Wanted to keep this separate from the stock market thread. Was hoping you guys who trade options can break it down for me. I've tried to do some research but I usually just end up more confused. I know it is supposedly a good way to decrease risk so I'd at least like to have that club in my bag.

A few specific questions:
- What is the difference between buying a put and selling a call option?
- When is the option considered "cheap" or "expensive"? How and why does this vary?
- When would buying a call option be a better play than buying the stock outright?
- I don't really understand "expiration" at all. How long until the options expire? If you can buy them out to different dates, how come we have these big "option expiration" days? What are your options once it is set to expire?
-

9/21/2009 5:50:32 PM

I'll try and answer. I'm not a pro but my skillset of knowledge of them is improving.

Quote :

"What is the difference between buying a put and selling a call option? "

In regard to sentiment of the underlying, nothing. They are both bearish bets on the stock. The ultimate difference is your time frame. If you sell the call, the stock can languish for awhile and you'll make money on the option as time decay its into its value. If you buy the put and the stock languishes, you lose money on the premium. Whenever I've googled for strategy, most people would rather you be sellers of premium rather than buying. It isn't so cut and dried as this regarding your actual account. When you buy a put, your maximum loss is limited to what you paid for the put. When you sell a call, your max loss is theoretically unlimited as the stock could shoot to the moon.

Quote :

"When is the option considered "cheap" or "expensive"? How and why does this vary?"

The implied volatility + how in the money the option is determines it's value. You can look at the historical volatility to get an idea of how volatile an underlying is now compared to its past. Honestly, I don't have a huge grasp on this part of the options yet. I don't know how they are calculated or if they derive from how much the underlying is moving. Suffice to say that near events and expiration, their values you go up. I've learned that you can't buy options after a catalyst or during periods of high volatility (ie, you want leverage over what you can get just from the stock) and always get out in time before the volatility falls.

Quote :

"When would buying a call option be a better play than buying the stock outright?"

Again, I'm a bit of a novice, but if you buy the call option then the most you can lose is the cost of that call, versus a stock unexpectedly going to zero.

Quote :

"I don't really understand "expiration" at all. How long until the options expire? "

The options expiration days are the third Friday of every month (or Thursday if a public holiday). If you pull up a trading window (or go to yahoo finance, select a stock, then select options) you'll see the months that you can trade the options in, it varies a little from stock to stock, but generally you'll have 2-3 front months to trade in, and then long term (LEAPs) months. If you trade an option in the October contract, it will expire the third Friday this month.

Quote :

"If you can buy them out to different dates, how come we have these big "option expiration" days? What are your options once it is set to expire?"

See previous reply, you can trade in different months. At expiration, a few things can happen.

If you've bought a put and the stock isn't below that put, you're option will expire worthless on expiration day. If you've bought a call and you're stock is above, I think most brokers will exercise that option for you and purchase the underlying stock unless you instruct them otherwise.

If you've sold a put and the underlying is below on expiration, you will purchase the shares at the price of the put contract. If you sold a call, you will have to sale shares to the call buyer at the contract price. This is why option selling is more dangerous. If you sell me the option to buy AAPL at $100, and the stock is at $200 on expiration and you don't own AAPL shares, you will have to buy it for $200 and sell it to me for $100.

You could also do what's called "rolling" the option at expiration if you don't want to be exercised on. This is really nothing more than purchasing back the option you've sold and re-selling it in the next month. I did this just recently with SRS. I sold 6 August 10 puts for .30. When SRS jumped to 13 I could have closed these out for .10. Being greedy and wanting every last bit of that $180 (and not wanting to pay the paltry $8 in commission, lol) I let them run. Well, the market took off and SRS was well below 10 last Friday. Had I let it sit, I'd be holding 600 shares of SRS at $10 (well, 9.70 considering the put I sold) and I didn't want to be that heavy on SRS. I do believe the turn will come some day, but I kind of wish I would have just paid the loss on the option and moved on. Instead, I bought that put option back for like .80 and turned right around and sold Oct 10s for 1.45. You can more or less roll forever.

Quote :

"I know it is supposedly a good way to decrease risk so I'd at least like to have that club in my bag"

It can help definitely, but you really have to understand them very well to know if the pricing you are getting on them is good or not while staring at multiple strike prices and multiple months. I've got a grasp on most of the concepts except this.

For example, this was posted yesterday on the site I'm subscribed to:

Quote :

"AIG party - didn’t have a chance to look at AIG till now. With the high priced options, there are fun plays. One of them is: - Buy Nov 45/50 CALL vertical (buy 45, sell 50) for $2.08 - Sell Nov 85 CALL for $2.1 credit The net cost is zero, i.e. no loss on the downside, breakeven is 87 or so. Watch to make sure that the Nov 85 short CALL doesn’t get away from you."

I can't spot ideas like this yet. I don't know if this guy did or if he has something to help him.

But in general, that trade will work like this. If AIG finishes below 45 on Nov expiration, your 45/50 vertical will be worthless, but so will your 85 you sold. You gained nothing, you lost nothing. However, if AIG keeps rising, the value of the 45 that you bought will go up more than the value of the 50 you sold up until they are both over 50 at which point they will both move in step with the underlying and you won't get any more profit. Your max profit will be $5-2.08 on this part. However, if AIG starts really zooming, you will start incurring losses if it goes over $85. So you have to keep an eye on this part and potentially kill it. If you are ballsy enough and keep all options on the table, then if AIG finishes below 85 at expiration, you keep all of that 2.10 premium you sold on it.

I'm not sure if AIG was more volatile yesterday or what, but looking at the prices now, the 45 last traded at 8.60/8.75 bid/ask, the 50 at 6.65/6.85, and the 85 at 1.26/1.40.

Meaning as of today you couldn't make that trade like outlined yesterday. It's entirely possible the 85 hadn't traded yet on yesterday and the price he was seeing was stale.

9/22/2009 6:03:40 PM

Quote :

"I know it is supposedly a good way to decrease risk so I'd at least like to have that club in my bag"

One of the best ways to decrease risk is with what is called a collar.

Let's say you bought BAC in late July at around 10 and now it is up at 17. You've got 70% gains and you'd hate to see this wiped out. You've been reading the news and you feel like the upside on BAC is currently a bit limited but the potential for massive downside is still there.

You can perform a collar by buying a put and financing the buying of this put by selling a call. Often, you can do this for next to no cost. It's cheap insurance.

If I look at BAC options for October, the 17 puts are trading for .58c. If you bought this put outright and BAC collapsed between now and expiration, you would have the ability to sell BAC at 17, preserving the majority of your gains. Now, .58c is pretty cheap but suppose you did this for a couple of months and didn't need the insurance. Well, if the stock stayed near where it was right now, you'd start to get irked by having to pay for this insurance. So what you can do is sell the higher strike call. The Oct 18 calls are trading for .67. So, you could sell this call and completely finance the purchase of this put and have .1 left to show for it. However, if the stock finishes above 18 on expiration you will be called and have to sell your stock for 18.

You could go out to November. Here, they don't give you a 17 options, so you could buy the 17.5 for 1.27 and sell the 19 for .75. This is about .50c to protect all of your gains, but your upside isn't as capped as it was before.

You could go all the way out to Feb 10 and buy that 17 put for 1.97. Then, you could sell farther out strikes in the front months to offset this cost and not limit your upside as much. The October 20 calls are going for about .18c It's probably reasonable to assume you could sell calls 10% or so out of the money for about this same price so you'd get 5 months of .20 calls sold that will give you 10% upside each month and ultimately lower your cost of the put you bought down to around .97. I don't know about you, but I think if I made a good call on a shaky stock and I'm still not sure about its future, I'd sacrifice 10% of my profit on it to have some peace of mind.

Options are neat as hell, but I got torched a few times while learning the ropes with them. Mostly related to just randomly purchasing them heading into a catalyst or an expecting the market to turn and not setting stop losses.

I've gotten a lot smarter about using them lately but the potential is certainly there to get grizzled.

[Edited on September 22, 2009 at 6:29 PM. Reason : .]

9/22/2009 6:24:14 PM

^Do you recommend a book that explains each of these cases? Or literature on the market in depth (waaay beyond the simple buy/sell)?? Or where exactly did you learn this, other than googling

9/22/2009 6:33:20 PM

I learned everything I know by just googling and studying.

Start here to get up to speed

http://cboe.com/LearnCenter/OptionsInstitute1.aspx

Oh, and I forgot to mention on the previous post. On the last idea about buying Feb options and selling front months. Let's assume that each month the stock did rise by near 10% in price, but not enough to get called away. While this is happening, the value of that Feb 17 will keep going down because it is farther away from the money. What you can do though is roll up to the 18 (or 19, or 20, and so on). In this way, you keep locking in profit, but it will keep costing you to roll up such that you'll have to spend some of your "profit" to keep the gains. I can't give you exact numbers on this as you'd need to look at the history of a few different strikes and this isn't so easy to do. The idea is the options give you a ton of flexibility (in addition to leverage) regarding your assets.






[Edited on September 22, 2009 at 6:43 PM. Reason : .]

9/22/2009 6:35:43 PM

If you think a stock is going to increase; you basically can amplify your gains by buying the call options versus buying the same cash value of that certain companies stock.

On the other hand a stock is a hard asset while your options are worth $0 at expiration date if out of the money.

I do not have the time to micromanage enough to get into options.

[Edited on September 22, 2009 at 6:57 PM. Reason : l]

9/22/2009 6:57:33 PM

You don't need to micromanage. I have a few plays I made months ago that are still churning along that I posted about in the stock thread.

HTE (Harvest Energy Trust)
PGH (Pengrowth Energy
TNK (Teekay Tankers)

I bought all of these dividend payers and immediately sold long term puts and calls.

For HTE, I bought it at 5.44 and sold a Feb 10 5 call for 1.014 and I think the 5 puts for around $1 also. I bought the puts back at .40 for 60% gain but I could have just as easily let these go all the way to expiration. The stock is at 6.49 so it's likely I get called away at expiration, but not before collection .05 a month in dividend.

TNK I bought at 9.23 and sold 7.5 calls for 2.10 and 10 puts for 2.40. The stock is trading at 8.35 but I am at break even (down $16 actually on a $1800 position) at the moment before considering the .49 dividend I collected in August.

PGH is a similar story with a .10c quarterly dividend.

You should look into them. They aren't just for day trading. Covered call selling is the easiest way to make your asset do more work for you.

9/22/2009 7:07:32 PM

Thanks for the response. I am still pretty confused about most of it so I just want to be able to have a very basic understanding of when using options is a much better strategy than buying/selling the stock outright.

I think my biggest question (besides when is the option considered "cheap" or "expensive," which you couldn't answer either) is what side of the option to play based on your overall sentiment on the stock. Let's take WMT for example. I don't think that anyone will argue that WMT will be worth more in 10 years then it is right now. So overall I am bullish on the stock. However, I think that in the next few months it will be trading lower than where it is right now. Yet I would not mind owning it at it's current price and DEFINITELY want to own it if goes lower. What is my strategy? Buy calls, sell puts, buy the stock outright now, or wait and buy the stock outright at a lower price?

Now on the other end of the spectrum, let's take a leveraged vehicle like SDS. For a variety of reasons, I do not think SDS will be higher than it is right now in a few months let alone 10 years. So I am bearish long term on SDS and do not want to be stuck holding it. However, let's say I think the market will trend down in the short term, meaning SDS will rise. This also means SSO will drop. I know there is also time/volatility decay with owning a leveraged bear ETF, and using options can actually help that decay work FOR you. What is my strategy? Buy puts or sell calls on SSO, buy calls or sell puts on SDS, or buy SDS outright?

Also, when do I look to get out of the option? Does it work like a stock to where you can set a limit or a stop to lock in your profit or mitigate your loss? And can I calculate what the option will be worth ahead of time, or do I just have to wait and see how it behaves?

9/22/2009 7:43:47 PM

I would think your overall strategy is to make money through an increase in stock price rather than dividends....choose stocks that'll make you more money in the short term. Sure WMT might rise in 10 years, or even double then to. But its more fun to do heavy research and pick a small/mid cap stock that could double in the next 6 months or a year. You're young, risk a little to make much more....post a few you come up with here. I've been investing for 10+ years, never made a dime off those large caps...but I've had smaller companies triple in a few months....see what you can come up with

9/22/2009 9:15:28 PM

Quote :

" I think my biggest question (besides when is the option considered "cheap" or "expensive," which you couldn't answer either) "

Historical Volatility (calculated over whatever period you want) is one way to determine if the options are cheap relative to whatever time frame you are looking at. I also know that the Implied Volatility value is another reference used to determine the relative "cheapness" of a stock.

3X ETFs and very volatile stocks (like AIG recently) are going to have high IVs. For instance, Wal Marts October IV is 19.27% as of the close. It's nearest in the money (itm) call is the 50 strike for 1.45. The stock closed at 50.99, so you're paying .45c in premium (stock price - strike price) for this option.

Targets for october is 32.48%. It's nearest ITM call is 47.5 at 1.80. So you're paying 1.14 in premium for this option.

Quote :

"I don't think that anyone will argue that WMT will be worth more in 10 years then it is right now"

Well, you can look at the past 10 years for WMT and see if you want to modify that statement. Anyway, it doesn't matter for this illustration

Quote :

"So overall I am bullish on the stock. However, I think that in the next few months it will be trading lower than where it is right now. Yet I would not mind owning it at it's current price and DEFINITELY want to own it if goes lower. What is my strategy? Buy calls, sell puts, buy the stock outright now, or wait and buy the stock outright at a lower price?"

You have to consider the risk/reward of your play. If you think it is going lower, then you could sell calls and if the stock does go lower then you can profit every bit of the call you sold as profit. The risk is you end up under water on the call and begin losing money in the event you bet wrong.

If you sell the put and guessed wrong, then you pocket all the premium off the put. If you guessed right, then you get an entry into the stock at a discount. However, if the stock really wants to run away from you then you can incur big losses relatively quickly. On fairly predictable stocks, this isn't such a concern, but by the same token, the option prices aren't very rich either.

Let's take STI (Suntrust Bank) as an example with a more modest IV of 61.25% at todays close. The stock has had a nice run off the lows and is more or less mirroring the S&P. You think long term the stock is good but think there could be a near term pull back AND you fear any unknowns (this is a bank with potential accounting shenanigans for all you know) that might really damage a position in this stock.

It's currently trading at 23.68 and you wouldn't mind owning it at 10% down from here, or around 21. So you sell the Nov 21 put for 1.20. This if STI falls below 21 at expiration, you get exercised on the stock with a cost basis of 19.80. Remember though, you still fear something crazy might happen and really whack the stock, much more than you are planning for. In this case, you can buy teh Nov 19 for .65 as protection from a catastrophic fall. You've raised your cost basis up to 20.40 (because you paid for the put) but you've limited your maximum damage to 1.40 total (20.40-19).

If you were early on STI or that correction you thought could happen never comes, you profit the 1.20-.65 (the put sold - the one bought) entirely and you can try again the next month.

It can work the same on the call side if you expect the stock to go down. You could sell an out of the money call, and buy one higher up to limit your loss. This is whats call a vertical, or a put or call spread.

Quote :

"What is my strategy? Buy puts or sell calls on SSO, buy calls or sell puts on SDS, or buy SDS outright? "

Again, it's always better to be a seller of premium rather than a buyer. The risks are greater, so turn your single option idea into a vertical to limit the max risk.

The implied volatility on SDS/SSO isn't nearly what you'd expect. Long term, if you don't think SDS is going to go too much higher than here, you'd want to be a seller of far dated calls (you can go out to January 2011 at the moment), especially if you think decay is really going to help, or you could sell puts on SSO though this might not be as smart if you think decay will be a problem.

Regarding the leveraged ETFs. They are behaving MUCH more predictably now that the market is a lot tamer. In mid July, some of the guys on the site I follow had the idea to short equal amounts of FAS and FAZ when they were both trading right at about 45 in the days after the reverse split adjustments.

If you did that with 1000 shares of each, you'd be up 25540 on FAZ and down ~45000 on FAS. So clearly, the decay isn't working like folks thought it would because the market is trending in one direction and not moving up and down rapidly.

Of course, this could all change if the markets start getting erratic again.

Quote :

"Does it work like a stock to where you can set a limit or a stop to lock in your profit or mitigate your loss? "

Yes, however options are less liquid than stocks with wider bid/ask spreads (if you don't know what this is, its probably a little early for options).

Most heavily traded stocks under $100 will have a tight b/a spread on the order of 1-2 cent. For options, if the underlying is volatile the b/a spread will be fairly wide. If the stock isn't volatile, not so much.

Take WMT for example, it closed teh day at 1.17/1.18 for Oct 50 puts. So, you could enter a position on this option and set a stop loss just like a stock and not have to lose to much on the b/a spread.

AIG on the other hand (with 146% implied vol) is at 45.80 and has a b/a spread on the Oct 45 puts of 6.10/6.25. So, if you thought the stock was going to drop today, you'd possibly have to pay as much as 6.25 to get that put and if you tried to turn right around and sell it you'd be looking at a loss of .15c. The reality is you'd put an offer in at 6.15 or 6.20 and hope the market maker doesn't play games with you. Ie, the stock blips down and you put an order in just below the ask. The market maker doesn't hit your order even though the stock isn't trending against you. You cancel the order and fire it in again at .05 higher, the market maker happily hits your offer and immediately lowers the price.

I'm certainly not an expert in the ways they play games with you (do know that they make money on exploiting what buyers are asking on one side and what sellers are offering on the other, I don't know how it's legal, but it is), but it's happened to me enough to know it exists.

Quote :

"And can I calculate what the option will be worth ahead of time, or do I just have to wait and see how it behaves"

Yes, sorta. Options have whats are called "greeks", Delta, Gamma, Theta, Vega. Delta roughly estimates how much an option will move for every $1 move in the underlying asset. Delta will be higher or lower depending on how close the strike price is to the stock price and how volatile the stock is. For AIG, The Oct 45 calls closed the day with a delta of .57. If the stock gaps up tomorrow $1, you can expect the 45s to go up at least .57 (and most likely more because the big jump will make the volatility go up in the short term).

Theta is an estimate of how much value the option will lose per day. Those same .45s are expected to lose around 12c per day at the moment. I don't know what gamma and vega do, I wanna say gamme is the rate of change of delta and vega is the rate of change of theta. I'm sure these are useful for the uberest of option folks, but that isn't me.

9/22/2009 9:22:29 PM

https://www.thinkorswim.com/tos/displayPage.tos?webpage=trainingProducts

An excellent site for learning more about options trading and strategies. The site really helped get me through my Derivatives class last year. I especially liked the article on "The Greeks."

9/22/2009 11:17:57 PM

OPTIONS should be used to trade VOLATILITY

While Fail Boat has decent advice in the stock market thread, his options knowledge is brutal - I stopped reading after the answer to the buy put/sell call question...thats not even close

Buy a book

9/23/2009 1:13:51 AM

On that note, I think it's funny that options are often used as incentives for executives. Instead of encouraging these executives to make the company's stock price increase, the options encourage executives to make the stock price more volatile, which can lead to some pretty questionable decisions.

In most of what I've studied, options are used primarily to hedge, not to speculate on stock prices or volatility.

[Edited on September 23, 2009 at 2:54 AM. Reason : ;]

9/23/2009 2:50:00 AM

Quote :

"While Fail Boat has decent advice in the stock market thread, his options knowledge is brutal - I stopped reading after the answer to the buy put/sell call question...thats not even close"

I admitted right up front

Quote :

"I'll try and answer. I'm not a pro but my skillset of knowledge of them is improving"

Quote :

"I stopped reading after the answer to the buy put/sell call question...thats not even close"

Please enlighten everyone so we can all learn together.

I mean, I'm not trying to be a dick here, but this

Quote :

"OPTIONS should be used to trade VOLATILITY"

sounds like someone that hasn't actually traded options...ever.

The collar and covered call are about as basic as the option strategies get and the former has really nothing to do with volatility....at all. The latter, sure, you can use it to add some income each month if you time the sell right, but it's not meant to take advantage of volatility.

Interested to hear what knowledge you have to drop.



[Edited on September 23, 2009 at 7:36 AM. Reason : .]

9/23/2009 7:16:17 AM

1) I don't think you can learn adequate options knowledge in a University message board - hence the guy should probably look at a simpler portfolio
2) If you want the answer to the long put/short call question, draw a simple payout diagram that students learn in undergrad. Sure both are bearish plays, but like I said, options are used to trade VOLATILITY. You take a long call if you think volatility will increase, you write a call if you think volatility will stay the same or decrease.
3) I do not trade options personally (my work prevents me from devoting the amount of work needed to manage the risks - the aforementioned "greeks"; in addition to the fact that I am not trained in options trading), but I work with them on a daily basis at work (in NY, bulge bracket IB equity derivatives trading desk)

Perhaps I was crass in my earlier post, and I apologize to Fail Boat. I just don't want to see a person, clearly not qualified to get in this arena, come to this board seeking advice - and receiving advice from someone almost as unqualified.

PS - a collar and a covered call have everything to do with volatility.

9/23/2009 4:43:37 PM

Quote :

" PS - a collar and a covered call have everything to do with volatility."

rofl. Everything in the market has to do with volatility. You still sound like a guy that doesn't really know much at all about options other than maybe a short section during some training program you did at whatever i-bank you're at. Stocks are either going to go up, down, or stay the same.

Oh, i see

Quote :

"I do not trade options personally"

Quote :

"I don't think you can learn adequate options knowledge in a University message board - hence the guy should probably look at a simpler portfolio"

Well, that doesn't stop a bunch of amateurs and wannabes from pretending like we can.

Quote :

"If you want the answer to the long put/short call question, draw a simple payout diagram that students learn in undergrad."

I provided a link to the cboe tutorials that has all that in there. I'm not trying to do a full tutorial here. Just trying to have an interesting discussion and maybe it triggers some more questions and we can all learn.

Quote :

"Sure both are bearish plays, but like I said, options are used to trade VOLATILITY. "

Again, this is like saying "options are used to make different plays on stocks which are mostly volatile to some level be it high or low over some time frame be it long or short".

Quote :

"You take a long call if you think volatility will increase, you write a call if you think volatility will stay the same or decrease."

Volatility can also stay the same, do you not have a strategy for that? You're getting on to me, but making generic statements like this is just assinine. I can by a front month call expecting volatility to increase, it will, but the time decay can still kill its value before expiration. Don't knock me for having brutal knowledge when it's apparent you're well behind me, even at my relatively novice level.

Quote :

"I just don't want to see a person, clearly not qualified to get in this arena, come to this board seeking advice - and receiving advice from someone almost as unqualified."

So you're now the gatekeeper of investment advice on the internet? If someone comes to The Wolf Web for this kind of advice, it probably doesn't matter anyway.

9/24/2009 12:53:33 PM

haha, ok. take this guys' advice then, my apologies for stepping in...

didn't think my 1am post-bar advice (on business in the middle east) was going to by dissected line-by-line, not really interested in spending the time to answer those...

[Edited on September 24, 2009 at 2:43 PM. Reason : go pack!]

9/24/2009 2:42:19 PM

That's pretty low to drop in like a douchebag, call someone out for how ill-informed/wrong they are, not explain yourself, then leave like a bitch as though explaining how they are wrong is beneath you.

He even said he might be wrong and was happy to learn if you wanted to teach.

9/24/2009 4:48:21 PM

^It's way easier to pretend you know something than to actually know it. Hell, I do this in Soap Box all the time.

9/24/2009 5:18:36 PM

I usually invest 60-80% of my portfolio in large/mid cap value stocks and etfs and use the remainder for option trading. I did very well last spring opening and closing calls on the 3x etfs that we were all playing with then.

I've done well selling covered calls on my positions of companies like GE, MSFT and T. They generally aren't terribly volatile so the premiums aren't great, but if you sell a call one month out every month it adds up by the end of the year, especially on top of the healthy dividend that some of them pay out. For example, I'll sell a $25 call on MSFT every month. Often it will get called away and I can turn around and sell a $25 put for the next month. Hell, they're stocks that were called away from me 6 months ago that I'm still selling puts on. Of course, when you lose it at $25 and it rockets to $28 the put premiums shrivel as well.

A big problem with that strategy that you should be aware of is that over a long enough time period all of your winners will be called away and you'll be left with a basket of poor performers while missing out on a hefty upside. Aside from that it's a healthy strategy that's fairly conservative and good for getting your feet wet, even if it favors a flat market.

9/24/2009 5:32:48 PM

^^^ Fair enough, I agree - poor form on my part.

^^ take it easy on the shots, pal. I know exactly what I'm talking about

Follow this guy ^, I've seen some of these threads: he actually knows what he's talking about and will spend more time than I to explain it to you

[Edited on September 25, 2009 at 12:04 AM. Reason : a]

9/25/2009 12:03:39 AM

Quote :

"1) I don't think you can learn adequate options knowledge in a University message board - hence the guy should probably look at a simpler portfolio"

i believe i made it pretty clear in my posts that i was just looking for some basic options knowledge and not looking to start diving into them after reading a few TWW posts. i do appreciate the info that's been given though

9/25/2009 2:50:19 AM

would you agree that 100 contracts is an average sized trade?

9/30/2009 7:49:34 PM

Probably depends on both your level of funds and the individual stock. 100 shares of GOOG or AAPL versus 100 shares of BAC or CSCO is a big difference.

10/1/2009 10:05:14 AM

100 contracts is pretty big considering that each contract is generally for 100 shares.

10/1/2009 10:15:59 AM

Quote :

"would you agree that 100 contracts is an average sized trade?"

I'd say no depending on what your fee structure is.

I was able to carry over my TradeKing structure at $5 a leg + .65 per contract (which I think is fairly competitive based on what I have seen) to Think or Swim and their platform is probably one of the best in the industry right now.

At 100 contracts it would cost me $140 total to open and close that position.

I trade in the 1-10 contract range with 5 being about average.

If you're trading in 100 contracts, you either have a lot of money or you're trading FAR out of the money options.

10/1/2009 10:48:27 AM

Btw, I clearly don't know what I'm talking about, so don't take my word for any of that.

10/1/2009 7:11:06 PM

Quote :

"would you agree that 100 contracts is an average sized trade?"

you better know what you're doing if you're buying 100 contracts.

10/4/2009 12:40:28 AM

I have not read 30% of this thread but the big thing I saw at the beginning that I wanted to point out was the difference between put buying and call selling, HUUUUUUGe difference. If I sell a call on say apple, a few months ago when it was at say, 130 back in july, and I sold an october 140 call for say, 4 bucks at the time, and I was still in this trade (which would be monumentally dumb), i'd be down over 40 points, a little more with the time left until october expiration, which is extrinsic value. The 40 points that Apple is in the money (let's say Apple is at 180 today, but I think it's like 186, but say 180) is intrinsic value, the amount over $40 that the call option is over, is the extrinsic value, or time value left until expiration. The total amount of the option is determined by many many things, and they use the Black Sholes formula to compute this, i.e. some guy who got a noble prize in math. So summing up, yo usell a call, and you were miraculously still in this trade, you'd be down over 1000% (initial investment, 4 bucks, and to buy it to cover woudl cost you well over 40).

Buying a put at say 140 at that time would have cost you over 10 bucks, because the stock price woudl have been 10 bucks in the money and plenty more moeny in extrinsic value. But, you can only lose what you put in with put buying, no more, stock can shoot to 1,000, you simply lose what you put in, with call selling on apple, you can get burnt, badly.

Remy, please feel free to PM me about options. Start with the basics of calls and puts. As you get further, you'll get into options spreads, volatility (vega), deltas, gammas, rhos, etc. Options work because you can leverage large amounts of stock at a fraction of the long stock cost. To me, the best part of options is that you can make money in sideways markets just as easy as you can runaway bull markets, and struggling bear markets with condor spreads, butterfly spreads etc.

10/4/2009 12:39:31 PM

thanks for the replies. yeah, i kind of figured out that writing options seems to be a much easier way to get burned than buying them. as for the number of contracts, i went through the steps of a purchase right up til the "submit" button and was taken aback by the premium for 100 contracts. I didn't realize that 1 contract was 100 shares so that makes a lot more sense now - I definitely wouldn't be trading more than 5 contracts on average.

10/4/2009 7:37:00 PM

Quote :

"It's way easier to pretend you know something than to actually know it. Hell, I do this in Soap Box all the time. "

hahaha

at least you're self-aware...that's a big step ahead of most

10/4/2009 7:43:31 PM

Quote :

"I didn't realize that 1 contract was 100 shares so that makes a lot more sense now - I definitely wouldn't be trading more than 5 contracts on average."

I've definitely typed in order sizes of 500 when I meant to type in 5. Fortunately orders that big take a bit longer to go through so I usually have a moment to yell "OH SHIT!" and void the order before they go through.

10/5/2009 1:19:55 PM

Did an interesting juggle today.

I bought a big chunk of GE at $14.16 on 8/24.
The same day I sold Sept 15 calls at .26.
A week later I bought the puts back at .11.
Not a big deal, but if I make the same .15 on GE every month it ends up being 13% annually, plus appreciation and the dividend pay out.

On 9/4 I sold $15 Oct calls for 0.35 on the same lot of GE stock expecting the same sort of experience I had the month before.
Instead GE rockets to from the mid $14s to ~$17 between 9/11 and 9/16.
I sit on it for a bit and last week sold Oct 16 puts on GE at 0.41 and 0.46.
On Friday it drops below 16.
Today I notice that it's at $15.80 and the Oct 15 calls I sold at 0.35 are now selling for $1.08. While that's much more than I payed for them, I'm also locked out of the $0.80 over the strike price so I end up buying them back for $1.08 (rationalizing that .80 + .35 = 1.15 so I'm actually making 0.07 per share at the new price).
Then I turn around and sell Oct 16 covered calls on the same batch for .48.

My only big concern right now is the open Oct 16 puts. If GE is below 16 on 10/16 then my position in GE will be bigger than I'm normally comfortable with, but hopefully it will still be close enough to 16 to create healthy premiums on the Nov 16 calls so I'll be able to sell calls on half at 16 and the other half at 17. (Keep in mind that I originally sold the Oct 16 puts for ~.43 so if I can sell Nov 16 calls for ~.60 in 2 weeks I'll be making $1+ on that batch of stock, even though I bought and sold it at the same price.)

Another option is to sell Dec calls on all of it so I can collect the dividend on the next pay out date, even though GE isn't paying much now.

Of course, if it closes over $16 on 10/16 I sell all of my shares and keep the call and put premiums. If thats the case I'm pocketing ~0.99/share (which annualized is about a 75% return). At that point I would either buy back in fully, sell Nov 16 puts on all shares that I just sold, or a mix of both.

10/5/2009 4:22:44 PM

Sold Nov 45 puts on NFLX at $2.56 each.

10/12/2009 3:56:23 PM

^ Might want to check out what's happened the last two times to Netflix announced earnings, which they will do next week.

10/12/2009 4:10:03 PM

Yup. If I end up buying it I won't be too upset as I like it as a long term buy.

If it does end up getting put to me my cost basis will already have been reduced to $42.44, and my not-quite-worse scenario would be selling $45 calls on it. I think the worse case scenario would be something along the lines of finding out that Netflix is a front for al Qaeda and ending up in Gitmo.

[Edited on October 12, 2009 at 8:22 PM. Reason : .]

10/12/2009 8:17:31 PM

good shit on the options guys, informative to a beginner. i've been trading since i was 14 and options are awesome ways to trade. they give you a whole lot more for your money but please don't try to trade them until you are fully aware of everything that can happen to your money. don't let your options expire worthless.

10/15/2009 2:56:36 AM

^^ Time to BTC over 50% through the trade in 72 hours, pretty good

10/15/2009 3:07:05 PM

^ I put in a BTC limit order right when it peaked for the day and then walked away from my computer. Needless to say it didn't go through. No biggie. We'll see how this plays out.

10/15/2009 8:56:16 PM

BTC the NFLX put for $1.15. I think the order from last week was still open and filled automatically before I got to my computer today.

I ended up BTC the GE 16 calls for $0.15 just before close on Friday. If I hadn't I could have sold it at 16 on Friday and then bought it back for ~$15.80 today. Again, no biggie.

One of the most frustrating parts of options trading is making some money, but then realizing that if you'd done it differently you could have made more money. Of course, hindsight is 20/20.

BTC some COH Nov 31 puts at .55 today. I'd STO them at $1.05 on 10/7.

BTC some ATVI Nov 14 calls at .10. I'd STO them at .20 on 10/8.

Had some TM put to me at $80 today (I'd previously sold it at 80 in August) and some USU at $5 (had mine called away at $5 last month).

10/19/2009 4:32:48 PM

Quote :

"Might want to check out what's happened the last two times to Netflix announced earnings, which they will do next week."

Up 10.6% today to close at 54.89.

10/23/2009 4:04:44 PM

Cool play on AAPL:
http://www.cnbc.com/id/33399851

10/23/2009 9:00:36 PM

Bought LVS at $15.078

Sold Nov 15 calls at $1.16 on half
Sold Nov 16 calls at $0.75 on half

11/3/2009 4:10:25 PM

what kind of research tools do y'all use for options trading?

12/17/2009 2:55:35 PM

I usually do options on stocks that I find when doing standard stock research. I always habitually check to see if there's an option chain for a stock when I look at it and also compare the premium to the stock price. There have been a number of times when I've found a stock that I liked, but didn't buy it because it didn't have options so I couldn't pocket a little extra by selling covered calls on it monthly.

As far as multi-leg options, I like the blog on CNBC that I posted a few lines up, though I mostly do single legs and straddles so a lot of their strategies are a bit much for me.

12/17/2009 4:09:40 PM

qntmfred I've got a bunch that I use to follow the market. I have an account with optionsxpress. They are excellent. Here are two sites that I use on the regular.

http://briefing.com/ is a good link for news, even though people say news doesn't drive market prices, you make the judgements. It has alot of useful information.

http://stockcharts.com/def/servlet/SC.scan this is a great site for stock scans and different types of candlestick patterns. It's one of the best. Shows highs and lows, bullish and bearish trends and just about everything you may need. It updates daily. Alot of my past trades have come from finding the trends that have shown on the scan and doing the proper research.

What trader do you use? I've seen realtik, and tradestation. They are among the best for day traders and the like. Are you interested in day trading, swing trading, or long term investments?

12/28/2009 12:58:29 AM