Noob option trading questions

[MikeC]

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?

Looks right to me.

Compare that with holding shares, which would be a 50% gain if the share price ended up at 1550. But if SP ended up at 4000 it would match the 300% gain, without the risk of going to zero.

 

[AlexShimo]

Looks right to me.

Compare that with holding shares, which would be a 50% gain if the share price ended up at 1550. But if SP ended up at 4000 it would match the 300% gain, without the risk of going to zero.

And almost the same leverage than the +C1400 / -C1500 could apparently be obtained through a +C1000 / -C1500 spread.
With the added benefit of breakeven at circa 1140.
Got a few of them the last few weeks.
Main drawback of LEAPS spread from my point of view is the maximum profit only materialises at the very end date. Very helpful to play with the broker interface to forecast the P&L depending of various closing dates and various SP.

Cheers

 

[ninpb]

Thinkorswim displays delta and theta two different ways.
In the options chain, it's the text book -1 to +1, $/day respectively.
In your positions, it's relative to your ... position. Meaning the math has been done for you. At least that's the reason I've found on google.
Is this correct? Pros, cons? I have no experience with other brokers.

 

[car108]

HI , new to the TMC , and having studied TSLA and the Options tutorials , i have a question :

want to buy bull call spread / call debit spread , it is listed at 71 USD , exp. date is januari 2024.
The spread is at 1800 and 1825 .

IF TSLA is above 1825 , the theoretical gain is about 2430 .

I don't see any downsides , but this is my first trade . What am i missing ???

 

[car108]

Hi , in the above post , it is listed as mid 0.72 , so 72 USD , my bad ... , rest is still the same

 

[car108]

Hi , i have 2 follow up questions :
Q2: the 1800 has a large volume , and the 1825 only volume of 3 , is that why this is relatively cheap ?
Q3: I there any risk with low volumes ? ( meaning : as soon as it hits 1825 , i would try to close the contract , instead of waiting until 2024 jan.

 

[chiller]

Hi , in the above post , it is listed as mid 0.72 , so 72 USD , my bad ... , rest is still the same

The spread is huge on those strikes, so you should probably use a "worst case" which looks to be a cost of around 8.85 USD, so 885 USD per contract, for a theoretical max gain of 16.15 USD or 1615 USD per contract.

Please note that call spreads like that will not see the full gain until close to expiry, or if the stock overshoots by a lot.

 

[mongo]

Hi , i have 2 follow up questions :
Q2: the 1800 has a large volume , and the 1825 only volume of 3 , is that why this is relatively cheap ?
Q3: I there any risk with low volumes ? ( meaning : as soon as it hits 1825 , i would try to close the contract , instead of waiting until 2024 jan.

Q1: All a balance on your goals/ risk reward level
Q2: Using mid is less probable with low volume. Worst case cost is 205.50-196.65 = 8.85. If your brokerage allows multi-leg trades, you can set the cost for the position. Worst case, it doesn't fill.
Q3: low volumes and open interest can make the bid-ask spread wider which is less advantageous (bid-ask work against you opening and closing). Here's a site that calculates return vs SP and time (need to adjust IV yourself) TSLA Credit Spread calculator

 

[car108]

Q1: All a balance on your goals/ risk reward level
Q2: Using mid is less probable with low volume. Worst case cost is 205.50-196.65 = 8.85. If your brokerage allows multi-leg trades, you can set the cost for the position. Worst case, it doesn't fill.
Q3: low volumes and open interest can make the bid-ask spread wider which is less advantageous (bid-ask work against you opening and closing). Here's a site that calculates return vs SP and time (need to adjust IV yourself) TSLA Credit Spread calculator

Thanks Mongo , the brokerage is TW, and I (wrongly ) assumed the listed midprice was THE price .... .
This means you never know the contract price when buying options ? Or does it depend on the brokerage ?

 

[car108]

Thanks Mongo , the brokerage is TW, and I (wrongly ) assumed the listed midprice was THE price .... .
This means you never know the contract price when buying options ? Or does it depend on the brokerage ?

You are right on TW i can set / lock a price . However , say i set a lock in the morning , and the order gets filled in the afternoon , and TSLA drops in between .
My locked price was based on the price in the morning !
What gives ???

 

[car108]

Q1: All a balance on your goals/ risk reward level
Q2: Using mid is less probable with low volume. Worst case cost is 205.50-196.65 = 8.85. If your brokerage allows multi-leg trades, you can set the cost for the position. Worst case, it doesn't fill.
Q3: low volumes and open interest can make the bid-ask spread wider which is less advantageous (bid-ask work against you opening and closing). Here's a site that calculates return vs SP and time (need to adjust IV yourself) TSLA Credit Spread calculator

Thanks Mongo , here is a follow up question on Q1:

Q1: What is your opinion on this "strategy" from above ?
Assumptions:
1. TSLA will go to SP > 1800 , before jan 2024 ( bear case)
2. Make the strike - spread as small as possible , relative to the option spread price

Q2 : So why start the strike spread ATM , if assumption 1 has a 99 % possibillity ( ) ???

 

[mongo]

Thanks Mongo , the brokerage is TW, and I (wrongly ) assumed the listed midprice was THE price .... .
This means you never know the contract price when buying options ? Or does it depend on the brokerage ?

If using limit orders, you know the max you are would pay (if the order executes).
If using market orders, you have no control over the price.

You are right on TW i can set / lock a price . However , say i set a lock in the morning , and the order gets filled in the afternoon , and TSLA drops in between .
My locked price was based on the price in the morning !
What gives ???

That's the nature if a limit order. You say the max you are willing to pay. If the price starts out higher and moves down, you'll end up paying that max (or a little less). If the price opens below your max, you'll pay that lower amount.
If the price goes down after purchase, well that's the way things go.

Thanks Mongo , here is a follow up question on Q1:

Q1: What is your opinion on this "strategy" from above ?
Assumptions:
1. TSLA will go to SP > 1800 , before jan 2024 ( bear case)
2. Make the strike - spread as small as possible , relative to the option spread price

Q2 : So why start the strike spread ATM , if assumption 1 has a 99 % possibillity ( ) ???

The most profitable Bull call spread has the upper leg at the stock price at expiration and the lower leg one strike below that. However, you don't know what that price will be. If you are off by one strike the wrong way, you lose everything (if held to expiration).
The option profit calculator site is great for looking at what if scenarios.
Q1: due to time value, you only get the max payout near/at expiration (or massive overshoot of the strike)

 

[car108]

If using limit orders, you know the max you are would pay (if the order executes).
If using market orders, you have no control over the price.



That's the nature if a limit order. You say the max you are willing to pay. If the price starts out higher and moves down, you'll end up paying that max (or a little less). If the price opens below your max, you'll pay that lower amount.
If the price goes down after purchase, well that's the way things go.

Ok, seems reasonable !

The most profitable Bull call spread has the upper leg at the stock price at expiration and the lower leg one strike below that. However, you don't know what that price will be. If you are off by one strike the wrong way, you lose everything (if held to expiration).
The option profit calculator site is great for looking at what if scenarios.
Q1: due to time value, you only get the max payout near/at expiration (or massive overshoot of the strike)

Ok, that is why i set the bar "low" ( ) at 1800/1825 .
Assuming that will be the case , then :
due to time value, you only get the max payout near/at expiration (or massive overshoot of the strike)

Ok, i see 3 possibilities from here:
1. wait until exp. NO , because of the reason you mentioned above
2. wait for massive overshoot ( what is MASSIVE ??? ( 30 points , or 100 or 200 points ? ( over 1825) ?
3. settle for a slightly lower payout : if payout would be 10% less, that would be no problem , is this a reasonable assumption ?

Hope i am not picking your brain too much , mongo ! I did not see anybody on the internet doing this "strategy", so i got a bit suspicious about my strategy.
( By the way , in this tutorial (

) at 27.15 , it seems the midprice IS the contract price , that is how Chris Butler defines it . Bit Confused now ! )

 

[mongo]

Ok, seems reasonable !


Ok, that is why i set the bar "low" ( ) at 1800/1825 .
Assuming that will be the case , then :
due to time value, you only get the max payout near/at expiration (or massive overshoot of the strike)

Ok, i see 3 possibilities from here:
1. wait until exp. NO , because of the reason you mentioned above
2. wait for massive overshoot ( what is MASSIVE ??? ( 30 points , or 100 or 200 points ? ( over 1825) ?
3. settle for a slightly lower payout : if payout would be 10% less, that would be no problem , is this a reasonable assumption ?

Hope i am not picking your brain too much , mongo ! I did not see anybody on the internet doing this "strategy", so i got a bit suspicious about my strategy.
( By the way , in this tutorial (

) at 27.15 , it seems the midprice IS the contract price , that is how Chris Butler defines it . Bit Confused now ! )

Midprice is just the average of bid/ask. It doesn't mean someone would take the other side of the trade at that price, especially if there is low volume.

This link has your senario and shows the return vs time and stock price.TSLA Credit Spread calculator
For example: SP of $2,000 in June 22 nets about $450

 

[car108]

Midprice is just the average of bid/ask. It doesn't mean someone would take the other side of the trade at that price, especially if there is low volume.

Ok, understood !

This link has your senario and shows the return vs time and stock price.TSLA Credit Spread calculator
For example: SP of $2,000 in June 22 nets about $450

Ok ! thanks for the link , super !
After carefully studying this chart , my conclusion is :
1. Waiting until expiration is the best thing to do , according to the chart ! ( if SP > 1855 at exp. then profit is max)
2. BUT you wrote () If you are off by one strike the wrong way, you lose everything (if held to expiration).
"1. " seems to contradict "2." . What gives , Mongo???

FInally , why is NOBODY doing this ? Can't find anything/anybody on the internet about similar trades, meaning
1. a leap > 2 years ( min. risk ) , (++++)
2. combined with bull call spread , as tight as possible ( spread 25 or 50 , depending on volume): relative small investment = small risk (++++)
3. BCS spread far away , OTM with TSLA small risk (++++ ) and again , relative small investment

Would like to hear your honest opinion , because you are probably trading for a couple of years , vs newbie here

 

[mongo]

Ok, understood !



Ok ! thanks for the link , super !
After carefully studying this chart , my conclusion is :
1. Waiting until expiration is the best thing to do , according to the chart ! ( if SP > 1855 at exp. then profit is max)
2. BUT you wrote () If you are off by one strike the wrong way, you lose everything (if held to expiration).
"1. " seems to contradict "2." . What gives , Mongo???

FInally , why is NOBODY doing this ? Can't find anything/anybody on the internet about similar trades, meaning
1. a leap > 2 years ( min. risk ) , (++++)
2. combined with bull call spread , as tight as possible ( spread 25 or 50 , depending on volume): relative small investment = small risk (++++)
3. BCS spread far away , OTM with TSLA small risk (++++ ) and again , relative small investment

Would like to hear your honest opinion , because you are probably trading for a couple of years , vs newbie here

If the stock went from 1825 to 1800 on the day of exipry, your position goes from max profit to max loss.
Not advice:
There's nothing inherently wrong with that spread and has the pluses you call out. However, it doesn't return much in the short term. And in the situations where it does, other positions have better returns.

Alternatively, you can do a put spread for a credit and recieve premium now which the account needs to keep to cover the $2,500 at risk, but you can use some of that to buy other positions. Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.
TSLA Put Spread calculator

 

[car108]

If the stock went from 1825 to 1800 on the day of exipry, your position goes from max profit to max loss.

Ok, i am trying to visualize what that could mean , and i am looking now at TSLA for the last 12 months .
I see gigantic volatility .

That means i would have to take a "virtual volatility buffer" into consideration ... , on top of my 1855 target.
Unless ( i am lookiing at your chart now ) , say between

26 dec 2023 ( if SP = about 2000 assumed) : returns : 1600 ( about 22X
and 19 jan 24' ( if SP = about 2000 assumed)) returns of course : 2427

 

[car108]

Sorry , hit the wrong button on the keyboard

so the chart does not display the values in between ; i mean is this a linear scale from 1600 profit to 2427 profit ?
example
26 dec : 1600
27 dec : 1700
28 dec : 1800
etc.

Meaning : depending on the volatiliy in the last 2 week, i could "bail out " , of course with less profit

Or does it jump from 1600 to 2427 ???

 

[car108]

If the stock went from 1825 to 1800 on the day of exipry, your position goes from max profit to max loss.
Not advice:
There's nothing inherently wrong with that spread and has the pluses you call out. However, it doesn't return much in the short term. And in the situations where it does, other positions have better returns.

Alternatively, you can do a put spread for a credit and recieve premium now which the account needs to keep to cover the $2,500 at risk, but you can use some of that to buy other positions. Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.
TSLA Put Spread calculator

Alternatively, you can do a put spread for a credit and recieve premium now which the account needs to keep to cover the $2,500 at risk, but you can use some of that to buy other positions. Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.

Ok,
will look into that and study it , but until now my mind refuses to cooperate in puts ... , i don't have a feel for it yet unfortunately !

Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.
you mean 1 or 2 more option contracts ??? ( isn't buying shares blasphemy here in this thread ? ;-) )

 

[mongo]

If the stock went from 1825 to 1800 on the day of exipry, your position goes from max profit to max loss.

Ok, i am trying to visualize what that could mean , and i am looking now at TSLA for the last 12 months .
I see gigantic volatility .

That means i would have to take a "virtual volatility buffer" into consideration ... , on top of my 1855 target.
Unless ( i am lookiing at your chart now ) , say between

26 dec 2023 ( if SP = about 2000 assumed) : returns : 1600 ( about 22X
and 19 jan 24' ( if SP = about 2000 assumed)) returns of course : 2427

I was referring to a maximum profit point call spread. I'd hope TSLA was way aive 1825 in 2 years

Sorry , hit the wrong button on the keyboard

so the chart does not display the values in between ; i mean is this a linear scale from 1600 profit to 2427 profit ?
example
26 dec : 1600
27 dec : 1700
28 dec : 1800
etc.

Meaning : depending on the volatiliy in the last 2 week, i could "bail out " , of course with less profit

Or does it jump from 1600 to 2427 ???

It's a curve, the website can also do a line chart of return vs price with different lines for the date. And you can change the price range and date to zoom in.
Yeah, you can sell the spread ahead of time to lock gains.

Alternatively, you can do a put spread for a credit and recieve premium now which the account needs to keep to cover the $2,500 at risk, but you can use some of that to buy other positions. Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.

Ok,
will look into that and study it , but until now my mind refuses to cooperate in puts ... , i don't have a feel for it yet unfortunately !

Like 2 shares of TSLA which would gain an additional $1,800+ if the options expire OTM.
you mean 1 or 2 more option contracts ??? ( isn't buying shares blasphemy here in this thread ? ;-) )

For the last part, I meant if the stock price were over 1825 (both puts OTM), shares purchased now would have gained 800ish dollars each.