Time consideration short-term vs long-term buy call options Hello traders,
In my previous post, I wrote about, At the money / In the money / Out of the money call option, basic definitions, and the 6 factors that determine the option pricing.
I remind you that options pricing is based on the partial differential equation from the Black–Scholes model, the solutions to this equation are not linear, which means it is hard to visualize how the option price will behave.
A short explanation about “time premium” and “intrinsic value” and “premium”.
To buy an option you pay a “premium” the price of the option contract.
The premium is the combination of time premium and intrinsic value
Out of the money and At the money only have time premium. (intrinsic value is zero)
At the money options have the most time premium.
In the money options have intrinsic value and time premium.
The intrinsic value of an In the money call is the amount by which the stock price
exceeds the striking price. For example, the strike price of the option $90, the stock price $100, the intrinsic value is 100-90 =$10. To this, we add time premium for this example we assume $1, The Total price of the In the money option, called premium is $11.
The Theta
Theta is a measure of the time decay of the options. This is the risk measurement of time on the option position. Theta is usually expressed as a negative number, it is expressed as the amount by which the option value will change.
For example, an option bought for $7 and have 14 days until expiration, the theta of the option could be (-0.5), which means the option will lose half a dollar per day if all the other variables stay the same.
Options trader should know that time is the enemy of the option buyer and a friend to the options seller. (Options selling will be explained in another post)
Long-term options (one year for example) are not influenced by time decay in one day’s time. The theta of a long-term option is close to zero.
Short-term options, especially At the money options, have the biggest theta because they are the most exposed to time decay (The less time you have, the more rapid you lose time premium). At the money have the most time premium, do not get confused with premium (“time premium” and “intrinsic value”), Out and In the money options have less time premium.
The time decay (theta) of options on a very volatile stock will be higher than of options on a low volatility stock. The volatility of options will be explained in another post, but what you should know, the higher the volatility of an option the higher the price is (more “expensive”). The higher the price, the more time premium the option has, therefore more time premium to lose daily, which means those options have higher theta.
I want to note again, that the equation and their solutions are not linear, options will lose more of their daily value near expiration.
Chart explanation and conclusions:
We see two options in TSLA, short-term, and long-term, the faded colors belong to the short-term and the strong colors to the long-term.
Differences between the options: the option price, the days to expire, the volatility, and other “greeks” like the delta. The strongest factors, stock price, and the strike price of the options are the same.
We can see that the long-term options have a much sharper angle (more flat) than the short-term angle, meaning the time decay of the short options is much greater as we expect.
The profit lines (3,2,1) of the long-term options are above the short-term options.
The break-even and the loss lines of the short-term options are above the long-term options.
If you have questions ask them in the comments.
Options
Options 101. Learn them, and rapidly increase your capital. Greetings. I trade options, which has allowed my portfolio to appreciate much faster than trading regular stocks. In light of this, I offer a basic Options 101 tutorial. Enjoy!
Happy Trading!
An option is a contract giving the buyer the right but not the obligation to buy (CALL) or sell (PUT) an underlying asset at a specific price (strike price) on or before a certain date (expiration date).
The adventures of leveraged naked ootm option sellersAh the famous "free money" option sellers.
Ah the famous strangle strategy.
Option sellers. Ok.
Naked option sellers. Sooo...?
Way out of the money naked option sellers. Let me think...
Way out of the money strangle naked option sellers. Getting good.
Ultra Leveraged Way Out Of The Money Strangle Naked Option Sellers. Oh boy.
Ultra Leveraged Way Out Of The Money Strangle Naked Option Sellers That Never Cut Their Losses. Not fair for other Darwin award contestants!.
They have to be doing it on purpose.
A strangle is an absolutely garbage strategy where the writer sells (slightly) out of the money options on both sides.
The maximum profit happens when the price stays between both strike rates. Not going to make a full explanation and a drawing, but what is important is it involves option sellers that take small premiums win very often but are at high to unlimited risk.
The premium basically means that even if the price goes against you a bit you are still in the green. Out of the money means you have even more breathing space before the price gets to a losing area, and then additionally you have the opposite side premium as additional "breathing room", which in all means the price has to move very much for you to even start being worried. But when it goes that far... careful.
Depending on how out of the money the option is the premium can get pretty low... So the option seller won't make alot of money. There is no free lunch.
A summary of those strategy is "Picking up pennies in front of freight trains."
Ok here is a drawing xd
A few people use this, and I know it is taught by Tom Sosnoff that runs a brokerage. You might recognize him in some old documentary & interviews about the 1987 (he was a market maker obligated to buy people bags and "add to loser" and they all were running out of liquidity & had to beg banks for more money so the whole system would not collapse). He is the creator of thinkorswim that he sold to TD Ameritrade for a big bag of money.
He published a video recently where he bashed the robinhood effect where down synd- er I mean young credulous investors (and legends like Portnoy) are getting enabled to gamble on risky & complex products they do not understand. Oh wait no he praised it all, said it was wonderful and a new paradigm. Sad. "Hurray optimism" (until the suicide). Not sure what my opinion of him is right now.
On the long run those strangle work, and ... well I can't say any idiot can do those clearly with all the clowns blowing up ... but it does not require any prediction ability (you are better off if you can predict low volatility thought), it is maybe complex to understand for novices at first but rather "easy".
Someone running such a strategy will often win, and get consistant profits, but the profits are just... small. And funds or individuals using this strategy have to be prepared for big moves that sometimes happen and have a plan to hedge at some point.
Tom Sosnoff tells people to "trade small trade often" (another broker telling people to trade often gee didn't expect that).
Since this strategy makes little profit, fools have a tendancy to use leverage, sometimes alot.
Warren Buffet once said, or more than once, way more, that leverage was the best way to wipe out your wealth.
Especially when mixed with ignorance. He uses leverage himself, but not like this, not like these guys...
The only way I see leverage maybe making sense with those strategies is say you make 1% a year, so you'd put 90% of your money in a mix of equity indices & risk free with low correlation, then use 10 leverage on the remaining 10% that is used to write options, keep risk managed, so then you make 10% on the 10% and if something goes real wrong you have deep pockets, 9 times the amount... Using a bit or even 2-3 times more capital and more leverage too would not even result in getting wiped out for those that did. They REALLY asked for it.
There are plenty of naked option sellers that got wiped out, included hyped or famous ones. Naked selling means you do not own the underlying (so if you never buy until the client exercises his right you will have to first buy the asset at whatever price, or have to buy it from him if he is short potentially at a much higher price than the market price).
James Cordier from OptionSellers dot com, Victor Niederhoffer, Karen Supertrader, LJM Preservation And Growth Fund (HAHAHAHA they have a great sense of humor).
James Cordier used way out of the money options, so it would look something like that:
Wow! We found the holy grail! You cannot lose!
He really got zero sympathy, and even his clients did not get much. They either knew it was risky or did not bother how to even put this they did not even bother looking at was option selling was somehow?
James Cordier was making tiny profits with huge risk, had very high winrates, and because he made little profits he used extreme leverage to get any significant amount out. He is the epitome of the concept "Picking pennies in front of a freight train". They should use his picture in encyclopedias.
Those leverages aren't even poor risk management at that point we reached another stage. Seriously this guy is an absolute psychopath.
Victor Niederhoffer used to be a rather famous fund guy, he worked with Soros, he was rather popular I think he wrote in big journals, probably was on tv regularly. He was "one of the best" making 30% a year for 20 years, famous people held him in high regard, he was sort of a mentor to guys that are famous today. But he missed a few braincells. He sold a big amount of naked puts in 1997 then the market crashed. Rekt. Another "myfxbook" loser. Maybe he was just bad all along and got lucky for 20 long years. Outlier. He probably whine that it was just "20 sigma bad luck". He blew up again 10 years later 😂. Rekt by the trash securities crisis of 2007. Oh ye another "free money one". If you saw the movie "the big short" you might remember scenes where bankers were laughing and partying at the "idiots that bought options against CDO/MBS". He was not a banker himself so Bush did not use taxpayer money to bail him out. He was not unlucky actually, he was very lucky to have lasted 20 years the previous time. Dumb people often have Dunning Kruger...
Karen Supertrader was a random old lady that got into the Sosnoff noob strategy. It is very hard to lose money while keeping it small with that one, so idk I guess this is why he pitches it to complete noobs that would all become day traders and lose their money quickly. Hey they'd just lose their money otherwise, at least here they are making a little. It is true, can't even blame him he is maybe saving noobs. Should just let natural selection do its job just like getting rich slow is actually not slower, helping people is not actually helping.
She was an outlier in a normal distribution, mistook that for greatness, and started a fund managing to get idiots to invest hundreds of million. 150 I think.
She ended up losing if I recall a good 50 million, hide the losses as unrealized (which she rolled over each month and used new positions to offset), while still collecting fees.
I remember seing her interview on how great she was and thinking "ye give it a little while" and then doing some research, and oh ye blew up haha.
Didn't see that coming.
I don't get people brains. If people use certain strategies, it is mathematically impossible, literally impossible, they can get certain returns without taking huge risk or committing fraud. Why is it so hard for the creatures on this planet (especially regulators) to comprehend? It is physically impossible. Proven. This is not economy or climate science where randos come up with their ooga booga opinions and apocalyptic calls, mathematical PROOF means it is true period. Really blows my mind. How are all those mouth breathers even alive?
If a strategy no matter what is contained in Upper Bound Lower Bound and we are outside of the bounds it's not because of divine intervention or a parallel universe. I don't even know how they think. Lmao I crack up when I try to imagine their thought process. It's like the market moves 10% in a month, and someone tells you they simply bought & held, made 60%, and used no leverage. And some people are stupid enough to think this is possible??????????????????????????????????????? Wow.
LJM Preservation And Growth is just the funniest. "Preservation" in the name, then goes to the option selling casino with infinite leverage.
People trusted it blindly because it has preservation in the name? XD Reminds me of some groups in the USA self proclaimed "good guys".
Idiots that fall for this get the karma they deserve.
You can find stories and read about it on the internet it is all over the place. The best bits is how they always find excuses.
The fund came up with "there is no way we could have predicted the 911 attacks". The stupidity of this excuse is really beyond.
I don't even know where to start. Well I don't think I need to explain. They clearly were in the wrong business entirely.
"Oh no there are risks in the business" 😂
One of optionsellers client shared a google doc of his 1 million (in total) portfolio, here it is, it goes from left to right day by day so you can see how the positions evolve and how James Cordier holds onto his losers forever, until death pulls them apart.
docs.google.com
You can find the second to last idea James Cordier published on seeking alpha here:
seekingalpha.com
He got all excited at the "free money" (greed & euphoria) and then sh** his pants (fear), held the bags, blew up. The he was less excited (pain regret sorrow etc).
Emotions -> Emotions -> Emotions. Mistakes -> Mistakes -> Mistakes. Like a baws. And the guy had 20 years experience or so.
His last idea was a short on coffee and he was very right. Should have just went short for real with leverage since he was gambling anyway rather than sell for "only" 1.8 million.
The website has his ideas since 2009.
You know these people I think they just hate losing. He probably was right often enough but I am not going to backtest his ideas got better things to do (got a new zombie game to try haven't been able to play games in weeks because idk they bore me but at the same time I really need a distraction I must be alone having to force myself to play games rather than the other way around).
It is not the case for all of them of course, but I am sure alot would make money without having to use 50 leverage if they just applied their analysis and accepted to take the risks, rather than look for some really stupid trick to always win.
As a speculator you get rewarded for absorbing risk/volatility. Sometimes down sometimes up, but on average more up than down.
How can some people be in the business, and not as market makers or arbitragers or brokers, for 20 or 30 years and still look for "sure thing" strategies and be afraid of taking a loser? Who cares if the portfolio moves a bit in 10 or 20 years the end result is what will matter.
It is clearly not for every one.
They should know better and be prepared for the "big events", but they go pavlov brainwash and emotional and feel good about it, as long as it has not happened they think it won't (and even once it does some don't even learn and think they really fell under the wrath of god and did nothing wrong as demonstrated by Victor Niederhoffer, seriously how dumb is this guy? I don't have a quarck of respect for him.)
If you are able to survive those big events, accept small drawdowns and they do not cause you to make mistakes, you are already ahead of many.
Another obstacle to be making money in this game. When you "have it" it really seems like a no brainer, but yes there really are alot of people unable to climb that obstacle.
Aren't 90% of casual investors bagholders? With "strong hands". So afraid to take a loss. Strong hands ye right, weak chins.
The receding chins are using computers now so they don't piss themselves, but I don't think the computers will be able to do everything, just the small day trading.
If we get to the point computers can go THAT far to predict the future weeks away (not just M5 stat arb etc) we won't even need markets anymore anyway, and we'll be too busy visiting other galaxies xd
Imagine science without all the dogmas and politics. Imagine politics without all the politics. And so on. I ain't worried. My tip to profitable speculators: learn to invest, find a passive income stream, you never know if you'll still be making money in 10 years, but don't be too worried all opportunities just disappear (unless communism).
Yes you never know if it is a pullback or the end, it is easy to look at it in hindsight compared to being in it and think "oh it just goes up".
Locking in a Profit Without Day TradingDay trading can be a quick way to capture intraday profits. However, not all accounts are suitable for day trading or can afford the pattern day trader requirements. If a trader has already completed three day trades in the past five trading days, it leaves them with two options when they have a profit on a newly opened position.
1. Either close the position, take the profit, and trigger a pattern day trade label
or
2. Hold the position until the next day and hope the profit is still there.
There is a third option that locks in a profit while still avoiding a day trade. This is done by legging into a debit spread.
Legging into a Debit Spread
A vertical debit spread is created when an investor buys-to-open (BTO) one option and sells-to-open (STO) another option further OTM. Both legs are opened on the same underlying equity and use the same expiration. However, both legs do not need to be opened at the same time.
An investor can instead buy-to-open (BTO) the long leg first and then setup a sell-to-open (STO) order for another option further OTM. The STO order should be placed for a credit greater than or equal to the debit paid for the BTO leg. This is called legging into a debit spread.
Example:
BTO September 200 put for $10.00 of debit.
Instead of placing a closing order for the 200 put, place an order to STO September 195 put for $10.00 of credit.
When the STO order fills, this will create a September debit spread with a net debit of $0.00. (BTO for $10.00 debit - STO for $10.00 credit = $0.00 net debit)
The risk on the trade is $0.00. The maximum risk, or potential loss, from a vertical debit spread is the net debit (cost basis) of the spread (BTO leg debit minus the STO leg credit).
The potential profit is $5.00. The maximum profit that can be earned from a vertical debit spread is equal to the width of the spread minus the cost of opening the spread.
No further action should be taken on this spread until the next trading day. Even placing a closing order the same day opens up the risk of being filled and tagged with two day trades.
The next market day, a closing order should be placed to STC the entire spread for a credit. This order can be placed in premarket or at market open. Regardless of when the order is placed, it should be worked until the position is closed. When locking in a zero cost basis, the current value of the spread is the profit.
Example:
Holding a legged into debit spread with $0.00 cost basis.
STC the spread for 3.40 of credit.
The spread was BTO for $0.00 and STC for $3.40 resulting in a $3.40 profit.
The total profit on the position is $3.40 per share, or $340 per contract.
Locking in Profits
This strategy can also be used to lock in profits of a position that was initially intended to be held overnight.
An investor BTO a TSLA call based on an upcoming earnings play. TSLA moves 50 points going into market close and the current position has $25 of profit per share. Instead of using a day trade to close the position, STO an adjacent strike to create a debit spread to lock in a profit. Then BTO a new TSLA call to realign the account for the same earnings play.
Example:
7/21 13:15 PM ET TSLA trading at 1560.
BTO Aug 1560 Call for $150 per share.
14:30 PM ET TSLA is now trading at 1610.
The Aug 1560 Call is now worth $175, equaling $25 of profit per share.
STO Aug 1570 Call for $170 per share.
This creates a debit spread with a $20 net credit . BTO for a debit of $150, STO for a credit of $170 = $20 net credit . This is now a debit spread with a credit as the cost basis. Depending on your trading platform, this may be shown as a negative cost basis. This is because it is a credit on a debit spread.
Max risk = $20 profit, no risk on the trade. Locking in a credit is a guaranteed profit on the trade.
Max profit = $30: $20 of credit + $10 of spread width.
BTO the Aug 1605 call for $157 per share. This allows the account to still be setup for an earnings play.
Net risk of the two positions is $157 debit - $20 credit = $137 of risk per share.
Next Market Day:
7/22 9:30 AM ET TSLA gaps open to 1679 due to earnings.
STC the Aug 1560/1570 debit spread for a credit of 6.70.
Total profit on the spread is the $20 net credit + 6.70 of credit to close = $26.70 of profit per share or $2,670 of profit per contract.
STC the Aug 1605 call for $195 credit.
BTO for $157, STC for $195 = $38 profit per share or $3,800 profit per contract.
Total profit is $64.70 on a net risk of $137 = 47.2% return and no day trades used.
Credit on a Debit Spread
In the above example, the stock moved enough for the STO leg to have a higher value than that of the debit paid on the BTO leg. This legging in allowed for a credit cost basis when normally a debit cost basis would be held if both legs had been opened at the same time.
When the credit received on the STO leg is higher than the debit paid on the BTO leg, this creates a credit on the spread. This does not make it a credit spread. It is still a correctly constructed debit spread because the STO leg is further OTM than the BTO leg, but instead of holding a debit and risk on the trade, the position now has a credit, no risk on the trade, and a guaranteed profit
If a debit spread with a credit is held until expiration and expires out of the money, the “loss” on the spread is actually a profit equal to the credit held.
When a strike is OTM at expiration, it no longer has any value to it. It has lost all time value and because it is OTM, it contains no intrinsic (ITM) value.
Example:
The BTO leg for $150 is STC for $0.00 = $150 loss.
The STO leg for $170 is BTC for $0.00 = $170 profit.
$170 profit - $150 loss = $20 profit per share or $2,000 per contract.
If both legs of the debit spread are in the money at expiration, the profit on the spread is equal to the credit held plus the spread width.
When a strike is ITM at expiration, it only contains intrinsic (ITM) value. It has lost all time value.
Example:
AMZN settles at expiration at 1580.
The 1560 call is 20 points ITM.
The 1570 call is 10 points ITM.
The BTO leg for $150 is STC for $20 = $130 loss.
The STO leg for $170 is BTC for $10 = $160 profit.
$160 profit - $130 loss = $30 profit per share or $3,000 per contract.
It is not recommended to hold ITM spreads on American style options until expiration due to risk of assignment/exercise.
American vs European Style Options
Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration.
Indexes such as SPX, NDX, and RUT are European style options. This means that any exercise or assignment may only occur at expiration.
Trading spreads on European style options, can alleviate the concern of early exercise/assignment. If both legs are ITM, they can only be exercised or assigned at expiration.
For American style options, the closer to expiration and the further ITM the STO leg is, the more likely it is to be exercised/assigned. This is why building time into the position is beneficial by using an expiration at least 2-3 weeks out.
Additional Information
This strategy works best on long options, BTO a call or BTO a put. It is not recommended to be used to lock in a profit on an existing debit or credit spread.
While you can use this strategy to leg into a credit spread, debit spreads tend to be more efficient as credit spreads rely on rapid time value decay so generally require sooner expirations.
The legging in strategy works with any spread width. However, the larger the spread width the further the underlying will have to move for the STO leg to be at the same value or higher than the cost basis of the BTO leg.
When legging into wide spreads if you can lock in a cost basis less than the current spread value you still have profit potential.
Legging into a debit spread is an efficient way to avoid day trading but still guarantee yourself a position that can be closed the next market day for a profit. As long as the debit spread is not at expiration or extremely far out of the money, the spread should have value to it. A zero cost basis debit spread can be closed for a profit equal to the current value of the spread. While locking in a credit on a debit spread results in a guaranteed profit equal to the credit on the spread plus the current value of the spread.
The Stigma of Options Pattern Day TradingIs there a pattern to your trades?
Anyone trading options knows how little effort it takes to build up a healthy volume of transactions. But you should be aware of one rule that could inhibit your ability to trade options too often in a margin account.
In the past, day trading represented the wild west of the market. It was possible for day traders to move in and out of positions within the trading day and end up with no open positions. Margin is calculated as of the ending positions in the trading day; this meant it was possible to trade on large volume with little or no cash at risk, meaning no margin requirements. It also meant huge risks for brokers.
Trading on extreme leverage is attractive, but it is not the only motive for day trading. Many traders believe that the risk of price gaps between today’s close and tomorrow’s open are simply too great; day trading enables traders to close out positions during the trading day, avoiding this risk altogether. Even so, if you want to day trade, you could fall into the definition of a “pattern day trader.”
Entry and exit decisions are based on momentum, chart patterns, and other technical strategies. Whichever strategy employed, the theme to day trading is that positions are opened and closed before the trading day’s end. This problem, at times representing unacceptable risks to brokers as well as to traders, is what led to the enactment of new rules concerning so-called pattern day traders.
By definition, a day trade is when you buy-to-open and sell-to-close or sell-to-open and buy-to-close the same option within the same market day. A pattern day trader is when this action is repeated four or more times within five consecutive trading days using a margin account. If you fall into this definition, you must maintain at least $25,000 in equity balances (cash and securities) in your margin account. This balance has to be on hand before you can continue any day trading. You can also be labeled a pattern day trader by your broker if your broker believes there is a strong likelihood that you will day trade.
One exception: If your day trading is lower than 6% of the total number of trades you make in the five-day period, then you are not considered a pattern day trader. So, high-volume traders can escape the rule under this provision.
Once you have been labeled a pattern day trader, you will need to maintain at least a $25,000 equity value in the account . If your account falls below $25,000, it will be frozen from day trading until the account is restored to the minimum equity requirement of $25,000.
Example of day trading:
8/18 10:10 AM BTO AUG-21 TSLA 1900 Call
8/18 10:50 AM STC AUG-21 TSLA 1900 Call
This is a day trade. The position was opened and closed in the same trading day.
Example of not day trading:
8/17 3:50 PM BTO AUG-21 TSLA 1900 Call
8/18 10:50 AM STC AUG-21 TSLA 1900 Call
This is not a day trade. The position was opened and closed on two different trading days.
Example of Pattern Day Trading:
8/13 Opened and closed an AMZN Put
8/13 Opened and closed a GOOG Call
8/17 Opened and closed a BKNG put
8/18 Opened and closed a TSLA call
This is pattern day trading. There have been four day trades in a five trading day period. Trading days do not include weekends for stock/index/ETF options. If instead of taking the TSLA call on 8/18, the position was day traded on 8/21, this would not have been classified as pattern day trading. This is because the fourth day trade, TSLA, would have been over five business days away from the first day trade on 8/13. See below:
8/13 Opened and closed an AMZN Put
8/13 Opened and closed a GOOG Call
8/17 Opened and closed a BKNG put
8/21 Opened and closed a TSLA call
This is not pattern day trading. Assuming no day trades were placed prior to 8/13.
The pattern day trading requirements is one of those unexpected surprises many traders discover in their margin accounts. The rules are easily understood in hindsight, but unfortunately, they are likely to come to your attention only after you fall into the zone in which they kick in and apply to you.
Individual brokers may have more strict rules regarding pattern day trading. For example, one broker may view the opening and closing of a vertical debit spread as one day trade, while another broker may view the same action as two day trades, since a spread has two different options. It is always important to contact your broker to understand how their day trading rules apply to you and your account. They will also have a record of your current day trades. If it is posted on your platform, make sure you know how to locate the day trade count if you intend to avoid being labeled a pattern day trader and are looking to stay at three day trades or lower in a five trading day period.
Trader's Guide to Vertical Debit SpreadsThe strategies and ideas presented in this guide have been designed to provide you with a comprehensive program of learning. The goal is to guide you through the learning experience so you may be an independent, educated, confident and successful trader. There are numerous variations of traditional options strategies and each has a desired outcome. Some are very risky strategies and others require a considerable amount of time to find, execute and manage positions. Spreads are a limited risk strategy.
Spreads
Spreads are simply an option trade that combines two options into one position. The two legs of one spread position could have different expiration dates and/or different strikes.
Spreads can be established as bearish or bullish positions. How the spread is constructed will define whether it is bullish (rising bias) or bearish (declining bias).
Different types of spreads can be used for the same directional bias of the stock. For example, if the stock has a declining bias, a call credit spread or a put debit spread could be opened to take advantage of the same anticipated move down.
In this guide we will be talking about Vertical Debit Spreads, which are a limited risk strategy. Learning how to manage risk is as important as learning the details of a strategy.
Vertical Debit Spreads
A vertical debit spread is created when an investor simultaneously buys-to-open (BTO) one option and sells-to-open (STO) another option. The premium paid for the BTO is always greater than the premium received for the STO thus, creating a net debit from the trader’s account.
Example:
BTO a call using the May 180 strike for a debit of $7.57
STO a call using the May 190 strike for a credit of $3.42
Net debit for the spread is $4.15
The proper construction of a vertical debit spread is to BTO an at-the-money (ATM) strike and STO the strike that is 5 – 10 points further out-of-the-money (OTM). When opening a call debit spread, further OTM means a higher strike. When opening a put debit spread, further OTM means a lower strike.
Both legs are opened on the same underlying equity and use the same expiration month.
The Delta Ratio
Delta is a factor in how profitable a debit spread may be. When the underlying stock moves, the value of the options will change at the rate of the Delta. Delta values will be different for different strikes depending on how far out-of-the-money or in-the-money the strike is. Look at an options chain for the current expiration month. Find the Delta of the at-the-money strike and compare it to the Delta of a strike 20 points out-of-the-money. The ATM strike will always have a higher delta than the OTM strike. This means that the value of the ATM strike will change more quickly than the OTM strike, as the underlying stock moves.
When properly constructed, a debit spread is designed to take advantage of the Delta relationship between the long and short options. By STO a strike further out-of-the-money than the BTO strike, the long leg will increase in value more rapidly than the short leg. This is referred to as the Delta Ratio.
Put debit spreads are used when the stock shows a declining bias. Puts increase in value as the stock decreases in value. In this case, the long put would increase in value creating a profit. The short leg would increase in value creating a loss. However, as we learned earlier, due to the Delta Ratio, the long put is increasing in value faster than the short put is creating a loss. This will create an overall position profit as the stock moves down.
Here is an example:
Stock trading at 520 and has a declining bias.
BTO 520 put
STO 510 put
This spread creates a debit of $4.80
Stock declines to 510 causing the values of the puts to increase. The position can now be closed for a profit.
STC 520 put
BTC 510 put
The value of the spread has increased to $5.80. Since the stock declined in value, the put options are more expensive.
The spread was BTO for a debit of $4.80 and STC for a credit of $5.80 resulting in a $1.00 profit.
Call debit spreads are used when the stock shows a rising bias. Calls increase in value as the stock rises. In this case, the long call would increase in value creating a profit. At the same time, the short call would increase in value creating a loss. However, as we learned earlier, due to the Delta Ratio, the long call is increasing in value faster than the short call is creating a loss.
Stock trading at 500 and has a rising bias.
BTO 500 call
STO 510 call
This spread creates a debit of $4.80
Stock rises to 510 causing the values of the calls to also rise. The position can now be closed for a profit.
STC 500 call
BTC 510 call
The value of the spread has increased to $5.80. Since the stock increased in value, the call options are more expensive.
The spread was BTO for a debit of $4.80 and STC for a credit of $5.80 resulting in a $1.00 profit.
Risk and Reward on Vertical Debit Spreads
Reward
The maximum profit that can be earned from a vertical debit spread is equal to the width of the spread minus the cost of opening the spread. For a vertical debit spread to realize the maximum potential profit, both legs of the spread would need to expire in-the-money which means the position would need to be held until expiration.
I do not recommend holding positions until expiration. Short term movements in the stock/index plus limited time value decay provide opportunities to close out positions for a profit of about 10%. If a position is profitable and the trader decides to hold the position hoping for a bigger profit or in an attempt to carry the position to expiration, there is a good chance that the profit will disappear and the position could turn into a losing position. This also will increase the risk of assignment/exercise if trading an American style expiration.
A good way to lose money is to wait for a bigger profit
Risk
The maximum risk, or potential loss, from a vertical debit spread is the net debit (cost basis) of the spread (BTO leg debit minus the STO leg credit).
Example:
BTO 2765 call for a debit of $11.70
STO 2770 call for a credit of $8.30
Cost basis of the spread is $3.40
$3.40 is the maximum risk.
A maximum loss will occur when both strikes are out-of-the-money at expiration. Learning how to properly adjust positions will avoid this.
A trader establishes a bullish (call) debit spread when the chart indicates a rising bias. The breakeven point is the lower strike price plus the net debit. Referring to the example above, if the stock was at 2768.40 at expiration, there would be no loss and no profit.
Example of breakeven point on above debit spread:
Stock settles at 2768.40 at expiration
The 2765 strike is $3.40 ITM, the value of the strike has $3.40 of intrinsic value and no time value.
The 2770 call expires OTM worthless and you keep the 8.30 of credit as profit.
Since you do not want to exercise your right to own the stock, you sell the 2765 back at the price of $3.40. This results in a $8.30 loss. $11.70 BTO – $3.40 STC = $8.30 loss
You get to keep the original credit of $8.30 from the 2770 call. This netted against the $8.30 loss results in breaking even on the position.
A trader establishes a bearish (put) debit spread when the chart indicates a rising bias. The breakeven point is the BTO (higher) strike price minus the net debit.
Calculating the Return
The profit percent return is calculated by dividing the profit by the risk. After all, if the trade lost 100% of the risk that is the amount the trader would no longer have. In the example above, the net risk is $3.40. If the debit vertical spread trade resulted in a $1.00 profit, the percentage return would be 29.41% ($1.00 / $3.40). Lower risk drives higher returns relative to capital at risk.
American vs European Style Options
Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration.
Indexes such as SPX, NDX, and RUT are European style options. This means that any exercise or assignment may only occur at expiration.
Trading spreads on European style options, can alleviate the concern of early exercise/assignment. If both legs are ITM, they can only be exercised or assigned at expiration, which allows flexibility to continue to hold the position rather than take action to avoid assignment/exercise as would be suggested on American style options.
Opening a new Put Debit Vertical Spread
The following steps should be referred to when opening a new put debit vertical spread position:
1. Review the technical indicators on your chart and confirm there is a consensus between multiple indicators pointing to a declining bias.
2. Select an expiration that is one to three months out. One month is generally the minimum time to expiration you want to use. Building time into the position is advised in case it needs to be managed. The sweet spot for opening new positions is two months to expiration.
3. BTO the at-the-money (ATM) put strike. BTO the strike that is closest to the money. When the stock/index is trading between strikes, BTO the first strike higher than the current price of the stock.
4. STO the strike that is 10 points further out-of-the-money (OTM). With a put spread, further OTM means a lower strike.
BTO ATM and STO 10 points further OTM will create a debit. Generally, when properly constructed, the debit will be in the range of $4.00 - $6.00.
5. When placing the order, always use a Limit order. A limit order specifies to the market the amount of the debit you will accept. A limit order will be filled at the specified limit or lower. Market orders should not be used.
6. With some stocks and indexes, the difference between the bid and ask is quite large. The broker will usually give you a quote called the “Mark”. This is the midpoint between the bid and ask. It is the price you should start with when submitting your limit debit order.
7. Calculate the risk of the position. Cost basis of position is risk. So a position with a debit of $4.50 would have a risk of $4.50.
8. Use the risk number to determine the number of contracts to open. Risk x 100 = the investment required for each contract. With $4.50 of risk and one contract, the total investment would be $450 ($4.50 x (1 contract x 100 shares per contract)).
9. Once you know the total investment required per contract, you can decide how many contracts to trade based on the size of your portfolio. Generally, allocating 5% of the total portfolio to each trade is good risk management. Smaller account sizes may require a higher investment per trade but should not exceed 10%.
10. After the trade has been opened, place a Good-til-Canceled (GTC) order to close the position for a $1.00 profit. A GTC order will stay active until market conditions are such that the position can be closed for a $1.00 profit. GTC orders execute automatically and do not require you to be in front of your computer to take advantage of the profit opportunity.
What Is Options Assignment Risk?What is the options assignment risk?
Trading options is a very lucrative way to make money in the stock market. Using the same methods that I teach in my trading PowerX Trading Strategy, I was able to turn a 25k account into a 45k account in 2 months!
25K to 45K in 2 months? This sounds too good to be true… and I would like to tell you that it is NOT too good to be true, but there are some inherent risks associated with options trading.
ONE of the biggest risks, and possibly the MOST common risk associated with trading options are options assignment risks.
As you may know by now, options contracts expire. When you purchase an options contract you have the right to exercise the contract, and buy or sell the underlying asset for the agreed-upon price. If you allow the contract to expire in the money (ITM) you run the risk of being assigned the 100 shares of the underlying stock.
This is known as an options assignment risk.
Specific Examples of Options With Different Expiration Dates
In the example we’re going to discuss today, we’re going to look at how options expiration or the length of time to expiration can affect your options assignment risk.
To illustrate the relationship between options assignment risk and options expiration, we’re going to look at trading a 315 call options contract on Apple (AAPL) with 7 days left until expiration. The current strike price of AAPL is 318.
This options contract is currently trading for $6 , but only has $3 of intrinsic value. If you were to exercise the option, you would be able to purchase the AAPL stock for $315, and you would capture $3 of profit. If you sell the option, you’ll earn twice that, because the options contract is selling for $6.
The difference in the cost of the intrinsic value ($3) of the option and actual value ($6) of the option has to do with time decay. As the option contract gets closer to its expiration date, time decay erodes the value of the options contract.
In our next example, we’ll look at trading the same options contract with a $315 strike price, but with 0 days to expiration.
As you can see in this image, the same contract with zero days until expiration has only $3 of value. Time decay, otherwise known as theta, has slowly eaten away the value of the contract so that now there is only the intrinsic value of the option left.
On a side note: Selling Theta is a very powerful way to make money while trading. I have taught thousands of traders to use Theta, or the time decay of options, to produce income while trading options.
Options Expiration
As an options contract nears expiration, the risk of options assignment increases exponentially. When an options contract has been purchased, it can usually be sold before expiration to prevent an assignment.
However, options contracts that have been sold pose the opposite risk. If you have sold a put contract for example, and the options contract is in the money at expiration, you must either buy back the contract BEFORE expiration, or risk options assignment.
In this next example, we will look at selling a put contract on Herts (HTZ) .
The current price strike price of HTZ is $2.87.
If you were to SELL a $3 put option on HTZ , the option would have the intrinsic value of .13 cents! Meaning if you chose to exercise the option, you would only make .13 cents per share.
If we look at this option with 1 week out until expiration we can see that it has more value because time decay has not eroded the value.
To Exercise or to Sell, That Is The Question
As you can see, there’s WAY more profit when selling a contract vs exercising a contract when there is time to expiration.
In summary, it’s very unlikely that someone will exercise an options contract when there is time remaining before expiration. There is usually more profitability when there is less time decay or Theta decay in the contract.
When should you worry about options assignment risk?
Some traders are under the impression that IF the stock price moves below or above your strike price (depending on whether you sold a put or call) you risk assignment immediately. This is NOT true. You risk assignment the closer your contract gets to expiration.
Options: Four Ways To Exploit Price ChangesMany traders start out with a sensible plan, only to abandon it because of the way the markets move. This abandonment of a smart plan may lead to potentially large net losses.
In entering a trade, it is sensible to set two goals: the point where profits will be taken, and the bail-out point where losses will be cut. If you buy-to-open a long option, you should know going in that 75% of options held until expiration will expire worthless, so setting goals to sell and close make sense. These goals include getting out of the position before expiration, whether at a profit or a loss.
For example, you buy-to-open a long option for 4.00 per share ($400) and set the following two goals: Sell when net value grows to 6.00 or above, representing a 50% profit; or sell when the value falls to 3.00 or below, a 25% loss. You know going in that time decay works against you, so you face the strong possibility of incurring losses. This means you have to select long options with some additional goals:
1. Buy calls or sell puts after the downside swing. This means you enter the long position on sessions when the price drops so it is at or near support. Stocks tend to follow the broader market, so when an otherwise well-managed quality stock falls several points, you know it is part of the index drop and not a problem for the company alone. This may be the best time to buy a call or sell a put for a fast swing trade turnaround.
2. Buy puts or sell calls after the upside swing. This suggestion does not contradict the one before. It is the opposite. Prices may rise just as irrationally as they fall. So when the index values jump sharply, stocks tend to go along for the ride; but you may see a retreat in the following two or three sessions. When overall market prices rise quickly, buy puts on the upside swing, anticipating a drop back to “normal” levels of trading. This is smart timing to open covered calls or long puts. When you sell calls at the top, it also reduces risk if you own shares so that those option short positions are covered.
3. Be aware of earnings dates. When earnings surprises occur, stock prices often overreact, only to return to “normal” trading within a few sessions. This presents an opportunity for swing trading with options. At such times, avoid short positions because you do not know which direction the surprise will take prices. A low-cost long straddle or spread could make the most sense when timed just before earnings announcements.
4. Know your stock beforehand. Every stock exhibits particular trading tendencies and rhythms. Some tend to over-react to broader markets while others hardly react at all. This tendency, is a valuable technical factor in identifying how stock prices react to market movement.
Day trading and Scalping Example NIFTY July 8I use multi time frame analysis very heavily. I always establish context for trading before I start the day. For context and levels, please check the following posts prior to July 8 *** Links Below
I am always fascinated by day trading - not because of the lure of quick money. But I think it is extremely hard for me. At least it is hard for my personality. It is always said there are two kind of traders
1. Traders who can think very fast
2. Traders who can think very deep
I always see myself comfortable in category two - deep thinker. But to put myself out of my own opinion's prison - I day trade.
Though day trading is hard, it teaches many things to me as a trader.
1. Emotional Control and Money Management - I don't have time to adjust , reflect back and somehow prove to myself that I am on the right side. I better quickly exit of my positions with great emotional control.
2. Relentless Planning - Since I don't have lot of time, I have to plan insanely - thinking of all possibilities and my actions.
3. NO to laziness - I cant afford to relax during the day session. I need to have extreme clarity of thought throughout the trading session.
Now, one may think that all these learning can be from any time frame trading. That's true. But when you have a ticking clock next to you and market presenting you 1 of n possibilities every single candle, that changes you for good. It makes you fast. Then you can adjust to larger trading styles easily.
Below is my example live thought log for the day. I escaped the day with approx Rs 34 / lot profit. Not a bad hunt after crazy price movement!
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NIFTY chart is extremely positive. Market looks prime for 11000, but global clues soft. Typically, such setups if bullish do not give chance to enter, starts with gap up. If there is no gap up it may be contra indication for sideways movement for the day. Since it is Wednesday , 1 day prior to weekly expiry, it is better to sell options and scalp premium.
Risk : large volatile movement. Stop Loss, opening ranges of 1 st hr. Close positions starting from 1:30 PM.
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1. Expectation was rally. But flat opening. Global markets are soft. Hence I sold 9300 CALL. Idea is to cash in Theta loss for the day in case of sideways movement. It is a risky trade.
2. Candle at 9.30 starts confirming this movement. Let this movement complete.
3. Any close below Previous day High, position can be added to.
4. As yesterdays high shows support around 10800, 10700 PUT is sold as well. Again Idea is to get benefitted by sideways movement and theta decay.
5. Overall position entry is now 33+30.30 = 63.30 Rs.
6. Since breakout failed, now NIFTY likely to stay in the range. So 10800 CALL sold 68.05 Rs.
7. So far trade is going ok. definitely signs of consolidation. BANK NIFTY broken out, NIFTY lagging.
8. Position 10700/10900 Strangle : 66 Rs (3Rs loss)
Position 10800 Call : 74 Rs (6 Rs loss)
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9 Rs Loss
9. Position 10700/10900 Strangle : 65 Rs (2Rs loss)
Position 10800 Call : 56 Rs (12 Rs Profit)
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10 Rs Profit
Going as expected. On breakout of the opening range Another short added 10800 CALL 56
10. Opening range breakout failed. 10750 PUT sold, Now look for opportunity to reduce position on 10800 CALL as breakout failed.
11. Usually NIFTY may jump around after 1.30. VIX did not decrease so far. So NIFTY players sense uncertainity at these levels.
Closed 10800 1/2 position.
Position 10700/10900 Strangle : 56 Rs (10Rs Profit)
Position 10800 Call *: 62 (6 Rs Loss)
Position 10750 Put : 46 (3 Rs Profit)
* Position 10800 CALL : (68-61) (7 Rs Profit)
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7 Rs Profit / 7 Rs Booked Profit = 14 Rs
12. The price range is getting tighter. NIFTY advance decline is 25 to 24 Neutral.
13. As Expected move started. How strong the move to be seen. 10800 PUT sold as initial direction of the move crossing the range. VIX started cooling off
14. Break above range is not showing strong follow through so expansion attempt is not rapid. That is a good sign for my trades.
Position 10700/10900 Strangle : 50 Rs (13Rs Profit)
Position 10800 Call : 74 (18 Rs Loss)
Position 10750 Put : 31 (18 Rs Profit)
Position 10800 Put : 50 (4 Rs Profit)
* Position 10800 CALL : (68-61) (7 Rs Profit)
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17 Rs Profit / 7 Rs Booked Profit = 24 Rs
15. NIFTY is showing many indecisive moves. It is above previous day high. Essentially, the morning down move can be negated and fresh up move possible tomorrow.
It is 2.20 PM so 1 hr to go in trading. Priority will be to close short positions first. Then Long ones.
Closed 10800 Put : It was latest and more prone to loss.
* Position 10800 Put : 49 (5 Rs Profit)
16. NIFTY dipped below Previous day Low. Now NIFTY can again go to 10800
17. Actually large moevement at 2.30 PM. Closed the positions. Final tally is
Position 10700/10900 Strangle : (63 - 45)(18 Rs Profit)
Position 10800 CALL : (68-61) ( 7 Rs Profit)
Position 10800 CALL : (56-55) ( 1 Rs Profit)
Position 10750 PUT : (49-46) ( 3 Rs Profit)
Position 10800 PUT : (54-49) ( 5 Rs Profit)
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34 Rs Profit
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Retrospection :
-ve's
1. Position of 10800 PUT sell was not a good position to take, it was more like a balancing previous position.
Better option would be to just square off 10800 CALL position for loss.
2. Entry for 2nd position on 10800 CALL could have been better. Also it was not correct with original sideways assumption.
+ve's
1. Traded as per the plan.
2. I was able to close everything fast enough before the volatile move.
Reference
Monthly Analysis
Weekly Analysis
July 7 Log
Trader's Guide to Credit SpreadsThe strategies and ideas presented in this guide have been designed to provide you with a comprehensive program of learning. The goal is to guide you through the learning experience so you may be an independent, educated, confident and successful trader. There are numerous variations of traditional options strategies and each has a desired outcome. Some are very risky strategies and others require a considerable amount of time to find, execute and manage positions. Spreads are a limited risk strategy.
Spreads
Spreads are simply an option trade that combines two options into one position. The two legs of one spread position could have different expiration dates and/or different strikes.
Spreads can be established as bearish or bullish positions. How the spread is constructed will define whether it is bullish (rising bias) or bearish (declining bias).
Different types of spreads can be used for the same directional bias of the stock. For example, if the stock has a declining bias, a call credit spread or a put debit spread could be opened to take advantage of the same anticipated move down.
In this guide we will be talking about Credit Spreads , which are a limited risk strategy. Learning how to manage risk is as important as learning the details of a strategy.
Credit Spreads
A credit spread is created when an investor simultaneously sells-to-open (STO) one option and buys-to-open (BTO) another option. The premium received for the STO is always greater than the premium paid for the BTO thus creating a net credit to the account.
Example :
STO a call using the 120 strike for a credit of $5.20
BTO a call using the 130 strike for a debit of $3.80
Net credit for the spread is $1.40 = 5.20 credit - 3.80 debit
The ideal construction of a credit spread is to sell-to-open (STO) an out-of-the-money (OTM) strike and buy-to-open (BTO) the strike that is 5 – 10 points further out-of-the-money (OTM) using the same expiration. When opening a call credit spread , further OTM means a higher strike. When opening a put credit spread , further OTM means a lower strike.
Both legs are opened on the same underlying equity and use the same expiration month.
Call credit spreads are opened when there is a declining bias and will be profitable if the stock moves down. This is because a call credit spread is opened for a credit and since the value of a call option decreases as the stock goes down, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO).
Here is an example:
Stock trading at 500 and has a declining bias.
STO 510 call
BTO 520 call
This spread creates a credit of $4.80
Stock declines to 490 causing the values of the calls to also decline. The position can now be closed for a profit.
BTC 510 call
STC 520 call
The cost to buy back the spread is only $3.80. Since the stock declined in value, the call options are cheaper.
The spread was STO for a credit of $4.80 and BTC for a debit of $3.80 resulting in a $1.00 profit.
Put credit spreads are opened when there is a rising bias and will be profitable if the stock moves higher. This is because a put credit spread is opened for a credit and since the value of a put option decreases as the stock goes up, at some point the spread will be bought-to-close (BTC) for less than it was sold-to-open (STO).
Here is an example:
Stock trading at 520 and has a rising bias.
STO 510 put
BTO 500 put
This spread creates a credit of $3.60
Stock rises to 530 causing the values of the puts to decline. The position can now be closed for a profit.
BTC 510 put
STC 500 put
The cost to buy back the spread is only $1.80. Since the stock went up in value, the put options are cheaper.
The spread was STO for a credit of $3.60 and BTC for a debit of $1.80 resulting in a $1.80 profit.
Time decay is a positive factor in trading credit spreads. Since the position is opened for a credit, money comes into the traders account immediately. As time value decays, combined with a favorable movement of the stock, the value of the position will decrease allowing the trader to buy-to-close (BTC) the position for less than it was originally sold-to-open (STO).
Risk and Reward on Credit Spreads
Reward
The maximum profit that can be earned from a credit spread is equal to the net credit received when the spread was opened. For a credit spread to realize the maximum profit, both legs of the spread would need to expire worthless which means the position would need to be held until expiration and be out-of-the-money at expiration.
It is not advised to hold positions until expiration. Short term movements in the stock plus time value decay provide opportunities to close out positions for a profit of, generally, about 10%. If a position is profitable and the trader decides to hold the position hoping for a bigger profit or in an attempt to carry the position to expiration, there is a good chance that the profit can disappear, and the position could turn into a losing position.
A good way to lose money is to wait for a bigger profit.
Risk
The maximum risk, or potential loss, from a credit spread is the difference between the two strikes minus the net credit.
Example:
STO 120 call for a credit of $5.20
BTO 130 call for a debit of $3.80
Net credit for the spread is $1.40
The difference between the strikes is 10 points. $10 is the max risk less $1.40 credit = risk of $8.60. The maximum profit is equal to the net credit, $1.40.
Losses occur when the short strike (the STO leg) is in-the-money at expiration. This is because the trader has sold to someone else the right to buy the stock at the short leg strike. Since the trader does not actually own the stock, they will need to buy it and sell it at a loss.
A maximum loss will occur when both strikes are in-the-money at expiration.
The breakeven point on a bearish (call) credit spread is the lower strike price plus the net credit. Referring to the example above, if the stock settled at 121.40 at expiration, there would be no loss and no profit.
Example of breakeven point on above credit spread:
Stock trading at 121.40
Buyer exercises the right to buy stock from you at 120.
Since you do not own the stock, you buy it at the market price of 121.40 and sell it at 120. This results in a $1.40 loss
You get to keep the original credit of $1.40. This netted against the $1.40 loss results in breaking even on the position.
The breakeven point on a bullish (put) credit spread is the higher strike price minus the net credit.
Calculating the Return
There are two ways to view the percentage return of profits from a credit spread. One is to divide the profit by the difference between the strikes. If the difference between strikes is 10 points and the trade resulted in a $1.00 profit, that would be a 10% return ($1.00 / 10).
The second approach is to calculate the return based on the amount of capital that was at risk. After all, if the trade lost 100% of the risk, that is the amount the trader would no longer have. So, the profit percent is calculated by dividing the profit by the risk. In the example above, the net risk is $8.60. If the credit spread trade resulted in a $1.00 of profit, the percentage return would be 11.63% ($1.00 / $8.60). This approach shows the importance of managing risk. Lower risk drives higher returns relative to capital at risk.
Opening a new Call Credit Spread
The following steps should be referred to when opening a new call credit spread position:
1. Review the technical indicators on your chart and confirm there is a consensus between multiple indicators pointing to a declining bias.
2. Select an expiration that is two to four weeks out. Two weeks is generally the minimum time to expiration you want to use. Building time into options positions is advised in case it needs to be managed. The sweet spot for opening new positions is three weeks to expiration.
3. STO an out-of-the-money (OTM) call strike.
4. BTO the strike that is 5-10 points further out-of-the-money (OTM). With a call spread, further OTM means a higher strike. Generally, when properly constructed, the credit on a 5 point spread will be in the range of $1.20 - $1.80. A 10 point spread will generally be 2.50 – 3.50. The closer the strikes are to the current price, the higher the credit, while this reduces the overall risk of the position, it also increases the chances of the position moving in-the-money (ITM) which can result in an overall loss.
5. When placing the order, always use a Limit Order . A limit credit order specifies to the market the amount of the credit you will accept. A limit credit order will be filled at the specified limit or higher. Market orders should not be used.
6. With some stocks and indexes, the difference between the bid and ask is quite large. The broker will usually give you a quote called the “Mark”. This is the midpoint between the bid and ask. It is the price you should start with when submitting your limit credit order.
7. Calculate the risk of the position. Difference between the strikes – credit = risk. A position with a credit of $4.50 and 10 points between the short (sold) and long (buy) strikes would have a risk of $5.50.
8. Use the risk number to determine the number of contracts to open. Risk x 100 = the investment required for each contract. With $5.50 of risk and 1 contract, the total investment would be $550. ($5.50 x (1 contract x 100 shares per contract)). The total investment on 4 contracts would be $2,200. ($5.50 x(4 contracts x 100 shares per contract)).
9. Once you know the total investment required per contract, you can decide how many contracts to trade based on the size of your portfolio and personal risk tolerance.
10. After the trade has been opened, place a Good-til-Canceled (GTC) order to close the position. A GTC order will stay active until market conditions are such that the position can be closed for a profit. GTC orders execute automatically and do not require you to be in front of your trading platform to take advantage of the profit opportunity. Place the GTC for a limit debit price based on your desired profit target. One example is to set a GTC for 50% of the credit you received when you opened the position. With a credit of $4.50, a GTC would be placed to buy to close the position at $2.25 allowing a $2.25 profit.
Bollinger Band Snaps (BBS)Bollinger Band Snaps (BBS)
Timing of options trades are elusive, especially during dynamic price trends. There is one technique, however, that reliably and consistently allows you to time trades. The Bollinger Band Snap (BBS) signal occurs at very precise moments during a bullish or bearish trend, and vastly improves timing of both entry and exit.
The chart of Chipotle (CMG ) is highlighted with three examples. The first occurred in late February, when price moved below the lower Bollinger band for two sessions. The move then “snapped” back into range, which is predictable. Price rarely remains outside of the Bollinger Band range for long.
The second event occurred in mid-March, when price moved below the lower Bollinger band. In this case, the expected retracement (snap) happened the next market day.
The final incident was the longest of the three, from mid-May into end May. Price traded above the upper band for six consecutive sessions before snapping back into range.
The signal is reliable because a retracement back into the Bollinger Band’s two-standard deviation range is inevitable. It can take a longer or shorter period, but it eventually occurs. The signal provides both an entry flag (when price moves outside of the band) and an exit flag (when it moves back into range).
Trading this signal is also apparent at the time it begins to develop. A move outside of the Bollinger trading range generally is going to snap back within a few sessions in each instance. In the February case, price was approximately $755 per share. With the expectation of a snap back into range, a bull credit spread could be opened with puts. Buying one 735 put and selling a 740 put would have set up a small credit. Using the weekly expirations ensures rapid time value decay.
In the second example, price was approximately $465 per share. A call could be opened using 4 – 6 weeks to expiration and opening an at-the-money strike.
The credit spread strategy could also be applied in mid-May when price began advancing above Bollinger’s upper band at $998 per share. Buying one 1030 call and selling a 1025 call for a credit.
In all of these instances, the entry point is easy to identify. It is seen where price moves outside of the two standard deviation range marked by the upper and lower bands. The exit point then occurs when price snaps back into range.
Trader's Guide to Options Part 3The information in this guide is intended to get you started with your understanding of options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
Intrinsic Value
In-the-money
Call options are in-the-money if the stock price is above the strike price.
Put options are in-the-money when the stock price is below the strike price.
The amount by which an option is in-the-money is referred to as intrinsic value .
At-the-money
Options are at-the-money when the stock price is trading at or very near the strike price.
Out-of-the-money
Call options are out-of-the-money if the stock price is below the strike price.
Put options are out-of-the-money when the stock price is above the strike price.
If an option is out-of-the-money it has no intrinsic value .
Time Value
Options have two parts that comprise their value; Intrinsic Value and Extrinsic Value. Extrinsic value is also known as time value. When an option is in-the-money (ITM) it has intrinsic value equal to the amount it is ITM. Option price - intrinsic value = time value.
XYZ stock is trading at 181.72
The 180 call strike is 1.72 points ITM so, there is $1.72 of intrinsic value.
$5.85 is the ask price. $1.72 of this is intrinsic value.
$4.13 of the $5.85 ask price is time value.
Time value decays as expiration approaches. The closer to expiration, the faster time value decays. Sellers of options use time decay as part of their winning strategy. Time decay is a benefit for option sellers and a problem for option buyers.
The Reality of Trading
In the real world, investors very rarely exercise their option contracts to take profit from a trade. Instead, they simply BTC or STC the options prior to the expiration date. The advantage of doing so allows them to capture some of the time value of an option, in addition to the intrinsic value. It also allows them to use the leverage of options that do not require the larger amounts of capital required to actually buy and sell the underlying stock.
Let’s analyze some examples to become familiar with common terminology:
AAPL is trading at $360 and the following shows a BTO of 3 call contracts of the September $355 strike at an ask price of $27.40:
The underlying Apple stock value is $360 per share.
The expiration date of the call is the third Friday in September.
The strike price is $355.
The call is in-the-money because the stock price is above the strike price.
The premium is $27.40 per share.
There is $5.00 of intrinsic value (in-the-money)
There is $22.40 of time value (out-of-the-money).
Number of shares represented is 300 (3 contracts x 100 shares per contract).
Buyer is hoping the stock rises, increasing the intrinsic value and causing the value of the option to also increase.
Since the expiration is about 3 months out, on a move higher the position is not subjected to rapid time value decay.
MA is trading at $294 and the following represents a STO of 2 put contracts of the July $290 strike at a bid price of $9.50:
The underlying Master Card stock value is $294 per share.
The expiration date of the put is the third Friday of July.
The strike price is $290.
The Put is out-of-the-money because the stock price is above the strike price.
The premium is $9.50 per share.
Number of shares represented is 200 (2 contracts X 100 shares per contract).
Seller is hoping that stock remains above $290 at expiration. This will result in time value decaying thus, reducing the price of the option. Since it was STO for $9.50, when time value decays, the seller will be able to BTC for less than $9.50 and lock in a profit.
Spreads
Call and Put options can be bought and sold in combinations that offer other investment strategies. Some of these include credit spreads, debit spreads, and combination options spreads, to name a few. For example, when opening a spread, one option will be STO and a different option will be BTO. Spreads can be an excellent way to mitigate risk.
This concludes the Trader's Guide to Options. Please let us know if you have any questions.
Trader's Guide to Options Part 2The information in this guide is intended to get you started with your understanding of options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
Types of Options:
Call Options:
Call options increase in value when the underlying stock rises.
Buyers of calls have the right, without any obligation, to buy the underlying stock at the strike of the options contract. They retain their right until the option no longer exists, defined by the expiration date.
Call buyers anticipate the value of the underlying stock will rise. When it does, the value of the option will also increase at approximately the rate of the Delta. Buyers pay for the right to buy the stock in the future, sometime before expiration of the option. When buying the option, they pay the ask price. The premium they pay is less than buying the stock, yet they will still benefit from any appreciation in the value of the stock.
Say you wanted to buy XYZ stock because you think it is going to move up from its current price of $84. Instead of buying the stock a trader could buy a call option for a fraction of the price of the stock. Remember, all the trader is doing is buying the right to buy the stock without any obligation to actually buy it. The option only costs $4.00 for the right to buy the stock at some future date. Buying 1,000 shares of the stock would require $84,000 but buying 10 options contracts would only cost $4,000.
Call Options – The Sellers…
Sellers of call options are selling to someone else the right to buy the underlying stock from them. When/if the buyer chooses to buy the stock from the seller, (remember, the buyer has no obligation to do so) it is referred to as an exercise…the buyer is exercising the right to buy the stock. The seller is obligated to deliver the stock to the buyer. A seller’s obligation ends when the stock is exercised, the option expires, or the option is bought to close (BTC).
Call sellers receive a premium from the buyer. The buyer is paying the seller for the right to buy the stock in the future. Sellers want the price of the stock to go down. Why? If the price goes down, the buyer will have no reason to exercise since they could buy the stock for less at the current market price. In this case, the seller gets to keep the premium paid by the buyer.
So, what does this mean in plain English? The concept of a call option is present in many situations. For example, you discover a painting that you would love to purchase. Unfortunately, you will not have the cash to buy it for another two months. You talk to the owner and negotiate a deal that gives you an option to buy the painting in two months for a price of $1,000. The owner agrees, and you pay the owner a premium of $50 for the right to buy the painting.
Consider two possible scenarios that can impact the value of this “option”:
Scenario 1: It is discovered that the back of the painting has a signature of a famous artist, which drives the value of the painting up to $10,000. Because the owner sold you an option which gives you the right but no obligation to purchase the painting at the previously agreed price, he is obligated to sell the painting to you, the buyer, for $1,000. The buyer would make a profit of $8,950 ($10,000 value – $1,000 purchase price – $50 for the cost of the option).
Scenario 2: After closer review of the painting, it is discovered that the signature on the back is not of a famous artist, but is the brother of a famous artist. This actually drives the value of the painting down to $500. If the buyer exercised their option to purchase the painting it would cost $1,000. This would not make sense because the buyer could instead just buy it at “market price” for just $500. Since the buyer had no obligation to purchase based on the option contract, the agreement, or contract, would just expire and the buyer would lose the $50 premium paid.
The example demonstrates two important points. When you buy an option, you have a right, but not an obligation, to do something. You can always let the expiration date pass, at which point the option becomes worthless. If this happens, you lose 100% of your investment, which is the money you paid for the option.
Put Options
Put options increase in value when the underlying stock decreases in value.
Buyers of puts have the right, without any obligation, to “put” the underlying stock to someone else at the strike price of the options contract. They retain their right until they sell to close (STC) the option or it no longer exists, defined by the expiration date.
Put buyers anticipate the value of the underlying stock will go down. When it does, the value of the option will increase at approximately the rate of the Delta. Buyers pay a premium for the right to be able to put (sell) the stock to someone else in the future, sometime before expiration of the option. When buying the option, they pay the ask price.
Say you thought XYZ stock is going to move down from its current price of $84. Buying a put with a strike of $85 gives the buyer the right in the future to sell or put the stock to someone else at $85. So, if the stock declined to $75, the buyer of the option could buy the stock at $75 and immediately exercise their right to sell/put the stock at $85, making a $10 profit. Remember, all the trader is doing is buying the right but has no obligation.
Put Options – The Sellers…
Sellers of put options are selling to someone else the right to sell/put the underlying stock to them. When/if the buyer chooses to put their stock to the seller, this is referred to as being assigned……the buyer of the put option is assigning the stock to the seller. The seller is obligated to buy the stock based on the strike price of the contract. A seller’s obligation ends when the option expires or the option is bought to close (BTC).
Put sellers receive a premium from the buyer. The buyer is paying the seller for the right to sell the stock to the seller in the future. Put sellers want the price of the stock to go up. Why? If the price goes up, the buyer will have no reason to assign the stock since they could sell the stock for more at the current market price. In this case, the seller gets to keep the premium paid by the buyer.
Exercise and Assignment
Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration.
Indexes such at SPX , NDX and RUT are European style options. This means that any exercise or assignment may only occur at expiration.
Who wins when the stock moves?
1. Buyers of Calls – win when the stock goes up
2. Sellers of Calls – win when the stock goes down
3. Buyers of Puts – win when the stock goes down
4. Sellers of Puts – win when the stock goes up
Are you new to options trading? Stay tuned for Part 3 of Trader's Guide to Options which will include in-the-money, at-the-money, and out-of-the-money options as well as the reality of trading.
Trader's Guide to OptionsThe information in this guide is intended to get you started with your understanding of #options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
What is an option?
An option is a financial contract between a buyer and a seller. It is an agreement to buy or sell the underlying equity (stock or index) at a set price by a pre-determined date. Instead of buying the stock a trader could buy an option for a fraction of the price of the stock.
Options have the following characteristics:
Traded as contracts and each contract represents 100 shares of the underlying stock or index.
Pre-set expiration dates. Standard monthly options expire the third Friday of each month. Some index options like TVC:RUT , TVC:SPX , and TVC:NDX cease trading on Thursday before the third Friday. Weekly options expire each Friday.
Price points, referred to as the strike price, are the prices at which buyers and sellers trade option contracts. Options are, usually, available to trade in standard price increments of $5 and $10.
Quotes to buy or sell an option are presented as the bid and ask. When selling an option, the bid price is used. When buying an option, the ask price is used. Sell the bid / Buy the ask.
Delta is the change in the value of an option relative to each $1.00 change in the value of the underlying stock. If an option has a Delta value of .45, it will change in value by 45 cents for each $1.00 change in the value of the stock.
- NASDAQ:GOOG is trading at 1445.
-The 1445 call strike has a Delta of .50
-GOOG goes down $10
-The 1445 call will decline in value by $5.00 = ( $10 * .50)
The Options Chain:
All option information for any stock or index is listed on an options chain. The options chain can be found on the website of the broker you use to trade. The chain will list all available strikes and expirations, the Delta, and the bid and ask prices. It will also display both Call and Put options.
Ways to trade Options:
There are four actions that could possibly be taken when trading options:
1. Buy To Open (BTO) - buying an option as part of opening a new position.
2. Sell To Open (STO) - selling an option as part of opening a new position.
3. Buy To Close (BTC) - buying back an option that was originally sold to open
4. Sell To Close (STC) - selling an option that was originally bought to open
When a position is Bought-To-Open, it is referred to as a long position .
When a position is Sold-To-Open, it is referred to as a short position .
When a position is Bought-To-Open, it is done for a debit .
When a position is Sold-To-Open, it is done for a credit .
Are you new to options trading? Stay tuned for Part 2 of Trader's Guide to Options which will include teaching about call and put options.
<- Direct link to chart image.
Beginner TF Matching SystemA couple of people are trying this system I created, both have no previous knowledge of trading. This method is designed for people who are new to trading. This is system is suitable for strocks, forex, crypto, futures etc.They are also using it on an options demo account. Lets see how they go.
VIX Swing Trade Strategy The swing trade logic in VIX focuses on long term historic price action. There is always going to be volatility in the market and the "bottom" is historically between $11.50 - $13.50. When the VIX drops below $13.50 we would want to go long with an options spread (such as the VVS options strategy) and when the VIX rises above $24.50 we would want to go short with an options spread (such as a credit spread).
We can also run a skewed Iron Condor when the VIX is below $13.50 with the same logic: skew the Iron Condor with the "risk" on the low side and a "breakeven" to the top side. This allows us to profit from a "sustained" low VIX while also protecting our trade from a top-side breakout. We do not need to protect our trade from a "downside breakout" and we can set the breakeven on the bottom near the $11.50 range.
VVS - unlimited top-side profit potential by developing a call debit spread with an added put option to finance our trade.
Skewed Iron Condor - "status quo" capped profit potential with "top-side" breakout protection
Bearish Credit Spread - Call Credit Spread focuses on selling into strength after a spike in the VIX , leaning on drag and time
How not to miss out AND not risk losing every thing? (Simple)Are you worried Bitcoin might fall and want to sell?
Are you worried Bitcoin might fall, force you to sell at a loss, and then rocket ship up making you not only take a loss but miss the move?
I think Bitcoin is going to 3 digits, and if I was holding any I would sell.
But there is a 3rd solution. You can get all the upside, without having to hold bags all the way to zero if that happens.
Because I am really nice, I am going to give you a solution to both not risk taking a huge loss while at the same time not missing out if Bitcoin explodes up.
Uh? How is that possible? I believe most Bitcoin investors are not well versed in finance, and do not know this solution.
You have the ability to use options (not sure about EU citizens thought), this allows you to sell your Bitcoin at a set price in the future, regardless of what price Bitcoin is trading at. You could lock the price of 6500 for the next year say, giving you the right (but not the obligation) to sell at this price.
Of course they are not free, there is a premium.
If Bitcoin goes way up to 100,000, you will not sell exercise your right to sell at 6500, you might want to hold onto your Bitcoin, or sell them for 100k, you will lose the premium but that's all.
If Bitcoin crashes to 300 bucks, you are left holding bags, but you can sell them for $6500, and avoid losing all of your money.
I am not sure what the prices are now, back in June 7, 2017 you had the ability to purchase a put (right to sell) with a strike price of $2000 for 0.007 BTC.
You would take a loss but not lose all of your money.
Or the right to sell at 2700 for 0.05 BTC :)
Those were puts with an expiration date 22 days away. A longer expiration date will be more expensive.
If you were to buy a put for $5000 it would probably be pretty cheap I am guessing.
Kinda late to do that I feel thought. A $9000 put while the price was in distribution at 10-14k was the right choice.
www.investopedia.com
Once you have your option, you can sleep tight without a single worry. You know what your max risk will be and will not need to wonder "What if I sell and it goes up? What if I don't sell and it goes even lower?"
Disclaimer: I do not know if these options are safe or if the brokers offering them are reputable. Cryptocurrencies attract alot of criminals, and expect the worse to happen. Do not bet the house thinking you are 100% safe, especially if BTC goes to zero, those brokers might go under and not be able to honor your options. Do not risk too much in any case, that's all. Keep in mind that even with a protection, there is a small chance your will lose your entire stake anyway.
The biggest futures exchange in the world, the CME, great institution, is offering Bitcoin options in early 2020. That's as safe as you can get.
www.cmegroup.com
Master the Simple Inside Bar Pattern
hey guys,
on WTI we have a perfect example of Inside Bar candlestick pattern on a daily chart.
An inside bar is a series of bars or sometimes just one bar that is contained within the range of the preceding bar (mother bar).
The first rule that we should take into account is that inside bars must have a higher low and lower high than the mother bar.
The second rule is that we trade this pattern only after bearish or bullish breakout of a mother bar trading range.
The logic behind inside bar is simple. It indicates a time of indecision and market consolidation. Inside bars typically occur as a market consolidates after making a large directional move (bearish on WTI), you also can see this pattern at key decision points like major support or resistance levels.
For WTI our plan is to wait until a violation of a trading range.
Remember that the candle MUST close below or above the range before we take any action!