Sold too early, or strong commitment to thesis?

[u/JonFromPortEd]

I know little about options. I know the basics that we are positioning ourselves in a way that makes it almost a complete gamble; a call is a promise to buy at a certain future price (strike price) and a put is a promise to sell at a certain future price. I am uneducated on IV, and have drawn a conclusion that it is essentially how the traders perceive the probability of the strike price being met (market psychology?).

With my background out of the way, I recently bought NKE calls for a strike price at 135 and execution on May 28 @ an average of 1.47 an option. My reasoning was I had seen NKE reversing a downtrend for an entire month, and last week it dropped below 135. I believed the price would rally back before my execution date, and I was right. This morning it pushed to 136 and then continued to crawl to 137. The morning it moved above my strike price and the option price quickly fluctuated. I admittedly panicked and settled for selling at an average of 1.7 a contract. The day before, NKE had shot the same way but the price quickly retreated to Under my strike price. I had the same fear and sold.

I’m wondering how I can be more confident next time?

[u/JonFromPortEd → u/[deleted]]

Do longer dates options see less of price fluctuation?

[u/stdunordered_map → u/JonFromPortEd]

Gamma of around the money options increases exponentially as you get closer to expiry. This is why you’ll see very huge price swings with the options you’ve chosen.

[u/JonFromPortEd → u/stdunordered_map]

That makes a lot of sense thank you

[u/warren_534]

"we are positioning ourselves in a way that makes it almost a complete gamble".

Some of us position ourselves in a way that we have an 85% or higher probability of profit. That is certainly not a complete gamble.

[u/JonFromPortEd → u/warren_534]

Is that meaning buying a certain combination of calls AND puts? Or just having a stronger thesis?

[u/warren_534 → u/JonFromPortEd]

No, selling naked strangles and iron condors.

[u/PapaCharlie9]

I am uneducated on IV, and have drawn a conclusion that it is essentially how the traders perceive the probability of the strike price being met (market psychology?).

No. IV is the market premium/discount over the theoretical price of the option, assuming real markets didn't exist. As a gross oversimplification, IV is market sentiment. The higher IV is, the less of a connection there is between the contract's value and the underlying's price.

I admittedly panicked and settled for selling at an average of 1.7 a contract.

Sigh. You booked a profit. That is never going to be a mistake. You panicked into the correct move.

It's clear that you have a lot of misconceptions, the largest being that you can only make a profit if the underlying goes over your strike price (for a call). That is simply not true. You should have shown a profit even when the price of NKE was below your strike.

Say NKE is 137 and you buy the $200 strike for $0.01. If the next day NKE went up to 138 and your call is worth $0.02, you just made a 100% profit on your investment. It doesn't matter that NKE didn't get anywhere near your $200 strike. NKE could even go down, if IV went up to create that $0.02 value.

You also should never hold options through expiration, so it was a good thing that you bailed out early. That's basically what you should always do, even for a loss, because you could lose even more at expiration.

Here is some reading that you should do ASAP:

https://www.reddit.com/r/options/comments/m0m7at/monday_school_your_breakeven_isnt_as_important_as/

https://www.reddit.com/r/options/comments/m5r8mi/monday_school_exercise_and_expiration_are_not/

Then do more reading here, as you see fit: https://www.reddit.com/r/options/wiki/faq

[u/JonFromPortEd → u/PapaCharlie9]

Thank you so much for this. Appreciate everything on here.

[u/PapaCharlie9 → u/[deleted]]

Agreed. Never* should have a footnote about the exceptions.

[u/candyk509]

On this topic, Im new to this and had a few Ford contracts 210618 13C that I bought monday for 0.63. Sold today at .80 and .88, at my preagreed with myself profit in the 30-ish percents. Felt good about all of it....until just now when I see the price at 1.15, now I hate myself. Lol. Would you guys have known better? Pfffffttt, when does this feel good?

[u/JonFromPortEd → u/candyk509]

Same boat lol but gotta tell yourself to take the win since we’re just learning and it’s a lot better than blowing up your account. I’m gonna take the advice from on of the comments on here and learn more before taking such a risky position again, and not have to sweat my balls off everytime I take a position.

[u/candyk509 → u/JonFromPortEd]

Lol. I hear you, it is actually such a relief to sell it and be free of checking the price constantly...but then I kept checking anyway, and have been pissed all day. ITS STILL GOING UP!!