 hours. I am all for averaging down- but I am trying to caution that you don't necessarily want to choose the same option contract when you double down. Sometimes a different contract might be more profitable or less risky, but still maintain your doubling-down on your bullish position.

 

[brianman]

but I am trying to caution

Yup. No worries. Carry on.

 

[Mario Kadastik]

With averaging down one has to stay disciplined. You should only keep doing it if the original underlying assumption hasn't changed. So for example if you start to aggregate your position for Q3 earnings play, then averaging down on dips in between original date and Q3 ER is probably a good idea. I usually start with smaller position than I had planned for the play and increase to my planned position on dips. I then always plan for a "margin" part where I can continue to use the dips to average down assuming the underlying plan hasn't changed, but those I only use to lower the average purchase price and as soon as the option moves above the new average I liquidate the excess options. Rinse and repeat. However this has to be rethought if the stock keeps dipping and the basic original strategy might start to falter (i.e. if we keep averaging $160-$170 range the Nov $190's might not be profitable post Q3 ER). Right now I have 6 Nov $190's averaged down to $8.8 with a sell order on 3 for $9.

I will see how the week closes and next week if the stock doesn't start trading higher I might roll them over to Dec $190's just to regain some time buffer.

So averaging down shouldn't be a hoping affair (I hope it goes back up so that I can get rid of them for no loss), but part of your strategy for a specific play that you originally devised. Every time I've played the hoping game I've come out worse than just closing at a loss. There have been a couple of rare occurrences where it did work and net a nice profit, but that's pure gambling. But for ER plays it's quite the standard. Also use it to pick up LEAPs when they're discounted.

 

[InTheShadows]

hi brian. I agree, sometimes it works well- with tesla. Rarely is there a stock that recovers 100 % of the loss it incurred the day before within 48 hours. I am all for averaging down- but I am trying to caution that you don't necessarily want to choose the same option contract when you double down. Sometimes a different contract might be more profitable or less risky, but still maintain your doubling-down on your bullish position.

Averaging down common shares is one thing, options are a whole different ball game.

For tsla common stock to go to 0 they have to bankrupt. For an option to expire worthless your timing and price target could be off by $.01.

When I first started options I could never understand why people would let them expire worthless. Now that I have done that a few times I understand it.

The value of a slightly otm option moves drastically on the few days prior to expiration. It moves so quickly in fact that at some point even putting in an order to try and sell it cheap won't get filled because no one wants it. Then soon after that it's pointless to close the position because of the fees are more than you would get.

See my post in the advanced options thread about my trade yesterday.

Advanced TSLA Options Trading - Page 33

I sold the option yesterday because I have learned my lesson with smaller test trades how fast things move. I probably could have held those options until today ( expiration day) and turned them into a 3-4 bagger if the price today does what I think it is going to do. It was not worth the risk though because of how unpredictable tsla has been lately and if I am wrong the profit would have quickly gone to 0.

However with half of what I made yesterday I am considering another risky trade today but it is further out so time decay isn't as much of an issue and I won't even have to watch the stock at all today.

For the more advanced options traders ( like cit-T, Kevin, and many others) there is going to be big money to be made (and lost) today if they choose to play the day trade.

 

[brianman]

I sold the option yesterday because I have learned my lesson with smaller test trades how fast things move. I probably could have held those options until today ( expiration day) and turned them into a 3-4 bagger if the price today does what I think it is going to do. It was not worth the risk though because of how unpredictable tsla has been lately and if I am wrong the profit would have quickly gone to 0.

However with half of what I made yesterday I am considering another risky trade today but it is further out so time decay isn't as much of an issue and I won't even have to watch the stock at all today.

Yup. I need at least 3-4 weeks out, or I get uncomfortable/itchy to make a move. Getting itchy leads to rash decisions. (For me at least.)

 

[Larken]

I am wondering about something when it comes to short term options. Let's say I think TSLA is going to keep climbing today and I want to gamble with some options that expire today. Sure, I know it's a pure gamble but nonetheless. Let's say I buy a TSLA call option right when market opens and I want to hold on to it for the better part of the whole trading day. Then, two hours before the closing of the market and subsequently the expiry of the option, I would like to sell it. Is there any liquidity in an option that will expire in two hours, are there any buyers so to speak? What should I know before entering such a trade (other than that I might loose money)? What happens if no one buys it?

Thanks

 

[Mario Kadastik]

I am wondering about something when it comes to short term options. Let's say I think TSLA is going to keep climbing today and I want to gamble with some options that expire today. Sure, I know it's a pure gamble but nonetheless. Let's say I buy a TSLA call option right when market opens and I want to hold on to it for the better part of the whole trading day. Then, two hours before the closing of the market and subsequently the expiry of the option, I would like to sell it. Is there any liquidity in an option that will expire in two hours, are there any buyers so to speak? What should I know before entering such a trade (other than that I might loose money)? What happens if no one buys it?

This is very risky and volatile as the final day is basically the option following the stock VERY closely. This creates really nice opportunities, but it also can kill you very fast

Now for Tesla liquidity is not an issue unless you take far OTM calls and it's obvious it's not going to make it there an hour or two before the day close (i.e. TSLA dropped to $160 with your call at $180). My recommendation is take the first OTM strike, not further. For your first attempt I'd even recommend the first ITM strike (i.e. ATM). So today I'd recommend buying the $175 calls (closed around $1.6 last night, likely up $2-$3 today at open). Or if TSLA is pre-market approaching $180, then take that.

 

[Larken]

This is very risky and volatile as the final day is basically the option following the stock VERY closely. This creates really nice opportunities, but it also can kill you very fast

Now for Tesla liquidity is not an issue unless you take far OTM calls and it's obvious it's not going to make it there an hour or two before the day close (i.e. TSLA dropped to $160 with your call at $180). My recommendation is take the first OTM strike, not further. For your first attempt I'd even recommend the first ITM strike (i.e. ATM). So today I'd recommend buying the $175 calls (closed around $1.6 last night, likely up $2-$3 today at open). Or if TSLA is pre-market approaching $180, then take that.

Alright, thanks Mario. What about the possibility of selling it? I mean, how many hours before market close is advisable to exit your position before buyers really start to dissapear, just in general. Are there people still buying that option 10 minutes before market closes? And also, what happens if no one buys the option? Will I have the right to purchase the underlying asset (if it's cheaper than the stock spot price)?

 

[Mario Kadastik]

Sorry, was away most of the day. On liquid stocks like TSLA you can trade until the last second. But only ITM options, if they are OTM then good luck finding buyers, but they'd not be worth anything anyway. If the stock finishes at a price that puts your option in the money, then it will automatically be exercised. If you held a long call then you're assigned shares, if you held put then you sell shares. If you want to opt out you have to sell the contract before close (and there will be plenty of buyers to close out their short contracts to avoid dealing with shares). If you forgot and it did indeed end up ITM, then you can do the opposite transaction (i.e. if you held a call, sell the shares after hours even if you don't have them). But wether this needs special levels you need to check...

 

[Larken]

Sorry, was away most of the day. On liquid stocks like TSLA you can trade until the last second. But only ITM options, if they are OTM then good luck finding buyers, but they'd not be worth anything anyway. If the stock finishes at a price that puts your option in the money, then it will automatically be exercised. If you held a long call then you're assigned shares, if you held put then you sell shares. If you want to opt out you have to sell the contract before close (and there will be plenty of buyers to close out their short contracts to avoid dealing with shares). If you forgot and it did indeed end up ITM, then you can do the opposite transaction (i.e. if you held a call, sell the shares after hours even if you don't have them). But wether this needs special levels you need to check...

Yesterday was an interesting experience in trading short term options, and even though my options expired worthless I am glad I did the trade because I learned quite a bit. There will be more opportunities :smile:. Thanks for supporting newbies like myself Mario. Have a nice weekend!

 

[wishing_for_S]

I bought my first calls for Nov 16 to take advantage of the uptick I see from the Q3 ER. Any advice on how to play them? Because of the increase in IV before the ER I am considering selling them (if prices go up) immediately before the ER, but I can see the price going up more afterwards. Any thoughts? I am completely new to this so I defer to the more experienced.

 

[Mario Kadastik]

I bought my first calls for Nov 16 to take advantage of the uptick I see from the Q3 ER. Any advice on how to play them? Because of the increase in IV before the ER I am considering selling them (if prices go up) immediately before the ER, but I can see the price going up more afterwards. Any thoughts? I am completely new to this so I defer to the more experienced.

Well depending on how much the price goes up (if it does at all) you have basically two possibilities:

1) sell them on day of ER (i.e. Nov 5th) for profit
2) hedge them by selling higher strike calls at about the price you paid for your initial calls.

The second strategy is creation of a delayed construct call spread and if done well can give you a risk free exposure to maximally the price difference between the strikes x100.

Example:

You bought Nov $190 for $6. Let's assume the price does move up a bit and the IV also increases so that your call is worth $9 on the day of the earnings so you could net $300 per contract by just selling them. However if for example the $200 strike calls are trading around $6 at the time you could instead sell those (same amount as you had the $190 calls). Now you are risk free (you got your initial investment back) yet can have exposure up to $1000 if TSLA moves beyond $200 by Nov 16th. The downside of this play is that if TSLA drops or doesn't exceed $190 by expiration then you get no profit, but you also risk nothing.

But don't be surprised if TSLA doesn't actually move up enough to sell for profit or create a delayed spread, we seem to be in a tight converging channel up until Nov 5th so we might see mostly sideways movement that will reduce your calls value that may or may not be compensated by increasing IV. So you may well have to decide on day of ER if you want to ride the earnings with your calls or close them for possible loss.