Options, understandings and tacticsAlan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
I wonder if there has EVER been a more successful, more collegiate, more educational Micro thread (ie not led by a pro author) than this. Margaret, you have been a sensational leader who has put many hour into its success. Thank you for all your efforts.
Blinking well done !! Travis may be calling soon to make you an offer you can refuse.
I just started reading these posts. I have been trading options for a few years. I usually “start a trade” with selling cash secured puts and then (depending on the situation) either letting them expire (keeping the cash), rolling them to another month (strike price the same, higher or lower, depending on the situation), or take assignment and then sell covered calls. All of my trading is based on “selling” puts and calls and about the ONLY time I buy a put or call is to roll that position to another strike price and/or month.
ACTUAL EXAMPLE:
BTC=buy to close
STO=sell to open
2/21/14 STO- UCO3/14/14 32.50 P +$70.44
3/12/14 BTC UCO3/14/143 2.50 P -$344.56
3/12/14 STO UCO4/04/14 32 P – +$597.38
This 3/12/14 trade was done as a one trade rollover
4/4/14 Option expired
Money at risk $16250
Profit $323.26 (all commission have been deducted)
Days held – 42
Annualized percentage gain – ((323.26/42)*365)/16250 = 17.29%
Welcome to the thread Steve!
That is a fine strategy (selling for cash, or selling into a wheel trade by taking the stock and running covered calls against it). It is my favorite “set it and forget it” way to use options. Which is the main kind I have time for right now.:)
Understanding the greeks is very important to having success in options. If you are not familiar with the greeks I suggest you go to tastytrade.com and look for the “Market Measures” that discuss greeks or to dough.com and take the free course offered on options.
I too almost always only sell options. I use strangles when the volatility is high and sell 84% OTM puts and calls. When the volatility is low I sell skewed Iron Condors, Broken Wing Butterflies, or Calendars.
Theta represents time decay. When selling, theta is the amount you make each day due to time decay. When buying an option, theta represents the amount you lose each day from time decay. Options are influenced by Price, Volatility, and Time Decay so an options trader needs to understand all three. The impact of theta is the reason I prefer to sell and I prefer defined risk trades such as Strangles.
I generally try to start a trade by selling puts with a delta of less than 30. Notice i said generally, this is not always the case.
I’m a Agora Financial subscriber ( long story) and always look at the option side of their picks.
A stock pick last Oct focused on export LNG US Gov’t approvals and the the author wrote about one pick, VSN.to that no options are available. Wrong, they trade on Montreal Exchange ( I’m CDN) and bot a whack of Apr calls. Long cold winter, higher Nat Gas prices and US export approval came along…1800% return on Calls, 35% on the stock
Sadly I’m long ARNA stock…will look at the options plays suggested above to try and get back into the green there.
Thx for sharing
Has anyone used TradeKing to trade options? I was looking at them the other day, and they seem to have one of the best APIs in the business for retail traders. Far better than the OptionsHouse API which I use, which is already better than many.
TradeKing is more costly than OptionsHouse ($0.65 per contract I think, instead of $0.15), but if I can trade better, maybe I can make it up in the long run.
I’m just wondering if anyone has used them or is using them, and what your experiences (all aspects you want to comment on) were like.
Thanks!
I decided to look at Barron’s rating of online brokers and attached will hopefully take you there. IB is still number one and has been for last 3 years.
http://online.barrons.com/news/articles/SB50001424053111904628504579433251867361162
I used IB but as yet have not worked out how to get their new Probability Lab for options trading so intend to phone support next week to see where I have been going wrong.
Rolling options over to a higher strike price in the sale month
I was interested in Margaret’s selling and rolling to a higher strike price as the share price had risen (post 149) as I had never heard of such a thing.
Researching another trader, he recommended only trading high volume EFT’s, so I used Finviz to search for such EFT’s that traded over one million shares daily and came upon this article that very much supports Margaret’s decision to roll to the higher strike price.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
May 13, 2014, 12:16 P.M. ET
Interactive Brokers: ICICI Call Buyer Rings The Register; Share Pause By Shuli Ren
Indian cyclicals have been leading the Modi rally this year. ICICI Bank‘s ADR (IBN) has advanced 30%, outperforming the WisdomTree India Earnings Fund (EPI) by 11 percentage points. HDFC Bank‘s ADR (HDB) has similarly rallied 27%.
The rise in valuation is meteoric. ICICI jumped 8.7% last Friday, followed by another 2.4% gain on Monday, as exit polls showed strong performance by the Narendra Modi-led NDA coalition. Not surprisingly, the capital gain in the more risky options market is even more mouth-watching. According to Interactive Brokers, buying a 16May’14 46.0 call a week ago would hand investors a handsome 380% return today. This call option is written to time the election results, which will be announced on Friday, May 16.
Financials tend to lead business cycles, so if an investor has a bullish call that economic reforms will be carried out in earnest in India, it is not surprising she may want to increase her exposure to banks.
But some traders are only using Indian financials as a proxy bet on a decisive Modi win. One trader, who originally purchased 2300 of the call option above, sold his holdings this morning and bought another bullish call at 50 strike, with the same expiration date, data from Interactive Brokers show.
Shares of ICICI Bank hit a pause button today, falling 2.3% by noontime in New York.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
I have not calculated just how much profit this trader made, but is it worth following his lead with EPI and take some option trades perhaps selling some put spreads or indeed $50
Calls in the expect ion of further gains as he/she has done? I welcome your opinions.
Ken
PS I am keeping a watch on my paper trade selling KO June Options and will advise results.
Ken, you are selling KO june options — calls or puts?
Puts – cash secured?
Calls – you
Calls – you own the stock?
Steve
ken,
What june option date you selling?
KO OPTION BEAR CALL SPREAD – I thought that as KO was at top of its range it was likely to go down in price.
On May 1 at 3:36 am Sydney time lol, (fantasy only)
I sold 8 contracts June 20 $41 call for 60 cents
I bought 8 contracts June 20 $43 calls for 10 cents
Net premium received of 50 cents
Net risk was $2 spread less the 50 cents = $1.50.
Contracts to be sold, $1200 max loss divided by $150 for each contract = 8 contracts.
After deciding on this but before placing the trade I realised that KO was due to pay a dividend with entitlement date on June 16, but decided I would still take the trade but aim to close it on about May 26, some 3 weeks before dividend entitlement so as not to get too caught up with investors buying the stock for the dividend. May is possibly a good month to buy Puts or sell Bear Call Spreads if the Sell in May and go away holds true, so this was part of my thinking.
I have the Ex Div date as June 12. There are strategies to go along with the Ex date, and all things being equal, the stock goes down on the Ex date.
Steve B, I would be interested in hearing strategies to go along with the Ex Dividend date!
Update on KO Bear Ca;; Spread Price as of now.
The June 20 $41 calls to Buy back have an Ask of 30 cents
The June 20 $43 calls to Sell have a Bid of 1 cent –
at this very low price I would leave the $43 Call open as the price may come higher and it is not worth selling to get $8 as brokerage would exceed that.
The Net Gain to Close the $41 Call would be 20 cents X 800 = $160 less brokerage if closed now, (which I would not yet do!) a gain of say 35% on Option Price sold or about 11% on total investment risk capital of $1200 in 20 days. 11%/20*365 = 201% pa
Hi Pockets, I have a couple questions regarding your math in #133. I apologize ahead of time if this seems overly critical.
Assuming $300 as the starting price, and $240 as the new lower price…
After a stock price declines, the percent needed to get back to original price can always be calculated by:
1. Divide the original price by the amount of loss.
2. Multiply result by 100 to get the percent needed..
Are you sure?
Amount of loss = 300 – 240 = 60
Applying your step 1: 300 / 60 = 5
Applying your step 2: 5 * 100 = 500
500% is not the percentage to get back, and is not the percentage lost. However, if you meant
“1. Divide the amount of loss by the original price”?
60 / 300 * 100 = 20
You would get the actual percentage lost. (300 – 20% = 240)
That is still not the percentage to get back, however, which is what you said it was in your first line, if I’m reading you right.
Moving on to your examples:
Example 1.
Original Price = $300, price falls to $180.
Loss = $120
Percent to get back to $300 = 300 divided by 120 = 2.5
2.5 times 100 = 250 %
That is all true, until you do the unwritten step. At least according to my calculator, $180 times 250% = $450, not $300. So 250% can not be correct.
Unless I’m very much misreading you, I just can’t follow this math to the conclusions you did.
I did post something about this, above in this comment. I’ll expand that a little, presented in spreadsheet style math, please check my results!:
starting_price = 300
current_price=240
percent_lost = (starting_price – current_price) / starting_price * 100…= 20
makeup_percent = percent_lost / (1-percent_lost / 100)…= 60
new_original_price = current_price + (current_price * makeup_percent / 100)…= 300
(When I said “above in this comment”, I was intending that to be posted under #133, but the system wouldn’t give me a reply button there.)
Hate those missing buttons!
Blind Day Trader – Methinks we look at the calculation differently because we think about the starting point differently. I think about the loss. I think you are thinking about the amount you have left.
===============================================================
When I calculate the percentage needed to get back even, I ask myself, “What number, when multiplied by the loss, will get me back to the original amount?” Algebraically, if X is that number, X times Loss = OriginalAmount.
Solving the equation for X, X = OriginalAmount divided by Loss.
Your first example was “Assuming $300 as the starting price, and $240 as the new lower price…”
The loss is $60. X = 300 divided by 60 is 5 = 500 %.
5 times the loss ($60) brings you back to the original amount of $300.
===============================================================
I think you are asking yourself, , “What number, when multiplied by the lower amount, will get me back to the original amount? ”
Algebraically, if Z is that number, Z times LowerAmount = OriginalAmount.
Solving the equation for Z, Z = OriginalAmount divided by Lower amount.
Using the same example, Z = 300 divided by 240 = 1.25 = 125 %
1.25 times the lower amount ($240) brings you home again ($300).
===============================================================
Either way should give you the same original amount, ignoring any rounding differences.
Having said all that, your way of looking at it is slightly more efficient that mine (it’s eZer), because you don’t have to calculate the loss. It’s just that I have so many losses . . . . . :>) . . . . and my spreadsheet automatically calculates the plus or minus change.
Blind Day Trader; Whoops, too much math. makeup_percent is 25.
Pockets, yes I see your point, thanks for the clarification. At least with these numbers, my method results in less fractional dollar problems. In other words, not so many repeating decimals that could lead to a necessity of rounding to get the correct results.
But I don’t know if that is a feature of mine over yours, or just the state for these particular inputs.
It probably doesn’t matter in the long run anyway. (I just tested your Z calculation against mine)
Regardless, I get your point.
tanglewood, quite right. I don’t know why I wrote 60 there. 60 is the makeup dollar amount, not the makeup percentage, which is indeed 25, as that calculation derives. Silly me.
Thanks to Margaret for stimulating a flood of interest in options trading. For those who are serious about options trading, I would offer a few words of advice; go to CBOE for definitions, seminars, and just about any question you may have on options. Whenever you have a question on a definition or a strategy, it’s very simple, just pose the question to Google. Example: What is a strangle? What is an iron condor?
There is voluminous information about every facet of options trading on the ‘net, just ask Google. Do not trade options without at least 3 months of paper trading and plan your entry AND exit for each strategy in advance. ALWAYS be fully aware of your risk, and know how to manage your positions if they turn against you. Options trading is almost addictive, so be sure you know all the pitfalls before you commit real money.
Hi steve b; re post #162, I am trying to understand that trade.
UCO…2/21/14…closed at 34.63
…………3/12/14…closed at 32.27
…………4/14/14…closed at 36.06
STO put (32.50 3/14/14) premium received .75 to .80
BTC on 3/12/14 cost 3.35
STO put (32.00 4/14/14) premium received 2.00
Expired profit 4.06 per share.
I realize that all of the above gets multiplied by 100.
On the second STO put, can you verify that you received 2.00? It seems a little high to me.
I would estimate around 1.00
See money at risk over $16000, i was trading 5 contracts.
If you still have questions let me know
Well, now I am really confused. For 5 contracts, you would have made 2,000. plus premium on that second STO put.
I agree, something is confusing about this trade. Some of the prices have to be crazy in order to make it work. I assume I am at fault in reading the original data from post #162, but I can’t figure out how.:)
Are the contract counts off?
Those amounts are total dollar amounts minus commissions. In other words, when i started the trade i “made” a total $70.44 on the first trade – this is about 14 cents per share (commissions subtracted)
EXAMPLE
.14 X 500 = $70 commissions already taken out
The high on 3/12 was 32.70 so i rolled instead of risking assignment since i could do it and make money.
I bought back the contracts i previously sold and with the same order sold the april 4 contracts for a net profit (the difference of buying back contracts and selling more contracts) of 252.82 (597.38-344.56) which is roughly a profit per share of .5056.
.5056 x 500 = 252.58
Remember all commissions have been deducted so the amounts are not the exact amount per contract/share.
These transactions profited $323.26 —– this is the total amount of profit. I don’t understand how you are coming up with your numbers.
Get it now?
Here may be another way to look at it. Numbers as of the close of the market today i could rollover 5UCO5/23/14 34.5P to 5 UCO6/21/14 34P for a profit of .15 per share to .55 per share – that is a potential profit anywhere from $75 to $275 (i did not subtract commissions).
subscribe
???
Steve B, I would be interested in hearing strategies to go along with the Ex Dividend date! re Posting at #170 – Ken C
There are several ex strategies, but one that i have used is to buy the stock before the ex date and sell a covered call for the next date after the ex date. This can be done several ways:
-sell the call at a strike price below your cost of the stock but obtain enough premium so that if it is called before the ex date you don’t lose money. if it is called before the ex date you really don’t make much, if anything (if done right you should not lose money) . If the stock is not called, you collect the dividend. At the expiration of the option (if it is not called by then) you sell another call and lower your entry price again until you get called on the stock (brake even), but you have collected the dividend. You can also sell a call at a higher price and try to get more out of the strategy. With this variation, obviously, you will most likely be holding the stock longer, but might make more money.
You can also start this strategy by selling a put (with the intent of buying the stock) in order to buy the stock initially at a lower entry price.
Steve B
Yes I understand what you are proposing, however I would prefer not to be buying the stock but to sell options using spreads, as this greatly reduces the amount of capital tied up in the trade.
Ken C
the Blind Day Trader; Re; your text presentation, 2 questions. How do you create those different fonts that you sometimes use in your text? Do you create the document in another medium and then ‘copy and paste’ here. Also, how do you do that symbolic link or link with text?
Near your comment box, there is a section called “You may use these HTML tags and attributes”. I tend to use the b or strong elements to get the “different fonts”, and the a element to make links.
I don’t know if this will work, but here may be an example:
The below would be bold:
this should be bold, with the b element
This should be a link to somewhere:
that has podcasts that every options trader should be listening to!
If that didn’t work, here it is written another way:
The below would be bold:
<b>This should be bold</b>
A link:
<a href=”http://theoptionsinsider.com”>Podcasts that every options trader should be listening to!</a>
And yes, my second example is how you would do it. Basically, it’s writing some bit of HTML that WordPress supports for posting in these comments.
Thanks, Blind DayTrader.
Blind Day Trader, do you know of any real-time tickers that work with screen readers? Thanks much.
Don
Don. Nope, not a one. However, you can probably write your own using somebody’s API and the necessary systems (I.E. if you’ve got a Linux machine available where you can make something in JAVA, C++, or PHP; or can code GUI programs for Windows), if you have the necessary hacking skills. I wrote a very crude one using the edbrowse browser, the OptionsHouse mobile site, and a bit of scripting, but that is hardly ideal.
I’m working on a long term project using the TradeKing and OptionsHouse APIs that includes this functionality, but that’s custom to my rather elaborate trading goals, and I’m not sure how usable it would be by anyone else.
In any case, this is highly off topic for this thread. Drop me a line at ITrumpDoom(at)gmail(dot)com, and we’ll talk further–I’m sure there are some questions i have for you about how you get access to certain information as well.
It is good to see some people are taking interest to use derivatives for they advantages as a part of their investing portfolio. Long/short.
I just want to remind few things when it becomes to options.
1. options are leveraged to reflect the underlying, futures, stock, indexes, ETF… etc.
2. about 2/3 of the options just expires worthless (take a note if you are buying options)
2b. trade only liquid options, underlying’s that give you opportunity to get out of the trade.
2c. one should trade options same way as a anderlyings as a equities. One of the great way to buy stock one want to own is use options to reduce cost base of the stock.
3. Consider what is the main contributor to move options prices? Underlying stock can move dramatically, but options (you are holding refuse to move a nickel) MOST important thing when selecting strategy on options is IV FRANK, (IV percentile) = If IV% high (preferably over 50%) =sell premium, If IV% low = underlying moving sideways. You can stay in cash or you can take sideways plays calenders etc. Warning, when IV% is low when placing the trade, you must consider and take account the price of the back month strike. It is very likely that back month IV% is different some 50 days later, and have big effect on your strike price. That can make your trade fairly long with all adjustments, legs, legging out or even getting inverted, depending on your play. Take a note, when selling premium (and only when IV% is high) high IV% you must have enough duration (time) anywhere between 40 to 65 days to take advantage of crushing IV%. Your delta will be neg.
Always, it is important to stay small, but particularly when IV % is low it is a paramount.
Be ready to question the common assumption of risk. Thanks for the technology and High Frequency Traders (liquidity providers, who take other side of the trade for penny in a hope to make money) we have better chance to get fair fill.
4. by duration I meant that you must have enough time to adjust (lower your cost base) and be right pending on strategy chosen. If you have sold the premium…. There is no shame for rolling your trade to next month and collect some extra $$ and just keep the dream alive. You may have to work hard to scratch “one” trade with half a dozen legs etc. or if underlying finally, after couple months, accommodate, rolling may make it trade of the year. REMEMBER stay small, so you have enough powder dry, And stay mechanical. We must tread every opportunity to same way. Particularly when rolling, never roll untested side. Always roll the untested side.
5 if underlying is accommodate your trade it is PARAMOUNT manage your winners. Take the money off the table asap. If you have sold premium when IV% was high say 80% and you risked to say $1 to make $, take it anywhere from 25% – 75% of max profit while IV% is crashing. In a long run you will find that sooner you can reinvest you capital better your long term results will be.
Shortly;
-stay small
-pay attention for IV% (IV frank)
-select right strategy according the IV FRANK
-manage your winners
-if trade is defined risk trade and it goes against = just leave it and move on
-if trade is undefined risk trade (naked) = reduce the cost base, duration is more important than direction with options.
-stay mechanical
-stay positive (nobody has a crystal ball.
Keep up good work
RW (ETGI)
Thanks for your post, RW. VERY GOOD!
I came across an interesting webinar today.
How to manage a $20,000 options portfolio for monthly income
I’m not in love with the guy’s style, but there’s a bit of good stuff there for anyone interested. It’s about 90 minutes I think.
Just a quick question. I am new to options and I have heard about binary options. Has anyone heard about this? Comments would be appreciated?
Thanks.
I’m familiar with the concept, and some of the players. I don’t know anyone who has traded them, and I haven’t, but I’ve been reading up on them this year. Their probably my next thing to try.