Options trading strategy/advice

[vwman111]

Because your covered call is at a higher strike price than the LEAP you own, if someone exercises the sold call (obviously once it is in the money), you could either exercise the LEAP you own to offset the shares you have to sell, or (better) buy the shares back on the market and sell the LEAP. The latter is better because you earn more by selling the LEAP than exercising it because you earn the time value (theta) remains on the option.

Thank you, I saw your other post, i'm trying to figure out similar things. more money then i ever imagined...and most of it in less than a week

 

[pz1975]

Thank you, I saw your other post, i'm trying to figure out similar things. more money then i ever imagined...and most of it in less than a week

As has been posted many times on here, don’t mess with naked options (especially selling uncovered calls or puts) unless you really understand them. I learned the hard way (for me it was 2014) as many on here also did I’m sure.

 

[YellyYeti]

Looking for some (not) advice. I am comfortable with my long buy-and-hold strategy and I am leaving that alone. But I've come to realize it will not allow me to retire early and travel the world. So I've been reading up on options trading. I think I understand the mechanics, but I could use some real world examples.

My long term financial goals are covered by long stocks, 401k, various other assets. The goal for options would be a gamble to accelerate the timeline to retirement. I would be willing to lose $5K (per year?) on this gamble. $4M before taxes would do nicely, I would get out the moment I hit that. Is that scenario even possible with buying "lottery ticket" calls? Would someone care to give me some examples of what would be possible with this $5K?

And what brokerage should I use for that? I have had my E-trade account for decades now, they charge $6.95 per trade.

EDIT: Meant calls not puts. Told you I was a n00b

 

[vwman111]

I'm looking at adding some leaps. What do you look for when picking which leap you want to purchase. Specifically, how do you choose the strike price, is it based on expected stock movement, various greeks, or cheapest strike to maximize # of contracts. And...picking a month. Is it best to stick with January as a "true" LEAP? or go as long as possible.

 

[willow_hiller]

Is there something about weeklys that would translate into lower IVs? Less liquidity? Just fewer strikes? It looks like March 27 has lower IVs than March 20.

 

[JakeP]

Total noob question(s) here. I've been long on TSLA since July 2012, when I first drove a P85 at Get Amped in Chicago. I've never sold a share, and am a believer in the TSLA bull cases in the thousands. Several times during this ride, I have considered getting into options to amplify this growth. But I have never traded options before, as I always considered them too risky and complicated, from my limited understanding. As I start to research them more deeply, I think I would only consider long calls, as they seem to be the simplest and least risky. If I believe the bull case, and want to profit off that growth if it happens sooner rather than later, then I should buy OTM calls. Then if the stock price blows through the strike price, I should be able to sell my calls for a tidy profit. Assume I don't want to exercise the call, as I don't want to front more money to buy the shares, even if I could sell them for more than the strike price I purchased them at. Simple reason here is that I might for example buy 10 JUN 21 1880 call contracts, and I don't have 1.88M sitting around to buy 1000 shares at 1880...nor do I want to give up the long shares I own!

Now here are the noob questions on options trading:

1) Say the stock price rockets to 2200 long before the Expiration Date. When I sell the 10 JUN 21 1880 call contracts, do I become a call seller, and as such become obligated to sell shares if the buyer of those calls executes before the expiration date? Or is the original call purchase simply closed out at that point, with me taking the profit and no further obligation or risk whatsoever? I believe it is the latter, I just want to be 100% certain.

2) I assume I would want to set up a limit order or a stop limit order to sell the call once the underlying stock reaches a certain level above the strike price...or more technically accurate, when the bid price of my call option reaches a certain level that corresponds with that. I am playing around with paper money trades in a simulator to do just that. I buy the calls at say $35, and then enter a closing order with a limit of $235. [Is that how I should be doing it?] Prior to sending this closing trade, the confirmation page is saying "Max Loss = Infinite". Why on earth is that? Am I somehow "selling a naked call"? Is it because I am placing a sell limit order when the call I bought is still far OTM? That makes me exceedingly nervous. While I am fine with risking the loss of the entire premium I paid, I absolutely don't want to incur any risk of losses beyond that...much less infinite losses. What am I missing here?

Thanks for any assistance here, it is much appreciated.

 

[ggr]

Total noob question(s) here. I've been long on TSLA since July 2012, when I first drove a P85 at Get Amped in Chicago. I've never sold a share, and am a believer in the TSLA bull cases in the thousands. Several times during this ride, I have considered getting into options to amplify this growth. But I have never traded options before, as I always considered them too risky and complicated, from my limited understanding. As I start to research them more deeply, I think I would only consider long calls, as they seem to be the simplest and least risky. If I believe the bull case, and want to profit off that growth if it happens sooner rather than later, then I should buy OTM calls. Then if the stock price blows through the strike price, I should be able to sell my calls for a tidy profit. Assume I don't want to exercise the call, as I don't want to front more money to buy the shares, even if I could sell them for more than the strike price I purchased them at. Simple reason here is that I might for example buy 10 JUN 21 1880 call contracts, and I don't have 1.88M sitting around to buy 1000 shares at 1880...nor do I want to give up the long shares I own!

Now here are the noob questions on options trading:

1) Say the stock price rockets to 2200 long before the Expiration Date. When I sell the 10 JUN 21 1880 call contracts, do I become a call seller, and as such become obligated to sell shares if the buyer of those calls executes before the expiration date? Or is the original call purchase simply closed out at that point, with me taking the profit and no further obligation or risk whatsoever? I believe it is the latter, I just want to be 100% certain.

2) I assume I would want to set up a limit order or a stop limit order to sell the call once the underlying stock reaches a certain level above the strike price...or more technically accurate, when the bid price of my call option reaches a certain level that corresponds with that. I am playing around with paper money trades in a simulator to do just that. I buy the calls at say $35, and then enter a closing order with a limit of $235. [Is that how I should be doing it?] Prior to sending this closing trade, the confirmation page is saying "Max Loss = Infinite". Why on earth is that? Am I somehow "selling a naked call"? Is it because I am placing a sell limit order when the call I bought is still far OTM? That makes me exceedingly nervous. While I am fine with risking the loss of the entire premium I paid, I absolutely don't want to incur any risk of losses beyond that...much less infinite losses. What am I missing here?

Thanks for any assistance here, it is much appreciated.

1) "Sell to close" when you have previously bought ends the transaction... no further liability except tax.
2) Limit orders are a good thing. I routinely (to use your numbers) would put in a $70 limit order to close half a position I bought for $35. OTM calls often go up with stock movement then go to zero later, so this often (not always) leaves me with half of the initial order "for free".
2.5) At your level of experience, DO NOT PLACE STOP ORDERS. This is advice although I'm not qualified to give it, so that's your problem.
2.6) regarding the second half of (2), you must be doing something wrong, like trying to sell a call rather than close an open call. Edit: or were you trying a spread? An open long call at a lower price would count as covering.

 

[JakeP]

Thanks ggr! I must not be using the platform correctly. Using ThinkorSwim's paperMoney, I right-click the call in my portfolio and select the topmost option of "Create Closing Order". You would think that would create a Sell to Close limit order, without a Max Loss = Infinite caveat. It does indeed create a sell limit order for the call, and then I modify the limit amount accordingly...but it shows that Max Loss=Infinite on the confirmation page, which is unsettling. I wasn't trying a spread or creating a new trade, I thought I was operating on the position I was monitoring, the long call I had previously purchased, by right-clicking on it.

 

[ggr]

Thanks ggr! I must not be using the platform correctly. Using ThinkorSwim's paperMoney, I right-click the call in my portfolio and select the topmost option of "Create Closing Order". You would think that would create a Sell to Close limit order, without a Max Loss = Infinite caveat. It does indeed create a sell limit order for the call, and then I modify the limit amount accordingly...but it shows that Max Loss=Infinite on the confirmation page, which is unsettling. I wasn't trying a spread or creating a new trade, I thought I was operating on the position I was monitoring, the long call I had previously purchased, by right-clicking on it.

I have no experience with ThinkOrSwim, but it sounds like you were trying to do the right thing.

Another comment that I've made before. I don't like paper trading, it makes you (or me... experience) think that "of course I would have sold at the top and made a bundle!", and you have no emotions. Take some small amount of money, no more than 6 digits that you can afford to lose, and do a few more real trades. You (I) will probably lose most of it before you start making any money.

 

[willow_hiller]

Another comment that I've made before. I don't like paper trading, it makes you (or me... experience) think that "of course I would have sold at the top and made a bundle!", and you have no emotions. Take some small amount of money, no more than 6 digits that you can afford to lose, and do a few more real trades. You (I) will probably lose most of it before you start making any money.

I spent a year paper-trading on Thinkorswim, the biggest warning I can give for anyone who gained their options experience on it is that it gives you a really false sense of security with liquidity.

If a single trade happens in the real market for a certain option, all of your paper trades will clear at that price. I haven't graduated out of the paper trades yet, but I've heard that especially close to expiration liquidity dries up quickly.

 

[JakeP]

Meaning that you may not be able to sell (or buy) as readily when you want to, in reality?

 

[Jtrader]

Don't use PaperMoney to learn to trade. Fills aren't real and neither are emotions. Just learn to trade with real money, but VERY VERY SMALL!

 

[willow_hiller]

Meaning that you may not be able to sell (or buy) as readily when you want to, in reality?

Precisely. It's a real risk that if your option is too ITM or too OTM, there will be no willing buyers and you will be unable to sell to close.

If you have no intention of exercising an option (or no money with which to purchase the shares of an ITM call) then you need to contact your broker before expiry. The default is to automatically exercise ITM options.

 

[JakeP]

If you have no intention of exercising an option (or no money with which to purchase the shares of an ITM call) then you need to contact your broker before expiry. The default is to automatically exercise ITM options.

Thanks for pointing this out. What happens in this case? Say you bought a large number of long calls that you couldn’t possibly exercise, which go deep ITM...a huge winner...but you can’t find a buyer for your sell to close order. You call your broker to tell them not to automatically exercise if they don’t sell. Then what? Do they expire and become worthless? What does the broker do? Exercise for you and keep your profit?

 

[willow_hiller]

Thanks for pointing this out. What happens in this case? Say you bought a large number of long calls that you couldn’t possibly exercise, which go deep ITM...a huge winner...but you can’t find a buyer for your sell to close order. You call your broker to tell them not to automatically exercise if they don’t sell. Then what? Do they expire and become worthless? What does the broker do? Exercise for you and keep your profit?

Hopefully someone with real-life experience can chime in, but my understanding is that if you choose not to exercise an ITM call, it expires worthless (time value of the option is 0 at the moment of expiry).

It's a risk I'm unwilling to take, and so for the moment I'm holding off on trading options (especially on TSLA) until I have either 100 shares to cover certain positions or cash on hand to exercise an option if need-be.

 

[ggr]

Thanks for pointing this out. What happens in this case? Say you bought a large number of long calls that you couldn’t possibly exercise, which go deep ITM...a huge winner...but you can’t find a buyer for your sell to close order. You call your broker to tell them not to automatically exercise if they don’t sell. Then what? Do they expire and become worthless? What does the broker do? Exercise for you and keep your profit?

I've never encountered this situation. Someone holds the other end of that contract, and will have the stock called away. They wouldn't be holding the stock just for that to happen, and it might have tax consequences. In fact, the computers out there will take the trade if you price it a cent or two under the intrinsic value, which still gives you almost all of the ITM profit.

 

[Robertj]

With the IV dropping is it now a good time to look at buying leaps ?


Tesla, TSLA & the Investment World: the 2019-2020 Investors' Roundtable

 

[ckessel]

So, basic question. I sold $475 puts, expired today, and given the stock is at $427 then they should get exercised and I'll be assigned shares.

When does that happen? My TDAmeritrade account still shows the option in my portfolio. I'd expect it to have been closed out and assigned.

 

[ggr]

So, basic question. I sold $475 puts, expired today, and given the stock is at $427 then they should get exercised and I'll be assigned shares.

When does that happen? My TDAmeritrade account still shows the option in my portfolio. I'd expect it to have been closed out and assigned.

You'll be assigned tomorrow (Sat) Morning.

 

[ckessel]

You'll be assigned tomorrow (Sat) Morning.

Yep, assigned this morning. My cash/margin balances are weird, not sure how it's calculating the impact as it was entirely cash secured, but maybe it'll all settle out on Monday.