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Let's Trade Options

  • #15,921
  • Sep 27, 2018 9:10pm Sep 27, 2018 9:10pm
Quoting tommyhawk
Wanted to get your opinion on the following calendar spread. BAC Nov 2 sell 30 call and Nov 16 buy 30 call. Cost me 17 cents. Earnings on Oct 15th. Thinking they beat estimate and I can collect nicely on the Nov 16 call. Opinion?
HERE's your trade's p/l at expiry. Why did you put the trade so far out past the earnings date? And, if you expect the share price to rise, why did you put the calendar strike at $30 - roughly where it's trading now?
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  • #15,922
  • Sep 27, 2018 9:20pm Sep 27, 2018 9:20pm
Quoting The Fool
TSLA down >10% ah on more Musk tweet drama, not sure how likely it could be, but if Musk could be removed, the stock would go back to $350+ in a couple weeks....
maybe
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,923
  • Sep 27, 2018 10:56pm Sep 27, 2018 10:56pm
nflx sux...i can't find anything to watch on there...ER 10/16
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  • #15,924
  • Sep 27, 2018 11:39pm Sep 27, 2018 11:39pm
Quoting The Fool
{quote}HERE's your trade's p/l at expiry. Why did you put the trade so far out past the earnings date? And, if you expect the share price to rise, why did you put the calendar strike at $30 - roughly where it's trading now? {image}
Thanks for looking into that for me.

Well, it's a neutral strategy right. So the thinking is that BAC will weaken going into earnings giving me profit on the Nov 2 sell, therefore I really risk nothing but give myself a chance to hold on to the Nov 16 buy in case earnings beats and stock goes up.

Interested in your view or how you would've played it. Open to learning.
  • #15,925
  • Sep 28, 2018 12:12am Sep 28, 2018 12:12am
WELL i wouldn't trade it because it doesn't move much and it probably won't gin up much premium going into earnings to make a calendar worthwhile.

You have to understand how the p/l changes over time for the spreads. Calendars and diagonals and flys really need to run to near expiry. You are looking for an earnings beat but you have your short leg set 2 weeks after earnings.....?

you also have to be aware that your short options can be assigned any time they are in the money, even if they are part of a margin neutral spread. It's not true you are risking nothing - all of what you paid for the spread is at risk and it might cost you something additional to sell out of the trade if it goes against you or if some of the short calls are assigned.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,926
  • Sep 28, 2018 12:16am Sep 28, 2018 12:16am
whether you know/understand it or not, if you are trading options you are trading implied volatility. If you are looking at the share price returns on a chart and using options to trade directionally, fine - but you have to know that the relationship between share price and options price is variable - options pricing changes dramatically with iv, and there's nothing that indicates iv on a chart of the share price....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,927
  • Sep 28, 2018 7:35am Sep 28, 2018 7:35am
Quoting The Fool
whether you know/understand it or not, if you are trading options you are trading implied volatility. If you are looking at the share price returns on a chart and using options to trade directionally, fine - but you have to know that the relationship between share price and options price is variable - options pricing changes dramatically with iv, and there's nothing that indicates iv on a chart of the share price....
That is true, especially for longer term options capitalizing on earnings or splits or news. But for short term, at the money options in the current expiration, supply/demand for the option sets the price, and IV just tweaks it. And a short term (3 day) IV would fluctuate too much too fast to really be useful (all the Greeks do), and you can see the ebb and flow of all that (supply/demand and IV) in Level 2 option pricing during a move.
  • #15,928
  • Edited 8:11am Sep 28, 2018 7:58am | Edited 8:11am
SHORT Term changes in iv are one of the things that options traders live to trade. It's much easier to predict changes in iv than it is to predict directional moves in the underlying. This is obvious if you look at a plot of iv on any stock chart. Some more obvious than others.

Classic is YUM. Options iv starts to rise weeks before the ER and crashes immediately after. Common strategy to capitalize on this is to sell otm options into the ER and buy out of them right after earnings. A short strangle in this scenario would make money if the share price didn't move at all. I would hazard a guess that most of the annual options volume in YUM is day traded right around the ER's....

If you don't have the margin for short strangles or IC's on YUM, now is the time to get into a calendar that brackets the ER date - now when iv is low.

Buy low, sell high - the basic tenet of any kind of speculation. The rise in iv is what you are looking for in trading time spreads. Buy into them when iv is low, look to cash out as iv rises. This can and often does occur EVEN IF THE SHARE PRICE DOES NOT MOVE.
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  • #15,929
  • Sep 28, 2018 10:01pm Sep 28, 2018 10:01pm
Quoting moneymaker2
Two more that should make a little money: SAP Oct19 125 PUT @ $2.20 or better WBA Oct5 73.5 PUT @ $1.15 or better (This one has already made money but it should be ready to milk it again for some more) SBUX Oct5 57 PUT still looking like it will do it's thing....
Update on SAP Oct19 125 PUT up to $3.90 from $2.20

WBA still looking ok

SBUX still looking ok
  • #15,930
  • Sep 29, 2018 12:03am Sep 29, 2018 12:03am
Quoting moneymaker2
SBUX still looking ok
what'd you pay for SBUX puts? 60c? looks like they had dipped under 40c today, but came back in your favor at the close. Where do you draw the line?

I still stress about some positions sometimes, but usually I set up spreads that have a defined risk and I am prepared to take the entire loss of the trade if it is a small debit. I know what the max profit potential of the trade when I enter (within 10% or so) and I enter a tp order at some percentage of that at the same time the trade is entered. Then I can walk away and not think of it.

Anyway, good luck with sbux....
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,931
  • Sep 29, 2018 10:36am Sep 29, 2018 10:36am
Quoting The Fool
{quote}what'd you pay for SBUX puts? 60c? looks like they had dipped under 40c today, but came back in your favor at the close. Where do you draw the line?
$0.55, (though it went down as low as $0.32), which is what it is trading at now. As far as drawing the line, I assume you mean when to get out of a trade? When I see that the trade is no longer projected to do what I expect it to do or a predetermined profit based on a number of factors, but that profit target is liquid, as I seldom just set a sell order unless I know I'm going to be away from the computer. I've never been a big fan of set it and forget it trading, I just don't feel comfortable with that style.

By the indicators I use, SBUX has just barely started it's move down, so I still plan on probably two days worth of downward movement, which should be good for around 100% return on the $0.55.

WBA still looks good for a downward move, too.

But believing that, say, WBA is going to move down over the next 2-3 days, I know of no other method to really capitalize on that belief other that buying straight PUTS (or selling CALLS if your balance allows).
  • #15,932
  • Sep 29, 2018 1:57pm Sep 29, 2018 1:57pm
If your stock has weeklies you could do time spreads and lower your cost basis. On 3 or 4 day in out....but that requires a little more skill. I not selling anything ....go with what works for you.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,933
  • Sep 29, 2018 4:16pm Sep 29, 2018 4:16pm
Yeah, not all have weeklies. I certainly don't have the skill to determine time spreads right now, where you definitely have that skill set to do such methods. I'll look into it a little more to see if it would actually make me more money (even by saving me money at the beginning), because I'm all for that. With it being very short term trades, I'm just not sure it will give me the bang for the buck for all the work put into it, but I don't know that for a fact, so it will certainly give me something to look at. And there may not be that much work put into it, since I have to pull the trigger fairly quickly rather than waiting for the best time to get in, just do the spread when I would normally buy the PUT??….not sure, but I'll find out!
  • #15,934
  • Sep 29, 2018 5:06pm Sep 29, 2018 5:06pm
Well its not all that complicated really. I give an example.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,935
  • Sep 29, 2018 5:07pm Sep 29, 2018 5:07pm
Musk out at Tesla, sell puts Monday.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,936
  • Edited 8:46am Sep 30, 2018 8:00am | Edited 8:46am
Quoting The Fool
Well its not all that complicated really. I give an example.
I'll make one up: you are watching XYZ and you think it is way oversold. It's trading at $100. Maybe there's something on the calendar in a couple weeks that will help it come up (not earnings). Anyway, it has weeklies and you want to get in some long calls. The Oct12 $105 calls are $3.00. You could buy those and put $3 at risk.

otoh, the Oct5 $105 calls are $1.50. You could sell those and buy the Oct12 $105 calls at the same time - a calendar spread. This trade risks only $1.50.

You get to the end of next week and XYZ only gets up to $103.68 - the Oct5 short $105 calls expire worthless and you keep all of the $1.50 credit you got when you sold them. You are still in the Oct12 long calls.

Used this way, a calendar is just a way to lower the cost basis of a long call trade...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,937
  • Sep 30, 2018 8:15am Sep 30, 2018 8:15am
Quoting The Fool
Musk out at Tesla, sell puts Monday.
TSLA will get back all it lost last week - I bet it could get back above $300...the gap up premarket will be watched.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,938
  • Sep 30, 2018 8:31am Sep 30, 2018 8:31am
iv's shot above 100% and will crash back to <80% Monday...good opp to sell puts but we'll see how much gets done premarket
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #15,939
  • Edited 5:00pm Sep 30, 2018 11:20am | Edited 5:00pm
Quoting The Fool
{quote} I'll make one up: you are watching XYZ and you think it is way oversold. It's trading at $100. Maybe there's something on the calendar in a couple weeks that will help it come up (not earnings). Anyway, it has weeklies and you want to get in some long calls. The Oct12 $105 calls are $3.00. You could buy those and put $3 at risk. otoh, the Oct5 $105 calls are $1.50. You could sell those and buy the Oct12 $105 calls at the same time - a calendar spread. This trade risks only $1.50. You get to the end of next week and XYZ only gets up to $103.68...

Let's look at a real one, SBUX Oct5 57 PUTS. Right now, I expect it to drop more in the next two days.

Oct5 strike/PUT Costs:...…………………..Oct 12 strike/PUT costs:
57 @ $0.55...……………………………………..57 @ $0.75
56.5 @ $0.35...…………………………………..56.5 @ $0.53
56 @ $0.20...……………………………………..56 @ $0.37
55@ $0.08...……………………………………...55 @ $0.20

The only way I can see it being beneficial is to buy the Oct5 57 PUT (like normal) and sell maybe the Oct12 55 PUT. Then, I can make money with the stock move in the next couple of days with the PUTS I buy, and buy to close the Oct12 PUTS I sold sometimes between now and expiration (or they expire worthless). I guess that would be a type of diagonal spread?
  • #15,940
  • Sep 30, 2018 4:14pm Sep 30, 2018 4:14pm
Your short puts are further away, but they have more time value, so they will be robbing whatever profit your long puts make, and the latter have to come off a week before them. Im not sure how you see this trade as a good idea. But, like any trade, it might work out with luck.

Do you have an options analyzer? You need one to model any spreads and you have to run thru the p/l over every day of the spread life to really get an idea about how it works. Yes, its more complicated than rolling the dice long or short. Yeah, I know you are always right picking direction. Over time, though, do you think your picks do bettr than a coin flip?

There is an element of luck in any speculation. How do you define luck? There is no real rational definition. You can always define risk though. Good trading boils down to capitalizing on opportunities while doing all you can to manage your risk.

Thats today's sermon....
"If The Fool persists in his Folly he will become wise." - William Blake
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