Noob option trading questions

[adiggs]

Can someone point me to or give me an explanation of how a LEAP Covered Call (LCC) works and what the requirements might be for the LEAP itself? i.e., ITM, DITM, doesn't matter?

Leap Covered Call is, as far as I know, a term we've coined in the Selling TSLA Options thread and is not an industry term. You'll have good success learning more about this by DuckDuckGo'ing for "Poor Man's Covered Call". That's a more typical term and will directly discuss the trade in the context of a covered call. The idea is that the leap you purchase is standing in for the shares you would need to own for a covered call.

More technically this is an instance of a diagonal spread. Looking for that might also be helpful - I did my looking under the PMCC heading

 

[ggr]

A terminology clarification. LEAPS is an acronym (not plural):

LEAPS: How Long-Term Equity Anticipation Securities Options Work

Long-term equity anticipation securities (LEAPS) are options contracts with expiration dates that are longer than one year.

www.investopedia.com

What makes it special is that you can buy it far enough in advance that it can become long term gain.

 

[ninpb]

TD Ameritrade told me if I want to do calendar spreads/LCCs, I need to move up to next level of options (already writing CSP and CC) AND enable margin.
The margin thing scares me. Do LCCs require touching margin if I setup everything correctly?

 

[MikeC]

TD Ameritrade told me if I want to do calendar spreads/LCCs, I need to move up to next level of options (already writing CSP and CC) AND enable margin.
The margin thing scares me. Do LCCs require touching margin if I setup everything correctly?

Not as long as everything is fully covered.

 

[ninpb]

Not as long as everything is fully covered.

When writing the CC, there will be a section where I specify to go against my LEAPS?

 

[MikeC]

When writing the CC, there will be a section where I specify to go against my LEAPS?

No - but as long as you have the LEAPS there, you're automatically covered.

Just an example of not being "fully covered" - one way you would dip into margin is if you say had a 2023 LEAPS at 1200 and then sold a weekly CC for 1100, that difference of $100 x 100 shares would use up $10k margin.

 

[⚡️ELECTROMAN⚡️]

I've never exercised any options before, but I was considering exercising my 900 strike one, to make up for not buying enough shares during this last dip. If the market value of my 900 call has increased by $30,000 for example, do I get to keep those gains if I exercise the option, or is that just what someone would be paying if I sold that option? Also I don't see anything about exercising on my trading window. Do I have to call my brokerage if I want exercise an option instead selling to close?

 

[adiggs]

I've never exercised any options before, but I was considering exercising my 900 strike one, to make up for not buying enough shares during this last dip. If the market value of my 900 call has increased by $30,000 for example, do I get to keep those gains if I exercise the option, or is that just what someone would be paying if I sold that option? Also I don't see anything about exercising on my trading window. Do I have to call my brokerage if I want exercise an option instead selling to close?

I don't know the mechanics end of things, but when you exercise that 900 strike call, you will pay $90k and purchase the 100 shares the call represents. In doing so you'll be giving up any remaining time value, so one thing to consider is whether you want to give that up.

To be specific - with shares at $1056.78 the 900 strike January monthly call is priced at 166.45 to 168.30 (bid and ask). Either way the option has $156.78 worth of intrinsic (ITM) value, so the remaining ~$11 is time value. You give that value to the call owner if you exercise now. I made up the expiration date - I don't know what actual expiration date you have on the option.


The option is currently worth $16.6k to $16.8k. When you exercise the option you will still have that unrealized value - you'll just have $105.6k tied up in 100 shares instead of $16.6 - $16.8k to own the option.

Does that help?


For what its worth, and not-advice, I personally treat call ownership separately from share ownership. In the end its the same end result. Sell the call when the timing is right for you to sell the call, thereby collecting the time value that exercising would give up. And buy the 100 shares when the timing is right for you to buy the 100 shares. The end result is the same, except that you retain the time value instead of giving it away.

 

[st_lopes]

TD Ameritrade told me if I want to do calendar spreads/LCCs, I need to move up to next level of options (already writing CSP and CC) AND enable margin.
The margin thing scares me. Do LCCs require touching margin if I setup everything correctly?

Diagonal calls do consume margin buying power. Even if they are in fact fully covered. Also unlike other spreads, it is not a fixed amount of margin required as it fluctuates based in the underlying value of both the bought and sold leg.

Here is an example from my broker: Margin Trading Fees | Pricing | Questrade

Refer to Level 4 for margin requirements of short diagonal spreads.

 

[CLK350]

I got lucky and extricated myself from the blahs of this year converting TSLA into calls, but still without enough training (yes I know, ..) I find myself with short Jan 01/21/2022 calls and a Mar 03/18/2022 1600C

I'm more concerned about the 01/21/2022 975 C bought 09/09/2021 and 01/21/2022 1100 C - my plan was to put a sell order for a 20% improvement over their prices (yesterday around 12 noon) and let them get sold ... ha! of course not happening now

Well, I'm thinking of just waiting it out till Fri, maybe the Austin Giga announcement will move the needle high enough .

 

[ninpb]

No - but as long as you have the LEAPS there, you're automatically covered.

Just an example of not being "fully covered" - one way you would dip into margin is if you say had a 2023 LEAPS at 1200 and then sold a weekly CC for 1100, that difference of $100 x 100 shares would use up $10k margin.

What if I have 100+ shares and LEAPS. When/where do I specify to exercise against the LEAPS instead of shares?

 

[MikeC]

What if I have 100+ shares and LEAPS. When/where do I specify to exercise against the LEAPS instead of shares?

Nowhere - it doesn’t matter. It would only come into play when it’s time to be assigned, at which point you’d buy to close the short call and sell to close the LEAPS if you don’t want them to take your shares.

In the case of early assignment, they’ll take your shares, but that shouldn’t happen if there’s a decent amount of extrinsic value left.

 

[CrunchyJello]

Definitely a noob post:

I’ve been following this group for quite a while, trying to figure out the best approach for me, and thought I’d get some feedback from the more experienced. A critical factor is that I am 13 hours ahead of NY, so most of my trades will generally be in the first couple of hours.

I am looking for a repeatable income play; growth is a bonus.
My needs are modest, maybe $3/month, and I’m in a low tax jurisdiction.

I am currently looking at a covered short strangle approach:
1) sell ATM put; repeat if not assigned
2) if assigned, sell an OTM 25 delta put + sell a Near-the-Money OTM call
3) if it moons, go back to (1)
4) if it tanks, sell 2 OTM calls just above the cost.

This looks like a low maintenance plan, generating about $3-4k / week on 2 contracts, which seems to align with my goal.

What is the biggest weakness(es) in my approach?

 

[wooter]

That it's ATM

I'm very much a noob too, but the problem with ATM with TSLA is that it's very volatile, so it gets quickly ITM. Or OTM.

Puts are not protected by MM's, so there's a high chance you'd sell an ATM put on Tuesday, and turn back and find it DITM a few days later.

I'd almost wager it's easier to just skip step 1-3 and take step 4.

 

[CrunchyJello]

That it's ATM

I'm very much a noob too, but the problem with ATM with TSLA is that it's very volatile, so it gets quickly ITM. Or OTM.

Puts are not protected by MM's, so there's a high chance you'd sell an ATM put on Tuesday, and turn back and find it DITM a few days later.

I'd almost wager it's easier to just skip step 1-3 and take step 4.

The volatility can’t be denied;
can that risk be managed by 30 DTE’s?

Is it realistic to assume I’d be able to ride out a volatility drop to, say $700?
I don’t see TSLA sitting at that kind of dip for any length of time, and even if it did, my lower requirements suggest I could just continue writing 2 DOTM until it bounced back. I don’t like the idea of no drawdowns, but would accept it temporarily for a few months; even up to 6 months.

The premiums seem juicy enough for my objective of capturing a minimum annual drawdown of $40k+/- from the 2 contracts (in a worse case scenario). The normal premiums of 30 DTE’s seem to be well north of $10k, so I don’t see it being out of the question. Am I wrong?

My gut feel says I should normally be able to bang out an annual drawdown of $75k+, but even a minimal $40k is (reluctantly) ok, and not the end of the world. Hoping this makes sense; my logic is fighting a fever, lol.

 

[OrthoSurg]

The volatility can’t be denied;
can that risk be managed by 30 DTE’s?

Is it realistic to assume I’d be able to ride out a volatility drop to, say $700?
I don’t see TSLA sitting at that kind of dip for any length of time, and even if it did, my lower requirements suggest I could just continue writing 2 DOTM until it bounced back. I don’t like the idea of no drawdowns, but would accept it temporarily for a few months; even up to 6 months.

The premiums seem juicy enough for my objective of capturing a minimum annual drawdown of $40k+/- from the 2 contracts (in a worse case scenario). The normal premiums of 30 DTE’s seem to be well north of $10k, so I don’t see it being out of the question. Am I wrong?

My gut feel says I should normally be able to bang out an annual drawdown of $75k+, but even a minimal $40k is (reluctantly) ok, and not the end of the world. Hoping this makes sense; my logic is fighting a fever, lol.

I sold -p1135 in November and fou d myself DITM at $900 and rolled down to 975 for February strike

sold -p1150 last Monday and already underwater. Selling ATM put really never work for me. Never.

I roll them out every week, every time.

 

[CrunchyJello]

I sold -p1135 in November and fou d myself DITM at $900 and rolled down to 975 for February strike

sold -p1150 last Monday and already underwater. Selling ATM put really never work for me. Never.

I roll them out every week, every time.

Yea, not pretty.
The ATM approach is suggested by “Chicken Genius Singapore” on YouTube.

Im still experimenting with different ideas.
Maybe just sell delta 25 puts to provide a good assignment entry point.
If I’m long at 950+/-, a second short put $100 OTM would give me a good ACB, but still provide a minimal enough premium. Surely I can work 200 longs into $4k/month with limited risk.

Thanks for your insight; reality is harsher than paper trading.

 

[FlamingPIG]

What is double dipping? Exit a trade then re-enter the same trade?
use in this context by

jeewee3000​

"Some double dip. Some never do.
Some take profits early to hop back in again, some want to trade less."

 

[Knightshade]

I use it talking about closing a position for a given expiration then opening a new one for the same (generally talking weeklies)


Like say Thursday or Friday you open some put spreads for the following Friday.... Monday the stock spikes and you can close those for 80% profit, and then open some new (likely higher strike) put spreads for new premium on the same Friday expiration

 

[Budding]

Have a question, I know this is a conservative play. Call debit spread 1400/1500 for Jan 2024 is about $2300 now. If the SP crosses about 1550 then each spread contract would be worth $10000, right? That's about a 300% gain. Is there something I am missing?