Everything Options

Blazin

Creative Title
<Nazi Janitors>
5,808
31,737
162d 5h 25m
Options can be a powerful tool to add to your investing/trading toolkit. They can dramatically increase your risk or they can mitigate it and everything in between. This thread is for discussing options plays, options education and questions.

I have been trading options for about 20 yrs now, though I began doing so more in earnest about 5 yrs ago. There is a lot of lingo and terminology around options that can be daunting for traders new to them. Some basics definitions, I'm purposely leaving out nuance to avoid confusion and try to give definitions that are most practical rather than all inclusive of every situation:

A Call Option - this is a contract to buy 100 shares of an underlying instrument (could be a stock or an ETF) at a fixed price (Strike) with a set expiration date.

A Put Option - this is a contract to sell 100 shares of an underlying instrument (could be a stock or an ETF) at a fixed price (Strike) with a set expiration date.

OOM/ITM/ATM - Out of the Money and In the money. For a call option it is OOM when trading below the strike price and ITM when trading above the strike, and thusly reverse for the Put option it is OOM when trading above up the Strike and ITM when trading below the strike. At the money is when t he stock is trading at the strike.

Premium - this is the price paid for the option it is made up of the intrinsic value and extrinsic value (this term is not used particularly often).
Intrinsic Value - When an option is ITM the difference between the current price and the strike is it's Intrinsic value. For example a call option with a $50 strike on a stock with a current price of $60 has $10 of Intrinsic Value. (Want to note don't let the initial IV confuse you here, when you see IV mentioned around options it stands for Implied Volatility more on that later)

Extrinsic Value - This is made up the Time Value and a factor for Implied Volatility. I'm not going to get too into the weeds on the statistics and math of how this is derived, for starters it's best to understand that this is the RISK related to an unknown future. Ignoring the implied volatility the time value will decay each moment as the option moves towards expiration. So the seller of the option wants paid more based on how far out expiration is as more can happen the more time that is left. This time value decay (referred to as theta) is factored against the volatility of the underlying. If a stock is more prone to huge price swings that will be reflected in the IV. If a stock is boring and rarely moves it's IV will be very low.

Capture.JPG


Let's take a look at how the ticker of an option is written. Here is an example of a put option on Apple:
AAPL210212P132

Now break it down into it's different parts:

AAPL (this is ticker symbol of the underlying)
210212 (This is the expiration date written in YYMMDD format
P (Signified that is a Put option, would should C for a call)
132 (This is the strike price)

This Put at the end of the day on Feb 9 is selling with a premium of 0.25 with a strike of $132 and an expiration for this Friday (2/12) the stock was trading at $136.01. So the put is Out of the Money as it trades above the strike of $132 so there is no intrinsic value. If we fast forward to Friday if Apple trades at any price greater than $132.00 this option will expire worthless. If you were to buy this option your break even would be $132 (strike) minus $0.25 (premium paid) = $131.75 Break even.

Why would an investor purchase this Put. There are two main reasons, they believe the price of AAPL is going to decline and they plan to resell the option at a higher price before expiration. This is a way of going short a stock without actually borrowing the shares. Let's look at an example:


BUYING A PUT OPTION:
Investor A shorts 100 shares of Apple 100x$136=$13,600 it then drops to $130 before end of day Friday they could then buy back the shares (close their short) for $13,000 netting them a profit of $600.

Now let's look at the trade using the above Put. Investor B buys 1 contract on AAPL210212P132 for $25.00 (0.25x100 ) the stock drops to $130 before end of day Friday and the investor sells their option contract for $2.00 and they receive $200.00 for a profit of $175.00.

So in the first example the investors risked $13,600 in upfront capital and took on infinite risk and walked away with $600 a 4.4% return, not a bad haul. In example B the maximum amount risked was $25 which then became $175.00, a profit of 700% . The flip side of this is that when a trade doesn't work the option buyer is more likely to lose 100% of their investment.

So in our Apple example, the stock fails to drop and just stays at $136, Investor A could cover his short and walk away even. Investor B's option will expire worthless and he will be out the $25.00. What if it goes completely wrong Apple moves up to $140. Now investor A would cover for a loss of $400 and Investor B still just loses his $25.

BUYING A CALL OPTION:
Investor A buys 100 shares of Apple believing that it will rise in value over the next month. He pays $136.00/share and purchases 100 shares for a total cost of $13,600
Investor B wants to use options instead so he goes long by purchasing a call option with a strike of $136.00 and a cost of $4.75 per contract for a total cost of $475.00

30 days later Apple is worth $150.00
Investor A sells his 100 shares of Apple for a total proceeds of $15,000 and a profit of $1,400.
Investor B sells his 1 call contract for $14.00 resulting in a profit of $925.00 ($1,400 proceeds less $475 original cost)

So Investor A made $1,400 on his $13,600 investment and Investor B made $925 on his $475 investment. So like we say with the put example the option allows for a much larger percentage gain via a smaller up front outlay of cash. Now lets look at how it plays out if stock goes sideways or goes down.

30 days later Apple is still worth $136.00
Investor A sells his 100 shares of Apple for $13,600 and walks away even.
Investor B will have is call option expire worthless out of the money, he loses his $475 (Since he bought the call at the money he paid a high premium upfront and this premium decayed over the 30 days as the stock stayed stuck in the mud.

30 days later Apple is worth $122.00
Investor A sells his 100 shares of Apple for $12,200 for a net loss of ($1,400)
Investor B will have his call option expire worthless out of the money, he loses his $475

So while a call option is going long you can see by the results that the rewards and losses can vary significantly than just being long the stock both for and against the favor of the option holder. These are very important basic concepts to understand when considering buying a put or a call to go long or short.

NEVER enter an options trade until you have evaluated, and are comfortable with, how will you fair in the three possible outcomes (Up sideways or down)





MORE TO COME selling puts and calls
 
Last edited:

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Blazin is the option king so I will generally leave this area to him. I have learned a ton from him trading options.

Two things I will add. Options aren't stocks. You really want to have a good idea what you are doing before you play. The options market is deep water. Learn before you trade. Your portfolio will thank me later.

edit: As the SPAC hater pointed out, "technically" a SPAC can trade all the way down to zero. It has never happened since the floor is established by the escrow account but there is no rule or law that says the shares cant trade down below the NAV floor. There is also no rule or law that prevents me from getting a blowjob from Gal Gadot, but like a pre-margerSPAC trading at zero, the odds of it are astronomically high. :p

Second - Blazin doesn't trade in SPACs so here is a tid bit he probably wont be able to share. For the time being, there is a lot of money to be made in the options markets with SPACs. The confluence of the two is a bountiful harvest if you understand both markets. I am writing this assuming you understand SPACs.

SPACs have a NAV (Floor) before they merge. Most commonly it is $10 less expenses so lets call it $9.50. When a SPAC is formed, all its seed money goes in escrow, not in the Founder's pocket. Its locked up. If the SPAC doesnt make a deal that money is given back to the investors (less expenses). So SPACs have an absolute floor pre-marger of $9.50. This eliminates the largest risk to someone writing put options. That risk is a company you wrote puts on going bankrupt or the price plummeting like an avalanche. This shouldn't ever happen with a pre-merger SPAC.

This means I can write $10 or $12.50 strike options with close to zero downside risk. If I write a $10 strike option with a 50 cent premium, I shouldn't lose money. The SPAC price shouldn't drop below $9.50 because it has an escrow floor of $9.50. My strike of $10 minus the 50 cent premium I collect lowers my cost basis to $9.50 (the floor).

To add on this, lots of SPACs have insanely high implied volatility. This IV multiplies the premium you get for writing puts. Write a put on KO 10% below the current price and get 15 cents in premium. Write the same put on a SPAC 10% below the price with an IV of 200+ and you are making 75 cents to a dollar premium. I have written puts down 10% from the stock price less than 3 weeks before expiry and gotten almost $4 in premium. Risk vs reward. The difference is the floor of the SPACs and the minimized downside risk.

Consider two scenarios. A stock and a SPAC. I write a $15 strike put on the stock and get $2 in premium. My maximum downside risk is $15 - $2 so $13 if the stock goes to zero before I am assigned. Same condition for the SPAC. $15 - $2 is $13, but I have a floor of $9.50. My max downside should be $3.50.

The other consideration is to write puts on SPACs you like. If you missed a SPAC before it blew up, write puts on it. Example... SPAC X is selling for $23 a share. The $20 strike puts are selling for $3.50 premium. If I get assigned, my cost basis is $16.50 a share ($20 - $3.5). I would have no issue buying that stock at $16.50. Lets say I get assigned at $19. I pay $20 for it by contract, but in actuality I got a stock trading at $19 that I have a cost basis of $16.50. That is a win in my book.

Remember though, there are no sure things. Understand options and understand SPACs. That tweet from Elon that drove it up 30% can just as easily drive it downward 30%. SPACs move at lightning speed. And, options only trade from 9:30am to 4pm. SPACs can have huge swings in the after market while you just watch and wait until 9:30 to react.


Fortune favors the bold.
 
Last edited:

Blazin

Creative Title
<Nazi Janitors>
5,808
31,737
162d 5h 25m
I can't lose money. The SPAC price won't drop below $9.50 because it has an escrow floor of $9.50.
My max downside is $3.50.
I understand what you are saying but want to clarify language, these statements are not factual. They may be highly probable but you can lose money and your max downside is your entire investment. SPACS don't tend to drop below $9.50-10 but they certainly CAN, they could drop to zero. Just think people should enter any investment understanding the risks, no this is not an attack on SPACS it's true of any investment in fact them being at risk is what makes them "investments". Caveat emptor anytime you hear people talking about guarantees and not being able to lose.



Remember though, there are no sure things.

You do follow up with this well reasoned statement, though incongruent with the prior ones.

PS get your filthy spac talk out of my thread :)
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
I understand what you are saying but want to clarify language, these statements are not factual. They may be highly probable but you can lose money and your max downside is your entire investment. SPACS don't tend to drop below $9.50-10 but they certainly CAN, they could drop to zero. Just think people should enter any investment understanding the risks, no this is not an attack on SPACS it's true of any investment in fact them being at risk is what makes them "investments". Caveat emptor anytime you hear people talking about guarantees and not being able to lose.





You do follow up with this well reasoned statement, though incongruent with the prior ones.

PS get your filthy spac talk out of my thread :)
Fair enough, ill edit it. With the escrow account pre-merger the odds of a SPAC going to zero are about the same as AAPL going to zero. Mathematically possible, but statistically improbable.
 
  • 1Like
Reactions: Blazin

Blazin

Creative Title
<Nazi Janitors>
5,808
31,737
162d 5h 25m
Fair enough, ill edit it. With the escrow account pre-merger the odds of a SPAC going to zero are about the same as AAPL going to zero. Mathematically possible, but statistically improbable.

Totally agree, and if you said the same things about apple I'd have replied the same. An investment in apple can go to zero most people understand that about stocks, SPACS being a new dynamic for most I think it's a clarification worth making so that people don't think there is some rule preventing it from doing so. Won't speak to SPACS here beyond to say that Fraud is one of their primary risks exacerbated by the lack of proper oversight and regulation.
 
  • 1Like
Reactions: Sanrith Descartes

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Totally agree, and if you said the same things about apple I'd have replied the same. An investment in apple can go to zero most people understand that about stocks, SPACS being a new dynamic for most I think it's a clarification worth making so that people don't think there is some rule preventing it from doing so. Won't speak to SPACS here beyond to say that Fraud is one of their primary risks exacerbated by the lack of proper oversight and regulation.
I don't see SPACs as any more fraudulent than equities. The SEC watches them and the SPACs are publicly traded companies filing the same filings as everyone else. I think the big issue is SPACs are more popular with less experienced investors. I read the SEC filings of SPACs I am looking at. Sometimes I see shit I don't like and wont buy them. I don't see this as a fraud issue, i see it as their major audience won't/can't do their due diligence. With one exception, I have made a killing in SPACs. I am an educated investor who does due diligence. The one SPAC I got hurt on was based on something that was in fact disclosed in filings (the CEO of the SPAC merger partner also being the CEO of the merger company's largest customer), but it was buried pretty deep and just about everyone (myself included) missed it.

ps.. instead of an AAPL comparison I used a Gal Gadot comparison. :p


gal gadot help GIF
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Blazin Blazin explain something to me. Yesterday there were 100 bids when I put my order in to buy and close an option at 5 cents (like 9:30:40). They executed over 200 trades at that strike and mine never went. Today I put it in pre-market, there were 0 bids when I did it, and Fidelity filled over 30 before filling mine. Isn't it FIFO for options at the same bid?
 

Blazin

Creative Title
<Nazi Janitors>
5,808
31,737
162d 5h 25m
Blazin Blazin explain something to me. Yesterday there were 100 bids when I put my order in to buy and close an option at 5 cents (like 9:30:40). They executed over 200 trades at that strike and mine never went. Today I put it in pre-market, there were 0 bids when I did it, and Fidelity filled over 30 before filling mine. Isn't it FIFO for options at the same bid?

No, what I have learned to do is switch to a limit at the ask. When they are down to a few pennies like that you can sit all day at the bid and not get a close. If I put a limit in at the ask Fidelity will get me the price improvement so far at least 75% of the time and give the bid price which I had just sat at all day not filling. You can usually tell if this will work based on the bid ask sizes. If the ask is 3-4x bigger in size than the bid you'll most likely get the bid price. It's kind of odd, more like the computers realize "oh you actually want to sell that? Sure." Most of the bid ask size that we see is just the market maker set to provide the liquidity for when it's needed, you'll have 100 or 1000s on the bid ask all day long on an option with maybe 50 volume for the day. You have to let the system know you actually want the trade.

It's a fun game for me sometime if the spread is wider you can start putting your limit in closer to the mid over and over place it cancel place it cancel. You will then see the algo's start to give you the real bid/ask they have to see the activity otherwise it widens the spread out when there is no activity.
 
  • 1Like
Reactions: Jysin

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
No, what I have learned to do is switch to a limit at the ask. When they are down to a few pennies like that you can sit all day at the bid and not get a close. If I put a limit in at the ask Fidelity will get me the price improvement so far at least 75% of the time and give the bid price which I had just sat at all day not filling. You can usually tell if this will work based on the bid ask sizes. If the ask is 3-4x bigger in size than the bid you'll most likely get the bid price. It's kind of odd, more like the computers realize "oh you actually want to sell that? Sure." Most of the bid ask size that we see is just the market maker set to provide the liquidity for when it's needed, you'll have 100 or 1000s on the bid ask all day long on an option with maybe 50 volume for the day. You have to let the system know you actually want the trade.

It's a fun game for me sometime if the spread is wider you can start putting your limit in closer to the mid over and over place it cancel place it cancel. You will then see the algo's start to give you the real bid/ask they have to see the activity otherwise it widens the spread out when there is no activity.
Got it. Some options are in 5 cent increments and going form 5 to 10 cents on a 35 or 40 cent premium is significant. In this case it was expiring next week so I wasn't concerned about assignment it was just annoying as hell. I was wondering it it might have been an exchange thing as well. I didn't choose an exchange.
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Rolled my CCIV $17.50 puts out and up. Closed for 20 cents and wrote the $20 for 2.93 premium on the March expiry.
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Tmac Tmac To continue your questions here...

There are puts and calls. Calls give the buyer the right to buy stock at an agreed upon price (the strike) and at agreed upon date (the expiry). Technically European options can be executed early but that is another discussion.

Puts are the opposite of calls. They give the buyer the right to sell stock at the agreed upon price and date.

Now using the info above, you have buyers and sellers. So a buyer of a call has a right to buy stock and the buyer of a put has a right to sell stock. The buyer always pays the premium to the seller. Call or put, it doesn't matter. Buyer pays the premium and the seller pockets the premium.

In your example. You could have sold a put and if assigned you would have bought to stock at the strike price. You could have bought a call option to buy the stock at the strike. Either way, options arent instant. They have a time component of when they expire. This involves you having a belief of which way the stock is going to move up to the expiry. This belief helps you choose what options to buy/sell.

If you think the price of BTNB was going down you either just wait until it goes lower and buy, or you sell a put option and at expiry if the stock price is below the strike your option is assigned and you will buy the stock at the agreed upon price, no matter how much below below strike the actual stock price is.

If you think the stock is going up you either just buy the stock, or buy a call option and if the stock ends above the strike you buy it at the strike price no matter how much higher over the strike thebstock price is.

Options take thought and planning to anticipate stock movements so you can make money on the deal and not lose money on the deal.
 

Tmac

Adventurer
<Gold Donor>
8,203
13,849
92d 21h 18m
First post has been updated with an example of buying a call option. Tmac Tmac

Will explore selling options next.
Okay, I'm starting to understand. Those two examples (Call and Put) were super helpful, so thank you.

To repeat back to you what I read:

A Put is when I buy an options contract of 100 shares with the expectation that the stock price is going to drop to a certain strike. When it hits that strike I can then execute the option and make whatever the premium was x 100?

A Call is when I buy an options contract of 100 shares with the expectation that the stock price is going to rise to a certain strike. When it hits that strike I can execute the option and make whatever the premium was x 100?

Do I ever own the stock in either of these scenarios or am I simply buying the option and then selling at the strike?

Also, how does the timeline play out in this? Are there just options available at certain dates and I buy the one closest to my Put/Call expectation?
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Okay, I'm starting to understand. Those two examples (Call and Put) were super helpful, so thank you.

To repeat back to you what I read:

A Put is when I buy an options contract of 100 shares with the expectation that the stock price is going to drop to a certain strike. When it hits that strike I can then execute the option and make whatever the premium was x 100?

A Call is when I buy an options contract of 100 shares with the expectation that the stock price is going to rise to a certain strike. When it hits that strike I can execute the option and make whatever the premium was x 100?

Do I ever own the stock in either of these scenarios or am I simply buying the option and then selling at the strike?

Also, how does the timeline play out in this? Are there just options available at certain dates and I buy the one closest to my Put/Call expectation?


edit: my bad, I didn't see you were responding only to an explanation of buying only. Sorry.
 
Last edited:

Blazin

Creative Title
<Nazi Janitors>
5,808
31,737
162d 5h 25m
A Put is when I buy an options contract of 100 shares with the expectation that the stock price is going to drop to a certain strike. When it hits that strike I can then execute the option and make whatever the premium was x 100?

A Call is when I buy an options contract of 100 shares with the expectation that the stock price is going to rise to a certain strike. When it hits that strike I can execute the option and make whatever the premium was x 100?

In my examples for clarity I assume holding till expiration. You don't have to do that you could sell at anytime if you choose to. So you don't have to pick the strike exactly where you think it might drop to as all puts will increase in value if the stock drops. The decision comes down to more how much you want to spend and the risk you are comfortable with. The closer to the money (strike near the current price) the higher the premium is going to be.

So let's take calls for example. Again you are bullish on apple it's trading at $136
Capture.JPG

This shows the option chain for the options expiring on 2/19/21 with every strike from $132-150. You could buy any of these and potentially profit off a move higher. On the far left you see Delta that tells you how much the option would move for a $1 movement in the stock. So if Apple went up $1 the $132 strike would go up $0.70 . So as you can see the closer to the money you are, or in the money, the option will move closer to the movement of the underlying stock.

Buying a call option deep out of the money, say the $145s you would only pay $25 for a contract but you would only make a profit if Apple moves above $145.25 by next Friday BUT you don't have to hold it till next Friday. If you had bought this today and apple tomorrow goes up to $137 you could likely sell your call for $33-37 making about $8-12 profit per contract. So point being is you could make money on an option even if the stock never gets to the strike by selling it early.

However the biggest pay day is buying a call when it's deep out of the money then having it go INTO THE MONEY because now it's delta will be high and you will gain hundreds of percent on your initial investment as the intrinsic value increases (see definitions in first post) When you enter that 0.25 call it has zero intrinsic value because it's out of the money.

Do I ever own the stock in either of these scenarios or am I simply buying the option and then selling at the strike?

Also, how does the timeline play out in this? Are there just options available at certain dates and I buy the one closest to my Put/Call expectation?

In these situations you don't hold the stock on either the put or the call. The next section I will do will be covered calls which is selling a call against a position you hold. You could buy a put on stocks you hold as a way of insuring your position against a decline. But that protection is going to cost you money. When people do this they aren't looking to make a profit on the put they are buying it to have insurance against a decline and they are willing to give up the premium amount to get it.
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Some anecdotal advice on options. One you feel ready to start, start small. There is a "feel" to options in terms of choosing the strike and expiry that comes with experience. This feel is combined with technical analysis. I highly suggest single contracts on stocks that aren't super expensive. Also consider starting with less volatile stocks like Boomer value stocks. They are a lot more predictable and have less volatility. The premiums wont be as high, but its safer to begin learning the ropes.

I trade options on both low volatility Boomer stocks and high volatility SPACs. It is night and day in terms of how fast shit can move. You also learn that options pricing gives you a good feel for how the market views a short term price swing in the stock. When a stock takes a sharp price move and the options market barely reacts, it usually is telling me the market doesn't see this as a longer term trend, just a short aberration.

tldr: start small and on low volatility stocks.
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Someone placed what I guess was a market order at the open for 1 put contract of PSTH. It filled at 110% above what they should have paid for it. SMH.
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Always have an exit strategy before you pull the trigger. Every time. Options aren't stocks. The have something called time value that Blazin will explain at some point if he hasnt already. Time value experiences time decay. Time decay is either your best friends (if you are selling) or your worst enemy (if you are buying). But back to exit strategies.

Options aren't "buy and hold" investments. Their value is a function of the underlying stock price but it isnt linear. The closer the underlying stock price gets to the strike, the higher the delta goes (the delta being the change of the value of the option for every $1 in change of the underlying stock price). And vice versa.

For me personally, when I am writing (selling) options I target a 50% profit to begin taking notice. Remember, when you write an option you are given 100% of the max profit immediately. You can't make "more" than the premium you got on any single option that you write. So when I write an option and I have the ability to close it out (by buying to close the option I sold) for half what I was paid I begin keeping an eye on it. The volatility of the underlying stock and the overall market are factors. When I hit 75% profit I am beginning to actively look to close. Remember, If I got $100 premium to sell the option and I am at 75% profit that means if I close I made $75 profit on the deal. If the stock turns the other way that profit can erode quickly.

Depending on the stock I look for two exit ideas. One is to just buy to close. One factor I consider is how much time is left on the option. The more time left the more time the stock can swing the other way and bite me in the ass. Another strat is to roll the option and make some more premium. As you get close to expiry, the time decay is eating up the current option much faster than it will an option further out in time (say the next month). That creates an arbitrage situation. If the stock price takes a turn against you, since you are close to expiry but still far away from the strike, The value of your current option wont move as quickly as the one out next month. This allows you to take advantage of the stock moving against you and make some more premium. Now an example to explain (the numbers aren't 100% accurate since i am going from memory but this is a trade I did in fact make)...

On Jan 15th I write 5 put contacts for CCIV with a $20 strike and a Feb 19 expiry (four weeks). CCIV is currently at $23 share price. I get $3.80 cents premium because the implied volatility of the option is over 300%. Over the course of the month the stock shoots up over $30 and the price of my options plummets (this is a good thing for me). Lets say I am at 85% profit if I buy to close out (57 cents to buy out). On 2/7 the price of CCIV dives down to $25 in response to some tweet. Now the value of my option moves against me but since we are close to expiry the time value is really eroding and the cost to close out my option has jumped to $1.05 and I am still up 72%. However, the value of the March 19 expiry options shot up higher since they have like 4x the time value left in them. Now I am pretty confident the stock wont drop down to $20 but there is no sure thing and I have 72% profit sitting on the table. So I decide to roll out and down. This means I roll out the time to expiry on my option and at the same time lower the strike. This allows me to cut my risk and make some more money. So I spend the $1.05 to close my open options (realizing a profit of $2.75 out of my original $3.80 premium profit) and then simultaneously sell the March 19 expiry puts at the $17.50 strike (not the $20) for a premium of $1.90. This lowers my risk considerable ($17.50 strike vs $20 strike) and I took in more premium while avoiding the possibility of the stock tanking on me in the short term before that 2/19 expiry. I could have wrote the $20 strike and not rolled down, but that huge price drop in the stock has me a little concerned so I give up some premium for safety.

Here is the math...
Sold 5 options with $20 strike for $1900
Bought to close those 5 for $525
Sold 5 new options at the $17.5 strike for $950.
This leaves with with a current profit of $2325 and holding 5 options with a lower strike. If everything goes as planned the options expire worthless In March and I keep the $2325. If things dont go as planned and the stock tanks and I get assigned, I have already been paid $4.65 in premium thus my cost basis on the $17.50 options is $12.85. So if the stock crashed to $15 and I have to buy it for $17.50 I have still made a profit. I own the 500 shares currently trading at $15 but my cost basis is $12.85. I did not make as much money obviously, but the trade is still profitable and I can now turn right around and sell covered calls on those 500 shares to keep making premium i the other direction.

tldr: Always have an exit plan before you start a trade.
 
  • 1Like
Reactions: Fogel

Tmac

Adventurer
<Gold Donor>
8,203
13,849
92d 21h 18m
In my examples for clarity I assume holding till expiration. You don't have to do that you could sell at anytime if you choose to. So you don't have to pick the strike exactly where you think it might drop to as all puts will increase in value if the stock drops. The decision comes down to more how much you want to spend and the risk you are comfortable with. The closer to the money (strike near the current price) the higher the premium is going to be.

So let's take calls for example. Again you are bullish on apple it's trading at $136
View attachment 334207
This shows the option chain for the options expiring on 2/19/21 with every strike from $132-150. You could buy any of these and potentially profit off a move higher. On the far left you see Delta that tells you how much the option would move for a $1 movement in the stock. So if Apple went up $1 the $132 strike would go up $0.70 . So as you can see the closer to the money you are, or in the money, the option will move closer to the movement of the underlying stock.

Buying a call option deep out of the money, say the $145s you would only pay $25 for a contract but you would only make a profit if Apple moves above $145.25 by next Friday BUT you don't have to hold it till next Friday. If you had bought this today and apple tomorrow goes up to $137 you could likely sell your call for $33-37 making about $8-12 profit per contract. So point being is you could make money on an option even if the stock never gets to the strike by selling it early.

However the biggest pay day is buying a call when it's deep out of the money then having it go INTO THE MONEY because now it's delta will be high and you will gain hundreds of percent on your initial investment as the intrinsic value increases (see definitions in first post) When you enter that 0.25 call it has zero intrinsic value because it's out of the money.



In these situations you don't hold the stock on either the put or the call. The next section I will do will be covered calls which is selling a call against a position you hold. You could buy a put on stocks you hold as a way of insuring your position against a decline. But that protection is going to cost you money. When people do this they aren't looking to make a profit on the put they are buying it to have insurance against a decline and they are willing to give up the premium amount to get it.

When you say, "So you can see the closer to the money you are...", are you saying the money is the actual stock price at that time?

I also don't understand the delta. Yesterday, when you posted, AAPL was $135. If I'm bullish wouldn't I buy a call @ 135+? And the further away from 135 I get, wouldn't the delta increase? It shows that the delta decreases. Is that because the higher my strike the less likely it is to hit that, so the price I have to pay is less? Whereas if I buy a Call close to the current value, it's more likely to hit that, so the delta is higher?

You also said if I buy a stirke @ 145 I would pay $25... But the bid is .24 and the ask is .26. Am I just paying the average on 100 shares? So (.24+.26)/2 = .25 x 100 = $25? I also don't understand where 145.25 comes into play if I bought the strike @ 145.

Also, if I buy @ 145 and it goes to 137, how do I know I can sell for $33-$37? Which calculations or columns am I using? How do I know my profit is $8-$12 per contract?
 

Sanrith Descartes

Veteran of a Thousand Thread-Ban Wars
<Gold Donor>
34,925
91,216
170d 14h 23m
Wrote WBA puts on the dip. 3/19 expiry, $45 strike (right at the 50 DMA) 62 cent premium.