Investing General Discussion

Uhhh..what kind of options did you buy and for what purpose?

I know this is mostly stocks thread but this falls under investing so, one of the new construction houses that I invested in went into contract today for 50k more than we were anticipating. The whole project is going to be about 100k more profitable than expected. Neat. Azn buyers of course.

ps. forgot the important part. In total, the project will make about 60% over 2 years. Cost of land and construction was ~725k, selling price for the two houses built will be approximately 1.16 mil.

Locnar said:

Ok I know you all will be supportive and merciful. Tell me if I did right or wrong as I stumble forward into the wide world of options.

Today I bought 10 contracts for PLTR expiring next week at 33 strike at 3.31 a share

and also 20 contracts for PLTR expiring in February, 33 strike and 6.41 a share.

these are the first options ive ever bought , and they are already greatly reduced in "value" , wtf did I do????????

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I am going to cover all your questions here as best I can. Blazin is the real expert on options.

1. Never use market orders unless you are dealing with something has a penny spread. Even then I don't use them but at a penny its not a huge deal. Liquidity and volatility can widen the spread on even the most liquid of instruments like the SPY and QQQ. I was seeing spreads of 20-30 cents on PLTR today. Look at this chain. There are call spreads of 40 cents up to 1.00 on the bid/ask. Paying an extra 40 cents with a market order means paying an extra $40 per contract.



2. Disclaimer - I dont buy calls or puts. I prefer to be on the other side of the trade. Today you bought the right to buy PLTR at $33 a share and it expires next Friday. You also bought the right to buy it at $33 that expires in February. You must understand what you are trading. Options have two value components (time and intrinsic). Intrinsic value is easy. Is the current price at or above (in your case with purchasing calls) the strike price of $33. As of the close the answer is no, therefore there is zero intrinsic value. Based on stock price it is currently worthless. Time value is the value the option has based on how much time is left for the underlying stock to rise above the strike price. The more time left, the more chance exists for it to end in the money and thus the higher time value it has. The next part is VERY important. Time decay (how much time value you lose as time passes) is NOT linear. The closer you get to expiry, the faster it decays. Dealing with your calls expiring next week, I can tell you bought them in one of four time periods (see chart)



Based on this chart PLTR was trading around 30.50 - 31 a share when you bought the options.



So, you paid $3.31 a share for the right to buy PLTR next week at $33 when it was trading at about $30.75 a share. So they had no intrinsic value, just time. The reason they were so expensive a week from expiry is because of implied volatility. This acts like a multipliers to the value of the option. Go look back at the option chain I posted above and at the top it says the IV30 is 172.44. That is fucking enormous. Which is why you paid 3.31 for a weeks worth of time.

The reason your options fell off a cliff is becasue the underlying PLTR price went from $31 when you bought them to 27.66 at the close. That is nearly an 11% drop in price. This means the odds of your options hitting the money went down considerably. and since you are a week from expiry, time decay is eroding quickly. You have a few ways to play this. Come Monday you can sit back and ride out the stock and see what happens. The way PLTR has acted it could pop 20% at the open and it wouldn't surprise me at all. If buyer momentum has been exhausted it could drop 20% at the open and it wouldn't surprise me either. Which ever way it moves, your options price will move with it. Keep an eye on the movement in the pre-market on Monday morning. Get on Twitter and follow $PLTR Sunday night and early Monday morning. The stock moved up in the after-market today so that is a good sign.

You need to ask yourself this question. Do you feel PLTR will hit $33 next week? If the answer is yes, then just sit and wait then punch sell your options for a profit when it does. Or, wait until Friday and exercise them. If you don't feel that way then you have more choices. You can cut losses on Monday and bail, eating the difference between what you sell for and what you paid. Or you wait and see what the week brings and sell at hopefully a better price. I can't stress enough time decay IS NOT YOUR FRIEND this close to expiry. its going to only get worse the closer to Friday you get. Don't decide now, you need to see what the pre-market on Monday brings.

3. The Feb expiry $33 calls. You paid $6.41. The last trade was at $6.20. The closing spread was 5.70 and 6.50. Notice how the price did not plunge like the other options did. That is because these options have more than 3 months of time value in them. The decay is quite slow right now. Like the others they have no intrinsic value. Notice that spread is 80 cents. This is why market orders are the debil. If you paid an extra 80 cents per share at 10 contracts you would have paid an extra $800.



4. So, what do you do? Speaking only for myself, I would be a little patient on the Feb calls and look to exit at breakeven if you get a stock spike up. You have time on this. The reason I dont like this trade is that there is a lockup period that is going to expire after first qtr earnings are announced. This means a ton more stock owned by employees is going to hit the open market. Also, the stock was trading around 11 two weeks ago. Don't trade long term options plays on a highly volatile stock.

As for the ones expiring next Friday. Do your best to get out with the lowest loss if you can't break even. Its hard to say more until we see Monday morning movement. We also have the option of rolling the options out on Friday when there is near zero time value left but you could end up just throwing good money after bad if PLTR reverts back to the mean and doesnt get close to 33 again.

5. I can't stress enough you have to understand what you are trading. if my math is right you invested 16k on shit you didn't really understand. When buying calls, you are betting the stock is going to go up. You can make money with that trading just the time value without the option every gaining any intrinsic value. The trick with buying calls is you cant really be wrong without taking a loss. That is why I like being on the other side of the trade. Imagine I am on the other side of the call trade you made that expires next week. I sold them to you are 3.31 and I could have sold them at the close for like 1.60 and doubled my money. Better yet I can hold them and as long as the price stays below 33.00 I walk away with the 3.31. If the stock reverses and runs all the way up 32.99 I am 100% in the clear. It doesnt matter what the paper loss is, I am not going to realize it. If you miss by a penny and it ends at 32.99 then you lose 100% of your investment (as they expire worthless). If I miss by a penny, I have to buy stock at 33.01 and sell it to you at 33.00.

6. Selling calls on stock you already own and selling puts on stock you wouldnt mind buying at a discount is probably a much safer play for you until you get some trades under your belt and really feel you understand the options market. In my opinion the buy side is the toughter side of the trade.

I hope this helps.

Locnar said:

Yes helps a ton. I felt like a made so much lately I could afford to get wild. I know not wise, and im usually very prudent. I'm going through my WSB phase. I basically set the calls for next week on fire. I'll see what I can salvage next week out of them. But then again, how did I know whats his name was gonna pull a Neo on PLTR today.

I really had zero business jumping into them, but I wanted to see "big numbers".

I also got frustrated not really understanding the commands to take my 100 shares of INTC (and a few other things) and turn them into a covered call. We both use fidelty, what would I do to execute that? Also when I select my new calls I bought today, there is no "sell" button of any sort, how DO I get rid of them and who sets the sell price?

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When you own the underlying stock, you will use the option chain, find the strike/expiry and choose "sell to open".

To sell a call you bought, click it and choose "sell to close". Ot if you go into the option chain you will see a blue "c" on that strike and expiry. You can click that call as well and choose "sell to close". So for INTC, go to the INTC option chain, find the strike/expiry and click it to open the drop down and choose "sell tonopen" to sell a covered call. It automatically knows you own it so it becomes "covered" automatically.

If you sell an option (call or put) then you are "short" that option and you would "buy to close".

Let me add, my advice is stick to a single contract per option until you are more comfortable. Less profit but less risk.

This is where understanding the Greeks comes into play. The Delta of an option will tell you the approximate price movement of the option for every dollar of movement in the underlying stock. So if the Delta is 0.25 then on average every dollar the stock goes up or down, the value of the option should make a corresponding 25 cent move.

Fogel said:

In order to sell covered calls, go directly to the option chain for the stock you want to put the covered call on, and then select "sell to open" for 1 contract, input your bid price want, and fidelity will automatically reserve your shares for you. You don't do anything directly through the shares, its all through the option chain.

For the 2nd part of your question, in order to "sell" the call contracts you bought on PLTR, you'll go through the option chain again for PLTR, select "sell to close" for the same strike price you bought, select how many call contracts you want to sell back, and input the price you want to sell for.

You bought the calls at 3.31 a share, that means you break even for PLTR next week is 36 dollars. If you don't think PLTR is going to hit 36 dollars next week, then your best bet is to sell the contracts as soon as you can for as much as you can. But for every day that goes by that PLTR doesn't guy by, the time decay is going to make the price of the options go lower and lower

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I forgot to include the premium when I mentioned his open calls. Good catch. Its another reason I stick to the sell side of the option chain.

Locnar said:

This. I have no clue what demon possessed me to go so big so fast. I guess the WSB demon. Watch me unravel all my gains from the past six months on options...

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Just dont panic. As I said previously, the Feb options should be easy to unwind unless PLTR does a steep nosedive and I am not sure that is going to happen yet. I expect at least one more push upwards. Keep your eye on the Feb options come Monday and you can afford to be patient if it opens significantly lower. The ones expiring next Friday need a little luck for a positive open on Monday as you have not a lot of time left to play with.

As of close of business Friday I have the vast majority of my cash position (about 35k) put to work on options plays. My strategy is pretty simple. Stick to stocks I understand and know, stay on the sell side, and use short strangles on stocks I already own. I am also putting a focus on return on capital. I am tying up cash on the put orders (I dont trade on margin, so its all cash or stock covered option plays) until they expire/close so I am looking at the return on capital while it is tied up to help make the best choice among various possibilities. Here is what I am currently running.
ps.. A short strangle is where you sell puts and covered calls on a stock you own using the same expiry for both. So long as it stays in the range I win on both trades (collecting premium top and bottom). If it breaks the strike top or bottom, I win on the opposite play and can either roll or take the assignment. Since I already own the stock I am comfortable getting more of it at a cheap price. If I choose to let them take it then I sell for a hefty profit.

NIO $27 strike puts expiry 12/18 at 0.50 premium
HYLN $15 strike puts expiry 12/18 at 0.65 premium
MP $12.50 strike puts expiry 12/18 at 0.40 premium (bought to close late Friday at 5 cents. Profit 35 cents)
GMHI (Short Strangle) $10 strike puts expiry 12/18 at 0.70 premium and $20 strike covered calls expiry 12/18 at 0.90 premium
TRIT (Short Strangle) $10 strike puts expiry 12/18 at 0.27 premium and $15 strike covered calls expiry 12/18 at 0.20 premium
PLTR (Short Strangle) $14 strike puts expiry 12/18 at 0.50 premium and $35 strike covered calls expiry 12/18 at 0.35 premium
PLTR (additional puts) $18 strike puts expiry 12/18 at 0.65 premium
VLDR $15 strike puts expiry 12/18 at 0.95 premium
PSTH $22.5 strike puts expiry 1/15 at 0.95 premium
DAL $37 strike covered calls expiry 12/4 at $1.45 premium (I expect to roll these out and up on Friday if it stays in the money)

On the cash covered puts I ran a 4.02% return on capital (collected premium/cash to cover). Except for the PSTH everything expires 12/18 so by then I close and reload for the next set of moves.

Fogel said:

I'm pretty much doing the same thing, I've been pretty aggressive with my puts lately and still haven't been assigned, trying to get between .5 to 1% return on a weekly contract. My common plays the last couple weeks have been:

PLTR
AMD
PINS
SNAP
SAVE
LITE
DAL
GMHI
MP

Thanks Sanrith Descartes for the heads up on GMHI and MP, I also bought shares on them and am up 40-50% on both not counting options. I'm also adding SONO to my puts this week, see how it plays out after their big quarter.

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I sold out my MP at about 75% profit. I think the move was too high and I expect it to fall back into the mid-high teens in the next few weeks. I will keep selling puts on it in that range because thats a price I think its worth owning right now.