willow_hiller
Well-Known Member
A hair too late to edit, but I just realized I'm mixing units in the last chart. 30-day historical volatility is expressed in dollars, IV is expressed in percent. So I'm not entirely sure how to compare them.
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A hair too late to edit, but I just realized I'm mixing units in the last chart. 30-day historical volatility is expressed in dollars, IV is expressed in percent. So I'm not entirely sure how to compare them.
Volatility and stock price squared explains quite a lot, thanks!I was going to comment this earlier, but I didn't know if it would be too technical. The Black-Scholes-Merton options pricing model is actually where the all the Greeks come from. Here's the equation:
V is the option value, t is time, sigma is volatility, S is the stock value, and r is the risk free rate. So dV/dt is Theta, d2V/dS2 is Gamma, and dV/dS is Delta.
So you can see how central volatility is to the value of an option. Beside the stock price, it's the only other factor that is squared.
We've had some good conversation in the wheel thread, I recommend checking it out. I also recommend taking up @adiggs's suggestion on learnings about the greeks. They are what makes or breaks any options trade, and especially when selling for income.
I would also recommend getting some paper trades in--no time like the present to start. I've never actually used thinkorswim (TDAmeritrade) but it sounds like there's a sim in the platform.
LN1_Casey
Draco dormiens nunquam titillandus
That thread is almost 40 pages of technical Option jargon that I only understand like a quarter of.
I tried following it when it first started, but I very quickly got lost. And do you mean literal Greeks? I live in Greece. I know a number of them.
Think or swim has been down I believe.
Suppose you have 200 shares of tsla with two tax lots of 100 shares each, A and B. Suppose also that A has uninterrupted holding period of greater than 1 year. Now we have:
Tax lot A: long term capital gain status
Tax lot B: short term capital gain status with holding period 0 days starting from date T.
Now suppose that on day T+10, you sell one unqualified covered call. For tax treatment can you claim that this unqualified covered call is against tax lot A, instead of tax lot B which would have reset the holding period to 0 by setting holding start date to T+10?
Follow up: If we are allowed to pair covered call against a specific tax lot, that would mean for any combination of X tax lots where X = M + N, M being number of tax lots (each tax lot consisting of 100 shares) with existing long term cap gain status and N being number of tax lots that are in short term capital gain status, we can have at max M unqualified covered call position opened at a given time without impacting holding period on the N tax lots, right?
Similarly, opening a put position also reset holding period for shares that have not reached 1 year of holding period. If we are able to pair positions against other existing long term holding shares, the same conclusion about opening a maximum of M put position should be valid.
Tax lot A: long term capital gain status
Tax lot B: short term capital gain status with holding period 0 days starting from date T.
Now suppose that on day T+10, you sell one unqualified covered call. For tax treatment can you claim that this unqualified covered call is against tax lot A, instead of tax lot B which would have reset the holding period to 0 by setting holding start date to T+10?
Follow up: If we are allowed to pair covered call against a specific tax lot, that would mean for any combination of X tax lots where X = M + N, M being number of tax lots (each tax lot consisting of 100 shares) with existing long term cap gain status and N being number of tax lots that are in short term capital gain status, we can have at max M unqualified covered call position opened at a given time without impacting holding period on the N tax lots, right?
Similarly, opening a put position also reset holding period for shares that have not reached 1 year of holding period. If we are able to pair positions against other existing long term holding shares, the same conclusion about opening a maximum of M put position should be valid.
willow_hiller
Well-Known Member
Yes, thinkorswim has a good paper trading platform. Looks and acts just like the real thing, except with an orange background instead of green so you don't confuse it with the real one. The only caution I would give is to not trust the liquidity on the paper trading platform. If there's even a single valid bid in real life, your paper order will fill (and won't close the real bid). So it makes it seem like things are much easier to buy and sell than real life.
That thread is almost 40 pages of technical Option jargon that I only understand like a quarter of.
And do you mean literal Greeks? I live in Greece. I know a number of them.
Think or swim has been down I believe.
You might want to try this free options course first. It has 16 parts and explains almost everything you need to know.
Free Beginner Options Trading Course from Option Alpha
adiggs
Well-Known Member
That thread is almost 40 pages of technical Option jargon that I only understand like a quarter of.
And do you mean literal Greeks? I live in Greece. I know a number of them.
Think or swim has been down I believe.
I rated your comment funny, but decided to also answer seriously.
When people talk about the option "greeks", we're referring to the mathematical terms found in the option valuation equation(s). So you'll find the greek letters delta, theta, Vega, gamma, and rho (that I know of) in the equation. That's where "the greeks" comes from.
Of course the mathematicians could have used a, b, c, d, and e and then we'd have the alphabet or something shorthand like that to refer to the variables in the equation
There's technically quite a few of them, but the most practical ones for a retail trader moving a small number of contracts at a time are ∆, theta, and vega. The rest are second and third order derivatives or some kind of cross-derivatives that are really in the weeds for most folks. Like, I'm sure someone uses Ultima...I just don't know who that someone might be.
Investing exactly at the worst possible time - that happens to be my superpower!
Jokes aside, I actually was aware that IV was super high in mid-July right before ER, but was so confident of the ER blowing all expectations out of the water that I got greedy. In fact, the only other time worse than mid-July was probably mid-March and I bought options then too. Hard lesson learned for the future!
Anyways, although the short term weeklies expired worthless, most of my calls with longer expiration dates did recover and are nicely profitable. I just sold some with 21st Aug expiration for good profit, so have some cash to put to work with IV being so low (IV 30 is at 30th percentile as per Fidelity). So looking to see if LEAPS are a better deal or Oct/Nov monthlies for this year.
That thread is almost 40 pages of technical Option jargon that I only understand like a quarter of.
And do you mean literal Greeks? I live in Greece. I know a number of them.
Think or swim has been down I believe.
I rated your comment funny, but decided to also answer seriously.
When people talk about the option "greeks", we're referring to the mathematical terms found in the option valuation equation(s). So you'll find the greek letters delta, theta, Vega, gamma, and rho (that I know of) in the equation. That's where "the greeks" comes from.
Of course the mathematicians could have used a, b, c, d, and e and then we'd have the alphabet or something shorthand like that to refer to the variables in the equation
I also rated your post funny, but seriously, you should take at least the 1st track of the optionalpha course before you start writing calls. You can select 1.25X speed to get through it faster, but some to the jargon will become much clearer after. You dont need to follow the entire 'Wheel' strategy, but still need to understand the risks and strategies around writing calls.
As someone who got burned at least once writing calls too aggressively, I would highly recommend doing this before you initiate a new trading strategy. Buying Call options and selling them before expiration is pretty straightforward, but writing calls or puts can get complicated and you need to understand the basics. I haven't written any calls recently, but will plan to start later in the year after the split goes through. Currently I think the risk of getting the shares assigned is too high with the SP going up fast. Also, with the IV being as low as it is, not sure if the premiums are worth the risk.
If the S&P announcement does not come out today the general consensus is that it will come after the split date(Aug 31st). As a result I think we will continue trading sideways for the rest of this week and next week. The best time to buy more LEAPS would probably be next week.
So I’m going to sit tight and do nothing until next week. If for whatever reason S&P announcement happens this week I’m fine if I miss out but will not try to force it.
FWIW, to varying degrees spreads can be used to mitigate unfavorable volatility.
Hard lessons are my core competency.
FWIW, to varying degrees spreads can be used to mitigate unfavorable volatility.
Hard lessons are my core competency.
Since you are very knowledgeable about options can you please answer this question that asked a while back but no one answered:
Both legs were ITM.
dgodfrey
Member
It's a great plan until it isn't. I'm a greenhorn at this too but using a similar strategy, what I thought when I wrote the contract and how that changed as the SP starts to make dramatic upswings made me realize FOMO has the gravitational pull of a black hole. And the threat of having those 100 shares called away could end up in a black hole that swallows them up forever and you will never see them again at that price.Welp, as the stock split will enable me to actually have 3 digits of stocks, I'm going to try and start earning some cash via covered calls for my Tesla purchase rather than selling the stocks outright.
Before I start dabbling, I just want to gauge whether my plan is decent or if there is a vital flaw I'm missing.
So, depending on the stock price post split, I plan on selling ONE covered call for $510, or $100 above current SP (whichever is greater), ending that week (so Sept 4th).
I know I'll pay short term capital gains on the option itself, but long term gains on the stocks (since they're over 1 year), as they're not in retirement accounts. I'm fine with that.
So, say I sell the contract for $4, if the option expires worthless, I get to pocket the $400 that week, minus any fees from my broker (TDAmeritrade). Next week SP has been a bit rocky, so the option is now worth $5, and I pocket the $500. But, the SP reaches $520, and thus the call is also exercised. I would end up with $51,900 total, minus any broker fees, and pay LT Gains on the $51k, but ST Gains on the $900.
Is this a viable plan? Or am I missing some weird option factor?
I ended up buying back a CC that was about to hit the strike price for a huge loss but in hindsight, it was worth it. It cost about half what my taxes would have been and the SP has gone up $400 since then. I also would not have been able to sell a put that exercised low enough to get them back net even yet. Even with the peaks and valleys of TSLA still, I'm struggling with the concept that TSLA will go below $1,200 outside a black swan event. However, after the split, I'm much more willing to risk 100 shares with aggressively selling CC's and Puts if necessary as I don't plan on ever selling my shares for profit but would like to earn some revenue from them to buy more shares and, you know, stuff.
As you've shared, you say it's okay for them to cash out since they are funding your car but looking at the horizon, do you expect Tesla SP to climb at a higher rate than what you can get a car loan for? Additionally, for me, even long term tax gains of 15% meant that I would need to sell a put for around $200 lower than the current SP to try and get them back at a price point that left enough "profit" along with the premium to cover the tax liability. My giddy optimism on this company has me being more protective of these gold bars than I might have been a year ago.
I do think that your 25% buffer of strike price per week of expiration is conservative enough if you prefer to keep the shares. Otherwise, if you have/want to sell them anyway, maybe a closer to SP strike price with a much bigger premium could help soften the tax burden. But then again, what do I know. It's free advise on the internet so take it for what it's worth.
LN1_Casey
Draco dormiens nunquam titillandus
I am getting a car loan, but I can't afford a $110k loan for a car, so I'm selling to get half of that and then a loan that I won't faint over each month for the remainder. I know the shares will be worth far, far more in, say, January 2021, but I need a car in October 2020, and that vehicle is the only reason I even have shares. I would rather have the car then, than the value later, even if the value triples from now.
I was planning on being conservative initially, then getting more and more aggressive as the week approaches when I'd need the cash. If the Call is never ITM, than I'd just sell the shares outright at market.
I'm going to end up paying something like $6k in taxes, but I'm fine with that too.I will be messing with the Thinkorswim, as suggested. Eh, don't really want to play with options after I sell the shares, though. I want to sit on the remaining tiny hoard and let them grow for the next decade or two.
Statements of the obvious, but:
--In general, yes, any position where the anchor leg is sold requires going to expiration for max profit.
--In general, yes there is risk to holding that kind of position (as there is with holding any position, really), where unfavorable price movement will drive you deeper and deeper.
Next, standard disclosures apply--I really am just a self-taught retail-level hack--but IMHO:
--All positions should have a stop loss from the off. This forces one to reconcile acceptable loss and, more importantly, forces one to justify a high-probability entry. In context of your this trade it would mean you don't really care that much if you're ITM or in the red because you're still within your acceptable profit/loss.
--In other words, if you don't have a stop loss on this position and you don't plan on closing it right now, I'd strongly suggest putting on a stop.
--Especially with sold contracts, its better to use agressive stop losses to minimize risk. So if you're at 25% max profit, for instance, move up the stop that you might have set at 25% loss to ~0%. If you're at 50% max profit, move the stop up to 25% (or whatever). Better that you stop out of a reversing position at a small profit rather than a [relatively] unbounded loss.
--When I select anchor legs in a credit spread, the strike price is on the far side of a strong technical price...so if my position goes ITM that means underlying broke through that strong price and, thus, odds are its going to keep going and I should cut the rope on the position or roll out.
So...what's the actual position you're holding?
That was a trade from a few weeks ago. The spread went ITM for a little bit but the increase in price from what I paid was nothing maybe 5% percent... the stock went down a lot all the sudden and I lost it all but it was not a lot of money. I was just surprised that since both legs were in the money I was expecting to see a gain close to my max profit. Anyway I think I will do credit spreads instead. I did that trade in Robinhood but I mostly buy or sell options in Vanguard and they don't have a "stop loss"
option for orders; they only have "limit" orders.That was a trade from a few weeks ago. The spread went ITM for a little bit but the increase in price from what I paid was nothing maybe 5% percent... the stock went down a lot all the sudden and I lost it all but it was not a lot of money. I was just surprised that since both legs were in the money I was expecting to see a gain close to my max profit. Anyway I think I will do credit spreads instead. I did that trade in Robinhood but I mostly buy or sell options in Vanguard and they don't have a "stop loss"
Sorry, I totally misread your original statement as a credit spread not debit spread. So apply all my above to a credit spread. I can only assume its volatility that killed your profit.
IMHO Debit spreads are generally a better way to go than credit spreads, and certainly when volatility is low-mid to high-mid. For a debit spread my anchor leg will usually be ~ATM or sometimes OTM a bit and my -C/-P will be usually on 'this side' of a strong technical price, up or down as required for dialing ∆ and Vega (and also how strong I think the trade might be).
Note that I never do verticals for debit spreads. I pretty much exclusively go for diagonals (but occasionally calendars).
Random thoughts on IV the past week or so:
I’m really surprised to see IV levels staying so low(comparatively) given the run up we have had in TSLA the last couple of weeks. How do you explain this? Is this being manipulated by MMs and hedge funds to steal shares from unsuspecting retail investors? Is this somebody or some parties that are front running the S&P inclusion and accumulating by buying up calls at relatively moderate prices?
I’m really surprised to see IV levels staying so low(comparatively) given the run up we have had in TSLA the last couple of weeks. How do you explain this? Is this being manipulated by MMs and hedge funds to steal shares from unsuspecting retail investors? Is this somebody or some parties that are front running the S&P inclusion and accumulating by buying up calls at relatively moderate prices?
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