wanted to bump this to see how you guys might manage alerts or automate a btc event.... I can't always be next to my computer for hours at a time during the day... wondering if people just don't sweat it until fridays?
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Wiki Selling TSLA Options - Be the House
- Thread starter adiggs
- Start date
1. There's a serious misconception that bought options burn off time value at some uncontrollable rate, or even an unreasonable rate. They do not, if you buy properly, where "properly" = dated such that the time decay is a fraction of total CV over the period in which you'll likely hold the contract. So like, if you think you're going to end up holding the contract for a few weeks or a month, you buy a contract that's ~6 months out. If you think you want to hold the contract for 6 months or a year, you buy a 24 month leap. If you're day trading and are only going to hold the contract for a few hours (or even minutes) you might buy something for this month or even this week.
Its really the same logic as the other side of the chain--nobody would suggest selling a LEAP for its time decay with the intention of buying it back a few days later, and nobody would suggest selling calls is a terrible idea because there's 'no' time decay off a sold LEAP over the course of a week.
2. Market makers are not simply buying from or selling a contract to you when you open a position (shares or contracts), they're balancing their total market exposure from the gazillions of positions they have with folks like us with (again, more or less) an equal and opposite position. Figuratively at least (its much more complicated than this), if you sell an $800 call for next week to them, they immediately turn around and buy an $800 call for next week, which exactly offsets any financial exposure to their portfolio from underlying movement because The Greeks of the two contracts are equal and opposite. Where their major source of profit comes in is the bid/ask spread that you and I eat every time we transact with the MM. It might only seem like dollars to us when we pay The Man the spread, but multiplied by the gazillion units they move every day it adds up to a big pile of money to them.
The big rub is that MM's won't (and can't) exactly offset their exposure, for all manner of reasons. There's the pretty obvious reality of "immediately" being less than perfect, there's their huge portfolio to mangage full of plenty of shares and contracts, there's the fact that The Greeks from that $800 call and $800 aren't actually exactly equal and opposite, there's unexpected external forces (from the latest Tesla tree-wrapping to the current sociopolitical crisis and everything in between), etc.
So, at least within the good graces of The Man (SEC, whoever), MM's will <ahem> "hedge" the aforementioned exposure with shares and options in <ahem> "anticipation" of you selling them that $800 call for next week. In fact they have a multi-dimensional analysis that constantly adjusts their portfolio based on your $800 call plus all those other things based on where they see price movement going over the next hour or day or month. Because there's a ton of volume/money involved with those actions, the actions themselves tend to (Whoops!) drive market pricing as opposed to theoretically just reacting to it. So, naturally, as a for-profit entity the MM will, again at least within the law, conveniently leverage the fact that their portfolio actions are circular references that generally/usually drives the market toward their actions.
That's where something like the Max pain theory comes into play...though things like short shares also drive this (which is why Max Pain shouldn't be taken completely literally and absolutely, and should rather just be another tool on your belt).
bkp_duke
Well-Known Member
My job requires me to be constantly in front of a computer, so I have a separate monitor setup with the trading platform. I don't automate much, except usually on friday I place some 0.01 closing order for my calls, if I don't intend to roll them.
I've got the same view of things regarding the shares I own - whether the share price is $600 or $900 I own the same # of shares (or that is my focus). I have a long enough intended holding period that I consider my long term investment thesis to be an inevitable result and whether that takes 3 months, 3 years, or 30 years (ok - 10 years
) I am able and willing to be indifferent to that timing.So I don't focus on account or portfolio value - I focus on the cash I have plus the shares I have.
So its important to understand the nuance here. Relative to time value it is definitely true that buying and holding options is ultimately A Bad Deal; the duration with which their held needs to be contemplated before entering. However it is definitely true that when selling options one is FORCED into a "sell and hold" approach; one MUST wait for the contract to burn off time value. The issue is that there are only a few levers a trader can realistically pull relative to their actions in the market, and by selling an option for the purpose of burning off time value, one is locking themself out of one of those levers.
Again, there's a time and place for everything. What's important here is to make sure folks are objectively and accurately thinking about different positions.
At the meta level, going back to the logic that every trade should have an entry price, a target price, and a stop price, which combine into a Reward:Risk ratio, the target exit on a bought contract is simply that target price. FTR I recommend actually using underlying for price analysis of an options position, as trying to analyze the option itself is really difficult. And, similar to the logic of closing out a sold option at 80% (or whatever) of max profit, I find it useful to set an exit price at 80% (or whatever) of the target price. Put another way (And hopefully more simply), if my entry price on a day trade is $700 and my target price is $710 (maybe there's some resistance there or whatever), my actual exit price will be $708 (and maybe my stop price will be $697).
Ok, so that's entry and exits. Then your analysis of the volatility environment will determine what kind of position you open. It could be just a +C, but it could be some kind of spread, including a credit spread. If volatility is mad high it could even be a naked put. FTR there's varying logic in there on how to also choose strikes, but that's another story. Its pretty basic though--you just want to create a position with favorable aggregation of The Greeks.
Anyway, using the above numbers, if you buy the +C at $700 on the underlying you exit at $708 on the underlying. At $708 you can of course just close the position, but you can also bump up a stop loss to some minimum profit, or you can set a trailing loss in hopes that underlying will keep running up (because you really think $710 is the number) etc. But however you skin it, that was a perfect trade.
From a more practical perspective, you might be ok with a less than perfect trade. What you might end up doing is once underlying hits $702, you set your stop loss on the contract to be your purchase price--so your worst case for the trade is net zero. Its possible price will drop, stop you out, and then rebound back up to $708, but at least you didn't lose anything on the exercise, and you protected yourself from price dropping to $690. Or maybe once it hits $706 you decide to sell off enough shares to cover your entry price, so any value in the remaining position is 100% profit. Plenty of ways to skin that one too, depending on the trader's risk profile, conviction, etc.
If that all seems complicated, don't worry, its not. It simply comes down to 1) underlying price analysis and 2) options volatility analysis. And, if it wasn't clear, all that logic equally applies to both debit and credit positions. Or to spell it out even more bluntly, the above ABSOLUTELY APPLIES TO SOLD POSITIONS.
Wow neat with respect to #2....
But for #1.... "properly" = dated such that the time decay is a fraction of total CV over the period in which you'll likely hold the contract.
CV = Coefficient of variation? You lost me with respect to how you determine the relationship of fraction of total CV and date.... like is it "proper" it that number is >1 and improper if <1 sort of thing? It sounds as if you are saying there is a threshold of proper timing....
Don't take it so personally.
My heavy handed approach here is a function of correcting actual misinformation. I'm very on board with someone saying "I know there's a better way to do it but this is the way I'm going to do it". We're all different, we all have different priorities. If one is comfortable with selling DOTM CC's and that's all they want to do, that's great.
The disservice in this thread comes when someone says "the other way to do is is worse than my way of doing it and you shouldn't do it that way either" when such a statement is objectively wrong. Look no farther than the likes or other affirmations to those objectively wrong statements to know misinformation is pretty pervasive.
You are no more forced into a sell and hold approach with a short option than buy and hold with a long option. Likely your initial plan is to do so though, but it's not to say an early strong movement in the underlying in a favorable way can't provide a lion's share of your expected profit.
I'm not suggesting one is better than the other, just that you are never forced to profit on theta decay only
This is unequivocally wrong.
An owned contract can be rolled up or down, in or out, just like a sold contract, and the fundamental nature of the existing contract (= owned or sold) has no material bearing on success (or not) of the new contract. It is all about The Greeks of the new contract relative to market conditions (underlying movement and volatility) and there are just as many scenarios one could dream up where the bought contract gets "larger % chance of success" and the sold contract gets "less and less % chance of success".
It kinda depends on your platform, but if you're really just looking to BTC a sold contract I'd recommend doing an OCO (One Cancels the Other) against the CV. The "good" side of the OCO can just be at 90% position profit or whatever, and the "bad" side of the OCO can be at some palatable loss to you. If you want to be able to get in to do some maintenance, you can set an alert before your "bad" side trigger--I'd recommend doing that against underling price.
If you have an advanced platform you can effectively set up an automated "roll", but you'll have to choose the new contract in advance, so there's a little bit of noodling that needs to happen on that one and you could be slightly wrong compared to choosing a new contract to roll to real-time. So...your ticket becomes some trigger event (presumably underlying price or a target on the existing CV), and then the ticket would likely need to be (in order to execute fully) a market BTC for the existing contract followed by a market STO for the new contract. Its also possible (and definitely if you're tight on margin) that the STO will need to be an embedded OSO (order sends order) under the BTC--in other words, once the ticket fully executes the BTC it sends the STO order.
I've never actually set up a ticket in this way for this purpose, but it should work, IF your platform has the capability for complex tickets. (I couldn't do that in my Fidelity accounts, for instance)
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Totally agree, hence my deliberate choice of words.
I've covered in other posts how profiting off underlying movement on sold calls is inefficient and really only has a few ideal 'time and place' scenarios.
I can only speak for myself....but I'm surprised that it's wrong, only because I think I understand the gestalt of what he's trying to say
But if I understand you correctly, you are making a technical point.... even so, I have to translate it to something I understand.... such as "don't throw good money after bad,"
Yet I still understand what he's saying is right in certain instances.... "live to fight another day" ?
My goal is to simply know when I'm deluding myself until I have learned a better way....
Its kind of a relative thing. All else equal, time value burns off at a progressively faster rate (theta) as the contract gets closer to expiration. Generally with a sold option you want it to be ~close to expiration (where "close" is a function of a trader's strategy), because the contract is burning off value faster than if its expiration was farther away. The exact opposite is true for an owned option. You want it expiration to be sufficiently far in the future such that it can't burn off material value.
For instance, if you bought a Jan $700 call, it would burn off maybe ~8% of its value due to time decay over the course of a month (not including greeks fluctuation, but that's another conversation). If you bought a June $700 call it would burn off maybe ~40% of its value over the course of a month due to time decay. So...if you were planning on holding a contract for a month, you'd definitely prefer the Jan rather than the June. But the June call is only going to burn off ~15% of its value over the course of the week, and because the closer expiration costs less, maybe you're ok with eating that 15% for what you've analyzed as potential upside of the position.
Just for a round number of 50% profit , if you bought a June call now for ~$47 and underlying goes up to $735, the contract is going to be worth $70+, even factoring that 15% 'stupid tax' of time decay. That Jan contract would have actually made you more actual money ($2.8k vs $2.4k or so), but because you paid $138 for the Jan contract your profit on your capital is a smaller ~20%.
Greeks fluctuations not withstanding, ~equivalent sold contracts will have made more actual money (which is more or less @stealthyc's point above) because the trader is earning the ~15% time value on the Jun 700 as opposed to losing it as described above, but at a fraction of the profit %. In the above scenario a Jun 700 CC, for instance, would have returned ~0.5% profit on capital.
And to wrap this up with a horse beat, volatility is the huge variable. If IV on the June +C was to go up just 10 percentage points, your profit would go from ~$2400 to $3400, and a June -C would have a ~similar reduction in total profit.
Thx so much @bxr140 for all your help. I’m definitely getting much of what you describe. My quick summary for myself is: Though I’m making money on options, when compared to an optimum strategy, I’m doing it with more work, a lack of understanding, risking more capital, getting lower profits, and perhaps even losing on the overall account balance. Definite newbie, must try harder to learn. Thx.
Using the tool belt analogy, the comparison is basically the same as making the statement “You shouldn't own a screwdriver because you can't use it to drive nails”.
In other words, its all about context when it comes to options positions. It is at best difficult to make a this kind of blanket comparison between sold and bought options, and no realistic comparison would favor one or the other without a specific set of circumstances that is implausible or otherwise unrealistic for the 'red' side of the comparison.
In a realistic, practical scenario where one is rolling an owned call they are doing any combination of the following:
--Taking profit
--Reducing capital exposure
--Goign "up" the gamma bubble
--Reducing ∆ risk
--Capatalizing on low volatility
--Reducing theta
My pleasure. My only goal here is to ensure folks have accurate information with which to make informed decisions. Its very cool to take the approach of "I appreciate there's a better way to do things but I'm comfortable with what I'm doing now". Its just really hard for me to watch uninformed/false statements be made with such conviction that folks interpret those statements as truth.
I'm trying, in my head, to compare rolling a covered call, as opposed to a bought call
Typically you would roll the CC when it's ITM or ATM close to the expiry, normally very close, to remote the theta. You would essentially rebuy and then resell (which is all a roll is) maybe the same strike, maybe higher (or lower for CCP), but you net some more premium and whisk the call/put out of danger, at least until the next expiry date, when you can repeat if necessary - n fact you can roll a covered call forever until you end up with a strike price of $10k, in which case you'd probably be happy to have it exercised
A bought call, however, that you've paid for, near expiry, ATM or OTM, you would need resell, probably at a loss then pay another premium to buy another one
I struggle to see how the two are remotely similar, but might be I just don't understand it well and I'm totally open to being corrected/schooled on the subject
I totally get the concept of buying calls when the pieces are low, and yes I understand the leverage of buying calls, but there's a moment for those and it's not comparable to nibbling away week after week selling calls and adding shares when the SP is trading sideways
AsI said, I'm all ears to be educated here, but not fancy terminology please
I haven't gone through all the calculations, but is this sustainable even during a large stock rise like 2020? I suppose the key is as long as you roll around ATM? If you wait and roll when it's deep ITM, you could not reasonably recover (if it happens a few times in a row), I think.
I can confirm you cannot reasonably recover. I had near-term 600s I stubbornly refused to roll because the stock had been languishing under 400 for years, I didn't expect it to shoot by so fast.
Even worse, because they were part of a calendar spread, I lost money on them much faster than I gained on the LEAPs. Both ends of the spread were so DITM that there was no time value left even though they were like a year apart on the calendar. Trying not to make that mistake again, I'm sticking to share-backed short calls and more aggressive rolling.
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