Newbie Options Trading

[ShortSlaver]

Obviously 'newbie' and 'options trading' will send a chill down some spines, but I believe responsibly used it's great investors take this kind of control in their financial future.

I use them as a tool for leverage as it makes sense when you have money to take a responsible, educated change with but want more leverage to realize larger gains to make your bankroll larger.

For me personally, I don't like selling covered calls as I lose all the upside and maintain (forced into even) all the downside. If your brokerage account allows it, selling puts can be nice if you meant to buy the stock anyways. You might take a crap on it, but if you would have bought the stock anyways, you would have likely crapped anyhow. Especially if you planned on taking a long-term position - as in I would have held no matter what and waited for capital gains before selling. Either way, I don't personally sell either or - at least not now.

Options are especially nice to hedge a position but if you're already playing with a small bank roll you're hedging a relatively small stake and might be better 'going for it' anyhow.

If you have a margin account sometimes it makes some sense to short a stock and buy a short term out of the money call, as its cheap and you might plan on the particular stock dropping quite a but. But that's not always possible and about the only hedge like that I've played.

I think the main thing you want to avoid is a big short-term of of the money option. Either way, really, put or call. They lose. Almost always.

I think starting out you might want to play LEAP's as they at least give you time to get out if it gets too hot for you. But you pay a premium for time obviously.

Options can give you a lot of control of shares in a company you believe in and can be quite profitable. But do be careful and do a bit of math to see how unlikely a chance you have of gaining anything. TSLA is a weird company right now and just can't lose steam. Usually it isn't like this. It's at a rare point where it could just blow up and see explosive (more than it already has) growth or deflate by missing by just a bit.

Have fun, learn something and good on you taking control of your financial future.

Remember, options is a net-zero game. For every winner, there is a loser. Full-time players with sufficient bankroll have a better chance at winning.

 

[kenliles]

I don't like to give investment advice in general and on the Internet especially. But I will say that time is your biggest enemy when trading options. When I'm bullish on a stock and want to go long with options I prefer deep in-the-money LEAPs with 18+ months of expiration remaining. That extra time has saved my trade more times than I can count, and you still get 2-3x leverage using in-the-money LEAPs. I often use LEAPs to augment my long stock positions.

Really agree with PureAmps on this point. Jan15 (or even Jan14) are good choices. I typically do something just in the money, then if I want to up the leverage I'll sometimes add some out of the money and let the stock come through it. You can also make adjustments along the way if the stock really takes off by rolling up the strike, taking profit along the way. I'll be doing this shortly on my $30 strikes. Likely move them to $40 on both J14 and J15

 

[cwerdna]

One of my friends who is really good w/options and technical analysis isn't into LEAPS. I'm not really either and tried buying a few LEAPS calls on IBM and MCD awhile ago. I ended up losing $. IIRC, they were all ITM at the time of purchase.

I can understand his POV. He doesn't like holding positions thru earnings events primarily due to the risk associated w/them (big and/or unpredictable moves). Buying LEAPS means holding thru several earnings events...

IIRC, Cramer's (yeah, yeah, he has many critics) been an advocate of buying DITM calls as a stock replacement strategy.

 

[PureAmps]

One of my friends who is really good w/options and technical analysis isn't into LEAPS. I'm not really either and tried buying a few LEAPS calls on IBM and MCD awhile ago. I ended up losing $. IIRC, they were all ITM at the time of purchase.

This is precisely why I avoid giving investment advice on the Internet.

IBM and MCD are not growth stocks, so the time decay of the LEAPs will quickly erode any gains you may make. They are also dividend paying stocks, which adds some complexity to option pricing and analysis. Generally speaking, I do not use LEAPs on dividend paying stocks.

When it comes to options, the strategies used can vary wildly from stock to stock and from quarter to quarter. Believe me, I've figured this out the hard way. :crying:

IIRC, Cramer's (yeah, yeah, he has many critics) been an advocate of buying DITM calls as a stock replacement strategy.

Cramer recommended DITM leaps? Uh oh, now I have to completely rethink my option strategies.

 

[kenliles]

IBM and MCD are not growth stocks, so the time decay of the LEAPs will quickly erode any gains you may make. They are also dividend paying stocks, which adds some complexity to option pricing and analysis. Generally speaking, I do not use LEAPs on dividend paying stocks.

Hilarious , I was in the middle of responding when PureAmp post came in. My words nearly identical. Do NOT use LEAPS on non growth dividend stocks, just buy the stock. Tesla is the exact opposite; a hi growth, hi risk stock that won't pay a dividend for a decade; LEAPS would be used if you believe in TSLA long term growth and want to use less money than owning the same number of shares. If you bought the stock, it would go through all the same earnings reports both up and down. Play the ups and downs with a separate pool of $ whether stock or options and use different strategy for that. Don't mix the two is my advice

 

[cwerdna]

^^^
Thanks. It's always good to have other perspectives. That's why I stated I'm an options novice/amateur, for now. :/

I'm no fan of buying LEAPS. FWIW, despite MCD not being a growth stock, it had a pretty good run from March 2011 to early 2012 and another from November 2012 to about a week ago.

Cramer recommended DITM leaps? Uh oh, now I have to completely rethink my option strategies.

FWIW, he occasionally mentions it on the air. I don't watch his show that regularly anymore.

It was mentioned in "Getting Back to Even". Jim Cramers Getting Back to Even - James J. Cramer - Google Books might work for you.

 

[PureAmps]

Ok, so that's a wrap! We've basically concluded that options are not for newbies.

Seriously though, anybody making an investment should start with an investment thesis. For example, I think this stock is undervalued and will be valued at X in Y months. You could base this belief on fundamentals, technical analysis, or a hot tip from your brother-in-law. The important thing is to understand why you are investing and to make sure the thesis holds true while you hold the investment. If your thesis begins to unravel (e.g. I thought Tesla would ship 10k cars in Q2, but they only shipped 6k, or my brother-in-law gave me this stock tip, but he's now bankrupt), you need to re-evaluate your position and most likely cut your losses. If you had a profit goal as part of the thesis (and you should), then you should take profits.

Great, now the next question is how do you maximize your profit if this thesis turns out to be correct? First, realize you are certainly 100% wrong and the stock will not be at exactly X in Y months. Stock returns to tend to follow a Log-normal distribution, so even if your thesis is correct, the actual price will be within a probability distribution defined by your target price and the stock's volatility (which you will also need to predict). Great, now you have a probability distribution. To maximize your profit, you only need to analyze every single possible trade (long stock, long calls, spreads, straddles, etc.) that could be made, compute the expected value of that trade across the probability distribution and then pick the one with the highest expected value. Pretty simple, right? Well, if you can write some code, it actually kind of is. :tongue:

Ok, so you can't write code. Let's just look at some log-normal probability distributions:

What do these distributions have in common? They tend to have long tails to the "upside" on the right, but most of the area under the curve (most likely to occur) is on the left. So you are far more likely to have a "return" that is not as great as you think. The reason this matters, is that if you are playing with options and you are buying out-of-the-money calls, you are hoping to hit it big on the right side of the curve. Unfortunately, this is unlikely to occur, and if it does you basically "got lucky" from a probability point of view. Your odds are much greater to play the "left" side of the curve, which is why in-the-money calls win out over other option "bets" the majority of the time. Just like any risk/reward tradeoff the returns are not as big, but they pay off more often, and over time produce greater returns. Adding in LEAPs and the cost of time decay does complicate these calculations, but I have found that in-the-money options still win out over time, both through software modeling and actual trading experience.

Regardless of option trading strategy, if your investment thesis is wrong, you will probably lose money. Plain and simple. So before adding options, I would make sure you are capable of making good investments decisions first.

 

[cwerdna]

^^^
Let's assume the OP still wants to buy long dated calls (January '14 or January '15) for speculative purposes. Would you agree that currently Jan '14 TSLA options look expensive and have elevated IV (likely due to impending earnings)? Would you agree that perhaps it's a good idea for this nearest earnings event to pass first? I'm talking about a hopefully lower IV and letting the stock make its move due to earnings, if any.

I have no intent to buy any TSLA calls as I'm generally averse to buying calls in the first place (right or wrong).

 

[Causalien]

Ok, so that's a wrap! We've basically concluded that options are not for newbies.

Seriously though, anybody making an investment should start with an investment thesis. For example, I think this stock is undervalued and will be valued at X in Y months. You could base this belief on fundamentals, technical analysis, or a hot tip from your brother-in-law. The important thing is to understand why you are investing and to make sure the thesis holds true while you hold the investment. If your thesis begins to unravel (e.g. I thought Tesla would ship 10k cars in Q2, but they only shipped 6k, or my brother-in-law gave me this stock tip, but he's now bankrupt), you need to re-evaluate your position and most likely cut your losses. If you had a profit goal as part of the thesis (and you should), then you should take profits.

Great, now the next question is how do you maximize your profit if this thesis turns out to be correct? First, realize you are certainly 100% wrong and the stock will not be at exactly X in Y months. Stock returns to tend to follow a Log-normal distribution, so even if your thesis is correct, the actual price will be within a probability distribution defined by your target price and the stock's volatility (which you will also need to predict). Great, now you have a probability distribution. To maximize your profit, you only need to analyze every single possible trade (long stock, long calls, spreads, straddles, etc.) that could be made, compute the expected value of that trade across the probability distribution and then pick the one with the highest expected value. Pretty simple, right? Well, if you can write some code, it actually kind of is. :tongue:

Ok, so you can't write code. Let's just look at some log-normal probability distributions:

View attachment 20577

What do these distributions have in common? They tend to have long tails to the "upside" on the right, but most of the area under the curve (most likely to occur) is on the left. So you are far more likely to have a "return" that is not as great as you think. The reason this matters, is that if you are playing with options and you are buying out-of-the-money calls, you are hoping to hit it big on the right side of the curve. Unfortunately, this is unlikely to occur, and if it does you basically "got lucky" from a probability point of view. Your odds are much greater to play the "left" side of the curve, which is why in-the-money calls win out over other option "bets" the majority of the time. Just like any risk/reward tradeoff the returns are not as big, but they pay off more often, and over time produce greater returns. Adding in LEAPs and the cost of time decay does complicate these calculations, but I have found that in-the-money options still win out over time, both through software modeling and actual trading experience.

Regardless of option trading strategy, if your investment thesis is wrong, you will probably lose money. Plain and simple. So before adding options, I would make sure you are capable of making good investments decisions first.

Newbies need not be discouraged by the math. I spent 3 years calculating and modelling and losing money. Now at 5 years in, modeling the graph in my brain takes only seconds. Like any skill, everything just become a habit in the end. The only time you will need to sit down and do calculations, I find, is when a glitch in the matrix is discovered and old premises needs to be checked. Usually resulting in money making opportunities.

 

[PureAmps]

Let's assume the OP still wants to buy long dated calls (January '14 or January '15) for speculative purposes. Would you agree that currently Jan '14 TSLA options look expensive and have elevated IV (likely due to impending earnings)? Would you agree that perhaps it's a good idea for this nearest earnings event to pass first? I'm talking about a hopefully lower IV and letting the stock make its move due to earnings, if any.

I have no intent to buy any TSLA calls as I'm generally averse to buying calls in the first place (right or wrong).

I would personally stay from the TSLA option market right now. The stock is way too volatile and moving higher for no obvious reasons. That trend could easily reverse. In general, I don't think TSLA is a good stock to "learn" options. I'd start with a stock with lower volatility and more liquidity.

Newbies need not be discouraged by the math. I spent 3 years calculating and modelling and losing money. Now at 5 years in, modeling the graph in my brain takes only seconds. Like any skill, everything just become a habit in the end. The only time you will need to sit down and do calculations, I find, is when a glitch in the matrix is discovered and old premises needs to be checked. Usually resulting in money making opportunities.

My intent was not to discourage newbies with scary math. My point, perhaps lost, is to know the reasons why you are making a trade and *then* find ways to maximize profit. If you are using options to increase profits, you are essentially placing a bet on time and price, so you had better understand how the odds work for or against you.

 

[kenliles]

I would personally stay from the TSLA option market right now. The stock is way too volatile and moving higher for no obvious reasons. That trend could easily reverse. In general, I don't think TSLA is a good stock to "learn" options. I'd start with a stock with lower volatility and more liquidity.



My intent was not to discourage newbies with scary math. My point, perhaps lost, is to know the reasons why you are making a trade and *then* find ways to maximize profit. If you are using options to increase profits, you are essentially placing a bet on time and price, so you had better understand how the odds work for or against you.

that's good advice in my view;
I learned what little I know about options in AAPL- much more liquid, enough volatility to learn, but nothing like TSLA. I stick pretty much with straight calls, on occasion some puts or small spreads. But I agree with PureAmps once again here. TSLA is a dangerous stock to 'learn' options with. I use LEAPS as a stock replacement strategy that works well now that I learned (via APPL and some others) better how to resist over leveraging etc. For example I just moved current LEAPS (J14 $30) all to J15 $40 booking nearly half profits into cash but maintaining most of my long position. This was needed because the balance of money risked has shifted dramatically. In addition make smaller trades on speculation of cycles in TSLA- but only in small amounts. Good advice all-round here on this thread; start small, with longer time expirations, and at or in the money strikes to start

 

[luvb2b]

that's good advice in my view;
I learned what little I know about options in AAPL- much more liquid, enough volatility to learn, but nothing like TSLA. I stick pretty much with straight calls, on occasion some puts or small spreads. But I agree with PureAmps once again here. TSLA is a dangerous stock to 'learn' options with. I use LEAPS as a stock replacement strategy that works well now that I learned (via APPL and some others) better how to resist over leveraging etc. For example I just moved current LEAPS (J14 $30) all to J15 $40 booking nearly half profits into cash but maintaining most of my long position. This was needed because the balance of money risked has shifted dramatically. In addition make smaller trades on speculation of cycles in TSLA- but only in small amounts. Good advice all-round here on this thread; start small, with longer time expirations, and at or in the money strikes to start

the only reason tesla was too dangerous to learn on is because it was too easy to make a lot of money very quickly.

a newbie who experienced that would be addicted to life. kind of like a first heroin or crack high.

 

[Jonathan Hewitt]

the only reason tesla was too dangerous to learn on is because it was too easy to make a lot of money very quickly.

a newbie who experienced that would be addicted to life. kind of like a first heroin or crack high.

I am telling myself that I will only option trade on TSLA, no option trading on any other stock. Maybe it will be like heroin and this is only the beginning, haha. First, I need to get approved for option trading. I faxed in my application yesterday to USAA (I've been using them for stocks as I can instantly move money in and out of my USAA banking account). After reading comments on here it sounds like I won't get approved based on my short trading history. I did call USAA and ask about my prospects of getting approved. The guy didn't see any reason why I would get denied but didn't seem very sure of himself. He said I should know within a couple of days.

I figure that if I get denied I will just consider it a sign and stick to my long position.

 

[blakegallagher]

the only reason tesla was too dangerous to learn on is because it was too easy to make a lot of money very quickly.

a newbie who experienced that would be addicted to life.

Guilty as charged .... already committed to playing options my entire life lol

 

[luvb2b]

I am telling myself that I will only option trade on TSLA, no option trading on any other stock. Maybe it will be like heroin and this is only the beginning, haha. First, I need to get approved for option trading. I faxed in my application yesterday to USAA (I've been using them for stocks as I can instantly move money in and out of my USAA banking account). After reading comments on here it sounds like I won't get approved based on my short trading history. I did call USAA and ask about my prospects of getting approved. The guy didn't see any reason why I would get denied but didn't seem very sure of himself. He said I should know within a couple of days.

I figure that if I get denied I will just consider it a sign and stick to my long position.

if you are going to try to start trading options on tesla now, you should reflect on how much the prices have increased.

in the middle of march, with the stock near $35, i was able to buy april 40 calls with one month left for 20-25 cents. so think about that for a moment, the option is about 15% out of the money with 1 month to go, and trades for 25c, or about 0.6% of the stock price.

fast forward to today. the may 60s are more than 15% out of the money and have 3 weeks left. they are trading around $1, or 2% of the stock price. i realize an earnings report is included in that span, so that accounts for some of the higher price.

however, you can see that the equivalent call with less time left is trading at 3x the price.

it's a lot harder to make money when you have to pay 3x as much for the same play.

also, i think all the new posts related to options trading on this board are a sign that the easy money in tesla options will soon come to an end.

 

[Jonathan Hewitt]

Based on this info IF I get approved I should probably just sit out until after the earnings report and then reevaluate the situation. At least we have a firm date now on the earnings report to work off of.

 

[kenliles]

the only reason tesla was too dangerous to learn on is because it was too easy to make a lot of money very quickly.

a newbie who experienced that would be addicted to life. kind of like a first heroin or crack high.

yes good point, and the other reason is how rapidly that can (has) changed

edit:
oopps - I see you covered that above- easy TSLA option plays are rapidly coming to an end

 

[Causalien]

I agree, hitting it big in options first time is like getting a 10/10 as your first girlfriend.

 

[smorgasbord]

easy TSLA option plays are rapidly coming to an end

There are still some out there (including Put options that pay well or net you shares at $35 or less), but discussion of them should go to the Advanced Thread.

 

[Jonathan Hewitt]

Oh my gosh, I just got approved to buy Calls, Puts, and sell Covered Calls. This is the worst timing ever, a day where it just went up 3% and a day before Elon's next announcement and the market is already closed so I can't do anything today. Smartest thing is for me to stay out but the temptation to get in is so strong...Maybe just buying one contract can't hurt too much, right?