As I understand, as option seller you want Theta of time decay to do its job as fast as possible for the option prices to go down like crazy and that is the last week. I think these contracts over 18 months will bring less income overall. Less stressful and less time management strategy but less reward.
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Noob option trading questions
- Thread starter OrthoSurg
- Start date
Where does this strategy go bad?
Sell 11/19 900 CC ($139 Friday)
Buy 12/23 940 call ($140 Friday)
1.) Elon continues selling price goes to 900-950 by Friday
If below or at 900 get to keep the 12/23, if 950ish close both but should be positive.
2.) Elon stops selling or good news happens, price goes to 1100.
11/19 is $60 loss but won’t 12/23s have climbed more than $60 because of rising gama to be able to sell at a wash?
3.) Price stays flat. 11/19 at $135, will 12/23 fall below 130? Is this the worst case?
Sell 11/19 900 CC ($139 Friday)
Buy 12/23 940 call ($140 Friday)
1.) Elon continues selling price goes to 900-950 by Friday
If below or at 900 get to keep the 12/23, if 950ish close both but should be positive.
2.) Elon stops selling or good news happens, price goes to 1100.
11/19 is $60 loss but won’t 12/23s have climbed more than $60 because of rising gama to be able to sell at a wash?
3.) Price stays flat. 11/19 at $135, will 12/23 fall below 130? Is this the worst case?
Yeah, if that happens I thought the 12/23 would outrun the 11/19. I’m a little concerned about filling the 900 gap.
I have a question about Bull Put Spreads that expire with the underlying between the strike prices (where the short put is ITM, but the long put is OTM).
In that case, as I understand it, the broker will assign the shares, but not automatically exercise the OTM long option. For a high priced stock like TSLA, assignment could be very expensive and, not being in a margin account, I would not have enough to cover without liquidating everything (if even that would cover it). One obvious solution would be to roll or close the trade prior to expiration - but what if I forgot or got busy and didn't monitor it to the end?
I use TD's ToS, which shows max loss as the collateral required to put on the trade (the difference of the strike prices x 100, minus the credit). I infer from that they would automatically exercise the other leg, so I reached out to them to confirm and their response leaves me a little unsure...
"That is a great question! No, we would not automatically exercise the long put unless that contract was also in the money. That being said there are a few different ways to go about that. If you see that there is a high chance of only being in the money on the short contract, and not the long contract and cannot afford to buy the shares outright, you would have the opportunity to attempt to close out or leg out of that spread. In the event that you didn't realize you were in the money/didn't realize you were only in the money on one contract, or maybe you were previously in the money on both but the long leg became out of the money at that point we ask that you give us a call. If you contact us early enough we can have a broker enter an offsetting trade in what is referred to as a cashless exercise, otherwise any member of our trade desk and margin team would be happy to assist you with navigating handling the assignment after the assignment posts to your account. In short, if you have any reason to believe that you are at risk of being assigned without having the option to exercise, please just give us a call. We will gladly walk you through all of your options and help you navigate that risk."
So let's say I put on a trade in TSLA for something as shown below. If, at expiration, the stock is between 1025 and 1030, the shares would be assigned to me at a cost of $1,030,000 (10 contracts x 100 shares X $1030). That scares the bejeezuz out of me since the broker wouldn't automatically exercise the other leg. I wouldn't mind if I was out the $3,680 (the max loss), but the thought of getting through to someone on the phone is a concern.
Thanks for any assistance in understanding this better.
In that case, as I understand it, the broker will assign the shares, but not automatically exercise the OTM long option. For a high priced stock like TSLA, assignment could be very expensive and, not being in a margin account, I would not have enough to cover without liquidating everything (if even that would cover it). One obvious solution would be to roll or close the trade prior to expiration - but what if I forgot or got busy and didn't monitor it to the end?
I use TD's ToS, which shows max loss as the collateral required to put on the trade (the difference of the strike prices x 100, minus the credit). I infer from that they would automatically exercise the other leg, so I reached out to them to confirm and their response leaves me a little unsure...
"That is a great question! No, we would not automatically exercise the long put unless that contract was also in the money. That being said there are a few different ways to go about that. If you see that there is a high chance of only being in the money on the short contract, and not the long contract and cannot afford to buy the shares outright, you would have the opportunity to attempt to close out or leg out of that spread. In the event that you didn't realize you were in the money/didn't realize you were only in the money on one contract, or maybe you were previously in the money on both but the long leg became out of the money at that point we ask that you give us a call. If you contact us early enough we can have a broker enter an offsetting trade in what is referred to as a cashless exercise, otherwise any member of our trade desk and margin team would be happy to assist you with navigating handling the assignment after the assignment posts to your account. In short, if you have any reason to believe that you are at risk of being assigned without having the option to exercise, please just give us a call. We will gladly walk you through all of your options and help you navigate that risk."
So let's say I put on a trade in TSLA for something as shown below. If, at expiration, the stock is between 1025 and 1030, the shares would be assigned to me at a cost of $1,030,000 (10 contracts x 100 shares X $1030). That scares the bejeezuz out of me since the broker wouldn't automatically exercise the other leg. I wouldn't mind if I was out the $3,680 (the max loss), but the thought of getting through to someone on the phone is a concern.
Thanks for any assistance in understanding this better.
Not sure.
Seems like they would automatically sell the assigned shares to cover any shortfall in the account (if you have less than the 1.03 million ). The lowest sales price would be the long put strike (in which case, it seems they would execute those). The worst case situation would be short assignment after close on expiration day with long still OTM as the stock price is then unbounded.
You shouldn’t be getting into that position.
1. Might not be a good idea to use that 10x leverage if it opens you up to a loss you don’t want to face.
2. If you’re going to use that leverage, for God’s sake plan to close or roll by the end of the week. Forgetting or getting busy should not be an option. You can place advance orders to close, but you probably can’t guarantee that something will execute no matter the circumstances, so best to either plan to pay attention or close/roll earlier in the week if you know you’ll be busy Friday, etc.
When you created the spread, the broker reserved enough of your margin to cover the worst case, which is that the long leg expires at exactly the stock price. So, by definition, you had (at the time of creating the spread) enough margin to take the assignment of the short leg. Now, it's possible that movement in the price of the stocks that backed up your margin might have used up some of that margin, and you'll get a margin call whether the puts were assigned or not. But you won't get a margin call simply because of assignment.
Thank you for the replies, guys. Much appreciated!
@ggr : as for margin, this is an IRA account, so no margin, no shorting, no naked contracts. The broker (TD) only sets asside the difference in the strikes for put spreads.
@ammulder: yes, I wouldn't actually enter a trade this leveraged, it was theoretical, however, TD would have let me enter it even though I don't have $1M in equity. Normally if I fat-finger an order (their default option amount is 10 contracts and sometimes forget to lower that when appropriate), they catch me on the confirm screen with an error (not enough cash, exceeds buying power, illegal transaction, etc.). I was trying to provide an extreme example.
I think the best approach is to monitor and close/roll before expiry. I normally only trade simple single-leg options (CCs, CSPs). The BPS is very popular, so I wanted to better understand the mechanics and risks. Not sure it's for me. One suggestion from TD was to try it with paper money in ToS, which is a great idea.
Thanks all.
@ggr : as for margin, this is an IRA account, so no margin, no shorting, no naked contracts. The broker (TD) only sets asside the difference in the strikes for put spreads.
@ammulder: yes, I wouldn't actually enter a trade this leveraged, it was theoretical, however, TD would have let me enter it even though I don't have $1M in equity. Normally if I fat-finger an order (their default option amount is 10 contracts and sometimes forget to lower that when appropriate), they catch me on the confirm screen with an error (not enough cash, exceeds buying power, illegal transaction, etc.). I was trying to provide an extreme example.
I think the best approach is to monitor and close/roll before expiry. I normally only trade simple single-leg options (CCs, CSPs). The BPS is very popular, so I wanted to better understand the mechanics and risks. Not sure it's for me. One suggestion from TD was to try it with paper money in ToS, which is a great idea.
Thanks all.
FWIW I have an account with $30k cash that I sell 6x $50 weekly put spreads in (fairly well OTM). As it’s grown to $35k/$40k cash I’ve upped it to 7x then 8x then 9x $50 spreads (I squeaked out 9 because the premium earned basically counts as additional backing cash). If the stock price crashed and stayed low, I’d likely lose the entire sum of cash. I have other things in the account so it wouldn’t be devastating, but it would sure be a bummer. (I am not concerned that an oddity of closing prices would require more cash than I have to back the spreads; I’m diligent about closing/rolling each week.)
When the stock dropped nearly 20% in 2 days just recently, my spreads (then at $1000-1050 against a stock price of $1200+) went partly then fully ITM before I reacted… I just hadn’t thought that big a drop was plausible (oops) and it looked grim for a bit… but fortunately I was able to roll out a week for a profit when the price waffled up from time to time. Actually with the volatility the option pricing is high enough that I made just as much as usual in the rolls though they would typically go right back underwater shortly after the roll.
I was prepared to roll for little to no profit for a few weeks until the Q4 numbers or factories opening… Then yesterday it seemed like I might be out of the woods. (We’ll see if this holds?)
But, worth noting, if the stock price really tanked I would have few choices. Once deep enough in the money the roll options might have been for a debit (and I don’t want to throw good money after bad) or at in increased strike (not that attractive if stock is tanking) or farther out in time (though small spreads don’t do as well moving out in time) or widening the spread (requiring more cash backing; see good money after bad). If I had started this in what was it, February or April it might not have gone well?
So, I wouldn’t do this with money I can’t lose, or with a stock I don’t have confidence in… my goal with this scenario is to keep selling more spreads as the backing increases until I get to the point that the spreads throw off about $5k each week and then I will keep the spread count steady and invest that cash… hoping that if there is a total loss in the future, I will have at least generated enough income by then to feel like I can accept the total loss, sell $30k worth of shares, and start over.
Maybe if you’re going to try paper trading it would be good to have some kind of goal like that in mind, rather than just sort of ad hoc trading.
How much of the margin available on your account you have to set aside for requirement on your trades?FWIW I have an account with $30k cash that I sell 6x $50 weekly put spreads in (fairly well OTM). As it’s grown to $35k/$40k cash I’ve upped it to 7x then 8x then 9x $50 spreads (I squeaked out 9 because the premium earned basically counts as additional backing cash). If the stock price crashed and stayed low, I’d likely lose the entire sum of cash. I have other things in the account so it wouldn’t be devastating, but it would sure be a bummer. (I am not concerned that an oddity of closing prices would require more cash than I have to back the spreads; I’m diligent about closing/rolling each week.)
When the stock dropped nearly 20% in 2 days just recently, my spreads (then at $1000-1050 against a stock price of $1200+) went partly then fully ITM before I reacted… I just hadn’t thought that big a drop was plausible (oops) and it looked grim for a bit… but fortunately I was able to roll out a week for a profit when the price waffled up from time to time. Actually with the volatility the option pricing is high enough that I made just as much as usual in the rolls though they would typically go right back underwater shortly after the roll.
I was prepared to roll for little to no profit for a few weeks until the Q4 numbers or factories opening… Then yesterday it seemed like I might be out of the woods. (We’ll see if this holds?)
But, worth noting, if the stock price really tanked I would have few choices. Once deep enough in the money the roll options might have been for a debit (and I don’t want to throw good money after bad) or at in increased strike (not that attractive if stock is tanking) or farther out in time (though small spreads don’t do as well moving out in time) or widening the spread (requiring more cash backing; see good money after bad). If I had started this in what was it, February or April it might not have gone well?
So, I wouldn’t do this with money I can’t lose, or with a stock I don’t have confidence in… my goal with this scenario is to keep selling more spreads as the backing increases until I get to the point that the spreads throw off about $5k each week and then I will keep the spread count steady and invest that cash… hoping that if there is a total loss in the future, I will have at least generated enough income by then to feel like I can accept the total loss, sell $30k worth of shares, and start over.
Maybe if you’re going to try paper trading it would be good to have some kind of goal like that in mind, rather than just sort of ad hoc trading.
General question:
I was wondering also what is the rate of Theta decay increase in the last few weeks/days on options. Is it a linear graph or mainly an exponential graph? Where does the steep curve starts? In the last 2 weeks or few days?
There’s no margin in that account. All the put spreads are backed by cash, originally about $30k, currently up to $46.8k. (I’ve used $50 spreads so one for each $5k of cash, occasionally getting an extra when the premium for selling pushes the total over the next $5k boundary.)
At the moment it has 9x $1000-1050 put spreads for 11/26, which is closer to the money than I’m really comfortable with, but that‘s the spread I had when Elon announced he was selling (it seemed fine with $1200 stock price, what can I say?) and I’ve been rolling forward since then. I’m hoping next week I can close those out for peanuts and sell further OTM spreads. If not, I’ll roll again. I’m pretty confident the stock price will trend up toward Q4 P&D numbers, though of course no guarantees and specific timing may vary and etc.
I will take a stab at answering this based on my experience so far, though I’m poor with Greeks:
For weekly TSLA options, theta rarely matters. The option prices are way more driven by the stock price changes and IV changes than theta decay. If holding an OTM put or put spread (I’m also poor with calls), I will close or roll when the price is right, not when I have calculated a certain amount of theta consumed/remains. So maybe close for 80-85% gain, or roll when offered $5, or whatever the numbers are for the spread size and distance OTM and etc. Others close after a day if they see 30%-50% gain. I tend to put in close or roll orders in advance and hope that a momentary price or IV move will trigger them. I typically have moved to next week‘s expiration by Thursday. And again, that’s way more common with TSLA than everything staying steady and the option price slowly decaying over the course of the week due to theta.
The other odd thing I’ve noticed is on some reasonably close to the money options, is that they can hold surprising value until the last moment. Like, if I want to close for $0.10 on Friday, it could be 2 PM and $30 OTM and they’re still $0.45 or something (I just made up the numbers but you get the idea). So the “final bit” of time value can hang on for dear life when it seems crazy to me. Of course we’ve seen those $20 moves in the last hour, so maybe not quite so crazy…
For LEAPs or other longer-term options, theta can be more relevant. You’d have to get others to answer this part. I’ve heard people say the last three months is where the action is, but that’s secondhand. The one time I sold far-out puts (needed cash for renovation), I sold at low price and high IV and bought back maybe 1/4 of the way to expiration at higher price and lower IV. So again, it wasn’t theta in control for me. I tend to feel like theta is a “weak Greek” but I don’t have enough experience with long-term options to make a statement beyond “for me”.
adiggs
Well-Known Member
Theta and all of the greeks are continuous variables. Theta accelerates as a % of extrinsic value as you get closer to expiration. Delta changes on distance from the share price changes, and is in fact changing by gamma, which is itself changing as a function of how close to share price and how far to expiration.
Time decay becomes really obvious to me in the last 3 days, as long as you're not really close to the money. It becomes huge on the final day with the final minute being the very highest as % of extrinsic (it's all gone 1 minute later after all
).Think multivariate calculus.
Vanguard takes its time, but all is as you would expect. My 11/19 are still listed in holdings, but not impacting balances.
TheTalkingMule
Distributed Energy Enthusiast
For some spreads and covered options sold in my Fidelity IRA with limited margin I get a warning about "intending to day-trade" certain positions.
What's that all about? If I have limited margin, I assumed I didn't need to wait for any transaction to clear before the next transaction.
Anyone know what this is about?
What's that all about? If I have limited margin, I assumed I didn't need to wait for any transaction to clear before the next transaction.
Anyone know what this is about?
I think that is just regarding getting flagged as a day trader which kicks in a $25k minimum balance requirement.
How to Day Trade on Fidelity - Benzinga PRO
Flehmenlips
Member
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?
The strike of the long call has to be at or below the strike of the short call, and the expiration of the long call has to be the same or later. That way the long call will always be more valuable that the short call in any situation.
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