In general, all of them- the nearer expire will come down the highest percentage; the LEAPS will come down the lowest percentage. The same is true when they increase coming into volatile trading periods. They can all be variable, so this is just meant as a guideline. You should be able to list the IV as a parameter in your trading tool and it's always good to take a look so you get a feel for what constitutes high and low
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Newbie Options Trading
- Thread starter Jonathan Hewitt
- Start date
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- investing options TSLA tsla stock
In general, all of them- the nearer expire will come down the highest percentage; the LEAPS will come down the lowest percentage. The same is true when they increase coming into volatile trading periods. They can all be variable, so this is just meant as a guideline. You should be able to list the IV as a parameter in your trading tool and it's always good to take a look so you get a feel for what constitutes high and low
pz1975
Active Member
I don't know exactly at what proportion IV goes down wrt expiry date, but definitely anything expiring over the next few weeks will lose a lot of IV right away. Once you get into June and onward, there will be some IV drop but it lessens the further out you go. Some people "play" ER's using options 1-2 months out for this reason.
Thanks guys, these options are so addictive
My problem is that I can watch live movements only during my REM sleep phase, but the fun of it is worth the sacrifice. :wink:
If I interpret that correctly, it seems that the risk of holding short term options over ER period is too risky, especially for someone like me with limited experience.
mershaw2001
I'm short the short sellers
Create spreads to decrease the loss to IV and Time decay. If you're buying at-the-money, sell off 10-20 dollars out of the money and you get a cheaper option, tho with limited upside.
pz1975
Active Member
It depends on what your expectations are. If you are very confident that TSLA will go up significantly post-ER, then holding naked calls is your best bet as you will get the most upside. However, it is also the riskiest as you are likely to lose most/all of your investment if it goes, down, stays the same, or only goes up a smaller amount. For example, I bought 3 slightly OTM (5% higher than stock price) weekly calls for the recent FB ER as I thought it would do well. I was correct, they beat estimates, the stock went up, but because it 'only' went up 3-5% the next day, I ended up having to trade my calls in at a 25% loss because of IV loss.
I agree that creating spreads is a good idea to minimize the risk. As I said before, one could also buy options further out that won't lose time decay as fast and the IV drop will be lessened (they are also more expensive though and the upside is less of course).
I am far from confident in my guessing ability which way stock will go short term. I do expect upside long term and have shares and some leaps.
Options play is a learning exercise for me at the moment, so I am ready to lose these plays. Overall plan with the options is to have at least some level of skill to be ready for the big trade when the opportunity presents itself.
My certainty about the stock move was quite high same time last year, but I did not have options account at the time, and that was missed opportunity. I did buy a lot of stock so that is some consolation prize.:wink:
sub
Active Member
I always tell myself i'm going to do some options plays around ER, I then see the price of the options and decide against it. I ended up selling some OTM calls instead to take advantage of the high premiums. TSLA would need to rise 15% at this point for this move to backfire and even if it does I assume there will be profit taking and an opportunity to buy my shares back cheaper. If I were to play the other side I would do spreads, less upside but you can make money on a much smaller move. I only hold a core position of TSLA shares at this time, I think we will see a 5-10% move one way or the other after ER.
I can really relate to that feeling. Was there myself. I took it in 3 phases. The first phase stuck with stock as a 'pretend' phase. I would decide what to do (buy a call etc.), note the price (but actually only buy or sell some stock). Then follow that pretend options trade to see how it would've worked out. 2nd phase was to actually do the trades, but stuck with VERY small, almost nonsense amounts, like 1 contract. Very inefficient commission wise but part of the tuition cost for the self taught class. I'd do this on both LEAPS and very short term trades. The losses were almost insignificant but my competitive nature still made it lesson worthy experience. Phase 3 hen moved into real investment amount but started with longer term. Eventually I found my comfort was using LEAPS as a stock replacement position tool with occasional small plays in shorter term.
Bringing it home, this particular ER is nearly impossible to reconcile. Sticking with my LEAPS for stock at a minimum position with a healthy cash position to step in on pullback. From that position I really don't care which way it moves. I would like my current string position to gain, but I would like to apply cash to create a stringer position. Take what the market gives you and remember what price you'll trade at 5 years hence and enjoy the ride (just as if you owned a ModS!).
Luck to all fellow TCM investors
Thanks for sharing your experience kenliles. I follow your posts on leaps and plan to try out your leaps roll strategy on my leaps.
IB has paper trading function, but I lack patience and discipline for such learning. On my very first option trade I did 40 contracts and that turned against me. I did not loose money but I did loose sleep. It was so bad that when I was trying to buy some contracts back, I pressed the wrong button and sold more instead of buying them back. Then I did not have enough money to buy them all back, so I rolled them out. :redface: I am glad that trade turned the way it did as it taught me a valuable lesson. Now I am doing 1 to 5 contracts, depending what it is.
IB has paper trading function, but I lack patience and discipline for such learning. On my very first option trade I did 40 contracts and that turned against me. I did not loose money but I did loose sleep. It was so bad that when I was trying to buy some contracts back, I pressed the wrong button and sold more instead of buying them back. Then I did not have enough money to buy them all back, so I rolled them out. :redface: I am glad that trade turned the way it did as it taught me a valuable lesson. Now I am doing 1 to 5 contracts, depending what it is.
Ha! Perhaps not many would admit to making a similar button push mistake, but most all have done it in one form or other. More than once in my case. Which now makes me read the trade validation detail before executing.
On LEAPS: Start small with a stock backup to get a feel for the behavior. For the LEAPS-for-stock-roll, 2 easy rules dominate: 1) don't over leverage- use net Delta to guide investment risk rather than pure dollars, and 2) NEVER go to expiration, even at a loss (recession caused or otherwise) protect the position with a roll out 3+ months from expiration; use it as a tool to hold a position rather than provide just more bull for the money. On a long growth stock like Tesla, I think you'll be pleased with the result. Done properly, it can afford a lower risk, with higher return and fits well with many portfolios, but it does take some discipline. Even in this downturn, it's ahead of an equivalent (by Delta) stock position. Rise or fall next 48 hours, I'm looking forward to tomorrow! Big day as a holder of TSLA, JASO, GTAT, and some SCTY. Best of luck to all !
pz1975
Active Member
To add to the discussion of IV changes pre- and post-ER, I just looked up the current IV (day of ER after close) for ATM (200) calls between this week and Jan2016.
Time to expiry - IV
2 days (May 9) - 1.69
1 week (May 17) - 0.90
2 weeks (May 23) - 0.84
3 weeks (May 30) - 0.73
6 weeks (Jun21) - 0.61
4 months (Sept20) - 0.53
8 months (Jan2015) - 0.50
1 year,8 months (Jan2016) - 0.47
I will do this again post-ER tomorrow or Friday and compare the relative IV changes pre- and post-ER.
Time to expiry - IV
2 days (May 9) - 1.69
1 week (May 17) - 0.90
2 weeks (May 23) - 0.84
3 weeks (May 30) - 0.73
6 weeks (Jun21) - 0.61
4 months (Sept20) - 0.53
8 months (Jan2015) - 0.50
1 year,8 months (Jan2016) - 0.47
I will do this again post-ER tomorrow or Friday and compare the relative IV changes pre- and post-ER.
^^^
I haven't had time participate here much anymore (nor many other forums much :/) but for many stocks, esp. ones w/high IV to begin with, there's usually an IV run-up on the front month options that expire after an earnings event and an IV crush following it.
I've lived this before as I unsuccessfully tried a strat from a paid options forum where one would usually buy near dated strangles or straddles on certain stocks to take advantage of the IV increase. You were hoping this would be enough to counteract the negative theta. And, you'd almost always close out your position before the earnings event, win or lose.
Holding it thru earnings was a total lottery ticket. In most cases, you'd lose your shirt due to the IV crush. In a few cases, if the move was much bigger than expected, it could == huge profits.
I haven't had time participate here much anymore (nor many other forums much :/) but for many stocks, esp. ones w/high IV to begin with, there's usually an IV run-up on the front month options that expire after an earnings event and an IV crush following it.
I've lived this before as I unsuccessfully tried a strat from a paid options forum where one would usually buy near dated strangles or straddles on certain stocks to take advantage of the IV increase. You were hoping this would be enough to counteract the negative theta. And, you'd almost always close out your position before the earnings event, win or lose.
Holding it thru earnings was a total lottery ticket. In most cases, you'd lose your shirt due to the IV crush. In a few cases, if the move was much bigger than expected, it could == huge profits.
I read few books on options trading. Authors confirm your claim regarding selling options. Many traders buy puts as insurance, but rarely exercise them. Selling puts is akin to selling insurance, it is lucrative business. Some authors also claim arbitrage opportunity due to the fact that option prices do not reflect the expected long term growth rates of the underlying securities. Inflation is also not taken into account. The standard option pricing formulas do not incorporate these variables. By not taking into account the inflation and the growth prospect of the underlying security, the level of risk of a put option winding up in the money appears to be larger. This leads to overvalued premiums for long term put options.
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The Blue Owl
Endangerous Herbivore
I have a question about TSLA in the near term.
Normally, selling covered calls isn't such a good idea with TSLA, due to its penchant of making large, sudden moves upwards. However, for the next 2 to 3 months, there are no known catalysts on the horizon. With this in mind, one could regularly sell covered calls expiring one week out, say $10-15 OTM, against a core TSLA position, and buy more shares with the proceeds. Repeat every week. The idea would be to keep accumulating shares, on the assumption that large upward moves are not in the cards for the next 2-3 months (not an unreasonable assumption, I think). Even if TSLA keeps going down much lower from here (which I'm highly doubtful of, unless the macro weather worsens), shares would keep accumulating, which would be the point.
If a big move upwards does happen and the options end up in the money, well, you just buy back the shares at whatever $ and keep doing it, on the theory that it is more likely to end up with more shares after 3 months than if you simply held your initial core position.
Any thoughts?
Normally, selling covered calls isn't such a good idea with TSLA, due to its penchant of making large, sudden moves upwards. However, for the next 2 to 3 months, there are no known catalysts on the horizon. With this in mind, one could regularly sell covered calls expiring one week out, say $10-15 OTM, against a core TSLA position, and buy more shares with the proceeds. Repeat every week. The idea would be to keep accumulating shares, on the assumption that large upward moves are not in the cards for the next 2-3 months (not an unreasonable assumption, I think). Even if TSLA keeps going down much lower from here (which I'm highly doubtful of, unless the macro weather worsens), shares would keep accumulating, which would be the point.
If a big move upwards does happen and the options end up in the money, well, you just buy back the shares at whatever $ and keep doing it, on the theory that it is more likely to end up with more shares after 3 months than if you simply held your initial core position.
Any thoughts?
Posing a theory and executing on it are very different skills. Execution skill comes with practise. I like to think of trading as surfing, the best way to become good at it is to try and time the waves.
This comes from someone who is not good at either of these.
mershaw2001
I'm short the short sellers
In my experience doing this, i built up a very large position of shares covered by calls- then the bottom fell out. The stock had been moving up and hitting resistance and then falling back numerous times, and each time it did I would do as you say- but I would increase my exposure to the stock. Then when the bottom fell out and it had a -20% week, I was screwed. It didn't help I was on margin too.
The Blue Owl
Endangerous Herbivore
I don't use margin, and I don't mind if the stock falls further, as I said, since I plan to keep it until Elon takes off to Mars. I was curious if anyone has done this and with what results.
The biggest flaw I see in what I described is that TSLA probably hasn't lost its volatility, and it will continue to surprise us with +$15 moves when we expect it the least. Especially since, notwithstanding today's action, I am guessing we'll be driven by NASDAQ more than anything else for a while, because I'm assuming no news. And, many times in the past, +1.3% for NASDAQ meant +6% for TSLA. So, the risk I see is the risk that the shares run away from me faster than I can accumulate. But that will be a nice problem to have, because I'm still sitting on a pile of J15s which I'm not willing to let go of, so if TSLA spikes, I'm still happy. I'm giving it a try.
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True that. I may not be able to execute well (for instance by choosing bad strikes.) But I was curious if others thought it was a bad plan to begin with.
If one can stay cool headed when facing disaster and not knowing what is around the corner, then one might be able to execute very well on the theory. Cool headedness comes naturally after facing disaster and surviving many times. The trick is to survive.
I'm not sure there are any "secrets" per se, but I mostly sell options and I agree that it's a pretty consistent income source. However, it's small compared to what I've made on my few long-side trades. I suppose that's to be expected, though.
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