Newbie Options Trading

[Mario Kadastik]

The issue with stops at market open is that the bid-ask bracket is very likely to be huge and therefore if one edge triggers your order the difference from there to the other edge may well be 10-20% or more of the option price.

 

[pahar103]

Hi guys, I just got approved for options trading.
Question:
Is there a rational to not get a call option at a high premium but in the money, if the total price (strike+premium) is almost the same as the stock price? Ex. Strike of 3.50, premium 2$ and stock trades at 5.40...
To me, this seems like a good deal cuz it means I have 6 months to exercise this, and if the price goes up by 10 cents, I m making $$.
Am I missing something?

 

[Mario Kadastik]

What stock and option had such a price? Six month time value should be more, at that price indeed you are paying $200 instead of $540, get the same upside dollar value, but risk is limited. I'd go for it as well

 

[pahar103]

RAD had a call with strike of 3.50, premium 2$ and the stock trades at 5.28 right now, exp July 2014.
What r the downsides/upside of getting this option vs lets say an option with 4$ strike, and 1.50 premium with same exp?
I wonder why such low time value for an ITM call?

 

[Mario Kadastik]

Well I just used an options price calculator and indeed it's in fact a reasonable price for an IV of 57%. I guess the stock isn't too volatile then because it does look like a good value instead of buying the stock. You are only paying a 3.8% premium if the stock moves sideways and it gets exercised at the same value yet at the same time get better delta for dollar value.

 

[pahar103]

Well I just used an options price calculator and indeed it's in fact a reasonable price for an IV of 57%. I guess the stock isn't too volatile then because it does look like a good value instead of buying the stock. You are only paying a 3.8% premium if the stock moves sideways and it gets exercised at the same value yet at the same time get better delta for dollar value.

Yes, seems like a good value compared to the stock.
I guess, my question is why should I choose an option with high premium and in the money strike price, vs low premium and out the money strike, if the total value is the same?
Ex. Premium 2$ strike 3.50 = 5.50 total price, vs premium 0.50 + strike 5 = 5.50 total price.
Just a hypothetical situation....

Thanks

 

[Jonathan Hewitt]

Yes, seems like a good value compared to the stock.
I guess, my question is why should I choose an option with high premium and in the money strike price, vs low premium and out the money strike, if the total value is the same?
Ex. Premium 2$ strike 3.50 = 5.50 total price, vs premium 0.50 + strike 5 = 5.50 total price.
Just a hypothetical situation....

Thanks

The one that is out of the money could give you a greater % return off of your investment. More risky, but possibly more rewarding.

 

[InTheShadows]

Yes, seems like a good value compared to the stock.
I guess, my question is why should I choose an option with high premium and in the money strike price, vs low premium and out the money strike, if the total value is the same?
Ex. Premium 2$ strike 3.50 = 5.50 total price, vs premium 0.50 + strike 5 = 5.50 total price.
Just a hypothetical situation....

Thanks

If the stock doesn't move towards your strike price it will loose value as time goes on. The other thing you need to look at is open interest which determines how liquid the options are. Which may be a reason the option is so cheap. (I didn't look at your stock pick. )

 

[Mario Kadastik]

If the stock doesn't move towards your strike price it will loose value as time goes on. The other thing you need to look at is open interest which determines how liquid the options are. Which may be a reason the option is so cheap. (I didn't look at your stock pick. )

In this case that he highlighted the time value was almost non existent. So $2 for $3.5 strike and $0.5 for $5 strike are 100% equivalent in absolute time value yet the $0.5 provides all the upside with 4x smaller downside. Yes if the stock remains at $5.3, then in one case you lose 40% of the value, in the other you lose 10% of the value, but to get the same delta exposure you probably invested 3-4x less money in the first place so in absolute terms the loss might not be different. If you invest the same dollar amount, then yes the $0.5 is riskier, but you get far bigger delta exposure to go with it. So the strategy has to be adjusted based on your risk tolerance. Do you want 3-4x higher delta exposure and hence upside potential for the risk of 3-4x bigger loss if the stock moves sideways or down. If you do delta equivalent investing, then the $0.5 option at $5 strike is by far the better one as your maximum risk is smaller.

 

[pahar103]

In this case that he highlighted the time value was almost non existent. So $2 for $3.5 strike and $0.5 for $5 strike are 100% equivalent in absolute time value yet the $0.5 provides all the upside with 4x smaller downside. Yes if the stock remains at $5.3, then in one case you lose 40% of the value, in the other you lose 10% of the value, but to get the same delta exposure you probably invested 3-4x less money in the first place so in absolute terms the loss might not be different. If you invest the same dollar amount, then yes the $0.5 is riskier, but you get far bigger delta exposure to go with it. So the strategy has to be adjusted based on your risk tolerance. Do you want 3-4x higher delta exposure and hence upside potential for the risk of 3-4x bigger loss if the stock moves sideways or down. If you do delta equivalent investing, then the $0.5 option at $5 strike is by far the better one as your maximum risk is smaller.

Yes, I get more buying power since it's all mainly time value here. I am long on RAD and I want to get more stocks but capital restrained so getting these options seems like a great value to me.
I bought a couple of July, 14s.

 

[Mario Kadastik]

Yes, I get more buying power since it's all mainly time value here. I am long on RAD and I want to get more stocks but capital restrained so getting these options seems like a great value to me.
I bought a couple of July, 14s.

I'm assuming July, 14s means July 2014 options And not with a strike price of $14, that might be a tad bit optimistic

 

[pahar103]

I'm assuming July, 14s means July 2014 options And not with a strike price of $14, that might be a tad bit optimistic

Haha, yes, July 2014, ITM strike of 3.50$, 2.15$ premium.
If I choose to exercise them to own the stocks and later decide to sell the stocks- are taxes calculated at profits starting from 3.50$ or premium is subtracted from net gain?

 

[Mario Kadastik]

Haha, yes, July 2014, ITM strike of 3.50$, 2.15$ premium.
If I choose to exercise them to own the stocks and later decide to sell the stocks- are taxes calculated at profits starting from 3.50$ or premium is subtracted from net gain?

That's for someone in US to answer as you have crazy tax laws. Here it's simple. The money you put into investment account is considered deposit and what you take out is withdrawal. If the withdrawals exceed deposits you pay tax on the excess amount. No questions on timing or what not, as simple as that.

 

[chillong]

over here its even simpler: you only pay taxes on dividends

 

[surfside]

anyone else have march 2014 180 options "left over" from the q3 earnings bloodbath? up 98% today -- amazing to see how much deep OTM options can move in conjunction with a big day like today.

surfside

 

[Mario Kadastik]

anyone else have march 2014 180 options "left over" from the q3 earnings bloodbath? up 98% today -- amazing to see how much deep OTM options can move in conjunction with a big day like today.

surfside

*raises hand*

 

[CyberDutchie]

anyone else have march 2014 180 options "left over" from the q3 earnings bloodbath? up 98% today -- amazing to see how much deep OTM options can move in conjunction with a big day like today.

surfside

Oh, you have plenty of time left on those!

I still have my Dec 21 '13 160, up over 700% yesterday! Already written off as a loss. However, they may come back in play ... My average premium paid for those is $21 (bought them first before ER at $34 and been averaging down after ER till I figured a complete loss and didn't want to pour more money in it to salvage).

Now the question is one of timing, with about two weeks to go. Right now I get ten cents on the dollar (current bid is $2.1). If they move ITM before Dec 21, I recover whatever amount above $160. If at $181, I recover all my money, and above that I even make a profit (wishful thinking).

Decisions, decisions ... I will hold them for now.

 

[Mario Kadastik]

Oh, you have plenty of time left on those!

I still have my Dec 21 '13 160, up over 700% yesterday! Already written off as a loss. However, they may come back in play ... My average premium paid for those is $21 (bought them first before ER at $34 and been averaging down after ER till I figured a complete loss and didn't want to pour more money in it to salvage).

Now the question is one of timing, with about two weeks to go. Right now I get ten cents on the dollar (current bid is $2.1). If they move ITM before Dec 21, I recover whatever amount above $160. If at $181, I recover all my money, and above that I even make a profit (wishful thinking).

Decisions, decisions ... I will hold them for now.

I think I still have some December $175 left as well though I exited most of them at $4.3 taking a loss. But there's a minor minor chance that they'll still go up a few bucks. The march ones I left because I knew that'd not be a problem necessarily as it catches also Q4 results. January 2015 ones I've moved to a lower strike and those are now far in the plus (not quite recouped the full initial cost of my Jan '15 original bet).

 

[ckessel]

How can you get a list of the last X trades on a stock? I went to set up a sell for some of my CSIQ in Ameritrade and it defaulted to the last bid which is waaay below the close. Either it's an anomaly or the stock has something catastrophic happen after closing.

 

[sleepyhead]

How can you get a list of the last X trades on a stock? I went to set up a sell for some of my CSIQ in Ameritrade and it defaulted to the last bid which is waaay below the close. Either it's an anomaly or the stock has something catastrophic happen after closing.

If a stock closes at $30 at market closed, the bid/ask spread might have been $29.98/$30.02.

But afterhours is a completely different story. As soon as the market closes at 4pm EST. Afterhours bid/ask widens a lot because of lack of liquidity. Solar stocks have virtually no liquidity in afterhours. Some days are better than others, but on Friday afternoon nobody cares anymore about trading solar stocks in afterhours.

You did not mention what the bid was, and whether you sold or what happened. But going back to my example in afterhours bid/ask might be $11.00/$60.00. Or it could have been $11.00/$30.01. All this means is that nobody is buying in AH. If the bid/ask for CSIQ was $24.00/$25.00 when it closed above $27 then I would be worried. But you did not mention what the ask was. I am sure that the ask was at or above closing price.

Nothing alarming here at all.