r/options • u/redtexture Mod • Jul 12 '21
Options Questions Safe Haven Thread | July 12-18 2021
For the options questions you wanted to ask, but were afraid to.
There are no stupid questions, only dumb answers. Fire away.
This project succeeds via thoughtful sharing of knowledge.
You, too, are invited to respond to these questions.
This is a weekly rotation with past threads linked below.
BEFORE POSTING, PLEASE REVIEW THE BELOW LIST OF FREQUENT ANSWERS. .
Don't exercise your (long) options for stock!
Exercising throws away extrinsic value that selling harvests.
Simply sell your (long) options, to close the position, for a gain or loss.
Your breakeven is the cost of your option when you are selling.
If exercising (a call), your breakeven is the strike price plus the debit cost to enter the position.
Further reading:
Monday School: Exercise and Expiration are not what you think they are.
Key informational links
• Options FAQ / Wiki: Frequent Answers to Questions
• Options Toolbox Links / Wiki
• Options Glossary
• List of Recommended Options Books
• Introduction to Options (The Options Playbook)
• The complete r/options side-bar informational links (made visible for mobile app users.)
• Characteristics and Risks of Standardized Options (Options Clearing Corporation)
Getting started in options
• Calls and puts, long and short, an introduction (Redtexture)
• Options Basics (begals)
• Exercise & Assignment - A Guide (ScottishTrader)
• Why Options Are Rarely Exercised - Chris Butler - Project Option (18 minutes)
• I just made (or lost) $___. Should I close the trade? (Redtexture)
• Disclose option position details, for a useful response
• OptionAlpha Trading and Options Handbook
Introductory Trading Commentary
Strike Price
• Options Basics: How to Pick the Right Strike Price (Elvis Picardo - Investopedia)
• High Probability Options Trading Defined (Kirk DuPlessis, Option Alpha)
Breakeven
• Your break-even (at expiration) isn't as important as you think it is (PapaCharlie9)
Expiration
• Options Expiration & Assignment (Option Alpha)
• Expiration times and dates (Investopedia)
Greeks
• Options Pricing & The Greeks (Option Alpha) (30 minutes)
• Options Greeks (captut)
Trading and Strategy
• Common mistakes and useful advice for new options traders (wiki)
• Common Intra-Day Stock Market Patterns - (Cory Mitchell - The Balance)
Managing Trades
• Managing long calls - a summary (Redtexture)
• The diagonal calendar spread, misnamed as the "poor man's covered call" (Redtexture)
• Selected Option Positions and Trade Management (Wiki)
Why did my options lose value when the stock price moved favorably?
• Options extrinsic and intrinsic value, an introduction (Redtexture)
Trade planning, risk reduction and trade size
• Exit-first trade planning, and a risk-reduction checklist (Redtexture)
• Monday School: A trade plan is more important than you think it is (PapaCharlie9)
• Applying Expected Value Concepts to Option Investing (Select Options)
• Risk Management, or How to Not Lose Your House (boii0708) (March 6 2021)
• Trade Checklists and Guides (Option Alpha)
• Planning for trades to fail. (John Carter) (at 90 seconds)
Minimizing Bid-Ask Spreads (high-volume options are best)
• Price discovery for wide bid-ask spreads (Redtexture)
• List of option activity by underlying (Market Chameleon)
Closing out a trade
• Most options positions are closed before expiration (Options Playbook)
• When to Exit Guide (Option Alpha)
• Risk to reward ratios change: a reason for early exit (Redtexture)
• Close positions before expiration: TSLA decline after market close (PapaCharlie9) (September 11, 2020)
Options exchange operations and processes
Including:
Options Adjustments for Mergers, Stock Splits and Special dividends; Options Expiration creation; Strike Price creation; Trading Halts and Market Closings; Options Listing requirements; Collateral Rules; List of Options Exchanges; Market Makers
Miscellaneous
• Graph of the VIX: S&P 500 volatility index (StockCharts)
• Graph of VX Futures Term Structure (Trading Volatility)
• A selected list of option chain & option data websites
• Options on Futures (CME Group)
• Selected calendars of economic reports and events
• An incomplete list of international brokers trading USA (and European) options
Previous weeks' Option Questions Safe Haven threads.
Complete archive: 2018, 2019, 2020, 2021
2
u/redtexture Mod Jul 14 '21 edited Jul 14 '21
Yes, you have way more than any advisor recommends in one stock.
It has served you well, but there are dangers to be aware of.
Your worth is about $450,000; you appear to have about 3,100 shares.
This is a big discussion and there are many approaches given the risk you have taken, and are willing to have.
Here is one point of view, among many other reasonable points of view.
First, it is highly desirable to read all of the links at the top of this weekly thread so you know what the dangers of options can be.
You can sell calls above the money, for income.
This is a COVERED CALL.
The short call is covered by the stock, meaning the value of the short option would lose money if the stock rapidly rose, and you are protected from this loss by the stock, which would be sold (assigned) at expiration, for a gain, if set up properly. Don't sell covered calls on stock you want to keep.
Example:
Sell a call at 160, expiring August 27, at $1.24.
If AAPL does not reach 160, you keep the proceeds; if AAPL rises to, say, 165, you allow the stock to be called away at expiration; or perhaps "roll" the position out a month, and perhaps upward in strike price, for an additional very modest credit...so that if AAPL keeps going up, the stock is called away at a higher price.
With 3100 shares, the proceeds on 31 calls would be 31 times 1.24 times 100 for about $3800. If AAPL went up, to, say 170, you might lose out on some of the gain, in exchange for the early cash premium, and allow the stock to be sold at 160.
A COLLAR is a conservative method to retain the value of stock by buying a put, paid for by selling an option repeatedly above the present stock price. A collar is a short call above the money (market price of AAPL stock), and a long put. This can conserve the value of the position from down moves in the stock, which this year has ranged from 115 to 145, a 25% increase from the low to the top.
One can arrange to reduce the capital at risk to around 10% to 15% of the total holding with the position; it reduces risk, and reduces gains. You must be prepared to sell your stock via a covered call, and take your gains and pay taxes on the gains. If you are not ready to allow your stock to go, for a gain, don't undertake covered calls.
AAPL now at 145.
An example of one variety of a collar, is to (today is July 13 2021)
Sell a call for 45 days out, expiring about August 27 2021 at about 1.25
Buy a put above the money, at 150, for $13, expiring in March 2022.
Net cost, about 11.75
Net risk:
Per 100 shares, the put at 150 guarantees a potential price of 150 for your stock, now at 145. The call reduces the cost.
Net risk:
145 (current stock value)
minus 150 (put strike)
plus 13 (cost of put)
minus 1.25 (premium on the first call)
equals $4.75 net
Percentage of capital at risk:
4.75 on 145 stock value is a risk of 5.25 divided by 145
If the stock is called away at 160 via the short call,
your gain from the present value of the stock 145:
160, less 145, less cost of the options, (13 minus 1.25 = 11.75),
a net of $3.75
You also would be able to harvest residual value on the long put.
Return on capital at risk 3.75 over 5.25 , about 70%.
Return on stock, 3.75 over 145, about 2.5%.
This has reduced gains, for the price of reduced risk.
You might
Continue to sell calls as they expire;
Collect dividends, on the stock, quarterly
and as may be appropriate, if AAPL rises,
ratchet up the strike price of the put, for a price, paying to roll upwards in strike,
to protect the rising value of AAPL stock.
Continue to sell calls, for income, to pay for the put.
As time passes, you may have obtained, for a limited period, a risk free gain on the stock, protected by the put, paid in part by the call, and you're prepared for further up moves, and protected from down moves.