Any option traders?

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DeadPoets
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Any option traders?

Post by DeadPoets » Tue May 21, 2019 11:36 pm

If so, what do you typically trade (buyer or seller of puts/calls?), and what do you like at the moment?

I sold some 3M 160 puts about 2 weeks ago. I have my eye on Nvidia at the moment. 50% fall in such a short period of time. That’s crazy for a semi with really good fundamentals.

I know it’s China related, but still seems to be some plays out there on Nvidia.

3504PIR
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Re: Any option traders?

Post by 3504PIR » Tue May 21, 2019 11:44 pm

I routinely trade spreads during earnings season and sell puts on stocks I don’t mind owning for a while. No real discussions here about this topic, but I enjoy the analysis and the low risk with protected trades. It takes some time to learn how to avoid risk, but it’s not that difficult once you learn the basics.

My earning season trades are not specific to stocks I intend to own, I look for liquidity and return on those trades.

rasta
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Re: Any option traders?

Post by rasta » Wed May 22, 2019 1:49 am

yes, i always sell premium

HEDGEFUNDIE
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Re: Any option traders?

Post by HEDGEFUNDIE » Wed May 22, 2019 3:22 am

Like anything else, diversify your bets.

If you think semis are cheap, I would buy SOXL instead individual stock options.

bondsr4me
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Re: Any option traders?

Post by bondsr4me » Wed May 22, 2019 5:03 am

I don’t trade them much anymore.

When I do, I sell naked puts on stocks I am willing to own.

I also sell covered calls on the few stocks I own when the opportunity presents itself.

I have a bunch of free trades from Fidelity, so that helps too.

I use weekly expirations or close-by expirations...I don’t go out far expirations.

countdrak
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Re: Any option traders?

Post by countdrak » Wed May 22, 2019 5:50 am

Just don’t BUY naked calls or puts. I used to do that a lot when I started out and found it to be a waste of $. It is like buying a lottery ticket with slightly better odds but the house always wins! It all evens out. I stopped trading options because I wasn’t consistently in the positive. I use ETFS both short and long to trade now, atleast time doesn’t kill you with etfs.

Like the previous poster suggested writing calls
For stocks you don’t mind selling and writing puts for stocks you don’t mind owning is a great strategy. Spreads also cap your risk.

This is just for PLAY money, I do not do individual stocks with my life savings, follow the boglehead model for that ;)

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market timer
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Re: Any option traders?

Post by market timer » Wed May 22, 2019 7:39 am

Image

msk
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Re: Any option traders?

Post by msk » Wed May 22, 2019 7:53 am

I used to. Quickly learnt that to feel good, I needed to Sell rather than Buy Puts and Calls. After many years I settled on selling one-year SPY Puts if I needed to add to my holdings and selling one-year SPY Calls when the market looks very richly priced, like now. The premium you collect is around 5% in either case. What I did not like is the constant anxiety; did I bet right? So now I stopped trading options altogether but I plan to Buy one year Calls on SPY whenever it drops by 30% from peak, then another dollop again at 40%, 50%, etc. $50k gives you the profits from a million $ of SPY (less the premium you paid, of course) and if the market tanks further and does not recover within a year, you lose only $50k. Awaiting the 30% drop... We've not had one for some time.

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 7:54 am

Big option trader here. I always try to limit downside risk so never sell naked puts. Usually just spread spreads. I also do butterflies on indices to play the VIX.

Covered calls are a great way to boost income in conjuction with rebalancing. If your SPX index rises 20% at end of year and you have 60% allocation, you'd sell about 15-20% of it to rebalance so that can offer chance to sell OTM calls to lock in rebalancing and extra income

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CardinalRule
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Re: Any option traders?

Post by CardinalRule » Wed May 22, 2019 7:58 am

That's basically me too - option spreads, writing covered calls, and selling naked puts (on companies I like). I'm basically looking for some premium income. I limit my exposure and activity, and I find this part of the market interesting to learn about (volatility, etc.)
3504PIR wrote:
Tue May 21, 2019 11:44 pm
I routinely trade spreads during earnings season and sell puts on stocks I don’t mind owning for a while.

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 8:01 am

msk wrote:
Wed May 22, 2019 7:53 am
I used to. Quickly learnt that to feel good, I needed to Sell rather than Buy Puts and Calls. After many years I settled on selling one-year SPY Puts if I needed to add to my holdings and selling one-year SPY Calls when the market looks very richly priced, like now. The premium you collect is around 5% in either case. What I did not like is the constant anxiety; did I bet right? So now I stopped trading options altogether but I plan to Buy one year Calls on SPY whenever it drops by 30% from peak, then another dollop again at 40%, 50%, etc. $50k gives you the profits from a million $ of SPY (less the premium you paid, of course) and if the market tanks further and does not recover within a year, you lose only $50k. Awaiting the 30% drop... We've not had one for some time.
Msk, that's a good strategy.  Ruled based ones often work well.

My only issue  with buying calls in a crash is the VIX is so high so they're expensive and price in a big move up.

I sometimes do OTM call spreads in a crash since the expensive nature of calls is negated when one sells one Call and buys another.

If someone trades SPY'S regularly then SPX index options can be much more efficient. Generally SPX = 10X SPY so one only needs to trade 10% of the contracts to have same size which saves commissions and more importantly SPX gets futures tax treatment so 60% of gains taxed at LTCG rate and 40% ordinary rate even if held for only a few days.  There's also loss carry back/Forward I believe too.

depressed
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Re: Any option traders?

Post by depressed » Wed May 22, 2019 10:20 am

3504PIR wrote:
Tue May 21, 2019 11:44 pm
I routinely trade spreads during earnings season and sell puts on stocks I don’t mind owning for a while. . . .
bondsr4me wrote:
Wed May 22, 2019 5:03 am
. . . I sell naked puts on stocks I am willing to own.
I also sell covered calls on the few stocks I own when the opportunity presents itself.
countdrak wrote:
Wed May 22, 2019 5:50 am
Like the previous poster suggested writing calls
For stocks you don’t mind selling and writing puts for stocks you don’t mind owning is a great strategy. . . .
Each of these quotes is potentially contradictory or at least misleading. They suggest that selling a covered call is somehow different than selling a naked put. But these two positions are identical:

1. Long 100 shares of XYZ and short one covered call on XYZ at a given strike price and expiration date.
2. Long treasuries equal to the price of 100 shares of XYZ and short one naked put on XYZ at the same strike and expiration as #1.

There are some annoying details to work out--for example, the duration of the treasuries, possible anticipated dividends, the style of the options (European or American), differences between the price of a call and a put based on how far in- or out-of-the-money, and so on (I'd enjoy talking about how those adjustments occur). But in any case, the point remains that it's misleading to say that you do #1 when you wouldn't mind selling the stock and you do #2 when you wouldn't mind buying the stock. The two positions are the same. In both cases (ignoring special situations), the investor ends up with the stock after expiration if the price is below the strike, and the investor ends up without the stock if the price is above the strike. The eventual profit/loss diagram is identical (or if it isn't, an investor can profit by an arbitrage, selling one of the positions and buying the other).

I think it's more accurate to say that an investor does either of these when he or she feels that the underlying equity is accurately priced at the given strike and it's unlikely to make a big move up or down. Equivalently: Do either of these when you'd like to own the stock on a drop below the strike (because you think it's fairly priced at that strike) and not own it above the strike (for the same reason, that it's fairly priced at the strike).

So which of the two positions do you actually enter? The short answer is that it doesn't matter. The slightly longer answer is that you enter the position that has the lower trading cost based on spreads, taxes, commissions, early-exercise considerations, and (possibly) options that may be mispriced (although mispricing is not common today).
Last edited by depressed on Wed May 22, 2019 10:27 am, edited 1 time in total.

rai
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Re: Any option traders?

Post by rai » Wed May 22, 2019 10:26 am

I sell naked puts and sell covered calls.
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 11:30 am

A covered Call on stock you is the same as a cash secured put. Not a naked put. Naked put implies.leverage and cash secured put doesn't not.

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 11:31 am

depressed wrote:
Wed May 22, 2019 10:20 am
3504PIR wrote:
Tue May 21, 2019 11:44 pm
I routinely trade spreads during earnings season and sell puts on stocks I don’t mind owning for a while. . . .
bondsr4me wrote:
Wed May 22, 2019 5:03 am
. . . I sell naked puts on stocks I am willing to own.
I also sell covered calls on the few stocks I own when the opportunity presents itself.
countdrak wrote:
Wed May 22, 2019 5:50 am
Like the previous poster suggested writing calls
For stocks you don’t mind selling and writing puts for stocks you don’t mind owning is a great strategy. . . .
Each of these quotes is potentially contradictory or at least misleading. They suggest that selling a covered call is somehow different than selling a naked put. But these two positions are identical:

1. Long 100 shares of XYZ and short one covered call on XYZ at a given strike price and expiration date.
2. Long treasuries equal to the price of 100 shares of XYZ and short one naked put on XYZ at the same strike and expiration as #1.

There are some annoying details to work out--for example, the duration of the treasuries, possible anticipated dividends, the style of the options (European or American), differences between the price of a call and a put based on how far in- or out-of-the-money, and so on (I'd enjoy talking about how those adjustments occur). But in any case, the point remains that it's misleading to say that you do #1 when you wouldn't mind selling the stock and you do #2 when you wouldn't mind buying the stock. The two positions are the same. In both cases (ignoring special situations), the investor ends up with the stock after expiration if the price is below the strike, and the investor ends up without the stock if the price is above the strike. The eventual profit/loss diagram is identical (or if it isn't, an investor can profit by an arbitrage, selling one of the positions and buying the other).

I think it's more accurate to say that an investor does either of these when he or she feels that the underlying equity is accurately priced at the given strike and it's unlikely to make a big move up or down. Equivalently: Do either of these when you'd like to own the stock on a drop below the strike (because you think it's fairly priced at that strike) and not own it above the strike (for the same reason, that it's fairly priced at the strike).

So which of the two positions do you actually enter? The short answer is that it doesn't matter. The slightly longer answer is that you enter the position that has the lower trading cost based on spreads, taxes, commissions, early-exercise considerations, and (possibly) options that may be mispriced (although mispricing is not common today).
You're example isn't really a naked put because it's secured by the cash from bond.

Naked put usually implies no cash backing the contract that requires you to buy the stock potentially.

A covered Call and owning stock is like a cash secured put. Not a naked put.

depressed
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Re: Any option traders?

Post by depressed » Wed May 22, 2019 12:15 pm

SovereignInvestor wrote:
Wed May 22, 2019 11:31 am
You're example isn't really a naked put because it's secured by the cash from bond.

Naked put usually implies no cash backing the contract that requires you to buy the stock potentially.

A covered Call and owning stock is like a cash secured put. Not a naked put.
I'd say we are on the same page, Sovereign Investor, and that your clarification is useful.

I could be wrong, but I'd say that the comments from those who suggest that selling naked puts because "you wouldn't mind owning the stock" are typically from people who are not leveraging their position. They are holding the cash (or equivalent) to purchase the stock should it be put to them, in which case their position is equivalent to an unleveraged covered call. I don't believe those people are suggesting selling a naked put that is backed by only the minimum margin.

As a side note, the *dollar value* of the profit or loss of an unsecured naked put is equal to the *dollar return* on the equivalent covered call, provided that you subtract the carrying cost (i.e., lost interest on the position's cost) of the covered call from its return. But, of course, if you are backing the naked sale by only the minimum margin, then you are highly leveraged, and the profit or loss as a percentage of that upfront money is greatly amplified. As you pointed out, it's the leverage you're talking about when you say that the a naked put differs from a covered call. You could, however, get similar leverage with a covered call if you bought the underlying stock on margin.

In summary: All four of the following positions have an almost identical dollar profit or loss throughout their lifetime (given the same strike and expiration date), but the 2nd and 4th positions have high leverage and hence a higher percentage gain or loss based on the money you ponied up. And the two leveraged positions are subject to margin calls if the position turns sour:

1. Long 100 shares of XYZ and short one covered call.
2. Long 100 shares of XYZ bought on margin (with favorable margin rates) and short one covered call [leveraged].
3. Short one secured short put on XYZ (full strike price secured by treasuries).
4. Short one put on XYZ with minimal margin in treasuries [leveraged].

I think it's useful to separate the leverage issue from the issue of position equivalence in terms of profit/loss. And it's definitely wrong to equate the *risk* of an unleveraged covered call with that of an unsecured naked put. That's not what I'd intended, and that's the value of your clarification!

Boy oh boy, that XYZ is seeing a lot of action. Most likely, it'll top the Nightly Business Report's list of most active stocks today. Thanks again for your response and the clarification you provided.

ThrustVectoring
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Re: Any option traders?

Post by ThrustVectoring » Wed May 22, 2019 1:03 pm

SovereignInvestor wrote:
Wed May 22, 2019 11:31 am

You're example isn't really a naked put because it's secured by the cash from bond.

Naked put usually implies no cash backing the contract that requires you to buy the stock potentially.

A covered Call and owning stock is like a cash secured put. Not a naked put.
It's naked put writing as opposed to covering the put by shorting the underlying, which is the bearish version of a covered call.
Current portfolio: 60% VTI / 40% VXUS

depressed
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Re: Any option traders?

Post by depressed » Wed May 22, 2019 1:35 pm

ThrustVectoring wrote:
Wed May 22, 2019 1:03 pm
SovereignInvestor wrote:
Wed May 22, 2019 11:31 am

You're example isn't really a naked put because it's secured by the cash from bond.

Naked put usually implies no cash backing the contract that requires you to buy the stock potentially.

A covered Call and owning stock is like a cash secured put. Not a naked put.
It's naked put writing as opposed to covering the put by shorting the underlying, which is the bearish version of a covered call.
Good point. And the combination of selling a short put and simultaneously shorting the underlying has a dollar profit/loss profile that's equivalent to selling a naked call. (I believe that the equivalence is precise if you're a trader who's able to invest the proceeds of the short sale of the underlying.)

Symmetry is your friend.

inbox788
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Re: Any option traders?

Post by inbox788 » Wed May 22, 2019 2:19 pm

1. Do you believe the efficient market hypothesis applies to the options market?
2. Do you believe options is a zero sum game?
3. Do you feel lucky?

BTW, if you're trading options, you may want to look up "put call parity".

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 5:39 pm

inbox788 wrote:
Wed May 22, 2019 2:19 pm
1. Do you believe the efficient market hypothesis applies to the options market?
2. Do you believe options is a zero sum game?
3. Do you feel lucky?

BTW, if you're trading options, you may want to look up "put call parity".
Add black Scholes to that list too!

The options markets have to be less efficient than underlying since rheres another variable of volatility that must be estimated.

I wish they were more efficient and liquid.

Would be nice to sell super ITM put or Call index spreads to mimic borrow at risk free rate and deduct the implied interest....cheapest form of financing there is! If they had 10 year options even better..

travlinman561
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Re: Any option traders?

Post by travlinman561 » Wed May 22, 2019 9:42 pm

Do most brokerages allow you to invest the cash collateral for cash secured puts in t-bills or short term bond etfs, or are you stuck earning the near 0 interest rates that they pay on cash?

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Wed May 22, 2019 10:17 pm

If you have a margin accout you can invest the collateral whereever

Park
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Re: Any option traders?

Post by Park » Thu May 23, 2019 12:22 am

This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?

travlinman561
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Re: Any option traders?

Post by travlinman561 » Thu May 23, 2019 2:01 am

SovereignInvestor wrote:
Wed May 22, 2019 10:17 pm
If you have a margin accout you can invest the collateral whereever
What if you have a cash account like an IRA?

Rhadamanthus
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Re: Any option traders?

Post by Rhadamanthus » Thu May 23, 2019 5:26 am

I started a new job earlier this year at a firm whose primary revenue is from options trading. Ironically, compliance reporting requirements and, more importantly, having to get pre-clearance for any personal trading (outside of normal trading like retirement accounts) and holding for at least 10 days (so options with at least 11 days until expiration) makes things like personal options trading not feel worth the effort, especially when it's just for learning purposes. (We're actually doing an internal class right now for us relative new hires on "Non-Trader Options Education", mainly to help us understand what our traders do. I just can't seem to really internalize an understanding of many simple concepts, especially the Greeks.)

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Thu May 23, 2019 7:00 am

travlinman561 wrote:
Thu May 23, 2019 2:01 am
SovereignInvestor wrote:
Wed May 22, 2019 10:17 pm
If you have a margin accout you can invest the collateral whereever
What if you have a cash account like an IRA?
I think you have to keep it as cash unfortunately.

SovereignInvestor
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Re: Any option traders?

Post by SovereignInvestor » Thu May 23, 2019 7:04 am

Park wrote:
Thu May 23, 2019 12:22 am
This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?
They could really help income Complimenting selling stock exposure via covered calls.

They offer speculative purposes since the options markets tend to be very inefficient. This is especially true for plays on implied volatility like butterflies and spreads.

The leverage is very helpful because undergirding option prices is the assumption that one borrows at the risk free rate since they're collateralized so options offer better leverage or liquidity/borrowing compared to margin.

They can be more tactical than trading stock I guess for leverage and hedging, if one has a large stock position and wants to sell partial amount for brief period he/she can delta and/or gamma hedge.

EdNorton
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Re: Any option traders?

Post by EdNorton » Thu May 23, 2019 8:51 am

Last option trade I did was buy 4 $100 call options on Nvadia for approximately $1,600 for all. Sold less than 30 days later for $14,000. If I would had held 2 more weeks, could have had another $10,000. NVDA went from $96 to $140 like a rocket. :sharebeer
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho

Park
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Re: Any option traders?

Post by Park » Thu May 23, 2019 8:58 am

SovereignInvestor wrote:
Thu May 23, 2019 7:04 am
Park wrote:
Thu May 23, 2019 12:22 am
This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?
They could really help income Complimenting selling stock exposure via covered calls.

They offer speculative purposes since the options markets tend to be very inefficient. This is especially true for plays on implied volatility like butterflies and spreads.

The leverage is very helpful because undergirding option prices is the assumption that one borrows at the risk free rate since they're collateralized so options offer better leverage or liquidity/borrowing compared to margin.

They can be more tactical than trading stock I guess for leverage and hedging, if one has a large stock position and wants to sell partial amount for brief period he/she can delta and/or gamma hedge.
I agree that with options, you can make more refined bets.

You can also make a bet on volatility. Larry Swedroe mentions the variance risk premium, and that can provide diversification. Unlike the equity risk premium or interest risk premium, I don't think you can access that passively. So you can DIY or pay for active management.

inbox788
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Re: Any option traders?

Post by inbox788 » Thu May 23, 2019 4:00 pm

Calygos wrote:
Thu May 23, 2019 5:26 am
I started a new job earlier this year at a firm whose primary revenue is from options trading. Ironically, compliance reporting requirements and, more importantly, having to get pre-clearance for any personal trading (outside of normal trading like retirement accounts) and holding for at least 10 days (so options with at least 11 days until expiration) makes things like personal options trading not feel worth the effort, especially when it's just for learning purposes. (We're actually doing an internal class right now for us relative new hires on "Non-Trader Options Education", mainly to help us understand what our traders do. I just can't seem to really internalize an understanding of many simple concepts, especially the Greeks.)
You do realize why they use the expression, "It's (all) Greek to me"?
https://en.wikipedia.org/wiki/Greek_to_me

LOL. Sounds like the same reason why they hire some investment advisors who don't know anything about the markets and index funds. And they get to advice clients. Seriously, I hope your role isn't directly related to the business the same way.

No Experience Necessary
https://twitter.com/USCWomensRowing/sta ... 780833792/
https://losangeles.cbslocal.com/2019/05 ... n-charges/

FWIW, I like to think of options trading like roulette, where experience really isn't necessary. Players bet, some win, some lose, and the house rakes in the profits (via trading fees, charges and commissions).

Rhadamanthus
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Re: Any option traders?

Post by Rhadamanthus » Thu May 23, 2019 6:10 pm

inbox788 wrote:
Thu May 23, 2019 4:00 pm
Calygos wrote:
Thu May 23, 2019 5:26 am
I started a new job earlier this year at a firm whose primary revenue is from options trading. Ironically, compliance reporting requirements and, more importantly, having to get pre-clearance for any personal trading (outside of normal trading like retirement accounts) and holding for at least 10 days (so options with at least 11 days until expiration) makes things like personal options trading not feel worth the effort, especially when it's just for learning purposes. (We're actually doing an internal class right now for us relative new hires on "Non-Trader Options Education", mainly to help us understand what our traders do. I just can't seem to really internalize an understanding of many simple concepts, especially the Greeks.)
You do realize why they use the expression, "It's (all) Greek to me"?
https://en.wikipedia.org/wiki/Greek_to_me

LOL. Sounds like the same reason why they hire some investment advisors who don't know anything about the markets and index funds. And they get to advice clients. Seriously, I hope your role isn't directly related to the business the same way.

No Experience Necessary
https://twitter.com/USCWomensRowing/sta ... 780833792/
https://losangeles.cbslocal.com/2019/05 ... n-charges/

FWIW, I like to think of options trading like roulette, where experience really isn't necessary. Players bet, some win, some lose, and the house rakes in the profits (via trading fees, charges and commissions).
I'm in IT and we support, among many things, our traders, the server apps the traders' desktop systems use for trading, etc. It's helpful for us to understand the lingo and how options trading works in general so we are better able to provide such support, and just to understand and appreciate the nature of the business itself, the information provided during all-hands meetings, etc. It's all very interesting for me, but just difficult to understand beyond a very shallow level for someone who's just really learned what options even are.

Really I just need to sit down for a few hours at a time and repeatedly go through their online education material, the Investopedia articles I've been reading, the Udemy Options course I bought, etc. This is serious study time for me. :)

Thesaints
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Re: Any option traders?

Post by Thesaints » Thu May 23, 2019 6:15 pm

Park wrote:
Thu May 23, 2019 12:22 am
This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?
Long DITM calls are a good way to leverage a stock purchase.

Topic Author
DeadPoets
Posts: 125
Joined: Tue Aug 14, 2018 9:18 am

Re: Any option traders?

Post by DeadPoets » Fri May 24, 2019 1:13 am

Since I’m fairly new to this (hence starting the thread), can someone explain to me what trading the spread means?

Maybe cite a couple examples of exactly how it’s done.

I’d look it up online but I’d rather hear from people with real experience doing it.

3504PIR
Posts: 846
Joined: Mon Jul 26, 2010 2:46 am

Re: Any option traders?

Post by 3504PIR » Fri May 24, 2019 4:57 am

depressed wrote:
Wed May 22, 2019 10:20 am
3504PIR wrote:
Tue May 21, 2019 11:44 pm
I routinely trade spreads during earnings season and sell puts on stocks I don’t mind owning for a while. . . .
bondsr4me wrote:
Wed May 22, 2019 5:03 am
. . . I sell naked puts on stocks I am willing to own.
I also sell covered calls on the few stocks I own when the opportunity presents itself.
countdrak wrote:
Wed May 22, 2019 5:50 am
Like the previous poster suggested writing calls
For stocks you don’t mind selling and writing puts for stocks you don’t mind owning is a great strategy. . . .
Each of these quotes is potentially contradictory or at least misleading. They suggest that selling a covered call is somehow different than selling a naked put. But these two positions are identical:

1. Long 100 shares of XYZ and short one covered call on XYZ at a given strike price and expiration date.
2. Long treasuries equal to the price of 100 shares of XYZ and short one naked put on XYZ at the same strike and expiration as #1.

There are some annoying details to work out--for example, the duration of the treasuries, possible anticipated dividends, the style of the options (European or American), differences between the price of a call and a put based on how far in- or out-of-the-money, and so on (I'd enjoy talking about how those adjustments occur). But in any case, the point remains that it's misleading to say that you do #1 when you wouldn't mind selling the stock and you do #2 when you wouldn't mind buying the stock. The two positions are the same. In both cases (ignoring special situations), the investor ends up with the stock after expiration if the price is below the strike, and the investor ends up without the stock if the price is above the strike. The eventual profit/loss diagram is identical (or if it isn't, an investor can profit by an arbitrage, selling one of the positions and buying the other).

I think it's more accurate to say that an investor does either of these when he or she feels that the underlying equity is accurately priced at the given strike and it's unlikely to make a big move up or down. Equivalently: Do either of these when you'd like to own the stock on a drop below the strike (because you think it's fairly priced at that strike) and not own it above the strike (for the same reason, that it's fairly priced at the strike).

So which of the two positions do you actually enter? The short answer is that it doesn't matter. The slightly longer answer is that you enter the position that has the lower trading cost based on spreads, taxes, commissions, early-exercise considerations, and (possibly) options that may be mispriced (although mispricing is not common today).
Wow on the out of context multi quoting analysis. You quote 3 different people, including me. What I do with a naked put is included in my sentence. I don’t need you to redefine my comment into what you decide as misleading related to covered calls. I specifically didn’t discuss covered calls because it is a separate topic to me than trading options. Please don’t quote me out of context to make some other point.

Park
Posts: 682
Joined: Sat Nov 06, 2010 4:56 pm

Re: Any option traders?

Post by Park » Fri May 24, 2019 8:55 am

Thesaints wrote:
Thu May 23, 2019 6:15 pm
Park wrote:
Thu May 23, 2019 12:22 am
This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?
Long DITM calls are a good way to leverage a stock purchase.
Thanks for the response.

So options can manage risk. This is through diversification as well as hedging. Diversification would be through the variance risk premium. You can also manage risk by buying insurance, albeit expensive, with protective puts.

About stating that options can generate income and provide leverage, I think that understates what options can do. The versatility of options can allow one to leverage investing strategies or generate income that might be difficult with other instruments. One can make a bet that a security will increase or decrease or stay stable in price. One can make a bet that the volatility of a security will increase or decrease.

With the exception of LEAPS, options are more for a trader than an investor, with the differentiation between trader and investor being on time horizon. As for investors using options, it is more for the active investor than the passive investor.

If you're a passive investor, there may be the occasional time that options can be used to manage risk. There may be also the occasional time that you might use options for income. But most of the time, there are simpler, less costly and more tax efficient ways to generate income or manage risk for the average passive investor. Finally, there are those who would say that a passive investor shouldn't be using leverage at all :-). I don't agree with that, and think long term leverage is a reasonable strategy for some passive investors. But whether LEAPS on securities such as SPY or EFA are the best ways to implement such strategies is debatable. However, in some tax advantaged accounts, that may be the only way.

Addendum. Assume you're going to buy a broad market ETF, but the market is volatile, such as during a decline. Instead of buying the ETF, sell a 30 day at the money put. You do run the risk of the price of the ETF going down, and you never end up owning the ETF. But in a volatile market with an at the money put, the probability of that is small. And you'll very likely end up owning the same ETF that you otherwise would have, except you'll have generated some income by taking advantage of the market's volatility.

Addendum 2. Assume you're going to sell a broad market ETF, regardless of any option strategy . To generate additional income, you could sell a 30 day at the money call (covered call strategy).

Comments?
Last edited by Park on Fri May 24, 2019 9:35 am, edited 3 times in total.

depressed
Posts: 149
Joined: Sun Oct 14, 2018 4:07 pm

Re: Any option traders?

Post by depressed » Fri May 24, 2019 9:03 am

3504PIR wrote:
Fri May 24, 2019 4:57 am
Wow on the out of context multi quoting analysis. You quote 3 different people, including me. What I do with a naked put is included in my sentence. I don’t need you to redefine my comment into what you decide as misleading related to covered calls. I specifically didn’t discuss covered calls because it is a separate topic to me than trading options. Please don’t quote me out of context to make some other point.
Thank you for your post above and for your private note to me this morning, 3504PIR. I apologize and shall be more careful in the future.

SovereignInvestor
Posts: 422
Joined: Mon Aug 20, 2018 4:41 pm

Re: Any option traders?

Post by SovereignInvestor » Fri May 24, 2019 9:29 am

DeadPoets wrote:
Fri May 24, 2019 1:13 am
Since I’m fairly new to this (hence starting the thread), can someone explain to me what trading the spread means?

Maybe cite a couple examples of exactly how it’s done.

I’d look it up online but I’d rather hear from people with real experience doing it.
A spread is general and usually refers to buying one option and simultaneously selling another. It can be different expiration or different strike.

The most common I do is vertical call spreads. I buy say SPX 3000 C for a expiration and sell the 3100C for same expiration. As SPX goes over 3100 the gain on long call 3000 cancels with loss on short 3100C so the profit is really between 3000 and 3100 or 100 maximum.

Say the 3000C goes for 40.0 and 3100 for 25.0 then it cost 40.0 to buy 3000C and I get 25.0 for selling 3100C and net cost is 15.0, and at most I make 100 if SPX is above 3100 at expiration..or I can sell earlier and get market prices. This is oversimplified.

One can also do calendar spread like buy 3000 SPX August call and selll 3000 SPX June call and basically bet on upside above 3000 occurring after June but before august.

There's also butterflies which play on Implied volatility and movements and are good for expecting the price to pin to a specific level.

There's also back ratio spreads which have unlimited risk.

SovereignInvestor
Posts: 422
Joined: Mon Aug 20, 2018 4:41 pm

Re: Any option traders?

Post by SovereignInvestor » Fri May 24, 2019 9:31 am

IMO selling secured puts with cash there isn't risky but if one sold a 2500 SPX put they theoretically need 250K cash to secure it. I prefer put spreads because it's less capital.intensive. I may sell a 2500/2400 SPX put spread...max loss is the 100 points or 10K a contract.

The issue is the upside of banking premium is less since I give back some of premium by buying back call and covering risk below 2400.

When VIX is high I prefer buying call spreads over raw calls since the implied volatility is high and options are expensive so shorting some IV on back end helps hedge. But that's one strategy everyone plays it differently.

3504PIR
Posts: 846
Joined: Mon Jul 26, 2010 2:46 am

Re: Any option traders?

Post by 3504PIR » Sat May 25, 2019 3:48 am

depressed wrote:
Fri May 24, 2019 9:03 am
3504PIR wrote:
Fri May 24, 2019 4:57 am
Wow on the out of context multi quoting analysis. You quote 3 different people, including me. What I do with a naked put is included in my sentence. I don’t need you to redefine my comment into what you decide as misleading related to covered calls. I specifically didn’t discuss covered calls because it is a separate topic to me than trading options. Please don’t quote me out of context to make some other point.
Thank you for your post above and for your private note to me this morning, 3504PIR. I apologize and shall be more careful in the future.
Thanks, I appreciate your post.

3504PIR
Posts: 846
Joined: Mon Jul 26, 2010 2:46 am

Re: Any option traders?

Post by 3504PIR » Sat May 25, 2019 4:05 am

SovereignInvestor wrote:
Fri May 24, 2019 9:29 am
DeadPoets wrote:
Fri May 24, 2019 1:13 am
Since I’m fairly new to this (hence starting the thread), can someone explain to me what trading the spread means?

Maybe cite a couple examples of exactly how it’s done.

I’d look it up online but I’d rather hear from people with real experience doing it.
A spread is general and usually refers to buying one option and simultaneously selling another. It can be different expiration or different strike.

The most common I do is vertical call spreads. I buy say SPX 3000 C for a expiration and sell the 3100C for same expiration. As SPX goes over 3100 the gain on long call 3000 cancels with loss on short 3100C so the profit is really between 3000 and 3100 or 100 maximum.

Say the 3000C goes for 40.0 and 3100 for 25.0 then it cost 40.0 to buy 3000C and I get 25.0 for selling 3100C and net cost is 15.0, and at most I make 100 if SPX is above 3100 at expiration..or I can sell earlier and get market prices. This is oversimplified.

One can also do calendar spread like buy 3000 SPX August call and selll 3000 SPX June call and basically bet on upside above 3000 occurring after June but before august.

There's also butterflies which play on Implied volatility and movements and are good for expecting the price to pin to a specific level.

There's also back ratio spreads which have unlimited risk.
I’ll add that you can buy and sell options with the same expirations but with different strike prices with a gap between that defines your risk or even reward. Similarly to futures trading you can also roll trades into longer duration but that can become much more complex.

acegolfer
Posts: 1486
Joined: Tue Aug 25, 2009 9:40 am

Re: Any option traders?

Post by acegolfer » Sat May 25, 2019 7:05 am

Park wrote:
Thu May 23, 2019 12:22 am
This is an option traders thread, so I'm hoping to get some feedback.

I invested some time learning about options, and came to the following conclusions. Option can serve three functions:

1)generate income. Right now, I don't need income from my portfolio. However, I came to the conclusion that if I did need income, selling stock exposure would work best for me. This is especially true for me, as I"m primarily a taxable investor.

2)manage risk. This is through hedging. In my case, I concluded that this is a niche application.

3)leverage. But when I examined leverage alternatives, margin lending or possibly futures made more sense. The one exception is in a tax advantaged account, where I couldn't use futures.

So with the possible exception of leverage in a tax advantaged account, I didn't see a role for options.

Criticisms? What am I missing?
Good summary. I'd add

4. "implied volatility". IMO, this is the best estimator for the volatility of a security. Better than sample stdev using historical returns.
5. "option strategies" by combining several options (such as straddle, spreads)
6. "securitization" by investment banks (but less to do with retail investors)
7. mimicking a short stock position by long puts

Topic Author
DeadPoets
Posts: 125
Joined: Tue Aug 14, 2018 9:18 am

Re: Any option traders?

Post by DeadPoets » Sun May 26, 2019 4:47 am

SovereignInvestor wrote:
Fri May 24, 2019 9:29 am
DeadPoets wrote:
Fri May 24, 2019 1:13 am
Since I’m fairly new to this (hence starting the thread), can someone explain to me what trading the spread means?

Maybe cite a couple examples of exactly how it’s done.

I’d look it up online but I’d rather hear from people with real experience doing it.
A spread is general and usually refers to buying one option and simultaneously selling another. It can be different expiration or different strike.

The most common I do is vertical call spreads. I buy say SPX 3000 C for a expiration and sell the 3100C for same expiration. As SPX goes over 3100 the gain on long call 3000 cancels with loss on short 3100C so the profit is really between 3000 and 3100 or 100 maximum.

Say the 3000C goes for 40.0 and 3100 for 25.0 then it cost 40.0 to buy 3000C and I get 25.0 for selling 3100C and net cost is 15.0, and at most I make 100 if SPX is above 3100 at expiration..or I can sell earlier and get market prices. This is oversimplified.

One can also do calendar spread like buy 3000 SPX August call and selll 3000 SPX June call and basically bet on upside above 3000 occurring after June but before august.

There's also butterflies which play on Implied volatility and movements and are good for expecting the price to pin to a specific level.

There's also back ratio spreads which have unlimited risk.
I appreciate your help

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