Newbie Options Trading

[jhm]

Thank you for your answer. My original question was unclear. I was thinking about buying puts. 6 months ago TSLA was trading above 270, so big drop is possible. But of course it is just a bet.

Yeah, that would have been a great time to get some downside protection, buying puts or selling covered calls. The trick is knowing when prices are unsustainably high. You might take a look at my Blind Faith Price Target post for a few ideas, Long-Term Fundamentals of Tesla Motors (TSLA) - Page 240. I would view anything above $400 this years as unsustainable with longterm growth objectives of Tesla.

 

[Panu]

Buying: I think it's almost certain that TSLA will not fall below $150 in the next 10 months

At this valuation level $50 drop happens very easily. I'm not saying it will happen (I'm long) but it is very much possible. One year ago the price was there.

 

[Robert.Boston]

At this valuation level $50 drop happens very easily. I'm not saying it will happen (I'm long) but it is very much possible. One year ago the price was there.

The market seems to have a great deal of support for TSLA at or near $200, and institutional buyers have substantially increased their position (with a corresponding decline in retail investor shareholdings). The Q4 ER & CC had lots of bad news, but the stock stayed above ~$190. Personally, I think Elon is sandbagging his Q1 forecasts so that he's got an "easy beat" coming up in three months, then the X reveal, and the start of X shipments. All in all, I see far more upside potential than downside. (But then, I'm still bullish on TSLA and have added to my '16 and '17 LEAPs recently. Others see the world differently.)

 

[sundaymorning]

At this valuation level $50 drop happens very easily. I'm not saying it will happen (I'm long) but it is very much possible. One year ago the price was there.

Language can be a bit tricky, "could" and "possible" cannot be "completely" factored out of an equation because although TSLA could drop to $150, I give that a very very very marginal and slim chance of happening. But I suppose anything could happen. ... An asteroid "could" potentially hit earth and wipe us all out.... On the flip side TSLA was at $280s not too long ago and could quite possibility get back to ATHs if we were you utilize the "could" and "possible" scenarios. From pure gut and observations I see plus or minus 10-12 point swings up or down being more realistic. Q4 was as scary as it's going to get for weaker longs and we bounced back rather quick. With X and stationary home storage being months away, I see $195-200 more of a very nice support, but with some measure of uncertainty, I also see $217 being resistance until some new info gets leaked. If you're trading options, I wouldn't be too greedy going either direction.

 

[AlMc]

At this valuation level $50 drop happens very easily. I'm not saying it will happen (I'm long) but it is very much possible. One year ago the price was there.

While I am also 'long' TSLA I would say many here would agree that I have been very cautious since Q3 2014 ER. This frames what I am about to say: I think it is more likely that we see $250 than $150. I don't think we will see $250 until late Q3/Q4 but I don't see $150 and would not bet (and have not bet) on that price level. TA indicates significant resistance at $207.5 and, as 'sunday' pointed out, $217.50.
I agree with Robert that we have good support at $195-200 and while possible that we see the $180s, I just don't see $150. If you buy the 'puts' you indicated I would be prepared to exit them with a max profit IF we hit the $180s. Holding them longer than that might compromise any profits.

 

[Matias]

Do you guys find any use of the price calculators? Eg this


Disclaimer

If I've understood correctly, they calculate the fair mathematical price for options based on "random walk" price of stock and interest rate and volatility. I tried this calculator with couple of calls and puts and it gave me almost exact the same prices as which they are traded. So what do I get from this?

 

[Matias]

TSLA Option Chain | Yahoo! Inc. Stock - Yahoo! Finance Volatility numbers seem strange? Is it because market is closed?

 

[Matias]

Da*n, it's dropping too soon, I don't yet have the puts. My current broker doesn't sell U.S. options. I'm still in the process of opening investment account with the broker that also sells those

 

[Robert.Boston]

Do you guys find any use of the price calculators? Eg this


Disclaimer

If I've understood correctly, they calculate the fair mathematical price for options based on "random walk" price of stock and interest rate and volatility. I tried this calculator with couple of calls and puts and it gave me almost exact the same prices as which they are traded. So what do I get from this?

I think the take-away is that option pricing theory has become unprovable because traders use it to price options. Under the efficient market theory, all the information available to the market is embedded in the stock price itself, so there's no extra information available from the valuation of derivatives (like options).

 

[Matias]

Oth one could say, that models are good? Or is it so, that the IV is calculated based on those models, so it is only natural, that models give the market price when you place that IV in them? It is self referential?

 

[Robert.Boston]

Oth one could say, that models are good? Or is it so, that the IV is calculated based on those models, so it is only natural, that models give the market price? It is self referential?

I think's it's self-referential. Everyone uses the same model to set a price, so the price can't be used to evaluate the model. And before Black and Scholes developed the model, trading in options was thin because no one had a good way to price them.

 

[neroden]

Do you guys find any use of the price calculators? Eg this


Disclaimer

If I've understood correctly, they calculate the fair mathematical price for options based on "random walk" price of stock and interest rate and volatility. I tried this calculator with couple of calls and puts and it gave me almost exact the same prices as which they are traded. So what do I get from this?

There's a hell of a lot of computers in the options market trading based on those Black-Scholes pricing model calculations.

If you're trading based on a sound understanding of fundamentals, you can therefore consistently make money off of the computers.

I've been extremely conservative: selling cash-secured puts on TSLA. There was a price where I figured (a) TSLA wouldn't drop below that, and (b) if it did, I sure wanted to buy for the long term.

During 2014, none of my puts were exercised. It was basically like earning 12% interest -- a very good deal. Better than owning the actual stock was during 2014.

Now, why did I have this opportunity? A combination of two things: a whole lot of people who think TSLA will crash (and therefore willing to buy protective puts at low prices), and computers using mindless Black-Scholes valuation for the options. Most of the people in the market knew nothing about TSLA, had never done their research, so I got an advantage by knowing more.

- - - Updated - - -

@matias, are you thinking about writing (selling) or buying these puts? Either way, I'm not interested (though you might be):
Writing: probably a safe bet, but it ties up a huge amount of cash or margin, $15,000 per contract. I do all my options trades in my retirement account, which prohibits use of margin, and I don't like to keep that much cash in non-interest-bearing accounts. That said, it's not a bad return on that cash: assuming you hold to expiry and the put is still OTM, you get $10.46 return on $150 of cash/margin "invested", or about 8.4% annualized rate of return, while taking on the risk of having TSLA put to you at $150.

This, more or less (different strike prices, various durations), is what I made my money on in 2014. For some reason I suspected that TSLA might not go up and stay up during 2014, but I knew it was very unlikely to sink a lot. This bet was correct as it turned out.

The key point if you're writing puts at $150 is that you have to think that TSLA's a good buy at $150, even if some bad news has come out (because some bad news would have to have come out in order for the price to drop to $150). If that's what you believe, then you win either way; if TSLA drops, you will buy it on the drop without even having to look at the stock market.

(For me this was a particular advantage because I knew there would be long periods in 2014 when I wouldn't be able to follow the market closely.)

 

[dmunjal]

There's a hell of a lot of computers in the options market trading based on those Black-Scholes pricing model calculations.

If you're trading based on a sound understanding of fundamentals, you can therefore consistently make money off of the computers.

I've been extremely conservative: selling cash-secured puts on TSLA. There was a price where I figured (a) TSLA wouldn't drop below that, and (b) if it did, I sure wanted to buy for the long term.

During 2014, none of my puts were exercised. It was basically like earning 12% interest -- a very good deal. Better than owning the actual stock was during 2014.

Now, why did I have this opportunity? A combination of two things: a whole lot of people who think TSLA will crash (and therefore willing to buy protective puts at low prices), and computers using mindless Black-Scholes valuation for the options. Most of the people in the market knew nothing about TSLA, had never done their research, so I got an advantage by knowing more.

- - - Updated - - -


This, more or less (different strike prices, various durations), is what I made my money on in 2014. For some reason I suspected that TSLA might not go up and stay up during 2014, but I knew it was very unlikely to sink a lot. This bet was correct as it turned out.

The key point if you're writing puts at $150 is that you have to think that TSLA's a good buy at $150, even if some bad news has come out (because some bad news would have to have come out in order for the price to drop to $150). If that's what you believe, then you win either way; if TSLA drops, you will buy it on the drop without even having to look at the stock market.

(For me this was a particular advantage because I knew there would be long periods in 2014 when I wouldn't be able to follow the market closely.)

Selling puts works great on stocks with strong support. Apple also works well. The only risk is a complete market crash.

I've been doing this for several years. I miss the big gains but I make 12-15% every year with not a lot of risk.

 

[Blip]

I'm trying the same strategy, but selling at-the-money puts for highest possible theta (time value decay). My question is; when is it advicable to roll up/down to maximize theta, and is this a good strategy at all?

 

[jhm]

Oth one could say, that models are good? Or is it so, that the IV is calculated based on those models, so it is only natural, that models give the market price when you place that IV in them? It is self referential?

Implied volatility is the value of volatility that makes the model price match the market price. They just back into it. So it is reflective of what value the market puts on the option.

 

[avatar]

Hi - I'm new to options trading and would appreciate some help. I'm thinking of buying call options expiring about 2 years from now on TSLA. I'm curious to know what happens to call options if TSLA is acquired in that period? I've been a long term shareholder (since the days of $25/share and going strong). I continue to be long TSLA and am curious about dabbling into call options.

Thanks for your help.

 

[Matias]

Implied volatility is the value of volatility that makes the model price match the market price. They just back into it. So it is reflective of what value the market puts on the option.

Ok.

 

[Auzie]

Hi - I'm new to options trading and would appreciate some help. I'm thinking of buying call options expiring about 2 years from now on TSLA. I'm curious to know what happens to call options if TSLA is acquired in that period? I've been a long term shareholder (since the days of $25/share and going strong). I continue to be long TSLA and am curious about dabbling into call options.

Thanks for your help.

What a great question from someone new to options. I really got scared on Apple rumours few months ago, as often calls may become worthless in some buyouts.

There are various scenarios of what can happen to calls in a buyout, but the odds for option holders are not that great. Here is a link to a short article that discusses various scenarios.

Some highlights

A lot may depend on the nature of a buyout, sometimes it's is for stock and cash, sometimes just stock. We'll discuss what happens in a cash buyout.

If the stock price goes high enough before the buyout date to put you in the money, pull the trigger before the settlement date (in some cases, it might be pulled for you, see below). Otherwise, once the buyout occurs you will either be done or may receive adjusted options in the stock of the company that did the buyout (not applicable in a cash buyout).

Typically the price will approach but not exceed the buyout price as the time gets close to the buyout date. If the buyout price is above your option strike price, then you have some hope of being in the money at some point before the buyout; just be sure to exercise in time.

 

[avatar]

What a great question from someone new to options. I really got scared on Apple rumours few months ago, as often calls may become worthless in some buyouts.

There are various scenarios of what can happen to calls in a buyout, but the odds for option holders are not that great. Here is a link to a short article that discusses various scenarios.

Some highlights

Thank you. one more follow up -

If I all I want to do is exercise an option and then sell at market price, do I need to have the full cash value of the strike price * number of shares on hand? or I can simultaneously buy at strike and sell at market without having to front the cash?

 

[ggr]

Thank you. one more follow up -

If I all I want to do is exercise an option and then sell at market price, do I need to have the full cash value of the strike price * number of shares on hand? or I can simultaneously buy at strike and sell at market without having to front the cash?

Yes, you need purchasing power to exercise, but you should never do this anyway. If the options are in the money, they presumably still have some time value left, so you will always be better off just selling the options. If they are not in the money you'd be mad to exercise them.