Noob option trading questions

[OrthoSurg]

Did not want to flood the option trading main discussion with stupid questions so here they are in a separate thread:

1) To option traders, does your brokerage platform let you sell the put and buy the call for a bull put spread in the same trasaction? Just spoke with a representative at national bank, they require me to enter them in 2 separate order and they charge $6.95 commissions for each.

2) If you sell a put and the bid/ask is 3.05/4.60, at how much do you place your sell price? 4.65? 4.70?

3) where do you find the Delta information for probabilities? If you want to open a strangle with 15% delta both sides, does your broker show that? Mine doesn’t have that option they say I have to call and speak to a rep and there is a surcharge if I want to place an order for selling a put and buying a call on the same transaction or create an Iron Condor in one trade. However, it is not my plan to spend my day on the phone every week when I adjust the legs of an IC.

4) Where do you find the IV rank of the stock real time to adjust your strategies depending on high IV or low IV?
I’m waiting for my accountant for a letter to roll my stock positions from one company to my holding corporation and transfer everything to Interactive Broker however it has been so complicated to reach him so far that I am stucked with what seems the worst option trading platform in human history.

thanks for your help everyone

 

[Johann Koeber]

A good broker platform like IB will let you:

1) enter spreads a one transaction. Nonetheless fees are charges for each leg

2) I start with the most favorable price and adjust it in 0.01, 0.02 or 0.10 increments; often it gets executed before i reach the middle of the bid/ask spread

3) the greeks are calculated in the trading platform. If you buy real-time quotes, they are updated in real time

4) same as 3); personally I am interested in IV on a daily or weekly basis, so real-time is not so important to me

 

[LightngMcQueen]

Did not want to flood the option trading main discussion with stupid questions so here they are in a separate thread:

1) To option traders, does your brokerage platform let you sell the put and buy the call for a bull put spread in the same trasaction? Just spoke with a representative at national bank, they require me to enter them in 2 separate order and they charge $6.95 commissions for each.

2) If you sell a put and the bid/ask is 3.05/4.60, at how much do you place your sell price? 4.65? 4.70?

3) where do you find the Delta information for probabilities? If you want to open a strangle with 15% delta both sides, does your broker show that? Mine doesn’t have that option they say I have to call and speak to a rep and there is a surcharge if I want to place an order for selling a put and buying a call on the same transaction or create an Iron Condor in one trade. However, it is not my plan to spend my day on the phone every week when I adjust the legs of an IC.

4) Where do you find the IV rank of the stock real time to adjust your strategies depending on high IV or low IV?
I’m waiting for my accountant for a letter to roll my stock positions from one company to my holding corporation and transfer everything to Interactive Broker however it has been so complicated to reach him so far that I am stucked with what seems the worst option trading platform in human history.

thanks for your help everyone

1)
Questrade allows that, you can create spread or even roll the spread (4 transactions) with one limit order and one commission. That works particularly well with limit orders, so your spreads will roll automatically when right conditions are met e.g. value of your current month spread decays through theta while volatility will spike value of next month spread. Questrade will let you use your TFSA as margin for selling options.

IBKR is less expensive and more powerful than Questrade but their UI experience leaves a lot to be desired, especially the web browser based interface, it frankly sucks, mobile (phone/tablet) interface is better. I do not believe you can enter multiple legs in IB browser interface ... you need to install their desktop software for that.

2)
You are the seller .. you do not have to sell. You might leave limit order with limit $5 and wait for volatility to spike or underlying to move down.
For immediate fill aim halfway between bid/ask.

3)
Delta is available in option quote, delta value is approximate proxy for probability of option ending ITM.

4)
I can not find IV in IB interface when I pull option quote ... I need to google it, which give you a bit stale data

 

[TDog]

You can get margin from Questrade and roll a spread? Very interesting.

With TD dashboard can only do options with two legs at one time.

 

[LightngMcQueen]

You can get margin from Questrade and roll a spread? Very interesting.

With TD dashboard can only do options with two legs at one time.

You need TFSA and Margin accounts at Questrade. I do not think Questrade is truly professional platform but it works well if you roll few spreads as a hobby and learn the ropes.

Let me walk you through example, lets assume:
- 150k in TFSA and $0 cash in margin that gives you roughly 2/3 of that or 100k of available margin buying power in margin account.
- you want to sell bullish Nov 19 TSLA PUT spread: Sell 700 PUT and buy 500 PUT

Thats 200x100 = 20k of TFSA account value that Questrade will use as collateral but you will pay no interest, unless you actually buy the put spread at loss and your cash balance goes negative.

You can immediately enter order to roll it forward, here is historical order example of rolling PUT spread with limit order:

The biggest issue with Questrade:
- doing stupid Norbert Gambit kabuki dance for currency conversion,
- manually calculating cost basis including currency conversion for cap gains (T5008s)

IB converts currency at spot prices. IB seems to be also tracking cost basis correctly using daily exchange rate, and generating correct T5008s, however IB interface and reporting has so many issues that I do not trust it it 100%

Biggest issue with Interactive Bonkers ... if you have issue with your account ... Canadian users are handled by call centre in red CHINA (formerly known as Hong Kong SAR). So you can assume that CPC knows your net worth and all personal data and that's really Bonkers

AFAIK TD is one of the most secure and professional institutions out there, I think your money is safe, but using Web Broker frequently is major hazard to mental health.

 

[TDog]

You can immediately enter order to roll it forward, here is historical order example of rolling PUT spread with limit order:

That looks great and definitely makes it easier to manage if things go wrong. I like TD as it's easy to move money around but that is the one feature I really want. Rolling spreads in one transaction.

Thanks for sharing.

 

[LightngMcQueen]

As we all hope for TSLA to the MARS one more thing to keep in mind is that there are broker insurance limits, so it eventually it maybe necessary to diversify:

About CIPF Coverage

www.cipf.ca

 

[⚡️ELECTROMAN⚡️]

Oh wow I found the perfect thread for me. Unfortunately the options geniuses of this forum probably aren't interested in hanging out here. Here's my dumb question: so I had a LEAP that I bought a little over a year ago. 01.21.2022 expiration with a 600 strike. I kind of panic sold it on Monday for $40,000. I thought a 300% gain was good enough, and I thought I would just buy about ten shares with the proceeds and hang onto some cash. But now I will just hold on to the cash since the stock price kind of got away from me. Here's my question: I didn't have any cash on hand to exercise the option, but if the value of the option had gotten up to $60,000 could I have used the gains to exercise the option and add the 100 shares to my holdings? If so, that is a concept to buying LEAPS I hadn't thought of. It's probably the main idea now that I think of it.

Also, if I go to the option chain and I look at the Jan 21, 600 calls, is that the same price my LEAP would be worth right now, if I hadn't sold it? So far a $12,000 mistake if that's the case. Luckily I still have a few 2023 LEAPS that are doing pretty well, that I can console myself with.

 

[ammulder]

Here's my question: I didn't have any cash on hand to exercise the option, but if the value of the option had gotten up to $60,000 could I have used the gains to exercise the option and add the 100 shares to my holdings?

You can either sell the option and get the cash it's worth, or exercise it and cough up the cash to buy the 100 shares. You can't do both with the same call (as soon as you sell it, the buyer took over the right to buy the 100 shares for $60K). However, if you had a bunch of 600-strike calls, you could sell some of them to generate enough cash to exercise the others (assuming you can generate $60K cash in sales for each one you want to exercise).

Also, if I go to the option chain and I look at the Jan 21, 600 calls, is that the same price my LEAP would be worth right now, if I hadn't sold it? So far a $12,000 mistake if that's the case.

Sure, but I recommend you don't do that. It's virtually impossible to perfectly idenfify the top, which means you're almost guaranteed to see that you could have done better if you go looking. The important thing is that you do well enough big picture, not that each individual trade is absolutely optimal. Given that options can be a little hit or miss to begin with, there are very likely to be some money-losing trades along the way, as well as some could-have-done-better trades, and some that-was-awesome trades. If you can't make the whole satisfactorily positive, or you find you can only focus on the misses, then maybe options aren't for you...

(Though I'm sure some would analyze prior trades to try to learn how to do better. I guess it depends on whether you can learn dispassionately, or whether you'll agonize over the exact $12,000 loss. For me, I'm better off knowing I did well but might have done better than looking up the exact amount by which I "would" have done better.)

 

[AquaY]

Oh wow I found the perfect thread for me. Unfortunately the options geniuses of this forum probably aren't interested in hanging out here. Here's my dumb question: so I had a LEAP that I bought a little over a year ago. 01.21.2022 expiration with a 600 strike. I kind of panic sold it on Monday for $40,000. I thought a 300% gain was good enough, and I thought I would just buy about ten shares with the proceeds and hang onto some cash. But now I will just hold on to the cash since the stock price kind of got away from me. Here's my question: I didn't have any cash on hand to exercise the option, but if the value of the option had gotten up to $60,000 could I have used the gains to exercise the option and add the 100 shares to my holdings? If so, that is a concept to buying LEAPS I hadn't thought of. It's probably the main idea now that I think of it.

Also, if I go to the option chain and I look at the Jan 21, 600 calls, is that the same price my LEAP would be worth right now, if I hadn't sold it? So far a $12,000 mistake if that's the case. Luckily I still have a few 2023 LEAPS that are doing pretty well, that I can console myself with.

A LEAPS is a long expiration option ( greater than a year when first traded)
there is no designation for a LEAPS . It goes by expiration .
there are leaps calls and puts so so your 600 strike 1/21/2022 is it depending if you bought a call or a put.

id recommend you go to the beginning of the options thread and take the advice of the first posts that you watch the videos and learn the basics . If you don’t you are guessing and that is not a good strategy

 

[OrthoSurg]

I let some puts I sold expire yesterday, the strike price was in the 700s. I looked before the close they were all +75 to 99% in my account. In the evening I saw one of the position at -273%

Than in the morning everything was back like the previous good numbers

Ever happened to you that an option cost you sold at 0,15 got to 0,01 then jumped back at 0,15 suddenly after the close? It was for a 700 strike out I sold expiring 29/10.

 

[⚡️ELECTROMAN⚡️]

One thing I've wondered is why wouldn't people at least sell way out of the money weekly calls. Let's take last weeks record week for example. It rose a 163 points. I'm not sure if that's the record for the most points increased during a week or not, but I'm guessing it's close. Right now the option chain is saying I could sell a 1350 call expiring this Friday for $200. I realize that will change when the market opens tomorrow. So why wouldn't people at least sell crazy high priced options on a weekly basis to pay for rent or medical insurance or whatever? Say I could live off of $2,000 a month. It seems like I could sell calls virtually risk free and generate enough monthly income to live on. What am I missing?

 

[OrthoSurg]

One thing I've wondered is why wouldn't people at least sell way out of the money weekly calls. Let's take last weeks record week for example. It rose a 163 points. I'm not sure if that's the record for the most points increased during a week or not, but I'm guessing it's close. Right now the option chain is saying I could sell a 1350 call expiring this Friday for $200. I realize that will change when the market opens tomorrow. So why wouldn't people at least sell crazy high priced options on a weekly basis to pay for rent or medical insurance or whatever? Say I could live off of $2,000 a month. It seems like I could sell calls virtually risk free and generate enough monthly income to live on. What am I missing?

I did this last week just to start off getting used to selling options and get used to the platform. I sold way out of the money put and call contracts however to sell 20 contracts you need a big margin. It’s not really interesting for someone with 2M margin available to cash in $3000 at the end of the week selling options having 2M margin requirements unless you sell way OTM BCS or BPS with 200 spreads just to reduce impact on margin requirement.

 

[⚡️ELECTROMAN⚡️]

I did this last week just to start off getting used to selling options and get used to the platform. I sold way out of the money put and call contracts however to sell 20 contracts you need a big margin. It’s not really interesting for someone with 2M margin available to cash in $3000 at the end of the week selling options having 2M margin requirements unless you sell way OTM BCS or BPS with 200 spreads just to reduce impact on margin requirement.

Why would you need margin if you already own the shares? I don't own 2,000 shares, but it seems like you could generate income from just selling one or two contracts a week.

 

[ammulder]

One thing I've wondered is why wouldn't people at least sell way out of the money weekly calls. Let's take last weeks record week for example. It rose a 163 points. I'm not sure if that's the record for the most points increased during a week or not, but I'm guessing it's close. Right now the option chain is saying I could sell a 1350 call expiring this Friday for $200. I realize that will change when the market opens tomorrow. So why wouldn't people at least sell crazy high priced options on a weekly basis to pay for rent or medical insurance or whatever? Say I could live off of $2,000 a month. It seems like I could sell calls virtually risk free and generate enough monthly income to live on. What am I missing?

A few things:

• You're comparing the Monday-to-Friday rise with the Friday-to-Friday option price. So really you should be considering a $205 stock price rise. Though, admittedly, that's unlikely to be a regular thing and the $1350 is probably safe.
• When the stock isn't going crazy, the IV is lower, and option prices are lower. So to get the $2/share you'd have to be much closer to the money. Which is potentially OK if the stock is in a less volatile period, until you get that one day with a Morgan Stanley price target increase and a Hertz order or whatever... If you wanted to stick with $200+ OTM you'd get way less money for those once IV settles down.
• If you have 300 shares, with which you could sell 3 covered calls/week at $2/share and earn $2400/month, there are other option positions available to you that could potentially earn way more. You'd have to have the discipline to not move to a risker but potentially more profitable strategy.
• If you did that with 300 shares, you'd be putting all 300 shares at risk -- in a taxable account this could land you with a large tax bill if the stock price ran away from you and you had to exercise rather than pay for the loss. (This may be less of a concern if you have well more than 300 shares, but is still something to be aware of in taxable accounts.)

All that said, it's not necessarily a bad idea. People make income that way. Maybe try it for a contract or two for a few weeks and see how it goes.

Just be aware that a lot of call sellers got burned badly in the last week, because nobody was expecting a $200 increase. Some had a week that wasn't as good as it could have been, some had a bad week, some lost a month or more's worth of gains, and some... well, let's leave it at that. Again, the danger is that IV goes down, you get suckered into say $50 OTM calls to keep that $2/share premium, and then a week comes where boom! Monday is up $115 and the rest of the week another $90. Keep in the front of your mind that a +$205 week is not only possible, but demonstrated.

 

[BrownOuttaSpec]

.... It seems like I could sell calls virtually risk free and generate enough monthly income to live on. What am I missing?

The post above mine goes into more details. As personal experience I opened a 1100/1150 BCS Monday morning to expire at the end of last week when the share price was about $950 for some "virtually risk free" money, I mean how could the price go up $150/share in 1 week, right? When the share popped to about $1,000+ in the first few hours I closed out of that position and lost money. I could have done some rolling or waited to see if it came back down but I just chalked it up to learning that nothing is "virtually risk free" and you better have a well planed strategy before things get crazy. It's hard to think straight when the stock isnt going the direction you thought it would and you are losing more exponentially money by the minute.

 

[⚡️ELECTROMAN⚡️]

So I should only use my IRA account to do this with? If the stock price hits or is getting close to the price I sold it at, is there no way to buy it back before it gets exercised? It’s not like buying a call where I can just sell to close whenever I want?

If I had the cash I could just buy a 100 shares at the price I sold the call at, and that would basically negate the deal. I don’t have the cash but I might be able to get enough margin to buy the shares back at the strike price, then pay off the margin with the proceeds from my sold call being exercised. Not sure if I can utilize margin in my IRA or not.

 

[ammulder]

So I should only use my IRA account to do this with? If the stock price hits or is getting close to the price I sold it at, is there no way to buy it back before it gets exercised? It’s not like buying a call where I can just sell to close whenever I want?

If I had the cash I could just buy a 100 shares at the price I sold the call at, and that would basically negate the deal. I don’t have the cash but I might be able to get enough margin to buy the shares back at the strike price, then pay off the margin with the proceeds from my sold call being exercised. Not sure if I can utilize margin in my IRA or not.

There Ain’t No Such Thing As A Free Lunch.

Let’s say you sell an 11/5 $1350 call at $2 (per share). Then Monday, the stock pops to $1250. You can look up specific values with online calculators, but the value of that option will go up… I’m just making something up but let’s say it’s now worth $10 on Monday. Here are your choices: 1. Pray it doesn’t go up another $100 in the following four days. Seems chancy after a $100 day. 2. Buy back the option for $1000 (recall you got $200 to begin with, so an $800 or 4x loss). 3. Roll to a strike of maybe $1365 for 11/12 for no cost. Though, if the stock goes up $200 this week, what are the odds it will go up only $10 next week?

All those choices are bad. You’re looking for the least bad. If you wait it out you might still get lucky and stock tops out at $1300 and your option expires worthless — but you might have a few sleepless nights in between. If you wait it out and get unlucky and the stock goes to $1400 on Friday, now the option is worth $50 (per share) or a 25x loss if you buy it back. You might rather let it be exercised, give up 100 shares for $1350 while the market price is $1400, and do something useful with that cash. It’s still a 25x loss but you didn’t have to produce extra cash. Only works if you’re not super-attached to the shares and there aren’t tax consequences.

I don’t mean to suggest you should never sell calls… just be aware that the down side is unlimited. You can’t suffer a 25x loss buying a call, but you can by selling one, and it only took the stock price going $50 farther than the strike. If the stock price moves fairly continuously against you, you may be faced with the choice of what multiple of your sale price to lose, while still hoping it might turn around by the end of the week, but the end of week movement is out of your control. Very, very stressful.

Now, if you’re talking about 5 calls initially $200 OTM, and they go $50 ITM, that’s “only” a $25,000 loss, and the 500 shares backing the call gained $250 each, so the rest of your portfolio is up $125,000. You could sell 20 shares to pay the loss and still be $100k up in the portfolio. But if you’d been gaining $4000 per month selling 5 calls up until that surprise week, you’d have just lost 6 months of option gains and your share count would be down by 20. HODL might start to feel attractive at that point.

The absolute worst case would be that you freak out at the $25k loss and determine to make it back or “rescue” your position with other option trades, so you start doing riskier stuff in the pursuit of big gains without a clear head…

P.S. No traditional margin allowed for IRAs. Only enough to cover unsettled cash.

 

[adiggs]

One thing I've wondered is why wouldn't people at least sell way out of the money weekly calls. Let's take last weeks record week for example. It rose a 163 points. I'm not sure if that's the record for the most points increased during a week or not, but I'm guessing it's close. Right now the option chain is saying I could sell a 1350 call expiring this Friday for $200. I realize that will change when the market opens tomorrow. So why wouldn't people at least sell crazy high priced options on a weekly basis to pay for rent or medical insurance or whatever? Say I could live off of $2,000 a month. It seems like I could sell calls virtually risk free and generate enough monthly income to live on. What am I missing?

Others have responded with their takes. I agree with those.

The central idea for anything that anybody comes up with - if it looks like free money, it isn't. If you can't spot the risks and rewards, costs and benefits, then you don't yet know the position well enough and need to keep hunting (asking questions like you've just done is one way to spot them)!

The other idea is that when selling options, you are entering into a position with a defined or maximum gain, while exposing yourself to unlimited losses. Or in the case of a spread as mentioned above, if you collect a $2 premium on a $100 wide spread, then you're taking a position that can earn you $2/share, $200/contract; that same position can lose $100/share or $10k/contract. Over a long enough time period (1 year) if you have 50 weeks of $2/share earnings, and 1 week of $100/share loss, then you've done 1 year worth of option selling and broken even. Worse - if that loss happens in the first week instead of the last week, then there may not be a second week of option sales and you've just lost $10k/contract.


A specific answer to your question about selling crazy far OTM options - a month or two back the call options that were that far OTM might have been selling for $0.20/share or $20/contract. Now 10 contracts are worth $200 instead of $2k while still carrying the same impact of the unlimited (or very large) loss. Now you're putting $10k on the table in an effort to earn $20 and you need 500 weeks of wins to offset 1 week of a maximum loss.


Another way to think about it - if you see a position that actually does represent free or risk free money, then remember that there are other market participants with a lot more resources and a lot better continuous evaluation of every combination of every option in the market, and they will have bought up all of that free or risk free money. There are traders that make those arbitrage opportunities their business. We need some other edge in the market to earn consistent income - such as our fanatical study of all things Tesla, yielding a better understanding of the company's future than Wall Street possesses.

 

[OrthoSurg]

Others have responded with their takes. I agree with those.

The central idea for anything that anybody comes up with - if it looks like free money, it isn't. If you can't spot the risks and rewards, costs and benefits, then you don't yet know the position well enough and need to keep hunting (asking questions like you've just done is one way to spot them)!

The other idea is that when selling options, you are entering into a position with a defined or maximum gain, while exposing yourself to unlimited losses. Or in the case of a spread as mentioned above, if you collect a $2 premium on a $100 wide spread, then you're taking a position that can earn you $2/share, $200/contract; that same position can lose $100/share or $10k/contract. Over a long enough time period (1 year) if you have 50 weeks of $2/share earnings, and 1 week of $100/share loss, then you've done 1 year worth of option selling and broken even. Worse - if that loss happens in the first week instead of the last week, then there may not be a second week of option sales and you've just lost $10k/contract.


A specific answer to your question about selling crazy far OTM options - a month or two back the call options that were that far OTM might have been selling for $0.20/share or $20/contract. Now 10 contracts are worth $200 instead of $2k while still carrying the same impact of the unlimited (or very large) loss. Now you're putting $10k on the table in an effort to earn $20 and you need 500 weeks of wins to offset 1 week of a maximum loss.


Another way to think about it - if you see a position that actually does represent free or risk free money, then remember that there are other market participants with a lot more resources and a lot better continuous evaluation of every combination of every option in the market, and they will have bought up all of that free or risk free money. There are traders that make those arbitrage opportunities their business. We need some other edge in the market to earn consistent income - such as our fanatical study of all things Tesla, yielding a better understanding of the company's future than Wall Street possesses.

even with fanatical tracking and following TSLA like a hawk, I could have never called the Hertz contract couples with the higher stock price target and the effects related. The only thing I could have done is close the positions as fast as possible to limit the loss. When selling a put or covered call to receive interesting premium, I realize it might always be risky. What seems less risky would be selling puts and roll them over for 1-2 months till the stock price turns back.