@FrankSG
Hi,
So, if my understanding is correct, you sold your Jun'22 $700 and Jan'22 $500, because the return on investment would be higher on the Jun'22 $1400 ? And this is because those are more risky than the $500 and $700 ones?
Thanks!
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trading
- Thread starter Boomer19
- Start date
Hi,
So, if my understanding is correct, you sold your Jun'22 $700 and Jan'22 $500, because the return on investment would be higher on the Jun'22 $1400 ? And this is because those are more risky than the $500 and $700 ones?
Thanks!
Hey,
Yes, although I still hold onto the vast majority of my Jan'22 $500s, I only sold a small number of them.
Yes, I believe the ROI on the Jun'22 $1,400s will likely be higher. There is some more risk attached to them of course, but I was comfortable leveraging up slightly at a good price at the time.
adiggs
Well-Known Member
With the huge volume in TSLA options today at 770 and 800, I'm thinking that the price tomorrow will land somewhere in this range. I'm posting now, Thursday morning, as a stake in the sand.
Now I'm trying to decide if I believe that strongly enough to trade based on that.
EDIT: next week is the May monthly expiration, with a lot more contracts / money involved. That max pain (today) is 700. A share price of 800 is 20% more expensive - the difference between $700M and $900M (rounded numbers).
So I'm thinking that next week's expiration is likely to start exerting a pull on the share price, possibly stronger than this week's expiration.
Decision (for me): I'm going to wait for tomorrow and decide then. Right now I'm thinking the 740 strike put for expiration tomorrow is likely to be a safe one, with the share price finishing tomorrow in the 750/760 range.
Now I'm trying to decide if I believe that strongly enough to trade based on that.
EDIT: next week is the May monthly expiration, with a lot more contracts / money involved. That max pain (today) is 700. A share price of 800 is 20% more expensive - the difference between $700M and $900M (rounded numbers).
So I'm thinking that next week's expiration is likely to start exerting a pull on the share price, possibly stronger than this week's expiration.
Decision (for me): I'm going to wait for tomorrow and decide then. Right now I'm thinking the 740 strike put for expiration tomorrow is likely to be a safe one, with the share price finishing tomorrow in the 750/760 range.
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adiggs
Well-Known Member
An important mistake in this post, plus one thing not clearly stated.
The mistake - max pain for next week (5/15) is 700 as of today. I just reread and realized I had more going on in my head than made it through my fingers and into the post
. I apologize for that mistake. The order of magnitude between this week's expiring options and next week's expiring options is big - next week has 100's of millions on the line; this week has more like 10's of millions between max pain and a fairly wide range of prices (say +- 50 strike). That's changing though for this week with some really big volume today.
Anyway - the decision I'm acting on for now - wait for tomorrow and then see if the 740 strike put is worth selling. My thinking is that despite the very high volume of 770 puts transacted today, I think that next week's relatively low max pain is going to start exerting some pull and bring us down to more like 750/760.
The alternative view is the market will hit tomorrow as close to 770 as possible, and then trade down next week. It's sort of a question of how much control the market can exert on the stock price, and over what time period. And whether I'm wrong about 770 or 750/60, I'll get the same result selling the 740's (I like some extra cushion). The 740's are way closer ITM than I've sold before, but they'll also only be open for a few trading hours.
And to be clear - if you're listening to me regarding short term movements in the share price, you get what you deserve. I am historically an excellent contrary indicator
. I'm hoping I can start developing some ability to forecast short term movements, and will be using that to make reasonably far OTM bets on option sales (I like to bet WITH the house instead of against). It limits my upside on each trade, but has my win rate and income/dividends derived from the trading working quite well so far.
adiggs
Well-Known Member
Well, this isn't what happened today
I saw the bump to low 800's first thing in the morning, and decided to sit out today. It helped that I was also going to be driving all day, so I wasn't going to be able to baby sit anything.
It was good to have an idea of what I was looking for today, and a plan for what I would do as a result. When the trading didn't match the prepared plan, I took seconds to ditch and avoid forcing anything.
Sudre
Active Member
Well, lets hope I didn't get suckered in on that dip this morning now that the Tesla factory is up and running with permission (strange time to dip).
I am in by buying some weekly CALLS. Lets hope the market understands the good news.
I am in by buying some weekly CALLS. Lets hope the market understands the good news.
Sudre
Active Member
Man. I should have held to my convictions. I jumped in too soon but I still expect this to pop back up to the new lower high. Can't believe I drew the scribbles at 7am and didn't trust them... since when does predicting the market work?
I may not get the shares I was hoping for on those calls.
adiggs
Well-Known Member
Are Mysterious Call Option Purchases Forcing Tesla Stock Higher?
Found this article today, and I'm having similar thoughts.
For those that understand market making better, is this directionally accurate? I saw the 10's of thousands of call options go through last week and that seemed crazy to me, but what do I know
My guess is that the hedging fraction he (seemingly to me) makes up in the article is way too high for that particular position. My guess is that those options were closer to a .05 delta, and I'd expect a requirement on the market maker that sold those options to have 5% of the theoretical shares to hedge (of course, they might already have some), rather than the 20% he uses in the article.
And more generally, I'm wondering if huge volume of put sales can have the same but opposite effect on the market - another mechanism to pull the market in a desired direction.
I'm finding that I get useful information and a different take on things from zero hedge. I'm also finding deliberately mis stated facts and slanted presentation of facts to create negative views on some topics - particularly Tesla. So I'm more wondering about the market movement dynamic in general, than the specifics of this particular trade or how this site portrays it.
Found this article today, and I'm having similar thoughts.
For those that understand market making better, is this directionally accurate? I saw the 10's of thousands of call options go through last week and that seemed crazy to me, but what do I know
My guess is that the hedging fraction he (seemingly to me) makes up in the article is way too high for that particular position. My guess is that those options were closer to a .05 delta, and I'd expect a requirement on the market maker that sold those options to have 5% of the theoretical shares to hedge (of course, they might already have some), rather than the 20% he uses in the article.
And more generally, I'm wondering if huge volume of put sales can have the same but opposite effect on the market - another mechanism to pull the market in a desired direction.
I'm finding that I get useful information and a different take on things from zero hedge. I'm also finding deliberately mis stated facts and slanted presentation of facts to create negative views on some topics - particularly Tesla. So I'm more wondering about the market movement dynamic in general, than the specifics of this particular trade or how this site portrays it.
Sudre
Active Member
I hate replying to my own post but it appears we are going to open right inside this predictive channel I drew days ago.
It will be interesting if we continue to follow it down to around 760.
Sudre
Active Member
Closed my PUT spreads for a small profit.
I'll pick more up today on the next drop for next week... consider it a roll. Good news has to happen some day right. Well good news that actually moves the market.
I'll pick more up today on the next drop for next week... consider it a roll. Good news has to happen some day right. Well good news that actually moves the market.
I sold a few (covered) $900 call expiring 5/29/20 for $9.90, and a few (covered) $1000 call expiring 6/19/20 for $14.10 today. Also sold some $650 put for 5/29/20 expiry, got $4.60 on those. With current macros and battery day being postponed, I think SP would stay in this range with bias to the downside. I would likely be wrong in which case I won't be too unhappy about selling at $900 and $1000.
This is my first time writing options, let's see how this plays out.
in which case I won't be too unhappy about selling at $900 and $1000. This is my first time writing options, let's see how this plays out.
adiggs
Well-Known Member
Are Mysterious Call Option Purchases Forcing Tesla Stock Higher?
Found this article today, and I'm having similar thoughts.
For those that understand market making better, is this directionally accurate? I saw the 10's of thousands of call options go through last week and that seemed crazy to me, but what do I know
My guess is that the hedging fraction he (seemingly to me) makes up in the article is way too high for that particular position. My guess is that those options were closer to a .05 delta, and I'd expect a requirement on the market maker that sold those options to have 5% of the theoretical shares to hedge (of course, they might already have some), rather than the 20% he uses in the article.
And more generally, I'm wondering if huge volume of put sales can have the same but opposite effect on the market - another mechanism to pull the market in a desired direction.
I'm finding that I get useful information and a different take on things from zero hedge. I'm also finding deliberately mis stated facts and slanted presentation of facts to create negative views on some topics - particularly Tesla. So I'm more wondering about the market movement dynamic in general, than the specifics of this particular trade or how this site portrays it.
(Thinking out loud). I think I've got a better handle on this dynamic - I'd like to see if this is at least directionally accurate.
I buy 10,000 call options (1M shares) with a delta of .05.
The market maker that sold me those 10k calls needs to buy 50,000 shares (5% of 1M) in order to hedge their exposure and remain neutral. This creates buying demand in the market of 50k shares which will tend to push the market up.
As we get closer to expiration, assuming that the share price and other factors are the same, the delta is going to start shrinking. Eventually it goes to 0, but along the way we'll see the delta drop to .04. That drop to .04 means that the market maker now needs 40k shares on hand to hedge their position, but has 50k. So the extra 10k are sold to remain neutral.
The delta continues down to .03 as time goes by and likelihood of finishing ITM goes down, and now only 30k shares are needed to be neutral, and there's another 10k shares sold.
I don't have an opinion on how effective this overall dynamic is on moving the market. I don't know enough. I HAVE seen gargantuan option volume in the final week to expiration (10's of thousands of option volume this week - sometimes daily).
Whether the effect is equal or not, it looks like any initial push up in the stock will be followed by an equally sized pull down (measured in shares - not magnitude of change in share price) as options move towards expiration.
I need to read more - I'm thinking that this might be where the open interest walls come from, and where the tendency of the share price to move towards max pain comes from (at least to some degree). I also think there is share manipulation going on, but I think there's more to the story than simply manipulation.
so steady so far...consolidation at low volume? could be indication that anything that’s ‘expected‘ is priced in before batt day and annual meeting, with questions surrounding jul P&D
after a tight pattern like this where is it going next
after a tight pattern like this where is it going next
Hey @vwman111 , let me reply in this more appropriate thread.
Let me try to simplify the concept even further:
Scenario
TSLA stock price is $800
TSLA $1,100 call options are $80 * 100 = $8,000 per contract
TSLA goes up to $1,200 when the $1,100 option contracts expire
Calculating ROI in dollars
Stock
Buying 10 shares at $800 per share costs $8,000
When the stock goes up to $1,200, these shares will be worth $12,000
Profit is therefore $12,000 - $8,000 = $4,000
ROI is $4,000 / $8,000 = 50%
$1,100 call option
Buying 1 option contract at $8,000 per contract costs $8,000
When the stock goes up to $1,200, this contract will be worth $10,000 (($1,200 - $1,100) * 100)
Profit is therefore $12,000 - $10,000 = $2,000
ROI is $2,000 / $8,000 = 25%
Calculating ROI in number of shares
Stock
Buying 10 shares costs 10 shares
When the stock goes up to $1,200, these 10 shares will still be worth exactly 10 shares
Profit is therefore 10 shares - 10 shares = 0 shares
ROI is 0 / 10 = 0%
$1,100 call option
Buying 1 option contract at $8,000 per contract costs $8,000. $8,000 is worth 10 shares at a stock price of $800, so buying the option contract costs 10 shares.
When the stock goes up to $1,200, this contract will be worth $10,000. $10,000 will be worth 8.25 shares at a stock price of $1,200, so the option contract will be worth 8.25 shares upon expiration.
Profit is therefore 8.25 shares - 10 shares = -1.75 shares. A loss of 1.75 shares.
ROI is -1.75 / 10 = -17.5%
Conclusion
In this scenario, you made money on your options trade, to the tune of $2,000, a 25% return on investment.
However, you made less money than if you had simply invested in TSLA stock, a much safer investment compared to the option.
So in this scenario, you took on more risk, and got a lower reward.
Let me know if anything is still unclear, and you'd like additional examples.
EDIT: And yes. In the example from the blog, the ~2x return on the options in number of shares is still decent, but not nearly as good as it might seem when calculating the return in dollars of >4x.
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JusRelax
Active Member
@vwman111 - I posted this in another thread, but it seems it may be useful for you as well:
Basic call options courses have a 'breakeven' -- the point at which you would breakeven compared to not investing at all. But for our purposes, I'm wondering if it makes more sense to look at a 'call to stock breakeven' instead, which is the point where buying a call becomes equivalent to buying the underlying stock instead. I created a rudimentary calculator for that... it will help you to compare when (and by how much) a call becomes more worth it to purchase when compared to the stock itself. Feel free to make a copy of it and play around with the highlighted cells to get a better understanding of how much you expect a stock to go up by the call expiration date to determine if it's more worth it to buy a call, or just buy the stock:
Google Sheets - create and edit spreadsheets online, for free.
Here's an example using a TSLA January 2022 $800 call option:
View attachment 543125
So if you bought the call option, the stock would have to be at $1175.65 or above at expiration for you to make more money by buying the call option when compared to buying an equivalent amount of stock with the $25,818 initially. If the stock price is at $1500 in January 2022, you will have made twice as much money by buying the call instead of the stock ($44,182 vs $22,110.86 profit)
@FrankSG and @JusRelax
Thank you very much for the detailed explanations and the spreadsheet. I now understand. Going back to the example from the blog, it's not that you aren't better off investing in options from a pure profit point of view. It is that the return isn't as high as one might expect given they would have approx half of the return just by investing in shares. Which then leads one to question whether it is worth the additional risk to invest in options in the first place.
I'll play around with my portfolio in your spreadsheet to review the risk/reward that i'm currently at and make any necessary decisions based on that.
Thank you once again!
Thank you very much for the detailed explanations and the spreadsheet. I now understand. Going back to the example from the blog, it's not that you aren't better off investing in options from a pure profit point of view. It is that the return isn't as high as one might expect given they would have approx half of the return just by investing in shares. Which then leads one to question whether it is worth the additional risk to invest in options in the first place.
I'll play around with my portfolio in your spreadsheet to review the risk/reward that i'm currently at and make any necessary decisions based on that.
Thank you once again!
adiggs
Well-Known Member
@vwman111. One suggestion I have is to consider the education from Free Beginner Options Trading Course from Option Alpha to represent the minimum knowledge you should have for trading options. This is a link to their beginner education - they've got two more tracks (intermediate, advanced).
I think of the 3 tracks as:
1) option basics
2) getting into a trade
3) getting out of a trade
The site is also teaching a particular option trading strategy which might not be of interest to you (it isn't to me), but the knowledge about how options work - I'd consider that the minimum. All of this is in their free education side of the site (they've also get paid services - I haven't bothered with any of those).
I've also learned for myself, that I needed to start doing some option trades to get a better feel for how they work and what works well for me. One of those things I've learned is that I prefer selling options over buying them (that is me).
Good luck!
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