Options noob, How does Tesla make any sense?

[Barchart]

Hiya,

Great forum and reading a ton. Been a Tesla long since 2011 and have enjoyed trading it for the better part of a decade. I've never traded options and decided to play around with them today - Simply put at an option price of 23/share, how do they make sense? Share would have to move for a call up $23 before you make any money not mentioning trading fees. Are people executing options and getting the actual shares or making money on the contracts?

Louis

 

[Boomer19]

Hiya,

Great forum and reading a ton. Been a Tesla long since 2011 and have enjoyed trading it for the better part of a decade. I've never traded options and decided to play around with them today - Simply put at an option price of 23/share, how do they make sense? Share would have to move for a call up $23 before you make any money not mentioning trading fees. Are people executing options and getting the actual shares or making money on the contracts?

Louis

word to wise.
play with fake money first..please!

open a paper trading account at interactive brokers so you can play with fake money first.

cboe online - should be free (at least some of it) but you have to register
Options Education Center - Cboe
cboe is largest options exchange, the knowledge base is all encompassing.

occ is the clearing house for us options. the options industry council also has online learning programs, similar to cboe’s
The Options Industry Council (OIC)


investopoedia
Options Basics: What Are Options?

 

[Barchart]

Boomer, thanks so much for the solid advise. I have literally read everything I can over the last two weeks and don’t understand how it makes sense. I am playing with fake trades so no worries on actual losses.

 

[Barchart]

Makes actual sense in reality ***^ in regards to Tesla

 

[Boomer19]

Boomer, thanks so much for the solid advise. I have literally read everything I can over the last two weeks and don’t understand how it makes sense. I am playing with fake trades so no worries on actual losses.

no problem

 

[mershaw2001]

Options are a good proposition when volatility is low (the market is not expecting a move) and you are expecting a move that is large.
Once the market begins to anticipate a large move in the future (volatility increases) prices of options move up to anticipate this move. Then they become less of a good proposition. In fact, they begin to be a losing proposition for someone who is buying the options.

Right now, we have very high volatility and the option market is predicting large swings in the price. This means that the stock must move a tremendous amount for an option purchaser to be profitable. Not only does that person have to be correct in direction, but he/she must also anticipate the magnitude of the move.

When you talk about an option being priced at 23 dollars, it would be helpful to include the expiration date and the strike of the option just for discussion help.
It is my opinion that options are too highly priced right now to be a "good deal". They still might be the correct thing to buy if there is indeed a massive jump in the price of the stock, but they are not a "good deal" right now. I think that the best advice you would get is to be buying shares for their long position. Then I make supplemental income by selling call options whenever the stock moves up.

 

[ggr]

It's relatively rare to hold an in-the-money contract to expiry or exercise it. The main reason I can think of (and have done occasionally) is after a big run-up in the underlying stock price, you can exercise a call option to get stock at a low price, then hold it for a year, to make the gain long-term capital gain. But mostly the point of options is increased leverage. You can buy a lot more effective stock for less dollars, and when the price moves in the direction you want it to, the gains are magnified. The downside is, as you've noticed, if it doesn't move enough, you still lose money. That's the "time value" of the options.

I agree with the idea of doing paper trading with one of the brokers, where they manage the portfolio as if it was real. I don't like the kind of paper trading too many people do, which is "Gee, I would have bought these options two weeks ago, and now I've made a bundle", because it's too easy to fool yourself.

If the scale goes from "investing" to "trading", playing with options is more like "gambling", with all the same problems of addiction... be really careful.

 

[hacer]

Of course there is the opposite side of the options: selling them. If you think their price is too high, sell them instead of buying them. For calls, unless you own an equal number of shares this can be really risky. Thus when you think about selling them, suddenly you might think they are too cheap. Especially if you are using them in a leveraged way.

One lower-risk options strategy is to buy 100 shares of stock and simultaneously sell a call; if you sell the call above the current price, then you have effectively bought the stock for a slightly lower price (the price minus the premium you collected for selling the call), but you have also limited your potential gains to the amount that the strike is above your purchase price. You also got a little bit of down-side protection because you got the shares at a bit lower price. I sometimes employ this strategy with weeklies, when there is only 1 week or less before expiration. An an example from today's closing prices:

You buy 100 shares for $310.10/share (cost $31,010.00 + commission). You sell a (one contract) 310-strike July 20 call (4 days to expiration) for $6.80, (proceeds are $680 - commission). Now if Tesla goes up (or stays the same) then the call will get assigned and you will be forced to sell the stock for $31,000.00 - commission. But you will end up keeping $670 minus 3 commissions, regardless of how much the stock goes up. If the stock goes down then you will keep the stock which effectively only cost you $303.30 plus 2 commissions, so if it only goes down a few dollars, you are still ahead. If it tanks you will lose a lot, but still less than if you just bought the stock. Now imagine that it goes up and down but ends Friday at $307.75, you keep the stock, you're ~$4/share ahead of a pure purchase and you can sell next week's 310 call for another 5 bucks or so on Monday (assuming not much opening gap).

So first paper-trade, then trade options in a non-leveraged fashion (like above) until you understand them. Then you can speculate. But always be aware of how much total $ value of stock you are trying to control; 20 contracts is 2000 shares of stock, or $620,000 worth at a 310 strike - if your account value isn't at least comparable to the dollar value of stock you want to control, don't even think about it.

 

[MikeC]

Hiya,

Great forum and reading a ton. Been a Tesla long since 2011 and have enjoyed trading it for the better part of a decade. I've never traded options and decided to play around with them today - Simply put at an option price of 23/share, how do they make sense? Share would have to move for a call up $23 before you make any money not mentioning trading fees. Are people executing options and getting the actual shares or making money on the contracts?

Louis

Options aren’t priced per share, that number you see is just the $2300 cost of the contract divided by 100 shares. The value of the contract will be determined by the strike price and expiration date.

 

[hacer]

Options aren’t priced per share, that number you see is just the $2300 cost of the contract divided by 100 shares. The value of the contract will be determined by the strike price and expiration date.

Option prices are quoted on a per share basis on every platform I've ever seen. Each contract is for 100 shares, so you must multiply the quoted price by 100 to get the actual price of one contract.

 

[MikeC]

Option prices are quoted on a per share basis on every platform I've ever seen. Each contract is for 100 shares, so you must multiply the quoted price by 100 to get the actual price of one contract.

You’re right, but I was responding to the OP who really seems to not understand how to value options.

If you see the part of the OP that I bolded in my reply, he seems to be under the impression that at $23/share, the underlying TSLA needs to move $23 to be in the money. I was just trying to point out that is not how it works.

It’s tough to be clear when there is such a fundamental misunderstanding, without writing an intro to options essay.

 

[TheTalkingMule]

My losses trying to time the SCTY(Tesla Energy) blowout via long term far out of the the money options still pains me at times. Best to just buy shares low and sell shares high, especially with an underlying stock that's so volatile(and will likely always be). If I were rich I'd probably sell puts, but that's about it.

 

[Sudre]

I have just started putting real money into Calls after playing with it on paper for quite a while. So far my method works but it's only been this year with real money. For me options require patients. You have to wait or find a price to suit your risk. Like the OP said. Prices seem too high right now.

What I did months ago was buy 24 J19s with a strike of $450 at a cheap (in my mind) price. Then I set them to sell 2 at a time in increasing amounts. On the run up to $370, 10 Calls sold and I made over twice the amount I put in. In my mind I now have 14 free Calls with a J19 strike of $450. If this mystical short squeeze happens I can make large profits and also buy shares at a low 450 price. If it doesn't in a few more months I will sell them and buy some cheap J20s and hopefully do this again next year.

In reality I did not expect the price to go up to $370. I was only looking to recoup the original buy price + com but hey, I won't turn down profits.

I had a note of what I expected TSLA price to be and what I expected the Call to be. If the sell price of the Call was not better than what I expected at a TSLA price that day I would have sold the whole lot because time decay would have been getting ahead of me.

If this idea sounds crazy feel free to let me know because I am trying this for the first time this year.

 

[neroden]

Hiya,

Great forum and reading a ton. Been a Tesla long since 2011 and have enjoyed trading it for the better part of a decade. I've never traded options and decided to play around with them today - Simply put at an option price of 23/share, how do they make sense? Share would have to move for a call up $23 before you make any money not mentioning trading fees. Are people executing options and getting the actual shares or making money on the contracts?

Louis

How do they make sense? Well, I sell puts at a strike of $300 and wait for them to expire. Perhaps you see how this makes sense. ;-)

There are many options strategies. Study before you do anything with options.

 

[neroden]

My losses trying to time the SCTY(Tesla Energy) blowout via long term far out of the the money options still pains me at times. Best to just buy shares low and sell shares high, especially with an underlying stock that's so volatile(and will likely always be). If I were rich I'd probably sell puts, but that's about it.

Options are tricky. I've found it's very useful to track the implied volatility at ivolatility.com. Learned how important this was from Jonathan Hewitt.