Newbie Options Trading

[mejojo]

First month options newbie asks:

As the stock rises, and some of my Jan 15 options go ITM and deep ITM, should I be getting out of those and moving into higher strikes for better returns?

 

[Johan]

First month options newbie asks:

As the stock rises, and some of my Jan 15 options go ITM and deep ITM, should I be getting out of those and moving into higher strikes for better returns?

Yes, if you believe the stock will keep rising and want to keep your leverage high. For lower risk you can keep them and you might see around dollar-for-dollar gains if the stock keeps climbing (minus lost time value as time goes by). Or roll out to a later strike like Mar or Jun 15? Jan15 is closing fast so these are become "medium term" calls and soon "short term" IMO.

 

[mershaw2001]

Yes, if you believe the stock will keep rising and want to keep your leverage high. For lower risk you can keep them and you might see around dollar-for-dollar gains if the stock keeps climbing (minus lost time value as time goes by). Or roll out to a later strike like Mar or Jun 15? Jan15 is closing fast so these are become "medium term" calls and soon "short term" IMO.

I'll play devil's advocate and say there are reasons not to roll up: will incur short term gains, you'll lose money in bid/ask spread, and if the stock stalls out at a particular price you will lose money as the options lose time value. Furthermore, you should minimize the number of trades you perform because you lose transaction costs, unless you feel absolutely certain of something. So if you are certain tesla is going to go up significantly between now and jan you should roll up, however, I'd make a guess that you need it to be over 300 in january to be worth changing your position. (i'm thinking you will lose 1-2 dollars per contract that you exchange, you will get greater time decay in the higher options that you will buy, and you will incur a tax cost in the 2014 year). Your leverage will be greater, but for you to capitalize on that you need a much greater move in the underlying stock price. You still capture all moves with a delta of one with your current setup.
So do it if you have conviction in the move before january. Don't do it if you are uncertain.

 

[Johan]

I'll play devil's advocate and say there are reasons not to roll up: will incur short term gains, you'll lose money in bid/ask spread, and if the stock stalls out at a particular price you will lose money as the options lose time value. Furthermore, you should minimize the number of trades you perform because you lose transaction costs, unless you feel absolutely certain of something. So if you are certain tesla is going to go up significantly between now and jan you should roll up, however, I'd make a guess that you need it to be over 300 in january to be worth changing your position. (i'm thinking you will lose 1-2 dollars per contract that you exchange, you will get greater time decay in the higher options that you will buy, and you will incur a tax cost in the 2014 year). Your leverage will be greater, but for you to capitalize on that you need a much greater move in the underlying stock price. You still capture all moves with a delta of one with your current setup.
So do it if you have conviction in the move before january. Don't do it if you are uncertain.

Very good advice. That's why just keeping them and letting them ride was one of my suggestions. Especially the deep ITM ones he describes might have such little time value that the difference with regards to that between now and Jan15 might be negligable.

 

[mershaw2001]

Very good advice. That's why just keeping them and letting them ride was one of my suggestions. Especially the deep ITM ones he describes might have such little time value that the difference with regards to that between now and Jan15 might be negligable.

I do really like what you suggested in your previous post, johan, roll up in strike price and out in time to march. If i was going to roll up, I would also roll out in time.

 

[InTheShadows]

I'll play devil's advocate and say there are reasons not to roll up: will incur short term gains, you'll lose money in bid/ask spread, and if the stock stalls out at a particular price you will lose money as the options lose time value. Furthermore, you should minimize the number of trades you perform because you lose transaction costs, unless you feel absolutely certain of something. So if you are certain tesla is going to go up significantly between now and jan you should roll up, however, I'd make a guess that you need it to be over 300 in january to be worth changing your position. (i'm thinking you will lose 1-2 dollars per contract that you exchange, you will get greater time decay in the higher options that you will buy, and you will incur a tax cost in the 2014 year). Your leverage will be greater, but for you to capitalize on that you need a much greater move in the underlying stock price. You still capture all moves with a delta of one with your current setup.
So do it if you have conviction in the move before january. Don't do it if you are uncertain.

I believe the OP said "first month options noob", so regardless the taxes (assuming it's a taxable account) will be short term gains so that should not influence the decision.

 

[chickensevil]

If you roll up (and possibly out) something you could also do to limit your added exposure would be to consider pocketing all your current gains and just re-rolling with roughly the same amount of cash you previously staked when you made your initial purchase. This is especially something I would consider if you are sticking with the Jan 15 expiration. No one got poor by pocketing profits

You then have cash on hand for a different play or thesis, or could roll it into stock, or whatever. The determination to pull out cash should mostly be based on what is driving you to shift to the higher strike.

For relative risk I would categorize holding and doing nothing as low, rolling up and pocketing profits as medium, and rolling up and doubling down (sticking all current money into the new position) as high. You could also potentially hedge some of the risk further by buying some puts with the profits.

 

[mejojo]

Thanks for the input. I only understand about half of mershaw2001's points, esp "you need it to be over 300 in January to be worth changing your position".

Perhaps if we took a specific example it might help me understand?

So, I've got Jan 15 options:
Strike Day Gain
@230 9%
@250 14%
@265 15%
@280 17%

So, I see that the 230 is not performing as well as the others. So, my question is whether to sell the 230 (60% total gain in 2 weeks) now and move into something higher, likely waiting for a dip to buy.

 

[chickensevil]

Thanks for the input. I only understand about half of mershaw2001's points, esp "you need it to be over 300 in January to be worth changing your position".

Perhaps if we took a specific example it might help me understand?

So, I've got Jan 15 options:
Strike Day Gain
@230 9%
@250 14%
@265 15%
@280 17%

So, I see that the 230 is not performing as well as the others. So, my question is whether to sell the 230 (60% total gain in 2 weeks) now and move into something higher, likely waiting for a dip to buy.

waiting for a dip is a whole other risk dynamic that I don't think anyone would be able to tell you how to play that since we are all ultimately guessing on the price swings. So you will have to weigh that on your own I think. But yes, you are seeing with the changes how having something ITM or deep ITM hurts you on return. But it really depends on your risk tolerance and your certainty we continue to see a price rise if you want to roll up to something else.

Ignoring the tax part, what he is referening to is the cost of the trade itself. Unless you get really lucky, you tend to lose *some* amount of money in rolling up. This is because you have to pay the commission charges on both the sale and the new purchase. This needs to be calculated into your decision to roll. Second you need to look at your planned real target price. If it is only going to go up say 5 more dollars over the next 2 months (well, then you should probably just sell out totally cause that is a losing proposition overall... but just go with it for a moment) you will in no way recoup your money from rolling up and if you picked a target price like 280 then you actually would lose all your money. Finally, you are going to lose out something on the conversions of the bid/ask spreads. You can minimize this some by haggling for a better price, but it can be hard outside of weeklies to get the ask price and you will likely fall somewhere at around the halfway mark between the bid and ask. So all three of these things add up to what you need to clear to make rolling up "worth it".

 

[Johan]

Thanks for the input. I only understand about half of mershaw2001's points, esp "you need it to be over 300 in January to be worth changing your position".

Perhaps if we took a specific example it might help me understand?

So, I've got Jan 15 options:
Strike Day Gain
@230 9%
@250 14%
@265 15%
@280 17%

So, I see that the 230 is not performing as well as the others. So, my question is whether to sell the 230 (60% total gain in 2 weeks) now and move into something higher, likely waiting for a dip to buy.

Like we said: yes, move to a higher strike if you want more leverage. But remeber it goes both ways; if today was a -2% day instead of a +2% day you'd see the same but inversely - the higjer strikes would be down by more %. I also like chickenevils suggestion to keep the gains and only reinvest the "original" ammount, especially if you buy higher strikes for the same Jan15 expiry since then you'll definately increase risk.

 

[mejojo]

OK, thanks again. And as chickensevil said, if I only expected it to go up $5 in 2 months, I shouldn't be doing any of what I'm doing.

 

[chickensevil]

What I also recommend is playing around with the calculators to help you decide what strike you want to pick based on where you think the price will go. They aren't perfect but should give you a good idea of what will happen your call over time.

Long call (bullish) calculator

To pull from your example at roughly current prices (which will tell you how much more return you will get out of holding vs rolling up

Sticking with the 230

Rolling up to 260

Rolling up to 290

So you can compare and contrast the three options (really you could do this with any strike but wanted to give you a decent spread. These values are percentages of return and since they are all taken from the same snapshot in time, given a perfect situation where you lost no money from commission or poor trade or whatever this would give you a "best case" as it were to compare against. You then would just need to identify how you wanted to go when you add in the losses.

To put it simply you can see it would take the price going to 300$ to be "worth it" at all to roll up to the 290s, and the price would need to go to 285$ for a roll up to 260 to be "worth it". Comparing the 260 vs the 290 you would need the price to jump to 305$ to be "worth it". This is based on final expiration price, of course if movements happen faster, the "worth it" factor pays out sooner for you. But for the sake of explaining it, it is easier to just talk about final expiration targets.

Again, none of this is taking the "losses" into account, and you are exposing yourself to a whole lot more risk by rolling up to 290 since you could easily miss the mark on that and not only not improve on your returns but potentially LOSE a significant amount of money from rolling. So this is why mershaw was saying you need to be expecting the price to go to 300 to be worth rolling. Otherwise I would just sit tight on what you have.

Edit: Just to note about the pictures those are percentage points in the chart, so assuming you are staking EXACTLY the same amount of cash across any of the choices, you can expect the charts to provide parity across each other. If you don't stake exactly the same amount of money this will shift that overall return percentage significantly.

 

[InTheShadows]

Considering the trade commissions. When talking about leaps I really do not put too much emphasis on it. With OptionsHouse I pay $5 for up to 5 contracts. If you are talking leaps that cost $6000 per contract, $5 is almost not worth considering.

When playing weeklies the commissions are a huge factor on the decisions I make. For example. Yesterday I bought 4 SPWR Nov 29 calls for .22 I paid $5 in fees ($93 total). Today I sold 2 of them for .46 ($87 net after fees) to get my money back. However because of the fees I am still $6 in the hole, so if the other two contracts expire worthless I still lost $6. Since I feel that SPWR is coming off of its lows and has the potential to climb as the other solars post good ER's I chose to ride the other two contracts for possible infinite gains with a risk of $6. To me that is worth it.

I am using smaller amounts because this spring the options market delt me a huge dose of humility. I consider these trades my education and I'm forming new strategies with smaller amounts, and as they seem to be working 80% of the time I will start increasing their size slowly. My mistake in the spring was I had massive gains and I got cocky thinking nothing could stop my new found power to amass wealth. I'm still way ahead of where I was when I started my options account, however, there is no doubt that had I not gotten cocky the account would be worth twice what it was in early March. Today it is 42% higher than its low of for this year and it's only worth 23% of what it was in March.

My first option purchase was August of last year, so I have been trading options a little over a year now. I'm glad I learned my lesson in 6 months, and not 6 years after I started. Options are huge gains with huge risks. They are also huge losses. They must be treated with respect.

 

[GasDoc]

Not a TSLA option question but still on topic as it's a Newbie options trading question.

I've been long AAPL for a long time and have a bunch of stock in a tax deferred 401k acccount. So no tax implications on trades.

A few weeks ago, I thought that the stock would trade sideways for a while and sold some Dec 5 covered calls $114 strike for about $0.50 each.

I wish I were on the other side of that trade now! The stock popped up and the options are now ITM and trading for about $2.95.

What should I do if I want to remain long in the stock?

1) Wait and see--if I get called away, I had a great ride and I can buy back in at a dip
2) Buy back my calls costing me $2.45 a share and sell some covered calls farther out. Maybe January 17 119's for $2.64--I'll have lost a little bit of money on this trade but I still have my stock.
3) Take my profits after getting called away and buy some further out calls or LEAPS

Off topic for TSLA but I can see myself making the same move on TSLA and then being stuck wondering what to do.

 

[ongba]

Not a TSLA option question but still on topic as it's a Newbie options trading question.

I've been long AAPL for a long time and have a bunch of stock in a tax deferred 401k acccount. So no tax implications on trades.

A few weeks ago, I thought that the stock would trade sideways for a while and sold some Dec 5 covered calls $114 strike for about $0.50 each.

I wish I were on the other side of that trade now! The stock popped up and the options are now ITM and trading for about $2.95.

What should I do if I want to remain long in the stock?

1) Wait and see--if I get called away, I had a great ride and I can buy back in at a dip
2) Buy back my calls costing me $2.45 a share and sell some covered calls farther out. Maybe January 17 119's for $2.64--I'll have lost a little bit of money on this trade but I still have my stock.
3) Take my profits after getting called away and buy some further out calls or LEAPS

Off topic for TSLA but I can see myself making the same move on TSLA and then being stuck wondering what to do.

GasDoc,

IMHO, since you have been in aapl for a long time (so cost basis has to be lower than the current price) and since this is a tax deferred account, I don't think you can go wrong with any of these choices. It really depends on where you think aapl is headed. Looking at the chart, it has had a great run, so if you think it is due for a period of consolidation, then wait to see if you get called away. If you think it has room to run prior to earnings in Jan, then roll your calls for breakeven or a small loss. If you do get called away, you can always buy back in (either with shares or LEAPS) on a pullback, which will occur as nothing goes up forever. The only thing I wouldn't do is buy back the calls at a loss (i.e. without rolling them). If you decide to roll, the only thing I would suggest is to wait for the call to trade near parity (ie with little time value, which will occur near expiration) before rolling.

 

[Robert.Boston]

@GasDoc: any of those choices is perfectly sensible. Don't be sentimental about holding on to your shares (#2); in a tax-free account, there's no reason to be concerned about having them called away.

Having said that, your strategies are in order of increasing bullishness, so you need to decide what you think the future path of AAPL prices will be. AAPL seems to be going up because the new Watch is being well-received, and there's some positive sentiment about their payment system.
(1) makes sense if you think this recent rise is a passing fancy and the options are likely to expire either OTM or barely ITM.
(2) makes sense if you're cautiously optimistic about the recent trend continuing.
(3) makes sense if you think this is this rise will continue into 2016 and you don't want to miss out. A better variant, perhaps, is buying-to-close the call, selling equities, and buying-to-open some more calls, which will increase your %delta exposure to AAPL prices rises. With #3 as you propose, you're missing out on any price rise between now and Dec.5.

 

[mershaw2001]

GasDoc,

IMHO, since you have been in aapl for a long time (so cost basis has to be lower than the current price) and since this is a tax deferred account, I don't think you can go wrong with any of these choices. It really depends on where you think aapl is headed. Looking at the chart, it has had a great run, so if you think it is due for a period of consolidation, then wait to see if you get called away. If you think it has room to run prior to earnings in Jan, then roll your calls for breakeven or a small loss. If you do get called away, you can always buy back in (either with shares or LEAPS) on a pullback, which will occur as nothing goes up forever. The only thing I wouldn't do is buy back the calls at a loss (i.e. without rolling them). If you decide to roll, the only thing I would suggest is to wait for the call to trade near parity (ie with little time value, which will occur near expiration) before rolling.

In a case like this I usually roll out in time with the same or the next strike price up, so buy back the options and sell options dated 3-5 months out with the 115 or the 117 strike. It should also provide you with a dividend during that time frame, so factor that into your calculation. Once the price has moved up so much over my strike that rolling is no longer effective, i let 20% of the position be called away and I use some of the money to buy back the remaining options at a loss.

 

[GasDoc]

ongba, Robert and mershaw: Thanks for your thoughts. It's really helpful to get some insight from experienced options traders such as yourself.

I think what I'll do is watch the stock until 12/5. My gut tells me it's kind of toppy and I can't really see it moving much more in the next three weeks. If this is the trend, as 12/5 approaches, I should be able to buy back my calls cheaper, right? Then I'm considering selling covered calls for April taking my current position and spreading it out over 120,125 and 130 covered calls.

 

[Auzie]

Considering the trade commissions. When talking about leaps I really do not put too much emphasis on it. With OptionsHouse I pay $5 for up to 5 contracts. If you are talking leaps that cost $6000 per contract, $5 is almost not worth considering.

When playing weeklies the commissions are a huge factor on the decisions I make. For example. Yesterday I bought 4 SPWR Nov 29 calls for .22 I paid $5 in fees ($93 total). Today I sold 2 of them for .46 ($87 net after fees) to get my money back. However because of the fees I am still $6 in the hole, so if the other two contracts expire worthless I still lost $6. Since I feel that SPWR is coming off of its lows and has the potential to climb as the other solars post good ER's I chose to ride the other two contracts for possible infinite gains with a risk of $6. To me that is worth it.

I am using smaller amounts because this spring the options market delt me a huge dose of humility. I consider these trades my education and I'm forming new strategies with smaller amounts, and as they seem to be working 80% of the time I will start increasing their size slowly. My mistake in the spring was I had massive gains and I got cocky thinking nothing could stop my new found power to amass wealth. I'm still way ahead of where I was when I started my options account, however, there is no doubt that had I not gotten cocky the account would be worth twice what it was in early March. Today it is 42% higher than its low of for this year and it's only worth 23% of what it was in March.

My first option purchase was August of last year, so I have been trading options a little over a year now. I'm glad I learned my lesson in 6 months, and not 6 years after I started. Options are huge gains with huge risks. They are also huge losses. They must be treated with respect.

Thanks for sharing Theshadows.

When reading other people's posts and trading experiences, it becomes apparent that some trading experiences are quite common. It is desirable to get these humbling experiences sooner rather than later:biggrin: as it happens on a smaller amount and hurts less.

My thinking is that "practice makes perfect", even in options trading. Good on you for doing so much work, it will pay off eventually.

I am curious about lodging tax return, specifically the issue of having to report numerous options trades in a tax year. Do people just report one line p&l on numerous trades or is reporting done line by line, for each trade. When I look at my yearly report from my broker, I find it quite difficult to discern separate options trades, as many of them involved rolling. It is much easier to just report summary only, if acceptable.

 

[Johan]

I am curious about lodging tax return, specifically the issue of having to report numerous options trades in a tax year. Do people just report one line p&l on numerous trades or is reporting done line by line, for each trade. When I look at my yearly report from my broker, I find it quite difficult to discern separate options trades, as many of them involved rolling. It is much easier to just report summary only, if acceptable.

FWIW for me, here in Norway, I was able to get away with submitting a yearly summary of all my trades and a total P&L at the end. We don't have short term/long term capital gains tax though, only one flat capital gains tax (28%) so that makes it easier I guess. What's it like in Australia?