[Argonaut]

Options keep creeping up in various topics, and I love the discussion behind them. They definitely deserve their own thread. I especially would like to feed on some of the knowledge from the veteran traders on this forum.

First question:
Which is the truer maxim for the options trader?
"A bird in hand is worth two in the bush" or.. "Stick to your guns".

My own concrete example, is that I am sitting on a good profit in some out of the money calls on LULU, which has definitely come to play today. These were bought with the intention of playing their earnings in September, and my eyes are fixed on some outlandish gains. But although I am still bullish on the stock I'm somewhat worried the congressional shenanigans might unfairly put LULU in the slaughterhouse before they report, leaving my options worthless.

What say you, options traders?

 

[avrex]

@Argonaut

Thanks for starting this thread.
I'm very junior to options and I would also like to pose questions in this thread.
(I was wondering if you could rename the thread to say something like "Options - Strategies / Questions" for clarification. thanks.)

 

[humble_pie]

i have no current position in lulu, no knowledge of its affairs & no idea what will happen over the september earnings. But while U R waiting for the option experts to appear perhaps i could whip up a couple simple views with an eggbeater & toss em out on the pastry table.

on the one hand, if you are bullish but worried, what sort of premium would you get by selling the calls that are a strike or 2 higher, in the same month. This is called a vertical spread btw.

observe that you would be improving your option return while locking in a fixed profit on the potential round trip in the stock if - but only if - it were to occur (you did mention existing calls are otm.) If exercised on the higher strike, you would in turn exercise on the lower & deliver.

in this scenario, though, you are forced to wait it out & accept advienne que pourra in lulu's share price over the next 8 weeks.

if lulu declines, you would have received some funds from the call sales but you would still be risking to lose all. And remember, too, that if you elect this strategy you will not be able, afterwards, to just lightheartedly up & sell your long calls. Certainly not, because that would leave you with higher-strike naked short calls & argo i am pretty sure your broker will not allow this.

on the other hand, there is the fact that time decay is beginning now to erode the B/As of your calls. It's those greeks again. You didn't mention how far otm your calls are, but the further otm, the greater will be their drop as they march forward to expiration in september, unless share price spurts dramatically.

as you know, share price has to surpass strike for calls to have any value on expiration date, so as we get into the final weeks of a series' life the otm options lose time value/theoretical value on a daily basis, and at a rapidly increasing rate. It's not uncommon in the last 7 or 8 weeks of a call's life to see underlying share price slightly rising while otm calls in the nearer months actually decline in price. This usually flabbergasts option newcomers !

i think i know where i'd go with all of this; but wishing the best of luck no matter what you decide to do.

 

[atrp2biz]

It sounds like there is some time left prior to expiration. To put a twist on Humble's vertical, you could also sell options with higher strikes, but with less time to expiry. This can create a positive theta position (whereby if LULU does nothing, you can take advantage of the decay of the short option). The risk is if LULU blows by the short strike.

I like neutral-theta positive positions, but they do have gamma risk (gamma is the second derivative of the change in value of the option wrt the change in value of the underlying) if the underlying goes up or down a lot prior to the expiration of the short position.

 

[davext]

Maybe you can sell half your contracts to take the profits first.

And buy some more call options closer to September. Hopefully this debt issue will have a temporary or longer term solution by then so that it will be mostly dependent on Lulu's earnings report.

 

[Causalien]

Sell

Outright buying of one direction is an investment strategy, not an option strategy for earnings release.

 

[humble_pie]

atrp2biz if we may just call you doctor for short ... this is an extremely brief version of what mode3sour likes to call voodoo ... it's a diagonal spread but now indelibly known to cmf forum as a voodoo spread ... one of my favourite things ... except i'd never do one with so brief a time frame.

also, in selling the august calls, everything depends on how far otm investor has to go & how many contracts inv has to sell, ie are the dollars even worth the commish, don't you think.

 

[Betzy]

Ok so the options aspect is something I want to get into. Question for you Option monsters: I am with TDW, are they ok or good to trade options with? Is there a better DB to handle these?
I think I know the answer to this but for clarification purpose, can you trade options in your TFSA and SDRSP or is just a cash Margin accounted needed? I would love to be able to sell puts to by good long term stocks in my TFSA???
Thanks

 

[HaroldCrump]

Ok so the options aspect is something I want to get into. Question for you Option monsters: I am with TDW, are they ok or good to trade options with? Is there a better DB to handle these?

You need to "upgrade" your account for options trading.
Usually there is a form that you have to mail in.
Takes a few days for them to review the account and approve it for options trading.

can you trade options in your TFSA and SDRSP or is just a cash Margin accounted needed? I would love to be able to sell puts to by good long term stocks in my TFSA???

Yes you can trade options in TFSA and SD-RRSP.
However, there are some restrictions of what type of options position the broker will allow in a registered account like RRSP, TFSA, etc.
You can't short sell, is one restriction.
You can't sell uncovered (i.e. non cash secured) puts either.
Buying options is usually always allowed.
Short calls may be restricted to covered calls only.

 

[Betzy]

Ok Thanks Harold,
I have an appointment to "upgrade" next week.
I wonder if there is a way to sell puts and secure the cash in a TFSA?
Now I need a book or a course on Options so I can make sense of the covered and uncovered, lateral spread and lingo you all use

 

[atrp2biz]

atrp2biz if we may just call you doctor for short ... this is an extremely brief version of what mode3sour likes to call voodoo ... it's a diagonal spread but now indelibly known to cmf forum as a voodoo spread ... one of my favourite things ... except i'd never do one with so brief a time frame.

also, in selling the august calls, everything depends on how far otm investor has to go & how many contracts inv has to sell, ie are the dollars even worth the commish, don't you think.

Definitely. Don't know how far OTM the longs are and what the expiry is. Commissions are always a consideration, but I think you are a proponent of IB, right?

Not actually fan of diagonals--prefer the straight-up calendar or double calendar. My only rule is that I don't open up a position in an earnings month. My favourite time to open a position is after the volatility collapse after earnings (ie. I'm long a calendar Sep/Aug 395 puts on AAPL right now entered a couple days after earnings last week).

 

[HaroldCrump]

I wonder if there is a way to sell puts and secure the cash in a TFSA?

What do you mean by secure the cash?
A cash secured put simply means that you need to have all the cash required to buy the stock at the strike price, if assigned.
So if strike is $10/share and you sold 1 contract, you need to have 100 * 10 = $1,000 + commission to cover your position.
Pl. check with your brokerage what the commission will be in this case.

BTW, you do realize that short put is one of the riskier option strategies, unless adequately hedged (even if cash secured)?
Don't just sell a put and sit there.
You won't get assigned as soon as stock drops to $10 (in the example above).
Quite likely stock will keep dropping and you will get assigned when it's well below $10...think TRE, RIM, YLO, SWI and some of the other recent debacles.

 

[Argonaut]

I wouldn't want to trade options in a TFSA. If only because the heavier commissions eat too much into your contribution room.

I think I'll hold onto my LULU options until earnings as planned. At the very worst it will be a learning experience, and I won't be out too much money. I'm also apocalypse-protected by an S&P 500 put and a GLD call in-the-money. I'll hope for more days like today with LULU up and the S&P down. If you can believe it, short interest on the stock is above 14%.. so hopefully those bastards will squeeze out soon.

For the record, my Sept strike price is @65. Selling calls wouldn't be worth the commissions and cap on the upside.

 

[Betzy]

What do you mean by secure the cash?
A cash secured put simply means that you need to have all the cash required to buy the stock at the strike price, if assigned.
So if strike is $10/share and you sold 1 contract, you need to have 100 * 10 = $1,000 + commission to cover your position.
Pl. check with your brokerage what the commission will be in this case.

So if I get this right, I have the cash in the TFSA to cover the position then I should be able to execute the trade of the Put sell.??

BTW, you do realize that short put is one of the riskier option strategies, unless adequately hedged (even if cash secured)?
Don't just sell a put and sit there.
You won't get assigned as soon as stock drops to $10 (in the example above).
Quite likely stock will keep dropping and you will get assigned when it's well below $10...think TRE, RIM, YLO, SWI and some of the other recent debacles.

So is this because all others who are long put selling have priority over me if i have a short position? So what is considered short and Long? Current month, two months, a year?

If only because the heavier commissions eat too much into your contribution room.

Is the commission the fee you receive for selling the put? Does this go into the TFSA as a contribution as opposed to gain on investment? Pardon the newbie questions I am but a squeak in the orchestra of investing

 

[andrewf]

I don't think you are allowed to sell puts in a registered account even if it is 'secured' with cash. From what I can tell, this is due to some arcane tax rule. For similar reasons, until a few years ago, you were not allowed to buy puts in a registered account because they were viewed as speculative rather than than an investment, or somesuch.

Am I wrong?

The commission is the transaction fee charged by your broker. The price of the option you sell is referred to as the premium.

 

[atrp2biz]

However, you can sell a covered call which has a virtually identical p/l profile as an uncovered put.

 

[atrp2biz]

Betzy,

Long = owning the security

Short = a negative position from selling a security without actually owning it; results in an obligation to purchase the security to exit the position.

 

[m3s]

To put a twist on Humble's vertical, you could also sell options with higher strikes, but with less time to expiry. This can create a positive theta position (whereby if LULU does nothing, you can take advantage of the decay of the short option). The risk is if LULU blows by the short strike.

I like neutral-theta positive positions, but they do have gamma risk (gamma is the second derivative of the change in value of the option wrt the change in value of the underlying) if the underlying goes up or down a lot prior to the expiration of the short position.

That's a lot of voodoo in one post. This reminds me how I felt in calculus class at first.. I won't understand a thing the teacher says until I dedicate some serious time to it. Interesting stuff though

 

[Argonaut]

That's a lot of voodoo in one post. This reminds me how I felt in calculus class at first.. I won't understand a thing the teacher says until I dedicate some serious time to it. Interesting stuff though

I definitely understand humble's first paragraph and the concept of spreads. And I have no idea how I passed calculus in university. I could probably only solve a couple basic derivative problems. It was just of no interest to me.

The "Greeks", on the other hand.. I know nothing about. To veteran options traders, how important are these concepts? I understand time decay and all that, and profit/loss potential. But gamma and theta and such are puzzling.

 

[Causalien]

If you take the stock price as a an imperfect 2D sine wave. Remember Sine(e^jwk) if jwk is 1, then the waveform is a perfect sine wave. So a normal stock price action has some weird jwk component in it.

Take that and do 1st degree derivative and you get delta. Do a 2nd degree derivative and you get gamma.

Theta is the time decay. It is an transposed exponential function that is very flat and decays exponentially as t goes to zero. Think Exponential with x from negative infinity to positive infinity graph. Then rotate it to the right. Take x =0 as t=0 which is the expiration date and you get the approximate theta decay.

Can't help you on Vega. It's a multidimensional variable. I myself need computer programs to visualize it sometimes to compare against theoretical value. This is where options inefficiencies mostly exist.

And that, is how you approach the greeks approximately using math.