Wiki Options & "the Wheel" Glossary and FAQ

[Chenkers]

This is the Glossary and FAQ for:

Wiki - Selling TSLA Options - Be the House

I decided to create this thread as a more focused variation of the Option Trading and Advice thread, with that focus on the option strategy known as The Wheel. The thing to understand up front - I'm not a financial advisor, nor am I particularly expert in options trading. So far my experience...

teslamotorsclub.com

The 'Be The House' Thread Glossary:

IC: Iron Condor
BPS: Bull Put Spread
BCS: Bear Call Spread
CC: Covered Call
LCC: a LEAP Covered Call
LEAP: A long dated option, typically 12 months+
C+/C-: Bought/Sold Call Option
P+/P-: Bought/Sold Put Option
CSP: Cash Secured Put
STO: Sold to Open
BTC: Buy to Close
BB: Bollinger Bands
SP: Share Price (TSLA)
$TSLA: Value of a Tesla stock holding
IV: Implied Volatility of an Option (can be overall IV for an expiry or the IV for an individual option contract)
IV30: The estimated Implied Volatility of options notionally expiring in 30 days
OTM: An option that is Out of the Money (eg a Call above current SP)
ITM: An option that is In the Money (eg a Call below current SP)
CTM: Close to the Money (eg very near the current SP)
DITM/DOTM: Deep In or Out of the Money (eg. a DITM Put would be a strike well below the current share price)
FITM/FOTM: Far In or Out of the Money (similar to DITM/DOTM, ie. a strike a long way from the current share price)
OI: Open Interest (number of contracts at a strike on the options chain)
DTE: Days to expiration
Call/Put Wall: A significant high point on the OI graph (Stock Option Max Pain)
The Wheel: An Options strategy where if a call is exercised you sell an aggressive Put that may get exercised or vice versa.
ShitCall/ShitPut: Well OTM lower value CC or Put
I Dare You Calls/Puts: Very CTM Calls or Puts, often near a strong Call/Put Wall
Roll: A simultaneous STC and BTO order that be used to move a change the strikes and/or expiry of an options position
Flip Roll: A roll that converts a put contract into a call contract (or vice versa).
Split Roll: A roll that converts 1 put/call contract into multiple put/call contracts or spreads.
More detailed description of spread and option related terminology

A general disclaimer - participants in the "Selling Options" thread are not financial advisors or planners. We're not experts or pros. We're learning together and that's the strength of the community. That being said though we each make our own decisions and experience our own consequences - good and bad. That'll be true for you as well.

There is no such thing as free money or a risk free trade. If you think you've found one, then realize that there are better funded and more knowledgeable market participants that are looking for something like that (and buying it all up). Best I can suggest is to ask questions (in the "Selling Options.." thread - not here).


Where and how to start?
(an idea. And as with everything here, this is not advice, and we each make our own decisions and experience our own consequences - both good and bad.)

1) Read the first page of the Be The House thread.
2) Follow the link there or here to the Options Alpha education material. Read/watch it ALL (~30 hours?)
3) Read all of the stuff in this post, at least the terminology stuff. The more detailed pointers below might wait for now, as additional reading.
4) And then more details about actual trade types and strategies to get started with.


Managing Spreads
As I see it, there are 3 main categories of management: Closing, Transforming, or Adding Leverage. I'm going to list out the management strategies that I've collected from the forum and then my thoughts on which ones work best. I don't credit most because it didn't occur to me to grab anything other than the text at the time. So apologies for that. To be clear, very few of these ideas are directly from me, and I've only used a few of them in practice.

Closing:
1, BTC the position. This is the simplest and cleanest management strategy. If you do it quickly enough, it's the least painful. The risk is that the position was actually just fine if you had left it alone. Many times that's true. When we fail to follow this strategy and we're wrong about a recovery, we move into the strategies below.
2, BTC half the position. When in doubt, do half of what you planned to do. This will likely result in either zero loss (or a small gain, depending on when you closed), if the rest of the position recovers, or half the loss, if the position continues to go against you.
3, BTC the short side of the position and let the long side run. If you're convinced the SP will keep moving against you, close the short side of the spread and the long side will continue to increase in value, possibly turning a losing trade into a winning one. The risk is that you're wrong, and the stock recovers, in which case you've lost twice and your long position may even expire worthless. Obviously this works best with narrow spreads where the long leg will go ITM more quickly.
4, BTC the long side of the position and let the short side recover. If you think the SP will go back in your direction, but not far enough to rescue your spread, you can sell the long side at what you think is top/bottom. At that point have a naked ITM option to manage. You can close this if it recovers or manage it as you would any ITM open single option position. This may be easier to roll and manage than a spread, but you're also giving up defined risk for unlimited risk.
5, BTC half and form an Iron Condor. Eg, if you have an ITM BPS, close half and open a BCS margin free. This may reduce overall margin requirements, but of course you're at risk with both up and down moves now, and it may be hard to open a position you would have opened anyway for good premium.


Transforming: (these are margin neutral)
1, BTC the position, STO any new position with equivalent credit. There aren't any limits to what you can do to manage a position in this way, but a general rule of thumb is to only open a managing position that you would have been happy to open if you weren't also trying to fix a mistake.
2, Roll it out and/or up. You're BTC the old position and replacing it with a new position a week or more out and at a better srike for approximately the same credit. For a spread, unlike a single position (CC or CSP), you don't want to wait until the end of the week to gain the most from theta, as your long side will lose theta faster than your short side will benefit from it. If you're going to do this, I think it's better to make this move ASAP to minimize the loss from detla. Ideally you want to do this before the SP touches your short strike, but you can usually roll for even credit so long as the SP doesn't hit the midpoint of your BPS. One thing to note is that as soon as you roll, your losses (or recovery) will slow, since rolling out in time and/or up in strike will lower the delta of the position.
3, BTC the position and STO an equivalent credit of the other side; eg, changing a put spread into a call spread. Also known as the flip roll. Great if you think the stock price is probably not heading back your way and you're too far ITM to play catch up.
4, Roll/convert the short side out to an ITM short opposite (STO call if you are managing a put or vice versa), keep the long side. Both make money if stock goes in the direction you expect, but both lose if it doesn't. Similar to the "flip roll" but you're no longer in a spread.
5, When the SP is in an obvious range, BTC at one end of the range and STO at the other. Eg, if you have DITM calls to repair, and the SP is range bound between 1220 and 1240, BTC the position at 1220 then STO it again at 1240, reducing the premium, or changing the strikes or time for the same premium. The risk here is that you're wrong about the range and get stuck.


Adding Leverage: (these generally increase margin requirement or risk)
1, STO the same position at a higher credit. Doubling down on a losing position that you think will recover partially but not fully will allow you to close at even credit twice as quickly. The risk is that you're wrong about the stock price move (or get greedy waiting for exactly even) and end up losing money twice as fast instead.
2, BTC long side, halve the spread and STO twice the contracts. Again, you're doubling the position, but this time without adding extra margin to it. This will either recover twice as quickly or fail twice as quickly, and you're also reducing your options to roll, as a smaller spread width provides fewer opportunities to roll.
3, STO and form an Iron Condor, no additional margin necessary. Use the resulting premium to improve the problem position. You can continue to roll the whole position, or let the reparative half of the IC expire and just roll the problem position again.
4, BTO additional long contracts in the long leg of a problem position. For example, let's say you're in a -1100c/1150c BCS with 10 contracts. Roll it to the next week as -1100c x 10/+1150c x 11 instead of improving strikes. This will keep the spread from going underwater as quickly if it continues to move against you, as the extra long strikes will gain money more quickly than the short strikes will lose it. I haven't done the math on this one, so it may be necessary to add additional money to the position in addition to the premium from rolling to get the correct ratio.
5, Convert to debit spread by moving the short side beyond the long side away from the money. Eg, if the SP is at 1000 and you have a BPS that's -1050p/1030p, you can BTC the 1050 and STO at 1010, making at 1030/-1010 debit spread. This will incur a debit, but if the SP falls, you now make money instead of losing it.


Summary/tips:
1, Remember that you can apply any of these strategies one contract at a time, and that you are not limited to a single strategy to repair a problem position. Eg, you can roll up and out AND form an Iron Condor AND add long contracts to the new position.
2, Always ask yourself, "would I open this new position if I didn't have a problem to fix?" Try to avoid digging yourself in deeper.

So in summary, it is possible to carry some small long term rolling positions (especially single options, much more easily than spreads) that are against you in case of a huge move in the other direction. But if you're going to close a problem position, just close it then redeploy the capital however you would normally have done so. That's 90% of the strategies here. The few strategies I like are forming an Iron Condor with the rolled position (because it's margin free), adding long contracts when you roll (because I would never have thought of that! I haven't tried it yet, but I like it) and just BTC.

Rolling spreads is much more complicated than naked puts or CCs. The problem is that you're losing theta with the long leg faster than you're gaining it with the short leg, and that can add up fast. So I many people just BTC, although timing when can be difficult. However, if you've got a massive number of contracts position, you may want to consider this great post from @Yoona:

Wiki - Selling TSLA Options - Be the House​

Finally, one strategy that I found for managing single options that I wanted to include:
STO the opposite type of option (calls or puts) at the strike of your problem position, forming a straddle. This is risk free money, since only one of these can go bad, and you already have a bad position here. Use those funds to improve the strike of the problem position, forming a strangle. Eg, if you had a short 800 call option, form a straddle with a short 800 put, then use that premium to roll the 800 call up to say 850 and form an inverse strangle.

Managing BPS / aka credit put spreads. Much more to come here - for now:
Some rough rules of thumb for rolling a BPS:
link
More: link
More: link


Other more detailed topics:
Fundamental logic of technical trading:
link

Why BPS, aka - leverage of a BPS. This applies to both (US) retirement accounts as well as standard brokerage accounts (though the margin calculations are different):
link

Some details regarding poor man's covered call, aka leap covered call, aka using a long dated purchased call as the backing for a sold call with a near expiration:
link
Mechanics info on the lcc assignment:
link

Thoughts on early close:
link

 

[ggr]

bump.

 

[BrownOuttaSpec]

How to close/roll spreads in e*trade:
Link with pictures

 

[CrunchyJello]

'The Wheel' Thread Glossary:

IC: Iron Condor
BPS: Bull Put Spread
BCS: Bear Call Spread
CC: Covered Call
LCC: a LEAP Covered Call
….

I don’t mind saying I get confused sometimes with BPS & BCS.
Are there common acronyms for Bear Put Spreads or Bull Call Spreads?

 

[LightngMcQueen]

I was going through my notes and thought I would share some clippings that I've accumulated from this thread
(emphasis in quotes is usually mine, some might got mangled through copy/paste):


Great hint from @ChefBoyardee:

"OTM leaps spreads (within reason) > ATM or slightly ITM leaps > Shares > deep ITM leaps

Pure OTM leaps are very risky, too high of a break even IMO
OTM leaps spreads insulate you somewhat from IV and have a good breakeven. They can reach like 4x profit with only a 50% stock gain in 1 year. This most closely matches the returns of put spreads selling. Also risky if the stock decides to go nowhere
ATM leaps use less buying power than shares but fluctuate a lot with IV. 100% margin req but costs less than 50% of what shares cost so you have more leverage.

Shares have a 50% margin req so you can use the other 50% to sell premium.

Deep ITM leaps (like 350 strike) cost half as much as shares but have 100% margin req, so there’s no advantage from a margin perspective

I do 60% shares, 20% otm leaps spreads, 20% cash, and sell premium with most of my margin. I’m planning to move a little more into leaps spreads though for extra leverage

PS if you expect more than 3x upside by expiration, go with leaps. If you expect less than 3x go with leaps spreads.
PPS if you love covered calls go with leaps or shares since you can’t write CCs against leaps spreads
PPPS I’m drinking so my numbers are probably off, but in general that’s how they stack up. Happy Friday!"



My favourite bxr140 quotes :

"Sucker money sells theta. (MM's love them). Smart money sells volatility."


"A sold put inefficiently burns off value as underlying price goes up, AND it requires a lot of capital/margin to enter (me: and to maintain), so its really not a good choice if you're looking to capitalize on underlying profit movement"


"its a hard concept to wrap one's head around, but the "main bet" when selling calls and puts is not that you're hoping time passes, its that you're expecting the erosion of volatility to be greater than any impact from unfavorable underlying movement (so, in the case of a sold call, upward underlying movement). The primary mechanism of this erosion is a decreasing volatility environment; this is governed by IV and Vega. Theta/time only plays a small part, mostly toward the end of a contract, and can basically be visualized as the erosion of volatility over time. And as noted upthread, while you can make some profit off ∆ when selling options, ∆ moves unfavorably in both directions on a sold option so they're a stupid directional play."


"… in general, selling options is most efficiently implemented as a low-aggression, conservative strategy. If one is going to make aggressive trades, one will realize more gains with lower risk buying options instead."


"If one's account balance is in growth mode, one should not be in the mode of selling options on a consistent recurring basis. That doesn't mean one shouldn't be selling options, that means one should strategically allocate the massive capital required for sold positions toward positions that capitalize on high volatility environments. And that means, explicitly, that a selling strategy requires 1) analysis and 2) patience. "


"If one's account balance has reached a point where growth is no longer required, transitioning toward [conservative] sold options as a nuevo dividend type strategy is a viable path."


"So shouldn't the c900 increase in price faster than c1400?
The important thing is to multiply the number of contracts by The Greeks.
10 contracts at .28 ∆ is a position ∆ of $2.8, while 5 contracts at .46 ∆ is a position ∆ of $2.3. This is in line with the general trend that the farther OTM the strike, the better the ∆/$ when you buy-in. Similarly position Vega is $28.5 vs $17."


"Its easy to get roped into using more and more of your capital to sell options due to the terrible capital-to-profit ratio, because its human nature to want more profit. The rub is that when those sold positions get into their worst place, that's often, if not almost always the best time to enter long. The more capital that is tied up with those now-shitty sold positions (which started as profit-capped positions), the less capital is available to go long on unlimited profit positions."


"For a sold option, "unfavorable" underlying movement (in the case of a call, upward underlying movement) results in progressively higher ∆. More movement, higher ∆. It doesn't stop going up until it asymptotes at 1.00, which is equivalent to the ∆ of the 100 shares the option itself represents. In other words, when WAY DITM, the option eventually reacts (more or less) exactly as 100 shares would to underlying movement.

The further ITM a sold option, the more and more ∆ outweighs any other greek."


"While the leverage of an option is great (and/or dangerous ) , making The Greeks work for you is the real game changer when trading options.

Second, FWIW, I never buy ITM contracts or hold DITM contracts after a big price move, for a few reasons, in no particular order:
--From an initial purchase price perspective, typically the farther OTM the strike the more ∆-for-dollar you can get
--There's a gamma bubble that peaks ATM, (gamma is the rate of change of ∆); to maximize gains from underlying movement, you'd prefer to always be at the top of that bubble
--Similarly, there's a Vega*IV bubble that peaks ATM, and so in a rising volatility environment you also want to stay as high on that bubble as possible
--Somewhat conflicting with above, the Vega*IV/$ ratio increases the farther OTM the strike
--And same for gamma, where the gamma/$ becomes more favorable the farther OTM the strike
--Much less important since time decay isn't much of an issue with properly bought calls but worth considering all the same, the farther ITM the strike the lower the theta/$ ratio
--And also much less important since interest rates are a minor player, the farther ITM the strike the lower the rho/$ ratio
--Often the B/A spread gets less favorable for the trader as a strike goes farther away from the money (in either direction) and so while typically small, you end up paying a bit more of The Stupid Tax when far away from the money
Again, some of those are conflicting with one another, and personal preference may weight them differently than I, but my go-to strategy rolls up to: buy slightly OTM (usually less tan 10% on the underlying but sometimes more) and sell/roll once they start rolling down the ITM side of the gamma and Vega bubbles. Put another way, I usually maintain owned contract strikes within ~10% or so of underlying."


"Its true that if one doesn't control a position relative to account size, its easy to take on A SHITLOAD of risk with spreads. However, the corollary issue is that naked positions make it easy to take on A SHITLOAD of margin (and expose the account to a margin call) so its kinda poe-tay-toe poe-tah-toe. Its all discipline in management.

If you're less confident in directional movement for sure fewer naked contracts will carry 'less unfavorable' downside than more spread contracts from a dollar perspective but, as noted upthread, the recovery strategy/timeline is basically the same if you get into unfavorable territory. "

 

[Chenkers]

(opens calculator and types in the numbers and then falls off the chair) : 2x the avg income of the last 16 weeks!

this week has been very good to me and i am very thankful to everyone , i read and like every post even if i forget to click on

few things i learned recently (from my notes):

• don't be ashamed/afraid of small gains and leaving money on the table; 4 quarters still add up to a dollar
• ignore noise (ie other thread's opinions that have no facts); focus on hard data and don't follow the crowd
• everyone on news/social media has an agenda or bias, trust in your own research
• plan your trade and trade your plan (this prevents emotional and spur-of-the-moment actions)
• have discipline (don't just trade left and right especially if they were unplanned the night before)
• have self-control especially when tempted; don't get caught up in the moment
• stick to the plan and don't abandon your strategy while thinking fast about something new
• the point is to reduce emotions, not remove emotions; we are not algo-bots
• let your stop loss or exit plan determine when to close a losing position; hoping for a reverse is not a strategy
• you can't control stock price up and down, but you can control your exit; there is nobody to blame for a large loss
• you don't need to time the lowest dip and highest peak, all you need is a piece of the move; stop maximizing gain
• you don't need to trade all the time, if there is no opportunity then rest on the sidelines
• think of risk-reward ratio; is risking $10k to gain $10 really worth it even at OTM, what if there is black swan tom?
• overtrading increases chance of losses, stop the addiction
• it's ok to relax on Mondays... sometimes, the best credits arrive on Wed/Thur
• don't do revenge trades (to make up for loss) if you didn't really think about the risk of the position's quick payback
• if lost money, there is no shame in walking away to try again another day
• if you don't want to own the stock, don't sell the put too aggressively (and then spend weeks fixing a problem)
• plan your trade's entry and exit; if there is no plan then it's gambling
• it's ok to earn even just a little here and there, stop trying to get rich quick
• it only takes one mistake to undo months of work
• options is not a salaried job, stop thinking you need to have a certain income every week (ie force a trade)
• there is no perfect strategy, all you can do is be consistent in following what works for you
• if you are not constantly looking at the stock price, then your process/system is working
• most problems are caused by sizing; reduce size and you have less problems
• focus more on why you are opening a position, not how to fix it once problem comes
• institutions are the ones making money, so observe/follow what they are doing
• you don't need to be good at everything, master what works for you and consistently do it
• being consistent doesn't mean profit is also consistent; it means you have discipline
• if you only care for a 2 DTE trade, why do you worry about next month's stock price?
• you can't control steep drops and hikes, so focus on what you can control: entry and exit
• most of all and most important, protect your capital
• the real goal is not to earn $$$ a week, it's to make sure positions have high probability of success
• if you want good income, then have high-probability setups
• ask yourself "how much can i lose?" instead of "how much can i make?"
• making money is the easiest part, preventing a large loss is why we plan ahead (entry/exit)
• control risk: it is not sexy and it is not popular because it means less income, but do it or you will lose everything