Note that options can also be used in conjunction with owning stock as a way to reduce risk. An example:
You have a bunch of Tesla stock and are bullish, but are scared about something really bad happening (earthquake at the factory, huge recall). I hate stop orders, because they are guaranteed to lock in losses if the stock is just temporarily dipping. Instead you buy Put options with the strike at whatever you would have set the stop order for (basically the amount of money you are willing to risk) and the expiration at whatever period of time you want to protect. If it dips below that price you are protected and can wait until the option expiry to determine whether to stay in the stock or not. If stays even or goes up you think of the cost of the option as insurance.
Personally, as a habit, I don't buy protective puts. I don't think I've done it once. Problem is that doing so can be a "waste" of money and erodes your profits (if you have any). And (unless there are mini options), you need 100+ shares to accompany it. For TSLA, that's no problem (but I have 0 shares). For high priced stocks like AAPL, there's no way I'd hold positions that large.
And yes, w/the high IV of TSLA, buying protection is very expensive. And as I said earlier, for many stocks, the IV of the front month options tends to rise before earnings and then collapse right after. So, if you buy protective puts right before earnings, there's a good chance you're overpaying.
I've read that some folks have the attitude re: protective puts of don't buy them, waste of money (see above). If you think a stock is going to get into trouble, just sell it or sell some.
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Always use limit orders with options (be it buy, sell or spreads).
Agree. For the strats I've been using, I always use limit orders.
Ok, another newbie question, do you ever buy or sell calls or puts that are out of the money? And if so, what are those scenarios?
I personally would never sell naked calls. I'm not nuts.
As I mentioned earlier, my primary way of collecting options income is sell way out of the money puts to collect premium (on down days but on generally uptrending stocks, where they are above their 200 D SMA) and hope they expire worthless or that I get a decent profit. I usually close them out when they get to a nickel or less.
If you're new to options, then you're mostly limited to selling Covered Calls. See ETrade's levels here:
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With options, you get larger percentage movements than the underlying stock. That's great when you're right, and bad when you're wrong. Add in the limited time during which the options are active and things can go from bad to worse quickly.
Buy Apple stock at $500 and when it goes down to $400, it's a bummer, but you can wait a year or two if you believe in the company. Buy an Apple $520 Call that expires in 3 months and when the stock goes to $400 it's virtually worthless until expiration comes near, and then it's literally worthless. Apple can shoot up to $100 a month later and you won't get a dime. So, with options you not only have to be right on what the stock is going to do, you have to be right on when it's going to do it.
There are lots of plays in TSLA right now, but all of them involve advanced strategies not suitable for a option newbie thread. The one thing newbie can do, that is sell Covered Calls, isn't a particularly good way to play Tesla right now.
Yep on all of the above. I'm not sure if you mentioned ETrade because they're your brokerage or because they just happened to have the levels listed openly. FWIW, from looking at https://us.etrade.com/e/t/estation/pricing?id=1206010000, I'd say their publicly listed options commissions are bad, and would be horrible for the trading I do.
Re: your AAPL example, yep. I've been burned more than once on simple long call/put positions where I got the direction right but the timing wrong.
I agree. I probably wouldn't sell covered calls on TSLA.
my quick contribution to this thread. 99%+ of option trades i have done in about 20 years are simple buying calls and puts. i pretty much never sell options because you end up in situations where you sell something for $1 that eventually ends up being worth $50. despite time erosion, i always want to be on the other side of that, where i risk $1 and i have a shot to make $50, 100, or whatever. the other thing when you sell options is you have to be much more aware of your short options being exercised, so there's a heightened level of diligence involved and more unusual things that can go wrong due to early or unexpected exercises.
i would say most people will be well served to avoid any strategies that involve selling options (including spreads, butterflies, etc. etc.). just learn how & when to buy a call or put option and how & when to sell it and you will do very well.
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options trading is very dangerous and addictive. it's pretty much gambling that's legalized with sometimes better odds than vegas, but most of the times worse odds than vegas. many traders i knew traded for years and were completely wiped out by being short options at the wrong time. others got too aggressive buying options and lost huge amounts that way. so don't be in a rush to get into this dangerous world. take your time, understand the risks, and use very small amounts of capital starting out. or... paper trade.
good luck and be very careful.
Interesting. Re: the bolded part, yep, that could happen, but the stocks on which I sell naked puts on for premium are generally pretty stable (and almost always above their 200 D SMA) and I always avoid having them expire after earnings. Most of them are stocks that I wouldn't mind owning anyway and at that price level.
As for short options being exercised, well, the naked puts I sell are usually way OTM. I don't let it get so bad that they become ITM.
As I said earlier, I don't sell naked calls though.
I like strats where time is on my side. In the past, I had sold iron condors in certain stocks, ETFs and along w/RUT and SPX.
I agree on your last paragraph. Start out small, don't take massive aggressive positions.