Newbie Options Trading

[mibaro2]

When do you cut your loses with options.
Just wondering what strategies you use to decide that it is time to get out of a losing option. Is is when the option has lost a certain %, or when it is close to expiration?
I figure everyone will be different with what % they are willing to lose. So I'm more focused on the time to expiration.
When would you start selling Jan15 for a loss...a month before expiration...2 weeks? Or did you dump it as soon as the stock downturn dipped below $275 hoping to buy it back cheaper and recoup some of your loss.

 

[Chickenlittle]

When do you cut your loses with options.
Just wondering what strategies you use to decide that it is time to get out of a losing option. Is is when the option has lost a certain %, or when it is close to expiration?
I figure everyone will be different with what % they are willing to lose. So I'm more focused on the time to expiration.
When would you start selling Jan15 for a loss...a month before expiration...2 weeks? Or did you dump it as soon as the stock downturn dipped below $275 hoping to buy it back cheaper and recoup some of your loss.

Your question is like asking your exit strategy after invading an Asian country. Should have clear cut strategy before investing whether options or stock

 

[mibaro2]

I agree.
Was just looking to compare exit strategies. But I now think there are probably too many factors at play to compare exit strategies . Too many variables.

 

[chickensevil]

I personally have done different things across different options. Some I am willing to lose the whole value, some I am not, it depends on how much money I stake and what the odds are that we will hit that value with the time remaining.

If you ever hit a point where you don't think the option will ever hit your strike price that should likely be an indicator to sell, especially if you can still salvage some money from the position. Time is NEVER on your side with a losing position. The longer you wait the worse it will be.

 

[Blip]

You probably know about GTAT and the Chapter 11 Filing... Anyways, I had a question over in the contrarian forum, but did not get any good response. My question is just a simple one: Is it possible to make some money by selling call options (and buying some higher strikes for protection) to create a bear - spread on GTAT ? It looks possible, but I am not sure how it would work out in the current situation... It seems "to easy" to speculate that stocks and options eventually goes to 0.00 in near future, but currently I can cash in 40-50 dollars by selling a Dec14 1/4 call spread (and possibly loose $260 if the stock clinbs to $4).
Edit: changed bull to bear.

 

[Johan]

You probably know about GTAT and the Chapter 11 Filing... Anyways, I had a question over in the contrarian forum, but did not get any good response. My question is just a simple one: Is it possible to make some money by selling call options (and buying some higher strikes for protection) to create a bull - spread on GTAT ? It looks possible, but I am not sure how it would work out in the current situation... It seems "to easy" to speculate that stocks and options eventually goes to 0.00 in near future, but currently I can cash in 40-50 dollars by selling a Dec14 1/4 call spread (and possibly loose $260 if the stock clinbs to $4).

Basically you're describing a way to short what has turned in to a kind of penny stock. If it was certain it was going to 0 why would it trade up 100% today? I'm not disagreeing with your assesment just saying there is risk/reward with anything and what you're talking about might turn out being "picking up pennies in front of a steamroller". For all we know the filing may be BS to shake out a lot of people and let people in the know quietly accumulate stock. Just sayin' I wouldn't touch this stock right now in any way.

 

[ggr]

You probably know about GTAT and the Chapter 11 Filing... Anyways, I had a question over in the contrarian forum, but did not get any good response. My question is just a simple one: Is it possible to make some money by selling call options (and buying some higher strikes for protection) to create a bull - spread on GTAT ? It looks possible, but I am not sure how it would work out in the current situation... It seems "to easy" to speculate that stocks and options eventually goes to 0.00 in near future, but currently I can cash in 40-50 dollars by selling a Dec14 1/4 call spread (and possibly loose $260 if the stock clinbs to $4).

Sorry, "bull spread" implies that there are bulls. At this point (for GTAT) there are bears, and there are speculators, there are no bulls. If you want to be bullish, Apple might pick up assets at bargain basement prices and hence might profit; but it's still a blip for AAPL.

 

[Blip]

Changed bull to bear... My mistake. :$

 

[kalikgod]

I am making my first TSLA transaction in over a year, since the BoA "upgrade" to $73 PT last summer.

I am going to roll some of my TSLA stock into TSLA call options. I sold off the portion of my long TSLA today and will be placing the options contracts next week when the money clears.

Since I only invest in TSLA in the longer timeframes, I am looking at the Jan 16 call options. Any advice on strike prices. I am thinking ~$250 range. I plan to sell the options back for stock if/when TSLA makes another run.

This is very similar to how DaveT describes his strategy. I had very similar thoughts before reading Dave's megaposts, so I do owe him gratitude for pushing me into action.

But I am also considering taking a very small put hedge right before the earnings report. Something near term that will get sold after the earnings no matter what, maybe Nov 22nd options $200 strike, assuming we are at similar prices just before earnings.

Any thoughts from more seasoned options traders would be welcomed.

 

[chickensevil]

I am making my first TSLA transaction in over a year, since the BoA "upgrade" to $73 PT last summer.

I am going to roll some of my TSLA stock into TSLA call options. I sold off the portion of my long TSLA today and will be placing the options contracts next week when the money clears.

Since I only invest in TSLA in the longer timeframes, I am looking at the Jan 16 call options. Any advice on strike prices. I am thinking ~$250 range. I plan to sell the options back for stock if/when TSLA makes another run.

This is very similar to how DaveT describes his strategy. I had very similar thoughts before reading Dave's megaposts, so I do owe him gratitude for pushing me into action.

But I am also considering taking a very small put hedge right before the earnings report. Something near term that will get sold after the earnings no matter what, maybe Nov 22nd options $200 strike, assuming we are at similar prices just before earnings.

Any thoughts from more seasoned options traders would be welcomed.

I think most people would suggest that we should be safely into the 260-280 range by this January, but it really depends on a bunch of factors that could drive the price. If you really want to be safe go for the March options since we will have the Q1 results out by then which are sure to be a blow out (unless you really want the LEAPS). If you want to be very safe, you can eliminate the time value from the options by purchasing deep ITM (in the money) options, for example the Jan 16 @125 strike currently only has a time value of 6$ attached to it, but it would take about 10k to buy just one contract. So it also depends on how much money you are talking about shifting over.

I personally like the March options since it is enough time for the stock to move without having a ton of risk, without having to pay out a huge time premium for purchase like you do with the Jan 16 LEAPS. But it really just depends on how much risk you are willing to take.

One thing to watch out for when buying these more thinly traded option chains is not to put in a huge order. I would buy them only a couple at a time or you risk inflating the price because of your order. Don't ask for like 100 Jan 16 @ 250 strike in one order... that would be bad...

 

[kalikgod]

I think most people would suggest that we should be safely into the 260-280 range by this January, but it really depends on a bunch of factors that could drive the price. If you really want to be safe go for the March options since we will have the Q1 results out by then which are sure to be a blow out (unless you really want the LEAPS). If you want to be very safe, you can eliminate the time value from the options by purchasing deep ITM (in the money) options, for example the Jan 16 @125 strike currently only has a time value of 6$ attached to it, but it would take about 10k to buy just one contract. So it also depends on how much money you are talking about shifting over.

I personally like the March options since it is enough time for the stock to move without having a ton of risk, without having to pay out a huge time premium for purchase like you do with the Jan 16 LEAPS. But it really just depends on how much risk you are willing to take.

One thing to watch out for when buying these more thinly traded option chains is not to put in a huge order. I would buy them only a couple at a time or you risk inflating the price because of your order. Don't ask for like 100 Jan 16 @ 250 strike in one order... that would be bad...

Thanks for the input.

I am only looking at a few contracts, but I am concerned about liquidity when I sell. I am looking at common strike prices for that reason. Does strike price make any difference on liquidity at exit? (i.e. 250 vs. 255, 250 being the round number and seems like higher volumes when I check.)

March 15 was a consideration. But in the event of a Q4 miss, I was hoping to be able to hold through Model X launch and reviews.

 

[Chickenlittle]

Thanks for the input.

I am only looking at a few contracts, but I am concerned about liquidity when I sell. I am looking at common strike prices for that reason. Does strike price make any difference on liquidity at exit? (i.e. 250 vs. 255, 250 being the round number and seems like higher volumes when I check.)

March 15 was a consideration. But in the event of a Q4 miss, I was hoping to be able to hold through Model X launch and reviews.

You can look at open interest for each strike. The more open interest the more liquidity

 

[Mitthrawnuruodo]

Thanks for the input.

I am only looking at a few contracts, but I am concerned about liquidity when I sell. I am looking at common strike prices for that reason. Does strike price make any difference on liquidity at exit? (i.e. 250 vs. 255, 250 being the round number and seems like higher volumes when I check.)

March 15 was a consideration. But in the event of a Q4 miss, I was hoping to be able to hold through Model X launch and reviews.

Should 2017 options be out soon? I am waiting for that Might have to wait a couple weeks for the open interest/premiums to settle to an acceptable point.


I love selling puts on TSLA stock. I keep mentioning that in this thread

 

[Robert.Boston]

Should 2017 options be out soon? I am waiting for that Might have to wait a couple weeks for the open interest/premiums to settle to an acceptable point.


I love selling puts on TSLA stock. I keep mentioning that in this thread

Selling puts is very capital intensive. Earning the option premium is like picking up nickels and dimes in front of a freight train. I'd rather use my capital to be on the train.

 

[InTheShadows]

Selling puts is very capital intensive. Earning the option premium is like picking up nickels and dimes in front of a freight train. I'd rather use my capital to be on the train.

I agree. Selling puts is not a newbie strategy. I have been in the other side many times. You never know when that shocking macro economic or company event might happen.

The fires were an example. 9/11 is another example. Detroit auto show last year. When something happens that gets the stock to move big time sellers usually get slaughtered. If you are selling puts and they are naked you can really take a beating.

 

[dmunjal]

Should 2017 options be out soon? I am waiting for that Might have to wait a couple weeks for the open interest/premiums to settle to an acceptable point.


I love selling puts on TSLA stock. I keep mentioning that in this thread

How far do you go out of the money? It is capital intensive as mentioned but it's also a way to buy the stock on the cheap if it ever happens.

I've typically used this strategy to buy high dividend paying stocks but am trying it out on TSLA.

 

[Mitthrawnuruodo]

I agree. Selling puts is not a newbie strategy. I have been in the other side many times. You never know when that shocking macro economic or company event might happen.

The fires were an example. 9/11 is another example. Detroit auto show last year. When something happens that gets the stock to move big time sellers usually get slaughtered. If you are selling puts and they are naked you can really take a beating.

I probably have different goals and investing technique than most. I don't own lots of shares anymore, so I sell puts to potentially be forced to buy 100 shares at a 30% discount. The exposure works for the part of my account I want to remain low-risk (the downside of buying TSLA shares at almost any loss is minimal, as I know it will turn a handsome profit after 10 years). I keep a lot of cash and can always cover these puts.

Incidentally last time I sold puts was after the 3rd fire. I bought back a week later, after the auto show, for 50% of what I had paid. Yes, calls would have been better. Oh well :/

How far do you go out of the money? It is capital intensive as mentioned but it's also a way to buy the stock on the cheap if it ever happens.

I've typically used this strategy to buy high dividend paying stocks but am trying it out on TSLA.

I buy at the money or 10% above. Assuming they expire it is typically 20 - 30% ROI on my 'restricted' capital per year (I keep enough cash to cover) Thus far I have never waited until expiry and I buy back within 3 months at half what I paid which is probably like 70% ROI on capital. Yes I try to time it close to the Short Term bottom, and yes LEAPS could make more (I am in and out of LEAPS in my IRA) but this is how I expose that portion of my net wealth I am somewhat saving for a home downpayment to the risk/reward approach I am comfortable with.

 

[kalikgod]

I probably have different goals and investing technique than most. I don't own lots of shares anymore, so I sell puts to potentially be forced to buy 100 shares at a 30% discount. The exposure works for the part of my account I want to remain low-risk (the downside of buying TSLA shares at almost any loss is minimal, as I know it will turn a handsome profit after 10 years). I keep a lot of cash and can always cover these puts.

Wow, that is a great strategy to put rainy day money to work. Do you hold them +1 year so you only get hit with capital gains?

 

[Mitthrawnuruodo]

Wow, that is a great strategy to put rainy day money to work. Do you hold them +1 year so you only get hit with capital gains?

No, unfortunately, I have never held anything except SCTY a whole year. My nervousness gets the better of me. I am keeping this in mind for the future.


Generally though as a beginner I have heard and believe I should mostly ignore tax consequences and fees. It overpowers the reasons why I choose to enter and exit a trade. When I have an ongoing strategy it will take a more active role in how I trade and invest.

 

[neroden]

Selling puts is very capital intensive. Earning the option premium is like picking up nickels and dimes in front of a freight train. I'd rather use my capital to be on the train.

This statement shows an ignorance of when you should sell puts. But then you're in energy, not finance, right?

If you have a pile of capital (I did), and you aren't really sure how high you trust Tesla to go (it might be overpriced), but you're sure that it *won't collapse*, and if it does, you're happy to buy the stock at that price...

...well, let's just say that earning the option premium on selling deep-out-of-the-money puts was the equivalent of earning 12% interest last year. And basically zero-risk. What was the worst-case scenario? I buy a lot of Tesla stock at less than its fundamental value? Go ahead, throw me in that briar patch.

Selling deep-out-of-the-money puts is a conservative choice if you think the stock may be somewhat overvalued, but the other fools in the market think it is extremely overvalued. It doesn't work on most companies because the option premium is usually low, but there were *so many people betting against Tesla* that the option premium was pretty huge.

Sure, it's capital intensive, but it's much much safer than buying the stock. I've been using it as an alternative to bonds or cash, frankly. I have a separate bundle which is actually invested in the stock.

Now, if everyone starts doing this, the option premium will shrink and it will stop working, of course.

Fundamental philosophy of investing note: most people buying calls are doing so to magnify their gains, and are taking extra risk as a result. People selling puts are doing so to have a *more conservative* investment, to minimize risk, and are sacrificing potential gains to do so. Both bullish, but very different risk profiles, suitable for different personalities and different investment goals.