Newbie Options Trading

[Jonathan Hewitt]

The only thing that paper money is good for is to get a feel of how time value of the option works.

Yeah, that time value can be a beast...I was a little too agressive last month when I bought a couple $110 slightly OTM calls and lost just over a thousand bucks. I had the right strike price but horrible timing Timing is everything. It was a good lesson.

 

[c041v]

Anybody think there's any worthwhile calls to consider going into Q2 release? From other threads on here, it's sounding like they are going to beat the estimates by a healthy margin. Was looking at Aug 160 Calls, but they are fairly pricey.

Mind you, I've kicked myself several times now for being on the fence about calls going into a big announcement...

 

[InTheShadows]

So am I understanding this right? If I would place this order, I would be offering the right for someone to buy 100 of my shares before the third Friday in September for $170 each. In turn I would end up getting $325 - the comission. Then if the stock goes to 190 before then someone may exercise their right and they would get 100 of my shares for 17000? On the other hand if the stock goes to 145 next week I could then buy it back for say 545 and make out on the deal only costing comissions?

 

[Jonathan Hewitt]

So am I understanding this right? If I would place this order, I would be offering the right for someone to buy 100 of my shares before the third Friday in September for $170 each. In turn I would end up getting $325 - the comission. Then if the stock goes to 190 before then someone may exercise their right and they would get 100 of my shares for 17000? On the other hand if the stock goes to 145 next week I could then buy it back for say 545 and make out on the deal only costing comissions?

Everything looks right until the end. It's hard to predict what you would be able to buy it back for with IV most likely going up as we approach earnings. If TSLA goes up next week you probably wouldn't "make out" on the deal. I am expecting IV to go up and the option will get pretty expensive to buy back. I don't think time decay will be strong enough for a September option to counteract that effect...

What are your thoughts IRT TSLA price movement? What are you goals? It sounds like you are trying to make money off of time decay...I don't think now is a good time to try that but who knows?

I've only been doing options since April so take my thoughts with a grain of salt.

 

[InTheShadows]

My option goals right now is to learn how they work. Not putting any real money into them until I fully understand them. I doubt I will be making any option trades this quarter. I'm in the watch and learn mode right now. My thoughts on price movement are up and down with a long upward trend.

PS: Thanks c041t and DaveT for the links. I had some good reading this weekend.

Thanks ggr for the warning. I'm using the same approach I used to learn poker. Learn the theory, play with paper, a mentor says that's a stupid bet and explains it, then to the real table.

Everything on these forums has been a great learning experience. I'm amazed at the knowledge here! It's fantastic!

 

[Sanny]

Sorry for my ignorance, but it's a Newbie thread so I think I can post my question here.
Let's say I'm sure that TSLA will not go below 92.5 (so I can sell puts with that strike with a peace of mind) and I want to make a bet on the upward movement (so buying calls will help me with that).
What option strategy can I use to fund calls purchase with some money got from the puts? As I understand if I just sell a put I still need to keep money in my account to buy stock at a strike price.

 

[mershaw2001]

You as an average investor with no margin ability and with low level option ability can't do much. You need to put cash up to cover the "worst case scenario" of the put - e.g. the stock going to zero if you are an average retail investor. I think that you meant, in essence, you are looking to make a synthetic long position and use the incoming cash from the puts to fuel the purchase of calls, but this only works if you can sell those puts naked with no cash covering- which you can't unless you have option level 3 or 4 at brokerages.

You could consider doing this in a margin account, and instead of putting down cash to cover the puts, you can use your "nonmargin buying ability" up to the point that you max out your SMA. With options in this situation, as with stock, I think you get a 2:1 leverage on the equity in your account with regard to SMA. If you have 100,000 in your account, and use margin, you could sell 20 100-strike puts, each requiring 10k in buying ability to cover.

 

[johnnydop]

Selling Call Spreads

My option goals right now is to learn how they work. Not putting any real money into them until I fully understand them. I doubt I will be making any option trades this quarter. I'm in the watch and learn mode right now. My thoughts on price movement are up and down with a long upward trend.

PS: Thanks c041t and DaveT for the links. I had some good reading this weekend.

Thanks ggr for the warning. I'm using the same approach I used to learn poker. Learn the theory, play with paper, a mentor says that's a stupid bet and explains it, then to the real table.

Everything on these forums has been a great learning experience. I'm amazed at the knowledge here! It's fantastic!

Selling/Writing Calls is quite a risky trade if you are just learning about options. The biggest risk with Selling (Shorting, Sell to Open, Write) Calls is that your losses can be infinite and as we've seen in the past the risk with TSLA is another monster short squeeze could drive the price upwards way passed your strike price.

If you think TSLA wont be higher than 170 by Sept and want to generate some income you could limit your risk buy doing a Call Spread.

Using the current prices:

Sell 170 Call for $1.79
Buy 175 Call for $1.57
Net Credit $.22

Your max loss on this trade is $4.88 ($5 minus the .22 you collected at the opening. The $5 is the difference between the strikes since you bought one and sold the other,

At expiration (For simplicty sake we'll look at two scenarios, TSLA at 180 (above 175 strike) and at 160 (below 170 strike) and we wont go into the all details of the exercise/assignment calcs unless you want me to)

TSLA at 180: Both are in the money
170 strike is worth $10 (intrinsic value, stock minus strike)
175 strike is worth $5 (intrinsic value, stock minus strike)
Your PnL at expiration is -$5 but since you collected .22 at the opening your Net loss is $4.88.

TSLA at 160: Both are out of the money
170 strike is worth $0.
175 strike is worth $0.
Your PnL is the .22 you already collected.

I know, .22 is a lot less then Selling the Call outright for $1.79 on its own but it eliminates tons (infinite) of risk to the upside.

Does that make sense?

 

[sullitf]

Hey everyone, new to the forum (been lurking for a while) AND new options trading. I've been kicking around a few ideas for trying my hand at options trading with Tesla and am interested to hear opinions on what I've been thinking most recently.


SELL Aug 135 Put for $17.85
BUY Aug 115 Put for $6.25
SELL Mar14 105 Put for $15.90

I'm basing this off my expectation that the stock will rise after the earnings report. Unless I'm looking at the numbers wrong (quite possible since I'm new to options)...

TSLA at 136 in August:
Both Aug Puts are out of the money, I net the $11.60 credit

TSLA at 114 in August:
Both Aug Puts are in the money, I lose $20.00 - $11.60 credit, or net loss of $8.40


The Mar14 put was mentioned in the Advanced thread and the idea jumped out at me. Worst case scenario I get the $15.90 credit and effectively buy 100 shares at $89.10 at expiration.


If I'm wrong across the board: I lose $8.40 in August and buy @ $89.10 in March, effectively paying $97.50/share
If I'm right across the board: I keep the credits and make $27.50


(1) Do I have the worst/best case scenarios right or did I miss something?
(2) Would you recommend this strategy? I have yet to come across any options trading lessons that recommend selling ITM options, but to my novice eye it seems like a strong bet on my expectations for the stock after earnings are released
(3) Any recommendations on changes that I should consider?


Thanks!

 

[ggr]

Hey everyone, new to the forum (been lurking for a while) AND new options trading. I've been kicking around a few ideas for trying my hand at options trading with Tesla and am interested to hear opinions on what I've been thinking most recently. (...)

You're in the wrong thread... that is not a newbie strategy. As a newbie myself I don't feel competent to comment further.

 

[mershaw2001]

So I'd like to look at your two positions (a credit put spread) and your sale of March14 puts independently first. Both plays are bullish, your first play (credit spread) bets that the stock will be above 123.4 on august 17th and it will be profitable from 123.4 upward (17.85-6.25=11.6, 135-11.6=123.4.

My thoughts: today's price is roughly 122 so essentially you are buying stock at today's price. In return for buying stock at today's price, you are given upside to 135 after earnings. This only gives you 11.4 dollars in profit. For that limited upside, you are compensated with a limited downside, you can only lose 8.4.

Now, it depends on what you think will happen at the earnings call. If you have this strategy, you are protecting yourself from a major loss but predicting that at best there will be minor gains (under 10%) in the stock price. One thing that i don't like about it is that if there is a slight miss, and the stock moves by only 5 dollars down, you are on the hook for losing money. However, if there is a major gain you can only participate in the first 11.4 dollars of it.

Half of the options game is deciding what event is likely to happen and what is not likely to happen, and the other half is to correctly choose the strategy. I think if you're new, this one will not bankrupt you either way and might be a kinda safe strategy to participate in the option market at the same time as limiting your downside.

If you add in your march put sale, you now add in tremendous downside to a tesla slide. If they report and drop, you are limited in the previous credit spread, but then for the part that you're safe from (115 and below) you then become exposed at 105 again. Plus there will be increased IV and it will be more costly to clean out of the position on a slide to 110 after earnings.

I guess that i don't suggest both of these in combination. You seem slightly bullish, and you might as well combine your protective put at 115 with your 105 put sale, in conclusion not selling a protective put. Then you're profitable all the way down to 117.15. There's very little extrinsic value in this play, and its profitability depends on the stock moving up. if you are more neutral, sell the 130 and claim more of the extrinsic value. If you are more bullish, sell the 140 and give yourself a little more upside.

 

[emupilot]

(1) Do I have the worst/best case scenarios right or did I miss something?
(2) Would you recommend this strategy? I have yet to come across any options trading lessons that recommend selling ITM options, but to my novice eye it seems like a strong bet on my expectations for the stock after earnings are released
(3) Any recommendations on changes that I should consider?

Your brokerage may not allow you to do those plays as a newbie and I wouldn't recommend it. I'm a newbie myself so my brain gets a little twisted trying to sort out the contingencies of that play, but I'll try to figure it out since this is a newbie thread. If you sell a put, you are giving someone the right to sell shares for the strike price, which means you make up the difference if the price drops below the strike. The theoretical worst case scenario would be if a bunch of Model S cars start spontaneously catching fire and TSLA tanks to near zero. Then you would be on the hook for $135 for the 135 put and $105 for the 105 put, only mitigated by being able to sell your now worthless TSLA shares for $115.

So why is it you want to trade options? If you want to make more money than just owning TSLA, I'd suggest buying deep in the money call options, since they have low premiums. I have some Sep 80 Call and Jan14 80 calls which give me nice leverage and high deltas for a low price. Use those to learn how much risk you are comfortable with, then you can move into the higher strikes and more advanced options plays. I have some 100 and 110 calls too, but I've learned to stay away from options with close expiration dates.

 

[sullitf]

Thanks for the opinions, exactly what I was looking for! Spreads in general are interesting to me because I like to know the exact max gain/loss going into it, but I think I was wanting to use a spread here where it doesn't really fit my bullish outlook on TSLA. Shot myself in the foot overthinking it, throwing in the $105 long I didn't recognize that I was basically protecting myself in the $105-115 range and opening myself up to large losses if it fell drastically.

As for why options...My wife and I are in a position where we are making a good living, have no kids, and have a good jump on long-term savings. We're at a point where we can (and need to) start investing more and can afford to take some risks with a portion of our funds.

My interest in options, from what I know about them so far, are that they:
(1) can be as safe/risky as you want to make them
(2) allow us to leverage our money, with the caveat that more leverage generally means more risk
(3) can be as simple/complex as you want them to be. There's a lot for me to learn here and I like the challenge. This also means I need to keep myself in check and not try to get too fancy until I have a solid understanding of everything at play

As for TSLA, my interest there is that I always prefer to invest in areas that I know and understand. I work in the tech industry and have always been a gear head, Tesla has peaked my interest since I first saw the Roadster years ago. I have personal opinions of where the market is going, but more importantly it seems that there are plenty of signs that TSLA could take another huge jump in the near future. My intention with TSLA options is to take advantage of that jump, if it occurs, by making some pretty strong bets on large growth. If I'm wrong we can withstand losing.

Would I be better off buying calls in expectation of a price increase? Maybe a combination of Aug 135, Sept 150, and Dec or Jan 175? I am looking at deep ITM calls as well as recommended above, my only hesitation there is that I can't leverage my money as much going that route.

 

[Jonathan Hewitt]

Would I be better off buying calls in expectation of a price increase? Maybe a combination of Aug 135, Sept 150, and Dec or Jan 175? I am looking at deep ITM calls as well as recommended above, my only hesitation there is that I can't leverage my money as much going that route.

For DITM calls less leverage means less risk as well. Like you said, options let you be as risky or safe as you want. Think about it this way, a DITM call still gets you more leverage than just buying the stock straight up.

I see nothing wrong with the calls you listed but I wouldn't put the majority of my money in those calls. If the stock doesn't appreciate that fast you lose it all. I recommend having a majority of your TSLA money in stock or JAN15 LEAPS, especially if you're just starting like I was a few months ago, and then you can put a smaller % in the calls you listed. I've found it's good to hold a mix of DITM, near the money, and OTM calls with a variety of expiration dates, but primarily long term expiration dates.

 

[emupilot]

Would I be better off buying calls in expectation of a price increase? Maybe a combination of Aug 135, Sept 150, and Dec or Jan 175? I am looking at deep ITM calls as well as recommended above, my only hesitation there is that I can't leverage my money as much going that route.

Your strategy should also take into account how often you want to buy and sell. Part of the reason I get ITM and deep ITM calls is because they rise and fall almost in synchrony with the stock. That makes it easier to profit off of the volatility of the stock. The OTM options don't respond as well to short-term fluctuations since they don't have intrinsic value, but of course the leverage is nice if your strategy is based on a longer term (months at least) upward trend.

 

[mershaw2001]

Sullitf:
In my experience, having a higher probability of coming out ahead any amount is more important and more satisfying than taking a long shot and winning the lottery. For instance, I'm holding deep in the money calls because I know I'll profit if it goes up no matter what, and i've got maybe 1-2 out of the money calls just in case it goes to the moon I can say "i was gambling and I won". If you're bullish and it goes to 155, a huge leap, you don't win with the strategies you list above.

Go with ~85% of your options in the range that will guarantee you a win. Then take 15% and go with the "long shot". If it goes to 200 you can hold me accountable for not making you a killing and quadrupling your money, but if it only goes to 145 then you know you'll come out ahead and not lose it all on the september 150 calls, which require a price over 155 to profit.

 

[InTheShadows]

I've been thinking about getting some leaps but I'd have to unwind my margin position to get them then sell another 100 shares just to break even with where i think the stock will be after earnings. I've thought about opening an account with another brokerage.

 

[gym7rjm]

Sullitf:
but if it only goes to 145 then you know you'll come out ahead and not lose it all on the september 150 calls, which require a price over 155 to profit.

The stock doesn't necessarily have to reach 155 in order to profit. This point confused me when I first started getting into options; every article reads like the call buyer's only way to profit is to reach the strike price + premium paid. If you aren't planning to convert the call option to actual shares then you can treat options just like another stock price. Right now the Sept. 150 call is 5.55 to buy. If a good earnings release comes out and the stock only jumps to 145 then the Sept. 150 call will be around $12 maybe higher depending on the IV. So no, 145 is not high enough to profit from converting the calls to shares, but you can just sell to cover and then make over 100% profit.

If you are extremely bullish on earnings and you feel the stock will go up either a bit or even a lot, then options will still return you a much better % profit - even if the strike price isn't hit - compared to only holding shares.

 

[c041v]

but if it only goes to 145 then you know you'll come out ahead and not lose it all on the september 150 calls, which require a price over 155 to profit.

I ask this question as a newb, but can you explain what you consider a profit?

For example, I've bought OTM calls for one price and sold them later on for a price that's still OTM, and made a profit. In fact, there's a lot of OTM calls I like because they carry such low prices. I'm sure there's less reward and certainly more volatility associated with these sorts of plays, but they're also quite a bit less expensive to get into.

I might be reading this completely wrong, but if the price goes up on any OTM call, and I sell for more than I bought after commission is deducted, that is a profit, no?

edit: Thanks for answering my question before I could even ask it, gym7rjm!

 

[mershaw2001]

Hey Gym, i agree completely, and I think you could make a good amount if that run up to 145 occurs before the earnings call. However, if the stock is 145 after earnings, the IV is going to be completely sucked out of the option the day after the conference call. I was short NFLX last week when the stock closed at 261 right before earnings, and to offset my short position I sold 220-strike puts for $300 each (3.00). Even though the people who bought those contracts were correct on the direction of the movement, and NFLX fell from 261 to 240 that day, the IV was sucked right out of the option and it decreased from $300/contract to $11/contract. Once people know what the results of earnings are, and they see that TSLA is going to 145 and not to 200, they won't pay a premium for the option contract.

- - - Updated - - -

Yeah! you're totally right Co041v, I completely agree with you! But you'll have to make your mind up about selling them for a profit before earnings vs after earnings, because you'll lose the IV inherent in the unknown earnings call.
If you've made a good profit prior to the call (and the stock has run up in anticipation) then I'd sell while I still had time and iv on my side. If you haven't, and the stock is still under 130, then I'd hold through the call.