# Options



## Argonaut

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

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

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

What say you, options traders?


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## avrex

@Argonaut

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


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## humble_pie

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

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

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

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

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

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

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

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


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## atrp2biz

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

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


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## davext

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

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


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## Causalien

Sell

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


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## humble_pie

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

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


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## Betzy

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


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## HaroldCrump

Betzy said:


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


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


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


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


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## Betzy

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


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## atrp2biz

humble_pie said:


> atrp2biz if we may just call you doctor for short ... this is an extremely brief version of what mode3sour likes to call voodoo ... it's a diagonal spread but now indelibly known to cmf forum as a voodoo spread ... one of my favourite things ... except i'd never do one with so brief a time frame.
> 
> also, in selling the august calls, everything depends on how far otm investor has to go & how many contracts inv has to sell, ie are the dollars even worth the commish, don't you think.


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

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


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## HaroldCrump

Betzy said:


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


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

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


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## Argonaut

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

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

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


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## Betzy

HaroldCrump said:


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


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



HaroldCrump said:


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


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



Argonaut said:


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


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


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## andrewf

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

Am I wrong?

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


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## atrp2biz

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


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## atrp2biz

Betzy,

Long = owning the security

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


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## m3s

atrp2biz said:


> To put a twist on Humble's vertical, you could also sell options with higher strikes, but with less time to expiry. This can create a positive theta position (whereby if LULU does nothing, you can take advantage of the decay of the short option). The risk is if LULU blows by the short strike.
> 
> I like neutral-theta positive positions, but they do have gamma risk (gamma is the second derivative of the change in value of the option wrt the change in value of the underlying) if the underlying goes up or down a lot prior to the expiration of the short position.


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


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## Argonaut

mode3sour said:


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


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

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


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## Causalien

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

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

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

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

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


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## andrewf

To exploit inefficiencies in options, I guess you have to play in the issues that the prop trading algorithms stay out of due to illiquidity, etc. I don't see why true inefficiencies would be left on the table by algorithms with microsecond response times and billions of dollars in capital to deploy.


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## Argonaut

andrewf said:


> To exploit inefficiencies in options, I guess you have to play in the issues that the prop trading algorithms stay out of due to illiquidity, etc. I don't see why true inefficiencies would be left on the table by algorithms with microsecond response times and billions of dollars in capital to deploy.


Agreed. But I wouldn't even want to touch anything illiquid. In that respect, the Montreal exchange is horrible. The TSX volume king XIU is about the only thing with reasonable liquidity that I've looked at.


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## humble_pie

*voodoo assignment*

argo you mention you do understand about "time decay and all that" ... but if you did, you would understand something about how the deltas, gammas & thetas work.

what they are going to do in these last 6-8 weeks of the life of your sep 65 calls is lower the value of those calls at an increasingly rapid rate, unless share price of lulu soars upwards. At expiration, as you know, stock has to be more than $68 in order for your calls to be worth any more than what they are worth today.

how likely is that ? i for one think the probability is on the lowish side & i'd be getting ready to sell them now, as causalien suggests.

options are not a true proxy for a stock. They are derivatives with properties of their own. However, when you say you will hold on to them for a september earnings-related share pop, this suggests to me that you do view them as 100 delta stock proxies. Which they are not.

put another way, a long sep 65 call holder needs stock to get north of $69 before he sees any significant appreciation over the price of his calls today.

there is an excellent pdf options manual on the montreal exchange website that describes the greeks most lucidly. Brief though it is, this well-written manual covers the ground from intro to options to binomial pricing theory & beyond.

http://m-x.ca/accueil_en.php

click:
- education
- guides & strategies - scroll down central column to Equity Derivatives
- click Equity Options Reference Manual.

back to the sep 65 calls in lulu. Holding them for a learning experience is good, too. But could you watch their progress day by day, noticing by how much the option moves & in which direction compared to the stock price, both observations being taken together between 11 am & 3 pm.

this is the voodoo assignment.


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## Argonaut

Well I sold all my options today. Luckily my S&P put and GLD call offset the slaughterhouse that is LULU today. Obviously I should have sold earlier, etc. When all is said and done combining all options and commissions, I made a 10% profit. Never been so angry about a 10% profit. My trade could have worked out very nicely if the US didn't decide to have a manufactured crisis. So angry.

I'll play the earnings very close to the earnings, which is the best thing I've learned from this experience. Then time decay won't be a factor. My thinking in buying this early was that LULU would power its way forward like it had been and the call would be in the money at that point.

EDIT: Selling that put early today was a good move.. S&P actually rallying right now!


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## andrewf

If the market is expecting the earnings to move the share price, the implied volatility tends to spike leading up to the announcement. 

Options always sound easier to use than they are.


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## humble_pie

gosh, don't do that. Don't play the earnings very close to the earnings. That's what total noobs do.

won't you look back at atrwhateverbiz' comment yesterday 28 jul at 3:52 pm. He said (& he is oh so right):

_" My only rule is that I don't open up a position in an earnings month. My favourite time to open a position is after the volatility collapse after earnings (ie. I'm long a calendar Sep/Aug 395 puts on AAPL right now entered a couple days after earnings last week)." _

please look at that spectacular put spread atrbiz put on in aapl. It's a crafted piece of perfection. He would have paid minimally right after the earnings/vol plunge & now he's just sitting back raking it in.

(sigh)

(adults are so difficult & it's very hard to bring them up properly)


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## Argonaut

So which is it.. avoid the time decay or avoid the earnings? I don't see how playing it close to the date is a noob thing to do. 

Take Agrium, which reports next week. Its August call @80 would only need the stock price to go up less than a buck to break even. That's not much implied volatility, given that it's down 1.6 points today. LULU is more volatile and the premiums will be larger, but in the past its earnings announcements have popped the stock 10-15%.


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## atrp2biz

Not from what I can see. I'm looking on the US side for AGU. (If you're looking at the last price, it's a meaningless number, especially in illiquid securities--instead, take the mid-point of the bid/ask)

AGU = 86.50

August 87.5 calls = 2.40 (IV = 33.7%)
August 87.5 puts = 3.40 (IV = 33.0%)

Straddle = 5.80

A long straddle would require a move of ±7% to break even. The IV will also go up leading into earnings day.

Take a look at the CBOE IVolatility Services tool. It provides a historical look at IV. 

http://www.cboe.com/framed/IVolfram...ADING_TOOLS&title=CBOE - IVolatility Services

You will notice that there is a very distinct pattern--kind of looks like an EKG. Pick an underlying. I follow AAPL closely. Leading into earnings, IV spikes and then collapses. IV then slowly creeps up or stays constant until earnings approach again and the cycle repeats. Use these cycles to your advantage.

Delta, theta and vega--these are all things that can kill an option. If you have at least theta and vega on your side, you can manage delta/gamma risk.


EDIT: BTW, my exit on the 395 put calendar is if AAPL goes outside of the $385-405 range between now and the August expiry. It should also be noted that the position is somewhat protected on the downside since typically if the underlying (and to a lesser extent the market in general) drops, IVs will tend to increase which help the position.


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## Toronto.gal

Fascinating thread!!


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## Argonaut

Doc, I realize you are experienced with options, far more than I. But I'm talking about an outright call, not a straddle. If one was bullish or bearish on Agrium's earnings, why not just buy a put or a call? If the quarter doesn't go your way, you cut your losses and move on.

AGU's August call @80 is selling for 7.80. The current stock price is 86.89. The stock would need to go up 0.91 to break even minus commissions, and above that the sky is the limit. What am I missing?

Note that I don't really follow Agrium, this is just an example.


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## atrp2biz

Well, the call you're referring to is quite a bit ITM. With deep ITM options, you are actually paying a higher volatility premium (not necessarily in terms of time value of the option which is the option price minus the amount ITM). Please refer to my old friend  <--volatility smile.

Bottom line, you're still paying a fairly healthy premium.

The better half is the doc--not me.


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## Causalien

Just my opinion, but buying one sided option bet is inefficient use of option (unless it's a protection like your spx put), which is probably why doc here suggested straddling earnings. You'd be happier using futures (if commod related) or margins. Just like it's inefficient to buy options on sub $5 stocks. Heck I'd go as far to say even sub $10 stock's options are inefficient for most people. This is why, I usually only use options for neutral strategies. 

Yes, there's usually no free money in options, even if your strategy is right, the implied volatility will usually take care of whatever advantage you thought up in a strategy. However, due to the massive number of options available, the computer algos haven't been able to take over every single arbitrage opportunity. (for every stock, there's about 6 expiration month and about 20 strike prices, add call and put to those) If you look hard, there are stocks whose volatility don't increase as it approaches certain events. There are those who's volatility increases too much because too many computer algos are pointed at it. In any case, test for computer algos involvement first, before entering into any options. That's the prudent thing to do.

And as you delve more into options, a lot of the weird price movement of the underlying stock will be explained. Take merger arbitrage for example. Why does the stock price never rises to the actual agreed upon merger price? It's because of options.


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## humble_pie

somehow this thread missed the one all-important preamble to every little book about options.

the preamble that goes It's the Options Buyers Who End Up Losing Money, followed by It's the Options Sellers Who End Up Making Money.

i don't know how we missed this homily. You can find it in just about every intro to options reference manual. It's been repeated here in cmf forum many times. Maybe the current cohort of option recruits were out on break each time.

option sellers usually require a hedge. Hence the paired & triad spreads.

as causalien says, buying one-sided option bet is inefficient.


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## Argonaut

Okay humble, on that point.. my next question is this. If most options expire worthless.. why not just buy an option, sell a similar option for a credit spread.. and then just hope you don't get exercised? Can you often get away scot-free even if it's in the money?

As to single options being inefficient.. a small scale investor like myself gets eaten alive by the commissions. Opening and closing a double-position can cost about $50, which is a lot when I'm only playing around with three or (barely) four digits.


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## humble_pie

argo not responsible for your commish lol.

do you want to learn how to turn option selling into income for life or do you want a nanny for every pesky little prob 

generally in options it's not a good idea to lurch from one anticipated earnings to the next, buying pricey hi-vol calls just before earnings & then hoping.

_" ... credit spread and then just hope you don't get exercised ... "_

i don't do these kinds of mono-directional credit spreads myself. Any new option position i would put on would generally be a debit spread. Along the lines of atrdocbiz' put spread in apple.

after that initial setup i would roll short positions forward as rollover credit spreads. Because i usually go out in time further than doc seems to do, i'd have correspondingly fewer commish.

_" ... get away scot-free even if it's in the money."_

all itm positions have to be escaped/rolled over prior to any major event such 1) certain dividend configurations, 2) merger, buyout or re-org news, or 3) expiration.

scot-free is a nice gaelic middle name, though.

_Hare's tae us
Wha's lich us._


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## Toronto.gal

I just finished reading 'Trading Options for Dummies' [18 chapters] and I feel like a dummy. 

I'll go shopping now to feel better [big sales at The Bay].


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## humble_pie

shall we meet for late lunch at 2 ?

i'd also go for some kind of cold fish + raspberries for dessert.

split a bottle of pouilly-fumé with me ?

lol dinner for our families ce soir is foutu.


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## Causalien

Argonaut said:


> Okay humble, on that point.. my next question is this. If most options expire worthless.. why not just buy an option, sell a similar option for a credit spread.. and then just hope you don't get exercised? Can you often get away scot-free even if it's in the money?
> 
> As to single options being inefficient.. a small scale investor like myself gets eaten alive by the commissions. Opening and closing a double-position can cost about $50, which is a lot when I'm only playing around with three or (barely) four digits.


Money talks in this regard. If you spend more, they'd be more willing to grant you trading priviledges like lower commission etc. You do have to ask for it. I've been with TOS since beta so I don't have as much restriction as the new accounts. Then again, maybe that's because I've already spent so much on commission over the years.


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## m3s

I would hazard to say you should save up more than 3 digits before trading individual stocks or options


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## Argonaut

mode3sour said:


> I would hazard to say you should save up more than 3 digits before trading individual stocks or options


You missed my point. My portfolio is five digits, but I certainly wouldn't put that amount into an options trade. $500-$1000 per trade seems right for me. I've already made very good money on individual stocks and options, but thanks for your concern??

humble: Like the nanny bit. But yes, I'd like to earn options income to supplement my dividends. Something like your lonesome goog idea is the best I've seen so far. Would definitely turn that into a spread myself though.


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## m3s

Maybe the broker is the issue. Options commish is what $1 on IB


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## Argonaut

That's a great deal on Interactive Brokers. But I don't want to pay a monthly fee. 

Questrade is $9.95 per trade + $1 per contract. Actually for a spread pair they only charge one commission so I was mistaken on how much I would be paying.


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## humble_pie

argo what are the details of questrade charging 1 commish fo a spread trade.

do you send in one online order indicating that it is a pair trade w a fixed spread ?

or do they observe that 2 back-to-back online orders were really a spread, so they remove the base charge from one side.


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## Argonaut

http://questrade.com/pricing/commissions_options.aspx

You have to call the trading desk to create the spread, but from what I gather it is a one commission deal + $2 for the contracts. It does kind of suck that you have to call to make the trade, like it was the 1980s or something. I inquired about options through email but they referred me to the trading desk.. those email folk probably don't know much of anything.


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## Abha

I'm impressed with the level of knowledge some of you guys possess with regards to options.

That being said, I hope the beginners and those who want to play the "options game" really understand the nuances before jumping in with their money.

The book Toronto.Gal was reading is a good start. Before playing spreads one must really understand the risks involved.


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## humble_pie

argo that's what i thought. The only firm with spread order software is IB & even that is not so great, for reasons that have nothing to do with IB.

this takes us to intermediate level Options 255 Trading Spreads. We could just skip the course (5 not-so-easy pieces) & say Don't. Ever. Enter. Combined. Spread. Orders.

course summary says this course is designed for traders who want better prices than the natural.

it shows why & how trading control won't bother to work a spread that's more than a nickel off the natural. Explains the little-known fact that unrealistic spread orders (more than a nickel off) don't ever even leave broker's trading control desk.

lesson 3 deals with nailing those better-than-natural prices.

lessons 4 & 5 cover why they don't happen for spread orders. These lessons prepare the trader for the reality that he will have to enter his spread orders as separate orders, one leg at a time, separately. As with all pair trading, a risk window will open between the 2 trades.

advanced options workshop 455 will show how to work that risk window as profitably as possible.


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## Causalien

humble_pie said:


> argo that's what i thought. The only firm with spread order software is IB & even that is not so great, for reasons that have nothing to do with IB.
> 
> this takes us to intermediate level Options 255 Trading Spreads. We could just skip the course (5 not-so-easy pieces) & say Don't. Ever. Enter. Combined. Spread. Orders.
> 
> course summary says this course is designed for traders who want better prices than the natural.
> 
> it shows why & how trading control won't bother to work a spread that's more than a nickel off the natural. Explains the little-known fact that unrealistic spread orders (more than a nickel off) don't ever even leave broker's trading control desk.
> 
> lesson 3 deals with nailing those better-than-natural prices.
> 
> lessons 4 & 5 cover why they don't happen for spread orders. These lessons prepare the trader for the reality that he will have to enter his spread orders as separate orders, one leg at a time, separately. As with all pair trading, a risk window will open between the 2 trades.
> 
> advanced options workshop 455 will show how to work that risk window as profitably as possible.


Humble's course loads are great, even though they sounded like satire. If he can be so kind as to actually write the 1000 page book, beginners everywhere would rejoice and people should pay $500 for them as they are a bargain.

My advanced options class I took cost $3000. Just to give you guys an idea.


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## Abha

Causalien said:


> Humble's course loads are great, even though they sounded like satire. If he can be so kind as to actually write the 1000 page book, beginners everywhere would rejoice and people should pay $500 for them as they are a bargain.
> 
> My advanced options class I took cost $3000. Just to give you guys an idea.


Was the class worth it?


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## m3s

Causalien said:


> My advanced options class I took cost $3000. Just to give you guys an idea.


I'm going to compile all humble's generous posts, and one day charge $1500/head for _mode's Option Trading Workshop_ 155-455. For an extra $20 I'll teach in French. Retirement plan set


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## humble_pie

i'll help you. Psst here's the deal, i think i'd probably be able to get the stuff for free.

don't you think we should present in french only, though. That way we could invite just the people we like.


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## Causalien

Yes. The course lasted 1 year and the coaches were present most of the day to go over your mistakes. My mistakes burned more money than the actual course and I wouldn't have been able to start trading options within a year if I were to embark on the learning by myself. It was one of those "buy one and get one free" deal. So the actual cost is $1500. 

Might be cheaper nowadays since options trading is so widespread.


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## humble_pie

took out another voodoo spread this am. In GSK, started long ago, in dec 2009.

total return was 30% over 20 months. Something like 17% annualized, all in capital gains.

standard run-of-the-mill voodoo.


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## Argonaut

The best part about options for me is that I can trade the price of gold. Bringing something I'm good at into something I'm new at. Bought back the GLD call I sold on Friday for a better price today.


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## humble_pie

there you go, that's how they hang.

you must have been covered on the gld call, though ? I don't imagine broker let you go naked on friday even though a hot weekend & holiday coming up ...


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## Argonaut

Covered with cash. Just buying an October 150 call option straight up. Glad that I exchanged a bunch of money into US in my account when the dollar was at 1.06. Of course all options trades are on the American exchanges so I don't need to convert back and forth.


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## humble_pie

my enemies will be delighted to know that the dagger is being stuck deep in my portfolio over my 2 rimm puts.

even the formula srike minus stk > option bid has turned like a poison asp in my hand & is waiting to bite me today.

enemies will be chastened to know that the effect upon margin is imperceptible, though.


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## Argonaut

humble, what strike did you sell your RIMM puts at? And why RIMM? It's probably the worst stock on the TSX next to YLO. I actually bought a RIMM put yesterday because it's arguably safer than cash at this point.


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## humble_pie

argo these 2 are the remaining tail end of rimm puts i've been continuously selling for more than 10 years.

i used to sell more contracts but commencing couple of years ago when the bad news started to appear, i began to roll everything down, ie roll forward to lower strikes plus fewer contracts. Finally got it down to 2 jan 42.5 puts which i'm short today. It's hard to believe now, but there really was a time when i'd sell 10 rimm 60 puts without turning a hair.

at the moment only a thin veil - varying from a few to 30 pennies - is keeping the poison asp of early assignment from biting.

it would have cost north of 18.50 to escape yesterday, for a total debit of of 3700. This is an ok loss given that 10 years of positive forward rollovers in rimm have netted me 12-14k. Plus i could use the loss to offset other gains. So i don't mind paying the piper.

this is an interesting part of options. Most of the time, a position can be rescued because there's an exit. Sometimes several exits. But every now & then one option will just plain blow up.


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## Argonaut

It looks like you're being saved today by their new smartphone announcement. Bad timing for me, but my loss is only .40 right now. Would be happy to break even and stick with GLD, SLV, and SPY options. Individual stocks are too unpredictable.


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## humble_pie

does anyone remember lephturn's collars ? they were not so very long ago. 

the collar trader sells an otm call & uses the money to purchase a put. After that, in a plunging market, he is the king of the collar castle.

leph's big dividend payors, such as the banks & bce, are all secured now at high prices because of his collaring strategy.

come in, come in, leph, wherever you are. It's your turn to take a bow 

but maybe you've already departed to your palace in monaco ...


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## atrp2biz

But a collar would also involve a long underlying...??? The p/l profile is similar to a long vertical.


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## humble_pie

salut doc

the thing is, leph's still getting his dividends ...


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## atrp2biz

But that's also priced into the options (ie. the calls would be relatively cheaper, so less premium is received on the short call).

Eg. For short-term ATM puts and calls that expire after an x-dividend date, the put would actually be more more than the calls (which is not the case for options on non-dividend paying stocks).


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## humble_pie

doc U R right.

keep in mind that leph was doing all this 6 months ago, we don't even know if he kept up with his collars, he was paying more for his puts as i recall.

but today is not a time for the microneurosurgical stuff. Today is a day for the old-fashioned butcher surgeons. Any security at all is good security imho.


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## atrp2biz

Yes--neuro vs. ortho.

Plain old long puts would have worked well (Argo).

I exited my calendars last week and am waiting for the dust to settle before going back in. The IVs sure helped the long horizontals.

Hmmm...peut-être un papillon de "pomme" (350/360/370)?


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## Argonaut

I'm glad that I got into options at the exact perfect time. The loss I took on LULU was worth it for the completely absurd gains I am getting on SPY puts and GLD calls. Even though humble always says the sellers of options make the money, it's hard for me to grasp that in this market. The way I see it, buying options is minimal risk and infinite gain potential, while selling options is minimal gain and infinite risk potential.

However, option premiums are starting to get pretty expensive. I can see that with the SPY puts, having followed them for the last little while.


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## atrp2biz

Think of the whole options universe. At any time except expiration, options have intrinsic value AND time value. At expiration, only intrinsic value (if any) is left.


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## humble_pie

there are worlds of difference between us argo.

option cherry-pickers don't usually stay the course, any more than day traders do. Although i agree that you have shown wonderful & amazing talent, things are not going to work out like this for the rest of your life.

i have a bigger proportion of option exposure than you do, so i work it conservatively. I approach it every day in stone, cold, sober, detached, workmanlike mode. I have things like childrens' orthdontia, college education, travel abroad to pay for. Right now my oldest is interning & studying spanish in el salvador. She sent home last week for 2 replacement pairs of eyeglasses & 2000 USD, both of which i'll deliver to her via an NGO minister who travels central america frequently. 

back to the options, is your account really in such fantabulous shape on a longterm basis. What about that brushfire in AR that you've been ignoring. What i mean to say is that your messages, alas, are looking just a little punchdrunk of late. This business about shirking your job while trading a 30-40k investment account does not make any sense whatsoever to me. I would tend to believe that your career at the bank is worth far more than any teensy option contract could ever be.

bref, if i were in the same trading room as yourself & the handful of other day-traders making all the noise in this cmf forum, i would stay on the very far side of the floor. Meanwhile you guys would sit together in your pod & shout your heads off. And in 10 years' time, who will be left.


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## Homerhomer

humble_pie said:


> What i mean to say is that your messages, alas, are looking just a little punchdrunk of late.


+1

Where did the reasonable, well spoken and thought out young man of few months ago disappear?


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## Argonaut

You guys are right of course. And don't worry, I'm not shirking work, haha. But when the market opened higher last Monday on the debt deal, and then sold off like an avalanche, I smelled blood in the streets and knew there was money to be made. The money has been made and my rabid trance has subsided, so life can return to normal. I'm not worried about AR, I bought it at 4.75 and it's not a huge position.


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## Causalien

Wait till you learned to use straddle and strangles then realize how to print money out of thin air with it.


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## humble_pie

nice to hear from you argo.

there's a huge weight on your shoulders. Don't forget, you are the forum's poster hope for the future. As you can see, there are quite a few folks cheering you on.

AR is a good mining op imho. The only thing i can think of re current pitiful prices for the junior golds is that mr market doesn't think much of the future price of the king metal some 2-3-4 years off.


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## Argonaut

Sold a GLD call for 17.50 that I bought last week at 7.25. Will look to buy another call if gold has a pullback. Bought an SPY put (again) as protection.


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## Causalien

Argo, I think you've made enough money by now that you should increase your total option stake by 25%.


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## atrp2biz

atrp2biz said:


> Yes--neuro vs. ortho.
> 
> Plain old long puts would have worked well (Argo).
> 
> I exited my calendars last week and am waiting for the dust to settle before going back in. The IVs sure helped the long horizontals.
> 
> Hmmm...peut-être un papillon de "pomme" (350/360/370)?


Sigh...having those calendars still would have been great. Oh well, have to stick to the exits that are established.

Never did the butterfly.


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## Causalien

Wow atr you can make money with butterflies? I've done nothing but losing with it since the beginning. The stock rises you are anxious, the stock drops and you are still anxious. Too much emotional stress for me.


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## atrp2biz

Of the neutrals, I prefer the calendar. But in an environment of elevated IVs, I would prefer the butterfly since the calendar is vega positive.

With set exit points, there isn't much to get worked up about if the underlying goes up or down.


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## Causalien

I've only done it while IV is low, which could be why I was losing out. In your experience, does the IV premium covers the price swing of a butterfly? 

From my point of view, IV increases following a dramatic drop only and with every dramatic drop, there's always the corresponding high probability recovery to the fibonacci retracement of 50%. In that regards, butterfly always loses unless the IV premium covers the cost of a 50% swing. Well, since we only have to worry about 1 side, it will be only 25%, but that is still a lot. I've only seen this premium in a selected few stocks.


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## atrp2biz

For some reason, I've had a love affair with calendars since high school (1998). During the summer between high school and university, DELL was trading at around $112 (mid-July). I was slightly bullish and selected August and September $120 calls that were around $4.50 and $7.75, respectively. DELL reported earnings the Thursday before the August expiration (I was young, naive and attracted to the high front-month IV). DELL struggled for a while, trading below $100. They blew away earnings and closed around $118 on expiration Friday. Great!, says me. The short side expired worthless and I carried the long side into Monday. DELL continued moving up and I got out of the long side (I think around $9.00) with DELL at around $124. 

This couldn't have worked any better, and I've had a love affair with calendars ever since. Don't ask me how I got an options account in high school.


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## Causalien

Since I've found an expert on Calendar, I'd like your opinion on this.

http://minus.com/medyXhQ

The characteristic of an option strategy that I am trying to reverse engineer. I think I've figured out what it is, but I'd like some second opinion on what it is and what the problems are.

It's pretty beautiful. Positive Theta with very low delta which is a gradient from negative to positive if the price drops from high to low. While any Vega increases its premium.


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## humble_pie

doc i can see why you & i have never met. I pull my gaze back to the very near term & say to myself omg-dell-was-at-112-with-earnings-in-a-month-&-he-paid-3.25-for-a-one-month-calendar-spread-at-120-omg.

me, for US stocks i like diagonal call spreads. Far out in time. These are basically income plays. Convert 100% taxable US divs into 50% taxable capital gains. Helpful in keeping below US estate tax threshholds. Tie up less capital than outright stock so less heartbreak during market crashes.

for dividend-paying canadian stocks i like short strangles.

plus i sell a few puts.

my riskiest - a longtime rolling sell of 20 naked calls in just one company. Longtime as in years & years. I manage to keep them otm. I don't smoke or drink, though.


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## atrp2biz

Like I said, young, naive and the short term IV...she was pretty from afar...but not pretty up close. (My attempt at an HP metaphor)

Causalien--interesting. My initial thoughts.

Can you break down the greeks to position units? It looks like the greeks are representing the position times a multiple number of units.

Delta becomes positive as UL goes down. Bearish vertical characteristic.

Gamma is essentially zero at the high end and decreases in the low end. Interestingly, there is no local minimum. This is odd. How is this possible? Tough to figure out without knowing where the local min/max of gamma is.

Theta is positive throughout but increases as UL goes down suggests derivative of a calendar or a high probability of profit credit spread.

Vega is interesting as well. At a low UL value, vega is negative and increases as the UL goes up. This suggests a long call or a short put characteristic. But it contradicts the delta characteristic! Relationship between theta and vega is normal (inversely related).

Overall, high end resembles calendar, while low end resembles an iron condor of sorts. Have to think about it some more.


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## Causalien

Well, if you are done thinking let me know and I'll post my own view. Unfortunately this is all I have. To learn more, I'll have to pay $3000 for the course


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## avrex

*Options Arbitrage*



humble_pie said:


> We could just skip the course (5 not-so-easy pieces) & say Don't. Ever. Enter. Combined. Spread. Orders.
> course summary says this course is designed for traders who want better prices than the natural.
> lesson 3 deals with nailing those better-than-natural prices.
> lessons 4 & 5 cover why they don't happen for spread orders.


@humble_pie
If I'm reading your post correctly, you are stating that individual investors, like us, will get taken to the cleaners by the big institutional investors, on pricing.

humble, you mentioned that you tend to buy/sell options further out in time.
I noticed that further out in time, there is less trading volume (which makes sense). But, there's also a large difference between Bid/Ask spreads.
Here's an example. GOOG Jan 2012 600 calls traded a total of 406 contracts today. At closing, the Bid was 29.50 and the Ask was 30.70. If I wanted to Buy 1 Call and I were to enter a Bid of 29.50, would the big institution notice my 'retail' bid and suddenly move the Bid and Ask prices up by 0.10, in the hope that I would chase it.

1. I guess what I'm asking is, "How does the retail investor get better than natural prices?" 
Or is that a course onto itself.  My guess is that the answer is 'experience'.

2. What about Options Arbitrage? 
I thought the big guys employ arbitrage trades to rectify price discrepancies, and more importantly, to profit. But when I see large differences between bid and ask, I wonder if there is options arbitrage going on, for these further out in time calls. If the theoretical price of this call was 30.00 and I bid 30.20, wouldn't options arbitrage kick-in and an institution would sell this call to me at 30.20, instead of the 30.70 ask price. I guess I'm a little surprised by the large Bid/Ask spreads. Perhaps, my example doesn't fall into the Options Arbitrage situation, because the volume is relatively low, and so the institutions don't care about this particular call's pricing.


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## humble_pie

avrex the cleaners are the specialists, the market makers. In montreal they can be next to impossible. This is why many/most canadians will go to US options, including for interlisted stocks.

in your GOOG example, i suspect the rather wide BA was a close-of-day feature. Many serious traders won't trade before 11 am or after 3 pm. I'd hardly qualify as serious but i usually get everything done between 11 am & 2 pm. As best i can make out, the specialists open their day with excessively wide spreads & they begin widening again soon after 3:15-3:30 pm. Spreads reach insane proportions before 3-day holiday weekends & also widen, of course, whenever there is panic in the market.

so i will look at goog jan 600 c today, around noon or 1 pm. A close-of-day quote doesn't mean anything to me; the most i could say is that i probably would not enter a buy order for more than 30.

i don't pay or sell at the natural. In the first place, i tend to choose liquid securities with liquid option markets. This helps. Next, it's useful to get a sense of how a particular market is moving. What, exactly, is happening with the underlying. I'm one who sometimes avoids pre-earnings markets while there are many who seek them out, for example. Are the high sizing volumes on the bid or ask side. Which side are you on. Are there large numbers of contracts on the opposite side & only a few on you side. If your order has been sitting out there a while without a fill, Is there a potential counterparty who might be enticed to raise or lower his price, if you were to lower or raise yours slightly.

a "spread" to me is not what argo has in mind. It is not phoning a broker to carry out 2 option trades at natural prices in order to obtain a reduced commission. It is, instead, having an idea of what the dollar difference should be between 2 different options - always a better amount than the natural would produce - and then setting out to obtain that amount by legging in 2 separate online trades. I do these one right after the other, because i set up the more difficult one first. If i can succeed in obtaining a favourable price on the difficult side, i figure it will be easier to do this on the easy side.

here's an example. On an extremely volatile day last week i set out to buy a diagonal call spread in PG. I wanted to buy jan 2013 50 calls & sell jan 2012 either 60 or 65 calls. Obviously the 2013 buy was the more difficult, ie less liquid, side. Stk was directionless, bouncing between 58.89 & 59.88. The day was chaotic. The 2013 call was 10.60-11.05. I don't have any notes about the sizing & don't remember, but something must have suggested i could succeed with a lowish bid. I entered an order to buy 10 @ 10.80 at 12:16 pm & was filled within the hour. Then i did the sell side, choosing in the end to sell the 65s, where i also got a price break but not much, since the BAs were only a few pennies apart.

in the end, i became the proud owner of a spread that cost me 9.82 per share including commish, which i'm hoping to sell for 15 at some time prior to january 2013, ie if & when share price of PG exceeds 65.

i'm not sure what you mean by options arbitrage. In fact i don't really spend any time thinking about what the institutions are doing. What i do know - because i do it several times a week - is that there's no reason to pay to the ask or sell to the bid.

it can occasionally happen, in a less liquid market, that no one except the dealer is present. In montreal this shows glaringly when the sizing is numbered as 10, 20 or 30. These contract lots are coming from the specialist. In montreal, he's not going to bend. These are situations to avoid.


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## Argonaut

I bought back the same GLD call at 9.00 that I sold for 17.50 previously. Funny thing is that the gold price is only $5-10 lower than when I sold last week. A week's worth of time decay doesn't account for that much, so I'm guessing implied volatility has gone down. 

Gold has to go up a mere 3% in the next two months for me to break even. But I'll probably sell the contract if I can get 15.00 again. Milking my gold for all it's worth. Sweet, golden milk.

EDIT: Correction, I bought a different strike price this time. But the premium on the options have still decreased notably. This particular contract was around 12.00 at the time I sold my other one.


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## Lephturn

Exactly - GLD Vega has come in considerably. I see a spike to 30 in the IV of GLD recently, and it's come down to about 24 in the last few days.

Because it's gold it has an upside skew - I mean the IV is higher on strikes above ATM than below. I'd love to get access to a tool like LiveVol Pro, but it's quite pricey. Lovely tool.

I also am partial to diagonals, one of my favorites.

I heard a good quote from a former market maker the other day: "When in doubt - palms out!" In other words be a seller of premium.


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## cannon_fodder

Are there any discount brokerages which allow you to exercise options online? Scotia iTrade requires you to call into a broker (and pay the $45 fee).


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## avrex

cannon_fodder said:


> Are there any discount brokerages which allow you to exercise options online?


I am with Interactive Brokers. Although I have not done it yet, it looks like you can exercise options online.


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## ddkay

How do I sell calls on TD Waterhouse? I wanted to sell some ITM SPY weeklies at $114 strike. Do I use "Sell to open uncovered" and get autocredited the amount the contracts are worth? I made $4135 selling 10 weekly $113 calls on ToS paperMoney but I'm not sure how to replicate a trade like that (with less contracts of course) on Waterhouse...


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## humble_pie

sell to open uncovered but they need to recognize you as level 4 or 5.


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## ddkay

Thanks humble


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## cannon_fodder

avrex said:


> I am with Interactive Brokers. Although I have not done it yet, it looks like you can exercise options online.


Thanks. I needed to be more specific. Are there any discount brokerages which allow you to exercise options online in your registered accounts?


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## Lephturn

cannon_fodder said:


> Are there any discount brokerages which allow you to exercise options online? Scotia iTrade requires you to call into a broker (and pay the $45 fee).


I have not had to do this in a registered account yet. Or at all come to think of it. I mostly trade options with OptionsXpress - and they will auto-exercise for me if an option is going to go out in the money.

Better question - why would you want to do this? If you have an ITM option, why not just sell it? I suppose if the market is too wide and it's thinly traded exercise might work out better. Exercising will cost you something, so it's not like you will avoid the commission... ?


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## cannon_fodder

Lephturn said:


> I have not had to do this in a registered account yet. Or at all come to think of it. I mostly trade options with OptionsXpress - and they will auto-exercise for me if an option is going to go out in the money.
> 
> Better question - why would you want to do this? If you have an ITM option, why not just sell it? I suppose if the market is too wide and it's thinly traded exercise might work out better. Exercising will cost you something, so it's not like you will avoid the commission... ?


Your conclusion was bang on. Thinly traded and bids nowhere close to intrinsic value. Fortunately I was able to sell most of the options and was only left with 5 contracts to exercise. 

Another good lesson that hardly pinched the profits.


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## Lephturn

cannon_fodder said:


> Your conclusion was bang on. Thinly traded and bids nowhere close to intrinsic value. Fortunately I was able to sell most of the options and was only left with 5 contracts to exercise.
> 
> Another good lesson that hardly pinched the profits.


Depending on your broker it may be worth calling them. I have had it happen a few times where bids were wide of intrinsic for me as well - but I called OptionsXpress and let them work it. Basically they'll go to the market makers and get them to give you close to intrinsic. The market makers leave the low bids sitting out there to scalp the un-informed traders into giving them free money, but I've found OX will get the order handled for me at a much better price if I call them. You can also just put an offer out there at intrinsic and wait, but I find in these situations I'm far better off to call OX and let them work it for me. As long as it is a reasonable number of contracts they tell me it's not a problem. I'm sure if you were slinging big size it wouldn't be as easy, but even then I'd call them and let them work it.

When i've called and had a broker work an order for me at OX it doesn't cost me anything extra - and even at RBC-DI although it should cost me extra, they have almost always ended up only charging me normal web commissions as it was something that I couldn't get done properly on their online platform.


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## Jungle

I am interested in selling put options but have never done an options ever. Most of our brokerage money is in Questrade. How hard is it to do put options in Questrade? How do you get someone to accept the contract? IE, figuring out strike price that would attract a contract and such.


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## Causalien

For beginners who doesn't have a platform that tells you these things. I find nasdaq's option chain quite useful in pricing your options:

http://www.nasdaq.com/quotes/options-chain.aspx

For selling put options, I don't know how questrade does it, but I assume you need to select "sell to open" in a web based platform. As a first timer, you will probably need to have enough cash to cover the cost of the option if it were exercised i.e strike_pricex 100 x #_of_contracts.

Good luck.


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## Jungle

Thank you Causalien. For selling put options, does someone have to buy your option in order for the seller to receive the premium?


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## Jungle

Also what is the difference between selling a put option and buying a put option?


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## Argonaut

I don't know that you should be selling put options, Jungle. Why are you eager to do something that you don't know the concept of yet? 

Buying a put option gives you the right to sell 100 shares of a security at the specified strike price. Selling a put means you are personally giving someone else the right to sell 100 shares of a security to you at the specified strike price. When buying a put, your losses are limited to the premium you paid for the option. When selling a put, your losses are nearly unlimited, and your gain is limited to the premium you sold it for.

Maybe start by buying options to make directional bets like I am doing to get in the game. Buy puts if you think the stock or index is going down, buy calls if you think it's going up. Premiums are quite expensive now given the recent volatility, so try to unload for a profit within a few days.


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## Jungle

I get the concept of selling put options which is something I would like to do, for the reason of purchasing stocks at a possible discount that we would normally go long with anyway. At this point I have no other interest in buying puts or calls. 

At this point I am still leaning and will not being selling puts unless I fully understand how to do everything and the risks involved. 

I have to upgrade the options level on Questrade as it will not even let me at the order screen.


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## rajaijah

Jungle said:


> Also what is the difference between selling a put option and buying a put option?





Argonaut said:


> I don't know that you should be selling put options, Jungle. Why are you eager to do something that you don't know the concept of yet?
> 
> Buying a put option gives you the right to sell 100 shares of a security at the specified strike price. Selling a put means you are personally giving someone else the right to sell 100 shares of a security to you at the specified strike price. When buying a put, your losses are limited to the premium you paid for the option. When selling a put, your losses are nearly unlimited, and your gain is limited to the premium you sold it for.
> 
> Maybe start by buying options to make directional bets like I am doing to get in the game. Buy puts if you think the stock or index is going down, buy calls if you think it's going up. Premiums are quite expensive now given the recent volatility, so try to unload for a profit within a few days.


Well said Argo. 

Jungle, if you have not traded options before, particularly selling puts I suggest do a paper trade for few weeks , maybe even few months. It will be better to gain the experience with paper money. In a particularly volatile market like this, if you sell naked puts you will get panicked but the swings in your options price. Not to mention, the commissions eat away your profits as well.

But there is a way to profit (relatively easy) from selling puts. You can sell cash secured puts for securities you want to buy anyways.


Let say you would like to buy BMO stocks. It trades for $59.24 as I write this. You could buy it for this price if you think its cheap. Or could sell a cash secured OTM put. If BMO stays above the strike then you get to keep the premium. If it falls below the strike you get assigned which isn't bad since you wanted to buy BMO when it was 59.24 but you actually bought it for less (strike -premium received). 

This works only for the stocks you like to own. If you are not comfortable owning a particular security then don't sell puts. you are better off buying calls/puts to benefit from market direction like Argo suggested. 

I would suggest reading a little bit about options before you venture selling them. You could try "Options as a Strategic Investment " by Lawrence G. McMillan. After gaining basic understanding you could read Sheldon Natenberg's Option Volatility & Pricing.

Just my 2c.


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## gibor365

Stupid question..., but can I trade option on registered accounts and TFSA?


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## Argonaut

Agree with raja. What stock would like like to possibly own with a put selling strategy, Jungle? Then we could look at a concrete example. Keep in mind options work in 100 share lots. So one option of AAPL represents a mammoth $30k+ position. And also, keep in mind that the TSX option market is pretty lame and best avoided.


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## Jungle

Thanks guys, I appreciate all comments and I will check out those books at the library.

I was looking at shares of RY. Maybe sell put options with a strike price around $45 or under. With the recent q2 miss and bear market trend, it might be possible to aquire the shares for cheaper (because of premiums) then buying at market order IF they hit $45. 

Not sure what the premiums are at this price, or if it's even worth it. I would only be looking at selling one contract as 100 shares is around $5000


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## rajaijah

Jungle said:


> Not sure what the premiums are at this price, or if it's even worth it. I would only be looking at selling one contract as 100 shares is around $5000


try here: http://tmx.quotemedia.com/options.php?qm_symbol=RY

or

http://www.m-x.ca/nego_cotes_en.php?symbol=ry&image.x=12&image.y=5&image=Submit#cote

Also if you want to check how the historical quote for any particular security varied : http://www.m-x.ca/nego_fin_jour_en.php

It gives an idea how the option price changed after big drop/jump, earnings date etc.


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## Argonaut

gibor said:


> Stupid question..., but can I trade option on registered accounts and TFSA?


Depends on the broker and your options level. Generally you can buy options with cash and/or sell covered calls in registered accounts.


Jungle said:


> I was looking at shares of RY. Maybe sell put options with a strike price around $45 or under.


Looking at the October strike of RY.TO 44, selling this put would net you about $65 after commissions. If you want to look at January, it would be about $150 after commissions. If there is another banking crisis in that timeframe Royal could potentially drop to $35, and you would have your RY shares, and immediately be down almost $1000 in your position. The risk/reward doesn't seem worth it to me, even though the most likely outcome is that your option expires and you keep your small premium.


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## Jungle

Ok thanks, the premiums are not that high.. to make a bet for $65 and wait until October. Who knows what's going to happen then. 

IN the example of October strike RY.TO 44 If one exercised contract cost $4400 subtracted the premium, it would net each share at 43.35. A difference of 1.49%. 

With unlimited downside risk, really. But consider these are shares we would by and hold anyway, it might be worth the _option._ (pun intended)

The question is do we want to buy RY at $44? This is kinda like a limit order with an insurance policy.


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## Lephturn

Do yourself a big favor and go here:

http://optionseducation.org/

This is the Options Industry Council - basically a group made up of the options exchanges - and it is their education arm. Tons of free online education, calculators, and other resources. It was my starting point in options and I highly recommend you start by going through all of their free online training classes.

Start at http://education.optionseducation.org/ and register, then get started with the MyPath tool that will build a curriculum for you.


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## cannon_fodder

Lephturn said:


> Do yourself a big favor and go here:
> 
> http://optionseducation.org/
> 
> This is the Options Industry Council - basically a group made up of the options exchanges - and it is their education arm. Tons of free online education, calculators, and other resources. It was my starting point in options and I highly recommend you start by going through all of their free online training classes.
> 
> Start at http://education.optionseducation.org/ and register, then get started with the MyPath tool that will build a curriculum for you.


How prescient again you are. I was going to ask the experts which courses would be best to significantly increase one's understanding of options. Books are fine (assuming the book itself is above average) but I think some online courses as a precursor to a classroom course would better suit me.

I'm learning more from my mistakes than my successes, but these mistakes I suspect are more from my own ignorance rather than irrational markets.

Are there any in-person courses you experts would recommend?


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## Lephturn

Again a good first step is the Options Education Day seminars run by he OIC.

http://www.m-x.ca/educ_oic_en.php

These are sponsored by the Montreal Exchange and the OIC jointly. They are heavily subsidized - $50 I think for a full day including food - and with multiple tracks and very knowledgeable speakers. If you are close and can attend one, you can't beat the price. I am in Ottawa and even took the train with my wife and child to TO and stayed over night to attend. We made a nice weekend of it for a fraction of the price of a big classroom course!

That's the only in-person training I've taken, the rest has been through online at OIC and my broker site and reading a ton of books. Oh and by trading small and making mistakes. Trading small and strictly limiting your risk is a great way to learn - real money teaches you how to handle the emotional side that paper trading can never do and is so critical to success.

I'd be interested if others have suggestions - particularly humble_pie since he has experience as a pro I believe.


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## cannon_fodder

Thank you, Lephturn. As it happens, in 3 weeks they are holding a session in Toronto and I'll be in town, so I've paid my registration fee. $50.85 including tax, 2 meals and a full day of sessions. If parking were free then it would be perfect.


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## Lephturn

Glad that worked out for you! I'm travelling for business or I'd be going again this year.

All the brokers will be there hawking their wares as well so you can take a look at all the different platforms and tools out there during the breaks.

In terms of books - I'm told the book that new options traders have been handed and told to plow through for many years is: http://amzn.com/155738486X

It's not an introductory book by any means - but if you know the basics it's solid.


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## rookie

thanks lephturn. i signed up for the seminar in toronto as well on the sep 24th. i guess we can have another get together that day at hilton...


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## Betzy

Lephturn said:


> Again a good first step is the Options Education Day seminars run by he OIC.
> 
> http://www.m-x.ca/educ_oic_en.php


So if one was looking into this course, how advanced is it? I am very new to options, but eager to learn. I had a ono on one with my branch, options basics. Would this be a waste, over my head?
Thanks


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## Lephturn

Betzy said:


> So if one was looking into this course, how advanced is it? I am very new to options, but eager to learn. I had a ono on one with my branch, options basics. Would this be a waste, over my head?
> Thanks


I don't think it would be a waste.

http://www.m-x.ca/evenements/optionsdayTor11b_en?r=MXW

Look at the two tracks - Program 1 is designed for investors new to options, and starts with the basics.

Too bad I am on the road for work or I would absolutely be in to meet up at the Hilton. They normally do big round tables in the meeting rooms - so you guys should arrange to get together - you can sit together at the presentations and it might help to get more out of the discussions.


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## Betzy

I just registered too, bring ice for my Brain


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## Toronto.gal

I'm considering it now too and yes, ice for my brain too.


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## Argonaut

Haha, I was looking through my trading history at my first option trade. Bought 3 contracts of GLD @ 160 in Dec for 5.50. Sold them for 6.25. The options are now worth 25.65. If I had just held onto those suckers..

****.

Still, I've made 5 option trades on GLD and they've all made money so I can't complain.


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## avrex

cannon, rookie, Betzy, Toronto., see you on Sept 24.


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## gibor365

Toronto.gal said:


> I'm considering it now too and yes, ice for my brain too.


I'm considering it too....but I don't know anything at all about option.....just thinking if it worth to go or first better to read some books


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## Toronto.gal

Same here, but I registered just the same. I figured it's on a weekend, very inexpensive & it includes Hilton Hotel food, so what more do you want gibor?  

I read a book, but it only confused me to death, so option trading may not be my cup of tea. At any rate, I want to learn all I can & if I come out of the workshop knowing more than I know now, it will not have been a waste of time [or maybe it will]. 

See you there guys!


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## humble_pie

t.gal i am positive you would be a wizard at it. You have all the right talents.

how about this. Options are a limitless cobweb of detail. How about you take one tiny basic filament into your life, in the form of quotes only that you'd watch. You'd be surprised how quickly a lot of the rest will seep in by osmosis.

the basic option strategy, the first the broker will allow, is what's called the covered write. Means holding the stock while selling calls on it. Could you pick a conservative, highly liquid, big cap stock in your portfolio. A bank, or a big telco, or a big energy. Something you intend to keep through thick & thin.

next, find out where the liquid option market is for your stock. Sometimes it's the US; these are better markets anyhow. Pick out 2 popular calls, say expiring in january 2012. One with a strike price close to today's market price, one about 2 strikes higher. Can you put these 3 in your quote basket. If it's an interlisted stock there could be 4 quotes, ie toronto, US, option 1, option 2.

that's it. Then you want to follow these quotes in a leisurely way. Both calls belong to speculators who are convinced stock will rise prior to 3rd friday in january. They were both sold by stockholders who range from bearish (option 1) to stable or mildly bullish (option 2) but who both wish to hang onto stk for various tax, dividend or timing reasons.

as you watch, you'll see each option fluctuate as the stock fluctuates, but the flight paths will not be the same. An exquisite harmony will govern these price trajectories, one that mode3sour recently poked fun at as "a mystical dance."

you don't have to understand at all. Just observe. You know, like yoga warmup. Inhale slowly. Focus on the breath. Exhale. Focus.


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## Toronto.gal

Thanks so much for the encouragement and info. HP.


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## gibor365

Toronto.gal said:


> I read a book, but it only confused me to death, so option trading may not be my cup of tea.


I just logged into my discount brokarage (CIBC) and took a look on option prices....it's so freaking confusing


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## gibor365

@humble_pie, isn't the simpliest options play - protected put... from what I understand you have right to sell your stock by fixed price if it goes down. Is it correct?


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## Argonaut

Puts are good protection, yes. Lephturn's favourite strategy, which would have worked out great this year, is to sell a covered call and use the proceeds to buy a put. My strategy, given that I have no intentions on selling my stocks, and because the options markets for all of them are far too light, is to just buy general market puts (SPY) if the situation calls for it.


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## gibor365

Argonaut said:


> My strategy, given that I have no intentions on selling my stocks, and because the options markets for all of them are far too light, is to just buy general market puts (SPY) if the situation calls for it.


can you pls expand on this? When you buying put and what you do with it?


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## humble_pie

yes gibor you are correct.

the most basic plays of all are simple buys of puts or calls, for reasons such as the put-related reason you have set forth.

what i had wanted to suggest, though, was a tiny step beyond the most simple. Following ariadne's golden thread deeper into the labyrinth. Or the cobweb. I was wanting to juxtapose pairs or a tiny group of numbers that could simply be observed & followed. Because, in time, their relationships will reveal themselves.

back to the simple buying of puts. A protective put means a put purchased uniquely for a stock investor is already holding. It's his exit insurance if the stock drops. This is imho a ridiculously expensive way of carrying on, because put prices are sky-high & have been for several years. I for one would never do this.

cmf member lephturn is an expert in a combination strategy called a collar, in which an otm call is sold to partially offset the high cost of the put that is bought. Even here, with a dividend-paying stock, the price of the put will greatly exceed price of call - because of the long-drawn-out low interest rate environment - so a number of different sub-strategies have to serve as workarounds to this problem. So here we go again with the pairs & groups of numbers ! sorry !

in addition, puts can be bought on any optionable stock or index, all by themselves, just because investor believes the particular stock or index or broad market is going to drop. Such puts are much kinder & gentler to the investor than selling short. They don't use margin (generally, if the investor has paid for them in full) & the risk exposure is limited only to the cost of the put.

PS pages of option chains can indeed look quite daunting & confusing. Perhaps you might name a large cap stock that you hold or like, one you have no intention of dumping. We'll look then for a couple of interesting options ...


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## Toronto.gal

HP, I think you might have to explain it to gibor in Russian and/or Hebrew and maybe in Hungarian for moi, lol.


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## humble_pie

sorreee no russian, hungarian ... not even any french yet

i have a new computer & am discovering that i really dislike windows 7. There are some things makes me wonder however did microsoft think that That could be an improvement.

ie9 is a bummer too, ie8 was better.

anyhow i haven't got the bilingual language pack yet


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## Argonaut

Windows 7 has grown on me, but use Firefox instead of IE, much better.

Speaking of options, I'm going to play the Lululemon quarterly announcement on Friday because I'm a masochist and I have money to burn. Hopefully it pulls back tomorrow so I can get in at a better price.


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## Abha

I love Windows 7. What is it that you dislike? 

I think as you use it, you'll grow to love it. If you still hate it, wait for Windows 8 which is another overhaul of the interface. 

For browsing I use Google Chrome and Opera / Firefox occasionally.


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## gibor365

IMHO humble_pie can conduct options' workshops by himself....

Maybe you can give some very simple basic real example with numbers?! (of course not as a recommendation to buy).?

BTW, does it make sense to play options on RRSP or TFSA?


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## humble_pie

can't really give an example, it might be of no interest to you.

gibor won't you hold up your end & name a stock (liquid, large-cap, so there'll be lots of options) that you yourself are interested in.


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## Lephturn

humble_pie said:


> can't really give an example, it might be of no interest to you.
> 
> gibor won't you hold up your end & name a stock (liquid, large-cap, so there'll be lots of options) that you yourself are interested in.


I'll give us an example to work with - not AAPL (the high nominal price creates issues) but let's be good Canadians and go with RIM. That doesn't mean we have to trade the Canadian security.

Or if you want something more solid and dividend paying - how about RY?

I'll let HP do the honors.

Just don't skip the OIC website here: http://www.optionseducation.org/

Good free and un-biased basic education there starting from the very basics. Look for the "New to Options?" on the right side of the page. Or you can try this: http://www.optionseducation.org/classes/syllabus_options_basics.jsp


Also don't overlook their podcast series if you have an iPod - search iTunes for "Options Talk with OIC" - everything from the most basic to complex strategies in 5-10 minute bites. Listen to it running, commuting, or whatever.


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## gibor365

humble_pie said:


> can't really give an example, it might be of no interest to you.
> 
> gibor won't you hold up your end & name a stock (liquid, large-cap, so there'll be lots of options) that you yourself are interested in.


As an example I hold SU, COP or RY that have been hammered lately, but I still bulish on them....


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## humble_pie

how about ry, it's a common holding.

gibor please look at the page of january 2012 options. We'll take the montreal exchange - canadian options.

you should be seeing the full chain, all classes of puts & calls. What i'd like you to do is notice the column marked Open or Open Interest. This tells you how liquid that particular option is, ie how many players are out there with open contracts.

for myself, i generally avoid options with low open interest. I always want to be able to trade my options fairly easily, that is, i want a market with other players, not just the dealer. For the same reason i avoid options in exotic stocks with low open interest in their options.

next, you want to identify the options with strike prices that interest you. I was also thinking of jungle who keeps saying he'd like to buy. Basically we're looking here to sell a call on stock we either already own or else intend to buy at the same moment; or we're looking here to sell a put on stock we don't own; or we're looking here to do both.

gibor you already own ry. You say you are bullish. If you are extremely bullish you would not be looking to sell any calls at this time. You would instead be looking to sell puts, or even to buy calls.

but let's assume one is only mildly bullish. This means that in calls one would be looking to sell the higher strike prices, say the 52s, 54s, 56s. As you can guess, in january you can't really sell much higher than 56 because the prices will be too low to bother with.

at this premarket hour of the morning all prices shown are wildly unreliable. Even the "last" price shown is false. It's what the computer invented overnight, not what the last price really was.

flip now to the april page & look at the open interest column. As expected, open interest is less than january, but it's still adequate in the 54 & 56 calls.

anyone who is bullish could also examine open interest in the puts for both months. If the goal is truly to acquire ry, one might be looking around the 44s or 46s. If the goal is to sell puts to generate income but never be assigned, one might be looking around 40, 42 or 44 range. For example, yesterday i sold 5 ry 44 puts as part of a rollover spread. My goal is to generate capital gains & not be assigned.

we can't discuss pricing in these premarket hours, so the idea here is just to commence understanding how an option table works.


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## gibor365

humble_pie, thank you for taking your time and trying to explain.... I see now that options much more robust and complicated than I thought before, not easy start learning when you're in middle 40s 
Dividend or index investing are much clear to me....

By "sell calls" , do you mean to write calls?

As I understood so far, buy call or put is much more safe because you just have *right* to do so...


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## HaroldCrump

gibor said:


> By "sell calls" , do you mean to write calls?


Yes, selling a call (also known as being short the call) means you are taking on the obligation to supply the underlying shares when called to do so.
For that obligation, you get a premium (the call premium).
The simplest call is the covered call, where you already have the shares on which you are selling the call.
This is the long-stock, short-call trade.



> As I understood so far, buy call or put is much more safe because you just have *right* to do so...


Yes, those are safer but not necessarily profitable.
When you buy an option contract (call or put), you have to pay the premium.
For you to make money, you have to get the pricing as well as the timing right.
For example, if you buy a call, for you to make money, the stock has to reach the strike price or above before the contract expiration.
An option buyer can bet in the right direction but getting the timing right is harder.
I believe there are studies that show pure call buyers don't make money over long periods of time.


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## Argonaut

I don't think one should be getting into options just for the sake of it. There has to be some purpose behind it, some meaning. Not just because other people are doing it. When I had looked at selling covered calls months ago the math, with commissions, didn't really make sense to me. 

But when someone here (andrewf?) suggested I buy GLD calls in order to get leverage on the movement of the price of gold, lightbulbs went off in my head. In fact, the non-GLD trades I've made only represent a puny 5% of the profit I have made from options. In other words, without my personal specialty, options trading wouldn't really be worth it.


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## humble_pie

argo U R writing about tiny numbers of contracts although you forgot to mention this.

higher numbers of contracts are cost-efficient. Rolling 20 or 30 contracts, which actually means 40 or 60 contracts because there are at least 2 sides to every strategy, thus at least 2 separate trades, can be lucrative.

right now i'm migrating talisman shares to my US account because TLM has commenced paying dividends in USD. The options are split between US & canada, apparently option traders haven't decided yet which market to favour.


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## Argonaut

Yes, the point being that different people require different strategies. I still do not see what gibor wants to achieve from options. If he holds beaten down stock that he is bullish on.. just continue to hold that stock.


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## gibor365

Argonaut said:


> Yes, the point being that different people require different strategies. I still do not see what gibor wants to achieve from options. If he holds beaten down stock that he is bullish on.. just continue to hold that stock.


Argo, obviously I don't want to jump tomorrow and start trading options... (enough I jumped at the beginning of the year into equites), for now I just want to get basic understanding how optims are working...for example I hold covered calls ETFs, ZWB and HEX and now I started to undestand a little bit more how they work.
I still confused how ZWB can keep practically the same dividend (coming from premiums) every month regardless if market is bulish or bearish


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## HaroldCrump

gibor said:


> I still confused how ZWB can keep practically the same dividend (coming from premiums) every month regardless if market is bulish or bearish


First of all, if you look carefully, the ZWB premiums are not the same every month.
They vary slightly.
Secondly, they are probably staggering the distributions across several months.
They might sell a whole bunch of call this month (for example) and then distribute the premiums over the next 3 months.
Also, the bank dividends are quarterly.
So they distribute those over the following 3 months as well.

If you want to know exactly what calls they are selling, you can get some idea here:
http://www.etfs.bmo.com/bmo-etfs/allHoldings?fundId=83031


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## humble_pie

to whom it may concern/ry shareholders:

ry call options always seem to retain insanely high amounts of $$ in tv (theoretical or time value) until just about the last 2 weeks of the option's life. Other banks not quite so gaga.

i was looking to trade my short ry jan 74s ... stk at 76.40, the call was 5.55-5.75 ... an unbelievable 3.15 of tv ... pure hot air ... fluff ... phfffft ... in the option price. And i know from experience that this is going to last up thru most of december.

bref, these things are great to sell. Buyers-back have to stalk them cannily.


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## humble_pie

yikes


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## humble_pie

my bad. Those were td 74s, not ry


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## gibor365

humble_pie said:


> how about ry, it's a common holding.
> 
> gibor please look at the page of january 2012 options. We'll take the montreal exchange - canadian options.
> 
> .


Humble, I checked RY options (admit that did it not during market time )
That what I got for Jan 21, 2012 for CALLs
1. In the money

Symbols
Last Change Last $Chg
%Chg Volume Open
Interest Series by
Expiry 
January 21, 2012 
last change $/% volume open int
RY Jan 38.00 Call Aug 30, 11 9:37AM ET 11.30 0.20 -1.74% 0 14 38.00 
RY Jan 40.00 Call Sep 6, 11 3:01PM ET 9.45 0.20 -2.07% 0 243 40.00 
RY Jan 42.00 Call Sep 7, 11 3:49PM ET 7.75 0.15 -1.90% 0 88 42.00 
RY Jan 44.00 Call Sep 7, 11 9:40AM ET 6.10 0.20 -3.17% 0 360 44.00 
RY Jan 46.00 Call Sep 8, 11 9:59AM ET 4.60 0.20 -4.17% 2 521 46.00 
RY Jan 48.00 Call Sep 8, 11 12:56PM ET 3.35 0.15 -4.29% 5 895 48.00

Similar number (only withmuch high Open int - in K) for Near the Money and Out of the Money options.

I'm so confused what those Near the Money|Out of the Money , In the money? What I get if I buy last 48 call?


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## Lephturn

gibor said:


> I'm so confused what those Near the Money|Out of the Money , In the money? What I get if I buy last 48 call?



http://optionseducation.org/basics/whatis/what_is_2.jsp

From that link...

In-the-money, At-the-money, Out-of-the-money...

The strike price, or exercise price, of an option determines whether that contract is in-the- money, at-the-money, or out-of-the-money. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in-the-money because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stock market. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in-the-money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive selling the stock in the stock market. The converse of in-the-money is, not surprisingly, out-of-the-money. If the strike price equals the current market price, the option is said to be at-the-money.

The amount by which an option, call or put, is in-the-money at any given moment is called its intrinsic value. Thus, by definition, an at-the-money or out-of-the-money option has no intrinsic value; the time value is the total option premium. This does not mean, however, these options can be obtained at no cost. Any amount by which an option's total premium exceeds intrinsic value is called the time value portion of the premium. It is the time value portion of an option's premium that is affected by fluctuations in volatility, interest rates, dividend amounts, and the passage of time. There are other factors that give options value and therefore affect the premium at which they are traded. Together, all of these factors determine time value.

Equity call option:
In-the-money = strike price less than stock price
At-the-money = strike price same as stock price
Out-of-the-money = strike price greater than stock price

Equity put option:
In-the-money = strike price greater than stock price
At-the-money = strike price same as stock price
Out-of-the-money = strike price less than stock price

Most brokerage screens when showing you the options chain will highlight the calls and puts in different shades or colors to let you visually see where the current price is and which options are in the money or out of the money. In other words which contracts have some intrinsic value and which ones have no intrinsic value and are all time value.

Option Premium:
Intrinsic Value + Time Value

For call options, in this case the 48 calls, with RY at 48.92 (on the Canadian exchange) these give you the right to buy RY at $ 48.00 - so they are intrinsically worth .92 per share or $ 92.00 per contract. That is you could exercise your right to buy 100 shares of RY at $ 48.00 and then turn around and sell those 100 shares back at $ 48.92 per share right now. But those options give you the right to buy those shares at 48.00 any time between now and Jan 21 2012 - so what do you have to pay another trader for that right?

RY Option(RY 012112 48 C:Montreal Options Exchange, CA) 
JAN 21, 2012 $ 48.000 CALL

Volume: 5
Open Interest: 895.0
Expiry: 134 Days

So yesterday there was 5 of these contracts traded and there is 895 contracts that are open positions - this is market closed so as HP says - the prices are not that accurate, but here is the pricing for that option:

Open: 3.25 Prev. Close: 3.50
Bid/Size: 3.25 x5
Ask/Size: 3.35 x50

So that means there is an order in with someone willing to pay $ 3.25 per contract for 5 contracts. There is also a sell order in with someone willing to accept $3.35 per contract for 50 contracts.

For the sake of argument - if the market was open let's say you could buy for the asking price of $ 3.35 per contract.

3.35 is the price - the option is intrinsically worth 0.92, so the 2.43 remaining is the "premium" or time value of that option over the next 134 days until expiry. If the price of RY should still be 48.92 at expiration, that 2.43 will slowly shrink until the option is only worth the 0.92 of intrinsic value.

There is much more to it than that of course, volatility, dividends, and probability of going "in the money" all changes as the stock price moves up and down between now and expiration and that will constantly change how much that premium is over the intrinsic value.


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## Toronto.gal

Thanks HP and Lephturn for the explanations.

I'm just as confused as gibor.


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## HaroldCrump

Toronto.gal said:


> I'm just as confused as gibor.


I think you should give yourself a little more credit than that, T.Gal


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## humble_pie

gibor & t.gal, don't worry, all will become clearer at the upcoming options workshop in TO.

in the meantime, have you guys had a chance to study the montreal exchange short, snappy how-to options manual. Only 50 pages, but everything is there. The best little options book in the world. Don't even think of putting a call until you read this thing.

here's the link. Scroll down principal left column thru Guides & Strategies to Equity Options Reference Manual.

http://m-x.ca/educ_guides_strat_en.php


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## humble_pie

the globe and mail reported today that 9000 existing put contracts in halted sino-forest cannot be exercised.

http://www.theglobeandmail.com/glob...rest-options-murky-after-halt/article2162441/

globe reports that: 

_" Shareholders of Sino-Forest Corp. (TRE-T4.81) aren’t the only ones with headaches after the Ontario Securities Commission halted trading in the company’s shares.

" Investors who thought they were buying insurance using “put” options against a decline in the forestry company’s shares are facing the prospect that their protection could be worthless."_

according to globe report the CDCC (canada derivatives clearing corporation) is seeking to negotiate an arrangement with the OSC whereby TRE shareholders who bought puts as downside protection may exercise their options. Speculators who bought puts only but no shares will not be allowed to exercise.

another reason why parties seeking downward protection for their portfolios should consider broad index puts as underlying broad index etf is not likely to ever be halted. Correlation might be crude & approximate onlyl but it's better than no protection at all.


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## Lephturn

humble_pie said:


> another reason why parties seeking downward protection for their portfolios should consider broad index puts as underlying broad index etf is not likely to ever be halted. Correlation might be crude & approximate onlyl but it's better than no protection at all.


Thanks HP - good point. I tend to solve that problem by not playing in these type of companies, but you still have a point.

Now if only RBC-DI would actually let me hedge this way in a registered account. Currently I have to pick up the puts in non-reg which sucks. I can buy puts, but they will only let me do it on the same underlying that I own. Not a problem for most of the stuff I buy with the exception of stuff like ZWB.

I'll have to take another run at them - it's been a while - there should not be any reason why I should be prevented from doing this in a registered account is there?


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## Argonaut

I do agree with humble about index puts and have done so myself, and also agree with Lephturn about staying away from names like this. But I don't agree with the decision to stonewall the people who bought uncovered puts in Sino Forest. Why should the people who sold it short benefit, and the option buyers not?


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## humble_pie

if i had TRE puts i'd be more concerned that somebody would sue in a class action (the put speculators, for example, could probably sue.) This would freeze any neophyte put project until the case could be settled, by which time all the puts would have expired & it would be too late to exercise anything.

in the US, i believe the custom, when a formerly robust stock collapses & goes to the pink sheets as a penny stock, is to keep on allowing exercise of the puts. Exercise by everybody, not just by those who hold both stock + long puts.

cease-trading TRE stock until january 2012 is also an abnormal decision by the osc, imho. It's far too long a time frame. So i think that fairly soon we'll see more lawsuits being launched.

i'm not sure what's going on with the bonds, believe they're frozen as well.


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## humble_pie

leph do you recall we posted about this about a year ago. At the time the only reason i could think of is that some hyper-cautious in rbc compliance was worried that a registered investor who doesn't hold the underlying shares but who does own the puts might, quel horreur, sneakily exercise his puts. While they're not paying attention.

and then investor would be short. the. stock. in. a. registered. account. Oh the horror of it all.

so they worked out this rule to prevent such shenanigans.

bmo also has a quaint rule. They won't let clients sell naked LEAPs in non-registered. They'll let em sell pricey apple or goog regular options, but never leaps, not even something as stodgy & low-priced as microsoft.

apparently their fear is that client will pyramid his short leaps, then if market tanks they, the brokers, will lose control of the margin.

and now tdw has the audacity to demand an agent-handled phone commish for an agent-handled phone trade. Tch. Always something.


----------



## Argonaut

Ugh, telephone trades. I'd like to set up an extremely long-dated short call spread on VXX, but it requires phoning Questrade to do so. This would be equivalent to Alexander Graham Bell using the telephone he just invented to call his broker and buy shares in Hudson's Bay Company.


----------



## megatron

Good evening every body!!


this is my first reply in this forum 

this morning i open this option trade 

I sell a put on suncor way down OTM @ 25$ strike for October 2011 i got 0.55$ as premuin 10 contract so i got 550.00

in case if I am wrong i will open a spread and hedge my position and buy a put before the expirary date.



Megatron


----------



## Causalien

I just peed myself buying NFLX put options in the past month... First time a pure unidirectional option bet worked out for me out of 3 years of buying options. Just to show how the odds are stacked against anyone taking 1 sided bet in options.

It was pure luck and my hatred for NFLX. Now back to blowing all these hatred money away.


----------



## Argonaut

Causalien said:


> First time a pure unidirectional option bet worked out for me out of 3 years of buying options. Just to show how the odds are stacked against anyone taking 1 sided bet in options.


Really? That's all I've ever made. I figure the leverage is on my side. You lose the bet, you maybe take a 50% loss. You win the bet, you maybe get a 300-400% gain. Of course I have a small sample size and have been working under unusually volatile times.

Selling any option, whether it's the part of a spread or not, scares me. I'd feel like I was losing control of my trade.. taking the hands off the steering wheel so to speak.


----------



## humble_pie

argo i don't quite know what's happening with you. It's not that it's highly unusual for a beginner in options to hit a winning streak of luck like the roll you're on. Rather, it's unheard of. It just doesn't happen.

what usually happens is that the beginner who bets on short-term single option buys ends up losing his money more than half of the time. He gets the direction wrong. Then the time factor slams him. Eventually, if he wants to keep on doing options, he comes to understand that hedged structures pay better than single bets over long periods of time.

but you might be the exception. I've always wondered about this business of throwing a handful of pennies into the air & the law of averages says that, with multiple throws, half will come down heads & half will come down tails. I'm not too smart at this, but the way i see it, every individual throw is a discrete event, separate & detached from every other throw. So why couldn't 100 separate, discrete, detached throws mostly come down heads.

so far, argo is coming down heads.


----------



## ddkay

It takes a long time to get comfortable with options, I'm still exclusively virtual trading. Even writing options is tough. Most of my dud trades have been directional and lost 100% no problem. Usually during supercharged TV decay in the last hours of opex.


----------



## Lephturn

humble_pie said:


> so far, argo is coming down heads.


How many trades are we talking here? It may not be that improbable.

Which is very dangerous. The worst thing that can happen is that you start out with a lucky streak. You never want to start out thinking you are a genius when the answer may be luck.

That said - maybe argo has a good system for choosing the equities he is taking positions on and that makes the probabilities better.


----------



## Betzy

For all you who signed up for the options seminar this Saturday, would it be advisable to meet during the day or just keep going on with our imaginative perspective of each other???


----------



## Argonaut

Thanks for the kind words, humble.

Lephtie: I don't think I'm an options genius, but I don't think I'm lucky either. Total has been 17 trades, with 10 wins and 7 losses. However, the gain:loss ratio makes up for that lukewarm record. With commissions, the ratio is 2.25:1. Ignoring the money spent on commissions the ratio is 2.8:1.

It's been worth it.. basically I'm getting my 2012 TFSA contribution room paid for, which is cool for a small portfolio like mine.

Getting harder to find high probability trades.. premiums are getting too high. Possibly interested in a long term home run opportunity with something like BAC 2013 calls.


----------



## dynamicdiva

*Newb to options*

Hey gang, 

I am new to this forum and new to the world of options. Just wondering if anyone has any suggestions for an online resource to learn more about trading options. I'm looking for the "For Dummies" version.....meaning I'd like it to be presented in layman's terms 

Thanks!


----------



## dynamicdiva

*Looking for example*

okay, so I've started doing some reading and tutorials on options, and I was wondering if someone can give me an example to the following statement:

"What Does Short Selling Mean?
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. *Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short*."

Apologies in advance if this is not the place to ask this question  Please let me know if there is a more appropriate thread.


----------



## Betzy

If you want to say hi, I'll be in black t, with Pegasus Logo. Erik Buell Racing...


----------



## Toronto.gal

I did look for you Betzy, but I didn't see you.

The Options Education Day today was very informative.

I found the Protective Options Strategies section most interesting, a great day overall; food was very tasty too!


----------



## zylon

dynamicdiva said:


> okay, so I've started doing some reading and tutorials on options, and I was wondering if someone can give me an example to the following statement:
> 
> "What Does Short Selling Mean?


Welcome to CMF dd 

There's a detailed explanation of short selling at the beginning of this audio:
http://www.financialsense.com/finan...ort-selling-could-be-hazardous-to-your-wealth


----------



## Betzy

Toronto.gal said:


> I did look for you Betzy, but I didn't see you.
> 
> The Options Education Day today was very informative.
> 
> I found the Protective Options Strategies section most interesting, a great day overall; food was very tasty too!


too bad, it was a great day, kind of surprised how much I managed to grasp and kind of understand I will for sure watch the videos of level two when they come out. Food was yummy 
Now the ice pack goes back on my brain for Monday 


----------



## Toronto.gal

Betzy said:


> kind of surprised how much I managed to grasp and kind of understand I will for sure watch the videos of level two when they come out.


I too was surprised at how much I understood given my very limited prior knowledge & even though the session was long and I had been up since 4 a.m. [out of excitement, LOL], I never felt tired thanks to that strong coffee they had.  All speakers were great [except the 2nd one spoke a lil too fast].

HP had been so right about the importance of Options, so thanks HP & Harold too for the encouragement and push! 

Yes, level II video should also be informative. 

A gentleman at our table recommended the book " Options as a Strategic Investment" by Lawrence McMillan. Going to the library today to see if I can find the 1st version.


----------



## Lephturn

Toronto.gal said:


> A gentleman at our table recommended the book " Options as a Strategic Investment" by Lawrence McMillan. Going to the library today to see if I can find the 1st version.


That book is required reading, but it's not light or introductory.

I'd add Natenburg once you are feeling advanced and ready to tackle it.

Both of those are considered "bibles".


----------



## Toronto.gal

In that case, I will buy the books. Thank you Lephturn!


----------



## humble_pie

t.gal you could just borrow the books, at least for starters. Frugally. Speaking.

there are tons of open sources in the internet. So much that it's amazing. I recently rmentioned a link to a small free 50-pager published by the montreal exchange. You can't put a call without it.

montreal ex website also has first-rate webinars.

tradeking website has excellent mini-presentations.

one could spend days browsing through the OIC website.

lephturn is right, his 2 books are the most venerated of all in optionland.  But i don't own them myself. I happen to believe that the best teacher is experience. Tomes that cover the strategy gamut from A to Z are helpful now & then, but they can also be borrowed when a need arises, or a strategy can be updated online.

you'll learn more from the 1st covered write you set up than you possibly could from plowing through a reference work cover to cover. Especially an observant person like yourself ...


----------



## HaroldCrump

+1 for borrowing books.
I haven't bought a book since the invention of the library.

Other than an unabridged copy of _Das Kapital_


----------



## humble_pie

i'm done for the day. Took in net 1,850 this am trading options in energy stocks.

just in options. Not bad for 3 hrs work.

now, on to real life. Grass needs mowing.


----------



## Lephturn

Nice one HP!

I agree that nothing teaches like experience with real $ on the line. However, I find myself much more comfortable and confident exploring some of these tomes in depth as I move into more complex options positions.

Also +1 on borrowing - the library is your friend - but they may not have these books at your local library.

I estimate I have saved several thousand dollars based on what I have read - well worth spending a few hundred for books. I absolutely learned a lot by doing - but I don't think I would have been comfortable attempting some strategies without the reading I did first, and the things I learned through that reading kept me from making a few "rookie" mistakes. I still need to do it myself to REALLY learn, but mistakes cost money, and one single thing from a book that prevents me from losing money is a good investment.


----------



## humble_pie

hey leph i just came across a headline in the internet describing option trading in aapl as *amatuer.*

now, tuer is the french verb to kill.

j'amatue.
tu amatues.
il amatue.
nous amatuons
vous amatuez.
ils amattuent.

even better is the form pronominale. Je m'amatue par des options. I kill myself with options trading.


----------



## Toronto.gal

humble_pie said:


> I happen to believe that the best teacher is experience.


No doubt about it! And yes, I noted the link you mentioned & all the other tips as well.

Thanks again and congratulations on your successful trading day!


----------



## humble_pie

the lonesome goog keeps travellin along. 

other puts that are good for selling are shoppers. The low dividend makes the stock itself less interesting to own, but short puts are an equivalent.

short put = long stk less short call.


----------



## Betzy

Here's a question, what are the chances of an option being exercised on the last day of it's life?
An example: PBN 8$ strike call option is bib for 0.15 right now at 3:30pm Friday the 21(It's expiry date) could I sell this and it be exercised within the next 1/2 hr??
I notice that the 9,10$ are not even listing a bid price...prob due to them not being exercised for sure??
Is this like gambling? I use selling calls to rent out my shares on other stocks so is this like really short term renting? For a day or a couple of hours??
Options are cool and deep


----------



## humble_pie

it's not a question of chances. Any option that is in the money at the close of trading on options expiration friday, even by as small an increment as a penny, will automatically be exercised by the broker before noon on saturday. Commissions for exercise are generally steep, generally higher than online commish.

i sincerely hope you did not sell. Any investor who sold an $8 call option at any time & who did not close that position before 4 pm today will find himself short the stock on monday morning.

since i'm assuming you owned the shares to begin with - ie it was a covered write - if you sold, your shares will be delivered & the net position by settlement day will be flat, or zero.

btw i'm not so sure that "renting" shares out is a good analogy. The long holder of a stock who writes calls upon it gets to receive the dividends throughout, so in that sense the rent belongs doubly to stockholder/option writer - he gets to keep both dividend plus option premium - & not to the call buyer.


----------



## rassmy

I dont mind paying 0.65 commission to invest in covered call etfs like ZWB and HEX rather than doing it myself. ZWB yielding 10% and HEX 17%. Let a professionel manager trade the options, $10K cost 65$ a year comission like about 7 trades.


----------



## w0nger

humble_pie said:


> Commissions for exercise are generally steep, generally higher than online commish.


question: if i sell a covered call and they get exercised by the buyer (brokerage), do i pay a commission? I would assume not? wouldn't my underlaying stocks be sold at the strike as a "free" transaction to me? I've already paid the commission to sell the call options, they wouldn't ding me again would they?


----------



## atrp2biz

They sure would. The only brokerage I know that doesn't charge for exercise or assignment is IB. Otherwise, they do charge (and sometimes at the full broker assisted rate!).


----------



## cannon_fodder

Toronto.gal said:


> I did look for you Betzy, but I didn't see you.
> 
> The Options Education Day today was very informative.
> 
> I found the Protective Options Strategies section most interesting, a great day overall; food was very tasty too!


I just wanted to add my thanks for the suggestion to attend this informative and very inexpensive day. Even the parking was only $6!

It has been a month since I attended and I've had my best month ever - some of which is certainly due to the adoption of a new strategy and attitude towards trading.


----------



## Lephturn

I'm glad you folks were able to attend - it's certainly a great value!

Hopefully next year my schedule will allow me to attend - I had to miss this year.


----------



## humble_pie

fairly nice diagonal spread in argonaut gold is available.

except the long leg is not an option, it's the warrant lol.


----------



## Argonaut

Love my Argonaut Gold, the news always seems to be good. Just found more gold in the ground than they thought they had. Would buy more common shares if I bought anything. Also looking into Scorpio Mines (SPM), which is a silver miner also in Mexico.


----------



## Causalien

Argonaut said:


> Really? That's all I've ever made. I figure the leverage is on my side. You lose the bet, you maybe take a 50% loss. You win the bet, you maybe get a 300-400% gain. Of course I have a small sample size and have been working under unusually volatile times.
> 
> Selling any option, whether it's the part of a spread or not, scares me. I'd feel like I was losing control of my trade.. taking the hands off the steering wheel so to speak.


Well, a 50% is equivalent to 200% (with 100% being neutral) So the math isn't really that clear cut like a 50% down vs 300% going up.

Then again, my NFLX put just turned my record of 3 year losing streak on uni direction bet into actually earning money.

If you look at my probability of betting right, it's abysimal, if you look at the money I made doing uni direction bet, then I am a genius. Which one am I? I'll go back to the safer hedged strategies now.


----------



## Argonaut

Nice, I did a NFLX put strategy too. Did you end up holding until earnings or cashing out earlier? Either way it was a winner. Your probabilities were high, not because of what the option was telling you, but because Netflix dropped the ball big time.

I suppose different styles for different people. I've made 11 directional bets work in the past couple months. But I'm not interested in the math side of things or the complicated strategies. The nice thing about it is that there is always the _option_ of picking the most logical trade at any one time.


----------



## Causalien

Well, I liquidated 50% once it reached the point of the bell curve where it started to behave just like stocks. Then I have to figure out what to do with these deeply ITM illiquid options. 

Shoulda rolled them as it drops, but I was too busy because business was bad and required my attention.


----------



## cannon_fodder

During last months Montreal Exchange options seminar in Toronto, one of the presenters talked about automatic exercise of ITM options at expiry.

he mentioned that even if your account (he used a TFSA as an example) didn't have enough money to buy the shares related to an exercised call you would still be assigned the shares but they would be sold and you'd end up with a profit.

he didn't go into all of the gory details but I was curious as to how this would work and how the Govt would look at this circumstance if it happened in a registered account.

What penalties would the account be subject to for basically going on margin? Or are the shares purchased on Saturday at Fridays closing price then sold at Mondays opening price? Or do you get some say as to what price to sell the shares?


----------



## m3s

humble_pie said:


> lephturn is right, his 2 books are the most venerated of all in optionland. But i don't own them myself. I happen to believe that the best teacher is experience. Tomes that cover the strategy gamut from A to Z are helpful now & then, but they can also be borrowed when a need arises, or a strategy can be updated online.
> 
> you'll learn more from the 1st covered write you set up than you possibly could from plowing through a reference work cover to cover. Especially an observant person like yourself ...


I'll add some of these to my amazon order in prep for my winter vacation in the jihad sand box. Training for writing options on the beach in more than 1 way

Edit: $85 for a 100 page book? There's a new edition coming out


----------



## Causalien

cannon_fodder said:


> During last months Montreal Exchange options seminar in Toronto, one of the presenters talked about automatic exercise of ITM options at expiry.
> 
> he mentioned that even if your account (he used a TFSA as an example) didn't have enough money to buy the shares related to an exercised call you would still be assigned the shares but they would be sold and you'd end up with a profit.
> 
> he didn't go into all of the gory details but I was curious as to how this would work and how the Govt would look at this circumstance if it happened in a registered account.
> 
> What penalties would the account be subject to for basically going on margin? Or are the shares purchased on Saturday at Fridays closing price then sold at Mondays opening price? Or do you get some say as to what price to sell the shares?



That is correct. But waiting till expiration and having it automatically exercised and sold is the least desirable option.


----------



## avrex

*Tax Treatment of Gains and Losses on Options*

Tax Treatment of Gains and Losses on Options


----------



## humble_pie

actually, the montreal exchange representative was wrong, heh.
there is, of course, a risk of loss.

every in-the-money option as of market close on expiration friday will be exercised at the strike price by noon on saturday. Please notice at the strike price. The price to be paid for the stock will be strike price, not any friday market price.

however, during the weekend disaster could strike & the stock could open up for trading monday morning several dollars, or even many dollars, below that strike price. This will not be a good situation.

an investor who had been long an itm call option will, after exercise, now be long the stock, whether or not he has any cash in his account to pay for it. He will have the normal 3-day settlement period, so normally a broker will contact the client to find out what arrangements the client wishes to make. In a mild loss situation, for example, a cashless client might decide to sell another holding in order to raise the $$ to pay for the assigned shares ...

exposing oneself to trouble like this is insane, which is why every experienced trader will strongly suggest that people wind up their option positions ahead of assign.

for various reasons i, for one, belong to the school that says Wind Up Options Early. At the latest the week before or early during the assignment week. This school further recites to never wait until the wednesday, the thursday or the friday of the final week, because all the pro players will be gone & the only person left waiting for your pitiful closing transaction, like a grinning executioner, will be the dealer himself.


----------



## m3s

humble_pie said:


> This school further recites to never wait until the wednesday, the thursday or the friday of the final week, because all the pro players will be gone & the only person left waiting for your pitiful closing transaction, like a grinning executioner, will be the dealer himself.


humble, you should write a book on options. I think you're one of those people who could make an otherwise bland topic somehow interesting to read. Everyone is switching to soft books now so you could even self publish it


----------



## humble_pie

thank you mode, so kind of you to take the trouble to mention something like this.

but there are plenty of truly excellent option books already. In addition - because i'm one who tries to learn difficult subjects in tiny bits & bursts - i think that options knowledge can best be passed along through focused workshops, webinars, even snippets of messages in forums like this one. 

there's one kind of book that hasn't been tried yet, though. Not in options or anywhere else in finance. A comic book. I'm serious. An adult comic book.

for example, if one were to push cmf forum's little bear just a bit further, one could have the beginning of a best-selling finance comic book, don't you think.


----------



## Causalien

Comic books for traders?

Just like the bling magazine that they used to have for traders showcasing their excessive styles. Satire would be great.


----------



## ddkay

lol would do but don't think I'm not guru level anything yet, maybe I'll order a wacom and doodle at christmas


----------



## cannon_fodder

Well, I got my answer. Of course the option would be exercised at the strike price. What I wondered was what would they (in my case, Scotia itrade) do to liquidate the purchased shares if there isn't enough money in the account to buy them.

it turns out that the stocks get sold on Saturday at whatever price they can get for them. How they determine a market for them, I don't know.

because of recent issues with poor health, I try to place preset orders for any options or futures positions in case I can't instruct someone to exit positions should I be hospitalized or worse.

Now I know what happens if even the preset orders aren't executed with an ITM expiring option.

BTW, I never want to exercise any of my options as there is no cost benefit and I never want to own the underlying in any option contract I buy.


----------



## bayview

*Option Brokers*

Hi, 

Im new in Canada. I have some equity investment experience and is now learning to trade options. I find many useful inputs in this Option thread.

Sorry for asking this as I may have miss it in this Forum: any recommendation for user friendly, reasonable rates and good research broker platform. Is TradeMonster available in Canada?

Many thks!:


----------



## Causalien

bayview said:


> Hi,
> 
> Im new in Canada. I have some equity investment experience and is now learning to trade options. I find many useful inputs in this Option thread.
> 
> Sorry for asking this as I may have miss it in this Forum: any recommendation for user friendly, reasonable rates and good research broker platform. Is TradeMonster available in Canada?
> 
> Many thks!:


Option express, thinkorswim.


----------



## avrex

Causalien said:


> Option express, thinkorswim.


Earlier this year, for my non-registered account, I signed up with Interactive Brokers.
US options at Interactive Brokers cost USD 0.70 per contract. 
I have had no issues, thus far with their services.

Meanwhile at the Canadian banks (TDW, Scotia iTrade) the cost is $9.99 + $1.25/contract. I believe ThinkorSwim costs $9.99 + $0.75/contract.

For example, 5 US equity option contracts cost:
Iteractive Brokers (IB) = $ 3.50 USD
Canadian Banks = $ 16.24 USD
ThinkorSwim = $ 13.74 USD

Perhaps others prefer to deal with the Canadian banks for their non-registered accounts, but the cost savings with IB are significant to me.


----------



## bayview

avrex said:


> Earlier this year, for my non-registered account, I signed up with Interactive Brokers.
> US options at Interactive Brokers cost USD 0.70 per contract.
> I have had no issues, thus far with their services.
> 
> Meanwhile at the Canadian banks (TDW, Scotia iTrade) the cost is $9.99 + $1.25/contract. I believe ThinkorSwim costs $9.99 + $0.75/contract.
> 
> For example, 5 US equity option contracts cost:
> Iteractive Brokers (IB) = $ 3.50 USD
> Canadian Banks = $ 16.24 USD
> ThinkorSwim = $ 13.74 USD
> 
> Perhaps others prefer to deal with the Canadian banks for their non-registered accounts, but the cost savings with IB are significant to me.


Thks for your suggestions (Causalien too!).

Sorry a dumb qt: what do u mean by non registered account?


----------



## Causalien

Interesting... But your numbers might be a bit high for TOS. For 7 contracts it's $7.50. At least that's for me.

Does IB still have a monthly fee we need to pay? If not, I might just sign up too.


----------



## cardhu

IB's commissions are crazy-cheap, but yes, there is still a monthly fee.


----------



## Causalien

I don't have enough transactions to offset the cost for months where I won't be using IB.


----------



## avrex

Causalien said:


> Interesting... But your numbers might be a bit high for TOS. For 7 contracts it's $7.50. At least that's for me.
> 
> Does IB still have a monthly fee we need to pay? If not, I might just sign up too.


I didn't reallize TOS was that cheap. 7 contracts for $7.50 is very good. Are you talking about the Canadian ThinkorSwim? 
I was quoting from this ThinkorSwim webpage.

IB Monthly fee. Yes, this is a negative for IB. If you don't incur $10 in commissions in a month, you get charged the $10. So far, I have been ok with this as I still believe that I am saving overall.


----------



## humble_pie

re think or swim canada & even tos usa, which is tos ameritrade, what i see in this thread are a few little hobbles & glitches.

1st, tos ameritrade is not available for canadian residents. There are regulations between the 2 countries that prevent US brokers from accepting canadian clients & vice versa.

2nd, according to the link in previous post which is to tos ameritrade, 5 option contracts would be 9.99 plus .75/contract, or 13.74, would they not.

3rd, tos canada is not up & running nor will it be for at least another year. One obstacle is possibly the automated montreal exchange, which cannot accept spread or contingent orders. By contrast, US option exchanges have electronic tools to work these orders.

a vital part of tos architecture is spread option orders or strategies. One has to wonder how this architecture could work when it collides headon with the montreal exchange. Could this barrier, in turn, cause TD to ask mtl exch to redesign their entire system. TD securities sits on the board of the CDCC, i believe, so anything they would seriously request would have weight. But if reconfiguring montreal is part of the delay, then i believe that tos canada will not be appearing for a long time yet.

4th, tdw canada has said that tos canada, if & when it eventually opens, will have commissions similar to tdw webbroker. These are already on the somewhat high side.


----------



## m3s

Causalien said:


> I don't have enough transactions to offset the cost for months where I won't be using IB.


The way I figure it, if I make even 5 trades a year (or 13 with 100k) IB is still cheaper even at $10 minimum USD/month (usually ~$9.50 CAD actually because they don't even rip you on the exchange of the fees!). Not to mention the dirt low exchange rates and margin rates, the ability to hold foreign currency without forced exchange, the ability to transfer money to foreign accounts, a functional mobile trading platform and probably many other things big banks lack for cheaper


----------



## humble_pie

interesting trivia: mode is right about the IB advantages.

save & except even IB can't get montreal to do spread or strategy orders. IB clients going to montreal options have to work their strategies one leg at a time, just like everybody else.

moral of the story: avoid montreal options. I recently noticed that one of the big 5 canadian banks - think it was the td - now shows US LEAPs options up to 2014. This means that the volume in that bank's regular US options has been sufficient for some time now to convince US market makers to open the leaps series. So we'll get some competition at last. Up til now the montreal exchange has benefited from near-hegemony on canadian bank options.

to be fair, in the rarest of cases liquidity works the other way around. For example thomson reuters US options have spreads so huge they look like montreal's. Those market makers have given up on TRI business. On the other hand montreal is still managing to make a decent market in TRI options.


----------



## Causalien

Oh, I am getting swayed.

Is $10 for the basic platform? Is the pricing still different for the most expert platform? I will also require computer data feeds to connect directly to my PC's robo strategies. Will $10/ month cover this? 

Also can I combine complex strategies and having each side costing only 1 leg? i.e. 1 iron condor costing only 2? Option spreads costing only 1.


----------



## avrex

humble_pie said:


> moral of the story: avoid montreal options.


I've definitely followed your advice here, humble. I've only ever performed US options.


----------



## avrex

Causalien said:


> Oh, I am getting swayed.
> 
> Is $10 for the basic platform? Is the pricing still different for the most expert platform? I will also require computer data feeds to connect directly to my PC's robo strategies. Will $10/ month cover this?


I currently only use the basic WebTrader platform. I pay $10/month. When I incur $10 in commissions in a month, I get the $10 as a credit back to me.
I can't seem to find what the cost is for their more advanced Trader Workstation (TWS). It includes tools OptionTrader and SpreadTrader.
Perhaps the platform is free, but you pay for data fees. I currently pay no data fees, as I just use live quotes when I submit orders. Here is the data fee schedule.

Causalien, as I recall, you have a bit of a technical background, so you may want to look at the fact that Interactive Broker's platform is extensible through their proprietary API. (I have not done so.)



Causalien said:


> Also can I combine complex strategies and having each side costing only 1 leg? i.e. 1 iron condor costing only 2? Option spreads costing only 1.


Caus, so far I've only performed one side, so I'll let you do some research on more complex trades. I'm guessing you pay for every leg. Have a look at Interactive Broker Option Fees.


----------



## Argonaut

Wow, Groupon puts are more than twice as expensive as calls. Almost triple. Stock has to drop about 20% by January just to break even on a pure directional bet. I'll pass, for now.


----------



## Causalien

Thanks Avrex, I'll investigate it. Although I prefer to hear it from people who've actually used it since there's always restrictions and quirks between theoretical and actual usage.

Yes, I need the API access, that's why IB is the only other choice I even consider. Though I got turned off the last time due to the cost. Maybe they've improved now that they have competition.

As for Groupon. Damn, I guess everyone thinks the same thing about the company's potential. That vega  I guess the best playis to short the actual stock and hedge with call.


----------



## m3s

avrex said:


> I currently only use the basic WebTrader platform. I pay $10/month. When I incur $10 in commissions in a month, I get the $10 as a credit back to me.
> I can't seem to find what the cost is for their more advanced Trader Workstation (TWS). It includes tools OptionTrader and SpreadTrader.
> Perhaps the platform is free, but you pay for data fees. I currently pay no data fees, as I just use live quotes when I submit orders.[/URL]


I just opened up a chat with IB, and as fast as I could type they confirmed that there is no fee for TWS. The fees for data are a drag but I like that I don't have to pay for full service like that until I need/use it


----------



## atrp2biz

Argonaut said:


> Wow, Groupon puts are more than twice as expensive as calls. Almost triple. Stock has to drop about 20% by January just to break even on a pure directional bet. I'll pass, for now.


Umm...I doubt it. Put/call parity would make that opportunity disappear really fast.


----------



## avrex

Put Call Parity for GRPN Dec 2011 $25 Strike
C + x/(1+i)^t = S + P
1.20+25/(1+0.005)^32 = 24.07+P
If calls are 1.20, then puts (P) should be around 2.12 (and not 3.45)

If my math is right, it looks like puts for this strike price are 60% overpriced, at the moment.


----------



## Causalien

Which formula is this?

The current put price I believe is because of the difficulty in borrowing (cost to short). The premium you gain from this safe strategy: sell put buy call short stock is approximately equal to the cost to borrow. Talk about a complicated way for the market to equalize itself.


----------



## avrex

Causalien said:


> Definitely take advantage of this mathematical oddity. I myself am bewildered by it. Other shorts must have the same thought. However, once the lockup expires, this mathematical oddity will disappear.


Causalien, are you saying that you have made a move to take advantage of this out-of-wack put-call parity formula?


----------



## Causalien

Nope. Because whatever you can make out of this disparity disappears with the cost to borrow of the actual short. Hence the equilibrium. Maybe if I try to tackle this from a long perspective, I can see some way of making money. But TSLA is keeping me busy.

I am still interested in which formula you were using so I can study it.


----------



## avrex

I can't remember which website I grabbed the above formula from, but it is the 'Put-Call Parity Theorem'. 
Here's one reference, http://www.norstad.org/finance/parity.pdf

By looking at the formula, GRPN seems to be out-of-whack. The relatively expensive puts makes me think that the underlying stock price will have to go down in price in order to restore the balance.


----------



## Argonaut

This is just conjecture, but it could be that the options are widely available and the stock is not. Once more shares are available, the market is pricing in a drop. I don't care much about put-call parity or formulas, but I'm just calling it as I see it, Doc. The 22 strike price calls and puts are about the same price, meanwhile the stock is sitting at 24.75.


----------



## Lephturn

Wow... I found out late - but I'm in Ottawa and they are doing an Options Education day here tomorrow.

http://www.m-x.ca/evenements/optionsdayOtt11_en?r=blog

I'm registered. Anybody else able to attend from the capital city?


----------



## andrewf

Well, the put-call parity just helps one sniff out arbitrage opportunities. One has to assume that the algorithmic traders are taking advantage of them, so that would indicate the cost to borrow is unusually high. Funny that the bets on this stock are so one directional, yet the price doesn't collapse.


----------



## avrex

Lephturn, enjoy Options Education day. The sessions look good.
I look forward to watching those webinars, when they get posted.

The webinars from the Sept 2011 Toronto Options Education day that I attended, have been posted on http://www.m-x.tv/media/home.


----------



## humble_pie

montreal exchange webinars are The Best imho.

was listening to their presenter Jason Ayres on this week's special on condors & flies. That Jason is one in a million. He could explain a nuclear reactor & make it sound simple in 5 easy pieces.


----------



## ddkay

Thanks for the link Lephturn. Do you know which Canadian brokerages allow retail futures trading on the MX? I would be interested in creating synthetic cash positions with SXMs, how is the liquidity there? SXF has about 100x the liquidity of SXM


----------



## Lephturn

It was a great day. I was on the more advanced track this time which was valuable to me.

Yes, both Jason Ayers and Patrick Ceresna are excellent - I got excellent value out of both of their talks. I also spent some time speaking to both gentlemen on breaks and learned a lot more.

Unfortunately I had to bail before the end so I missed Patrick's final session, but I will catch up to it. I believe they did the same sessions from Toronto.

Richard Croft was interesting from a Macro point of view and had some good insights on the global economic situation.

The other thing I found is that there is a local chapter of the Market Technicians Assoc. that meets near where I work - so I'm going to check out their next meeting. Getting together with others to hear speakers and discuss the current markets should provide some value.

To echo the others up thread... use the M-X video site! http://m-x.tv/media/home

Great stuff there - if you couldn't attend in person you can still get a lot of value out of that video site.


----------



## humble_pie

tradeking website always has good educational stuff, too.

here's a date to remember: Options Grab Bag with mark wolfinger, 29 november/11, 5 pm.
they'll probably archive it so all who wish can catch up.
it says for Rookies but that Reducing Risk of Ruin looks appealing across the board.

https://www.tradeking.com/education/live-events

*Options Grab Bag
Tuesday, November 29th, at 5:00pm ET *

If you have a few trades under your belt, but feel you are missing something, this webinar is for you. Join Mark Wolfinger as he goes through several decisions option traders face, and the missteps that plague them. 

How important is my choice of options strategy? 
How many contracts should I buy or sell? 
How much delta risk should I take? 
How can I manage risk better? 
How do I reduce the risk of ruin? 

These questions and others will be answered during an insightful session. Don’t miss it.

For Rookies.


----------



## humble_pie

i like extreme days. I like racing around putting out options brushfires. Especially with my brand-new Firesteel WhooshKaZaZam which mode has taught me to use.

i had previously sold 5 cameco USD jan 25 puts. Today ccj sagged to near-record one-year lows of 17.81, ie there was extreme risk of early assignment.

applying the trusty formula (strike-stk) > option bid = likely early assignment, i discovered that my jan 25Ps were commanding a tv premium of 2 measly pennies. Were those pennies to disappear, tomorrow i might find myself the proud owner of 500 new cameco shares for US $12,500 while being able to dispose of the same for only $8,905, a circumstance that would indeed make me most unhappy.

_when in disgrace with fortune and men's eyes
i all alone beweep my outcast state
and trouble deaf heaven with my bootless cries
and look upon myself and curse my fate._

while contemplating the 2 thin pennies that were slivering me from despair, magically the stock began to rise. The premium increased to 10 pennies. This is an adequate potholder. Enough to save the cook from the fire. I am a happy muffin.


----------



## Causalien

I really wish Cameco would stop bidding on Hathor for the stock price. But from a business stand point it makes so much sense. Please fall more. I am 50% in cash and waiting for the right signal to pounce.


----------



## Homerhomer

humble_pie said:


> i had previously sold 5 cameco USD jan 25 puts. Today ccj sagged to near-record one-year lows of 17.81, ie there was extreme risk of early assignment.
> 
> applying the trusty formula (strike-stk) > option bid = likely early assignment, i discovered that my jan 25Ps were commanding a tv premium of 2 measly pennies. Were those pennies to disappear, tomorrow i might find myself the proud owner of 500 new cameco shares for US $12,500 while being able to dispose of the same for only $8,905, a circumstance that would indeed make me most unhappy.
> 
> 
> while contemplating the 2 thin pennies that were slivering me from despair, magically the stock began to rise. The premium increased to 10 pennies. This is an adequate potholder. Enough to save the cook from the fire. I am a happy muffin.


I thought I understand what you are saying but as I re-read things go murky, if you could kindly explain some of the ins and outs of it would be fantastic.

If you don't mind sharing, did you sell the puts around October where the stock price was fairly low and the premium price comparable or higher than it is right now? 

I gather if you sold them when the price of the stock was higher, you would have received smaller premium for the put and you most likely would have worried about being assigned much sooner.

Does the formula strike-stock price > option bid (being a danger of assignment) apply to any short put scenario? 

Thanks.


----------



## avrex

humble_pie said:


> ... my brand-new Firesteel WhooshKaZaZam which mode has taught me to use.


@humble_pie, I was wondering if you could let us in on what you referring to here. Is it a web tool? an application?


----------



## humble_pie

avrex the Firesteel reference was an in-joke, there is a discussion somewhere in forum lamenting how basic items like safety pins & wooden kitchen matches are now cheapio manufactured offshore so they don't really work properly anymore.

and mode told me to buy a fire starter called Firesteel. This works in rain, snow, if dropped in water, etc. According to mode i am supposed to keep one handily attached to my belt.

firesteel turns out to be a miniature World War I flamethrower that hurls a ball of fire 6 or 7 feet in an imprecise general direction. I totally accept that it will work fine in a sleeting blizzard. Not that i really expect to have many such occasions. In the video Firesteel looks like it could perfectly well blow up an entire building.

(note to homer) put options can be sold both to generate capital gains income & to serve as a prelude to acquiring stock at a cheaper price. In my case it's always the former, so i never want to be assigned.

most of the otm options i sell approach expiration with little remaining value. The ones that are in the money have to be closely watched, especially prior to X dates when ditm options can be exercised early.

here are 2 easy formulas that help to determine when early assigment of an itm option may be looming (note the word "help," the formulas are indicators only):

CALLS: when (stock minus strike) > option bid = risk of assignment

PUTS: when (strike minus stock) > option bid = risk of assignment


----------



## Homerhomer

Thanks a trench ;-)


----------



## Lephturn

M-X blog has Richard Croft's materials from his session at Options Education Day up now. It's worth a look.

http://optionmatters.ca/


----------



## Causalien

Keep the video coming. It's fascinating learning how others uses options. Opens my mind to new ideas.


----------



## avrex

humble_pie said:


> however some are prevented from writing puts by their brokers. Many brokers require level 4.





Lephturn said:


> All my fancy option trading has been with OptionsXpress which was a little quiz or something I think.


Yep, I remember the same thing at Interactive Brokers. I filled in the online quiz and they gave me Level 5 with naked writing.

I also recently filled in an options application for my TDW RRSP. I just selected the check box that said that, "I have previous options trading experience." 
It looks like I'll soon be approved soon. (i.e. buy calls, buy puts, write covered calls)


----------



## avrex

2011 ends my first year in utilizing options.

I started in March by selecting one option, 3 months out. At the end of the term, I was assigned the stock (Honestly, humble_pie, this was the only time I was ever assigned ). After selling the stock back to the market, I broke even on my first transaction. The August 2011 market downturn caught me with my pants down. I held too many short puts (a la Derek Foster), lost a lot of money, and had to bail quickly. In the fall, I held many good selections that gave me a nice recovery.

For the year, I basically ended up even. My actual return was +2.5%. However, we can't forget about commission costs, because they can add up, depending on the size of your transactions and the broker you use (I use Interactive Brokers). My personal MER was 0.90%, reducing my total return to +1.6%.

Not bad, not great for the first year. I definitely learned a lot. I like the math of options. Yes, options can provide leverage (i.e. double-edge sword). However, I like the diversification they can provide to one's portfolio. I've developed and will continue developing my personal Options stategies going forward in 2012. 

Best wishes to fellow option traders for this coming year.


----------



## humble_pie

avrex actually i don't think assignments matter when it's a case of a few contracts & a brief little 3-month pop. It's when you get larger stock holdings with low cost bases, ie far below the strike price but now they are in the money, that concern surfaces over the potential capital gain if assignment were to occur.

suppose for example investor has 1500 bce with a cost base of 28/sh & he has sold $40 calls which already represent a substantial capital gain even though they are now itm & stock is considerably higher. At the same time bce is paying a high & valuable dividend. In most cases it makes sense for this investor to roll his short calls forward in order to push capital gains as far into the future as he can. He'd also try to roll them up, being usually willing to forego some or most of the credit in a rollover because he'd be satisfied to just protect the dividend along with the higher price for the stock.

in puts i'm psychologically averse to assignment even though i would have the cash. I would just not be happy paying higher than market for any stock, even if i had previously received a great big fat premium for selling the put.

although you surely did better than breakeven with that lonesome call assignment ? the stk must have risen ... plus you would have received a premium for the call sale, no.

here is a thought for 2012. Naked short strangles in US cnq are good-to-very-good. Premiums are high. I've been rolling these forward for nearly 5 years now, always keeping the strike prices well away from market price of the stock. Today i sold 15 jun 45s while stk tiptoed past 39, but this is as close to the money as i'll go. The cnqs are my only naked calls. It's true they are risky, so i'd only ever do this in a stock with liquid LEAPs, so that in an extreme dire emergency i could roll forward into leaps with higher, safer strike prices.

whatever you do
good luck to you


----------



## Argonaut

As I said in another thread I like long-dated SLV calls this year, even though they are up a lot in the first day of trading.


----------



## humble_pie

at last some decent options to sell in roybank.

took in 2,505 this am & it wasn't yet 10 am.


----------



## Betzy

Ok time to revive this thread. Option seminar coming up from TMX on March 3rd, I'm in who's game??


----------



## Toronto.gal

Yes, I got the email yesterday. I won't know if I'll be in town until next month, but if so, definitely going even though Package 2 is the one that interest me, but not sure I'll pick that one. 

http://www.m-x.ca/evenements/optionsdayTor12_en?r=blog


----------



## Betzy

Toronto.gal said:


> Yes, I got the email yesterday. I won't know if I'll be in town until next month, but if so, definitely going even though Package 2 is the one that interest me, but not sure I'll pick that one.
> 
> http://www.m-x.ca/evenements/optionsdayTor12_en?r=blog


Package 2 is what I signed up forlets hope it's not too deep....


----------



## Toronto.gal

You're ahead of me Betzy, so you should be fine. 

I may repeat Package 1, but if allowed, I might sneak into Package 2 for the afternoon session as I rather learn about the Greeks than ETF's.


----------



## humble_pie

betzy please don't underrate yourself. I think you have an excellent innate knack for figuring options out.

of course none of us will ever have the math smarts that causalien deploys, but that's ok. We can each just mumble along, playing this fun game in our own way.


----------



## Causalien

We should coin this as getting humble pie'd. Humble's compliment always have triple meanings.

Let me just remind everyone that math smarts does not bring to profits, Humble does.


----------



## humble_pie

i continue to be surprised at the higher premiums paid for US options on canadian interlisted stocks. Exchange rate is close to par but US options are selling dear. I shall have to seek enlightenment on this because there's no free lunch ...


----------



## Causalien

Out of all the people reading this forum. There are about 5 who came out and said they understand options. 

How many are uniquely situated in a position where they are Canadian, can trade both US and CDN options and actually understands options? It is a free lunch.


----------



## atrp2biz

Haven't looked to compare, but interest rate differentials?


----------



## avrex

@humble_pie, can you post some examples.
I didn't think the interest rate differential between the countries would make much difference to the pricing using Black–Scholes model.

ps. I currently don't trade Cdn based options, so I have never noticed this phenomenon.


----------



## Argonaut

1. Buy July 80C for TD on the TSX. Cost 2.17
2. Sell July 80C for TD on the NYSE. Get 2.65

You could call it the Pie Gambit. Exchanging CAD for USD. Except you get _more_ USD than you are supposed to! Talk about a favourable exchange rate.


----------



## newbie

Toronto.gal said:


> Yes, I got the email yesterday. I won't know if I'll be in town until next month, but if so, definitely going even though Package 2 is the one that interest me, but not sure I'll pick that one.
> 
> http://www.m-x.ca/evenements/optionsdayTor12_en?r=blog


45 bux only?
did i read that right?


----------



## Smoothie

Yippee! Signed up for options seminar March 3

Anyone know if they provide study materials before the course?

Hey - I got 99% in calculus I at Marianopolis in Montreal, a quality CEGEP. I useta do integrals in my head, and I did all kinds of math in my master's at mcgill. 

That was over 25years ago, though, and it feels kinda daunting looking at the options stuff online now. 

Brain don't fail me now!


----------



## Argonaut

I almost failed calculus in university and it was the biggest reason I switched out of economics into history. But I still do pretty well with options, so don't sweat it.


----------



## avrex

Smoothie said:


> Anyone know if they provide study materials before the course?


The materials will be provided when you arrive.



Smoothie said:


> Hey - I got 99% in calculus I at Marianopolis in Montreal, a quality CEGEP.


Yep, the math is fun, but it's more important that you know the direction of the underlying.


----------



## humble_pie

argo i can't quite agree with your figs because you are ahem mixing up the bids & asks.

here are closing B/As for the td july 80 calls:

montreal: 2.17-2.33
US: 2.55-2.70

technically speaking one would buy in cad at 2.33 & sell in usd at 2.55. Not bothering with the currency conversions (currencies are very close to par today, BOC noon rate), one would end up with .22 credit, which is not bad considering that one is offering to sell the july 80s in USD & these are, today, slightly more valuable than the home currency.

since i never pay to the ask or sell to the bid, i'd expect to come away with something like .30 for this pair, or possibly better.

i am seeing odd effects like this here & there, with US options looking slightly more attractive than they should be. Not all, just some. Can't explain it. Tentatively, perhaps the arbs are pricing in an expected decline in USD, ie if option assigned next july $80 US will be worth less. 

as for choosing US or canadian options (avrex' point) whenever possible i also go to the US. But alas some canadian stocks, for example cpg, xiu, xgd, trade canada only. Also i've only ever used canadian options for bank stocks, although maybe the time has come to switch.

option gambits - holding stock long in one currency account, usually canadian, while selling their options in the opposite currency - work just like stock gambits.


----------



## Argonaut

I just looked at the last trade numbers quick. I find with the bids and asks, if you just overshoot the bid by a little, an ask may come down to meet you. Anyway, no matter how you shake it there's a difference there for essentially the same option. Worth arbitrating, but curious as to how a broker would see it for margin.


----------



## Causalien

humble_pie said:


> argo i can't quite agree with your figs because you are ahem mixing up the bids & asks.
> 
> here are closing B/As for the td july 80 calls:
> 
> montreal: 2.17-2.33
> US: 2.55-2.70
> 
> technically speaking one would buy in cad at 2.33 & sell in usd at 2.55. Not bothering with the currency conversions (currencies are very close to par today, BOC noon rate), one would end up with .22 credit, which is not bad considering that one is offering to sell the july 80s in USD & these are, today, slightly more valuable than the home currency.
> 
> since i never pay to the ask or sell to the bid, i'd expect to come away with something like .30 for this pair, or possibly better.
> 
> i am seeing odd effects like this here & there, with US options looking slightly more attractive than they should be. Not all, just some. Can't explain it. Tentatively, perhaps the arbs are pricing in an expected decline in USD, ie if option assigned next july $80 US will be worth less.
> 
> as for choosing US or canadian options (avrex' point) whenever possible i also go to the US. But alas some canadian stocks, for example cpg, xiu, xgd, trade canada only. Also i've only ever used canadian options for bank stocks, although maybe the time has come to switch.
> 
> option gambits - holding stock long in one currency account, usually canadian, while selling their options in the opposite currency - work just like stock gambits.


Humble, hope you are not doing big lots... I am pretty sure once the brokers catches on, the arbitrage would disappear and there goes another source of income.


----------



## humble_pie

discrepancy between some options in CAD & USD is still present.

stk tto 19.97
ECA c 21jul12 22, bid .84/ ask .90

stk ny 19.98
ECA c 21jul12 22, bid 1.00/ ask 1.10

it's odd. All i can make of it is it's helluva opportunity to sell US options.


----------



## Causalien

This is so sad, I have to manually look for cross listed stocks with options.

My platform can't scan CDN options... Anyone know of any platform that can scan both US and CDN options and list them side by side?


----------



## humble_pie

i don't have a side-by-side platform, i'm just stumbling into these things.

cause would you say that the eca julys & other similars are showing that the market expects a decline in USD ?


----------



## Causalien

I don't think so.

The futures contract for CAD/USD is saying the reverse and that is, it will take less USD to buy CAD around June and September. The currency markets should have more money flow than Options market.

It could be just bid up in the USA in expectation of the pending Israel attack on Iran around April. I am going to look through the options history in the US and see the changes in greeks.

Got any other cross listed stock I can observe? Preferably not oil related because of the upcoming war.


----------



## atrp2biz

Ok folks, sorry to break up the party. Here are my thoughts.

Upon expiration of the options, one will be buying the underlying in CAD AND selling the underlying in USD if X>S. To use the TD example, this amount is $8000 per contract. 

What happens if USD plunged (for instance to zero)? Your overall portfolio position is zero, but your cash flows would be

$-8000 CAD
0 USD

How do you protect yourself from this? You have to sell forward the USD/CAD pair. How much? $8000 worth. 

Now, what happens if X<S. Now you're short USD/CAD ($8000 worth) but now both options positions expire worthless and you have this short USD/CAD exposure.

Bottom line, this is not arbitrage because there will be FX exposure. The exposure is different depending on if the options are ITM or not. The only way you can protect both ways is to be long a put on the USD/CAD pairing--which costs money. My guess is it is the difference between the calls on the underlying stock.


----------



## Causalien

Le sigh...
And it got me all frisky for a second. Back to installing doors.


----------



## humble_pie

hey doc i was hoping you'd pass by.

beautiful analysis. I am bowled over w admiration.

long CAD call + short USD call = currency risk. That's what i was wondering about. I think you are right in observing it's the high cost of the long put needed to secure the currency hedge.

for myself, i don't hedge. I've always sold US options against canadian long stock whenever possible. This has worked out because i guard against assignment continually. Plus it's impossible for me to imagine a situation where USD is zero but CAD is still at 80 cents, presumably with respect to a basket of world currencies.

would you have any more words to share that shed a similar genius light on why puts are so expensive across the board ? time was when calls were more expensive than puts. Now the prices are reversed. This phenomenon may be related to record low interest rates, but how they are linked baffles me.


----------



## dotnet_nerd

humble_pie said:


> I've always sold US options against canadian long stock whenever possible. This has worked out because i guard against assignment continually.


Humble, does your brokerage recognize this as a covered call? ie. does their system recognize the short US call as paired with the long CDN stock or do you require additional margin for the option?


----------



## humble_pie

no, they don't recognize the pair as covered. The short US options are uncovered.

i keep canadian stocks that pay their dividends in USD in US account for 2 reasons: 1) to avoid the broker's FX fee on all those dividends, which will be charged if such stock is held in canadian account (different topic - there are entire threads about this); and 2) to generate USD margin.


----------



## atrp2biz

There were two errors in my analysis, but nevertheless there is currency risk. I'll be sure to correct them later in the day.


----------



## atrp2biz

HP, are you talking about dividend paying stocks or non-dividend paying stocks. Puts on dividend paying underlyings, particularly longer term puts will have a premium since there is an opportunity cost of being long a call vs. long the underlying since you wouldn't be able to collect the dividends.


----------



## humble_pie

doc re costly options, i haven't been observing long term puts but i have been buying 2014 US leaps to use in call spreads like covered writes, except the long leg is the leap instead of the stock.

i buy em ditm so that, in a severely worst case scenario, presumably i'll still have some short term calls that i could keep on selling. And i find that stocks with low or no dividends often have 2014 leaps calls priced with no premium at all. Of course, it's always been true that ditm leaps often had bids below intrinsic value, but now i'm seeing offers/asks that are practically down to intrinsic value as well.

markets are very volatile, so this phenomenon isn't present every day. I'm buying, so usually i have to hunt a bit & wait a bit, but it's worth it.

right now i hold US stocks only in rrsp. The rest of my US stocks are these diagonal call spreads. I've been doing em since 06/07. First a pilot project, then this was successful, then i gradually switched over.

i find myself wondering why taxable canadians would buy these stocks long in the first place. When one can lock in the stock for 2 years, with almost no premium, at half the cost, with a leaps call. And then start generating the stream of favourably-taxed capital gains arising from the short-term call sales.

on the put side, i haven't been looking but i'm sure you're right, there will be a continental divide between puts for underlyings w big dividends & those without.


----------



## jcgd

Could anyone offer up some must reads for options? I currently have only the most basic understanding so I'm looking for some good resources. I've read most of the basic articles on investopedia and such.

Thanks.


----------



## ddkay

Did you download the m-x.ca options manual?

I also have the John Hull book Dmoney mentioned in his thread. It's about 700 pages. DM me if you want it.


----------



## jcgd

I saved that manual so I'll give it a read. PM sent your way. Thanks!


----------



## humble_pie

i'm in favour of a short-books-plus-small-experience combo myself. So i strongly support the montreal exchange manual whose link ddkay gave you. This is only 50 pages. It's priceless.

there's the Short Book on Options, mark wolfinger. You could probably borrow this from a library, or buy it 2nd hand at low cost. It's been revised several times, i believe; there should be plenty copies available.

there's the venerable MacMillan on Options, now in its umpteenth edition, a revered bible of option strategies that, they say, has never been surpassed or even equalled. I'm referring to what they say because i've never read it (this has not been a good idea) (it's just that i'm daunted by weighty tomes) (they intimidate me.)

the internet is a fabulous educational resource. The montreal exchange has webinars, blogs & tutorials for all levels of players. You could spend weeks browsing through mx-ca material.

then there's the mighty cboe in chicago. Again, webinars, tutorials, bibliographies, libraries. Here's their education website:

http://www.cboe.com/LearnCenter/default.aspx

US broker tradeking has excellent educational material. Author mark wolfinger is on board at tradeking, along with other option experts. Webinars, conferences & forums are excellent. I hope you will have a chance to check it out.

https://www.tradeking.com/education

last of all, but first in importance, comes the grande dame of pedagogy herself. Experience. Pick some slow-poke stock that you already own, look up all the call quotes (pull up entire chains) & figure out what you would sell (hint: keep the strike price pretty far above market price, since you don't want to be assigned on your maiden voyage.)

or you could try what some cmf forum members are doing, and pretty successfully, too. Cherry pick one particular option, either a call or a put, & then buy it. It's not supposed to work like this - monodirectional option traders are supposed to lose - but they are doing famously well. Perhaps there's a special cmf forum glow.


----------



## Causalien

atrp2biz said:


> HP, are you talking about dividend paying stocks or non-dividend paying stocks. Puts on dividend paying underlyings, particularly longer term puts will have a premium since there is an opportunity cost of being long a call vs. long the underlying since you wouldn't be able to collect the dividends.


atrp2biz did you ever get to correcting the 2 errors you mentioned? If so, can you put them in bold and underline what was the previous version?


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## humble_pie

_" You have to sell forward the USD/CAD pair ... [if] both options positions expire worthless and you have this short USD/CAD exposure ... there will be FX exposure ... The only way you can protect both ways is to be long a put on the USD/CAD pairing--which costs money."_

cause i think the error could be in the above. If trader is short USD/CAD, he'd buy a call to hedge instead of a put, would he not.

on the other hand, i think ... the trader ... in this scenario ... could be going ... long USD/CAD ... in that case he might indeed buy ... a put ... to hedge.

dear me, said the Mad Hatter. You look as huge as a polar bear lumbering along on its hind legs.

it's because we're in the great hall of mirrors so everything looks berserk, said the March Hare, whose reflection did indeed resemble a giant polar bear with matted white fur.

Alice gave a little scream because she had just caught sight of the Cheshire Cat, looking as fierce as a striped himalayan tiger in the curving mirrors.

hurry now, whispered a tiny voice beside Alice's shoe. Alice looked down. It was the Red Queen, as small as a gnat, almost invisible. Puts, calls, buy, sell, matter, energy, it's all exactly the same thing anyhow, whispered the Red Queen. Everything is just a question of quantum physics.


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## Causalien

I will keep that in mind and do a full calculation after this month's expiration. Even though atr is convincing, I still need to do it myself and test that the forex cost covers all of the premium. A small lot test is needed here.

What is the 2nd error from atr then?


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## Argonaut

Humble will be happy to know I made my first option sale today. Sold GLD June 155P and bought 145P for the spread. The only crappy thing is that you have to phone Questrade to do this but it saves one side of the commission. He said it will appear in my account tomorrow.. all very questionable, I don't like not having control.


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## humble_pie

no i'm not happy. Not until you get to the point of doing this yourself online. One leg at a time. No phoning the rep waiting paying higher commish out-of-control blah blah.

it's like true gambitting. Never mind this dollar stuff blah blah.

in option pairs - or triples, whatevers - one waits/hunts for the optimal spread moment. I never do an option pair at the natural spread. I always get a better price. Or else i don't do.

i usually do the more difficult side first. It's amazing what opportunities can be achieved. Once it's nailed down i put in the order for the easier side.

it's true a risk window opens. This is precisely what's so fun. Is knowing which side & how to trade first, in order to best control the risk.

even when waterhouse gets around to introducing think or swim canada, i'm not sure i'll bother to use its "spread order" platform. I doubt the spreads this platform can achieve will be as good as what i can achieve legging around on my own.

you see, from the market maker's point of view, there's always a problem with a spread order. Option specialist receives a spread order, he immediately thinks somebody is trying to put one over on him. The standard degree of paranoia, already very high, goes up several more notches. So he'll grant a small spread, but never a big one. *

the way around this is to sneak up on em with just one leg at a time. Another reason why the US is good, because the 2nd order might even go to a different market. 

(signed)
single-crust pie

* edit: he might grant a spread that's a tiny bit off the natural in favour of the trader. But he'll never grant anything that's significantly better than the natural, in favour of the trader. To obtain those significantly better prices, the trader has to work the spread himself.


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## Argonaut

I know, humble.. I wish I could. If so I would just sell the put outright and forget about the spread. But Questrade won't let me as I have to have $25,000 in my margin account.. whereas most of my money with them is tied up in my TFSA.


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## humble_pie

hmmn.

argo you work for the big green, don't you. I sometimes think that, in their marketing plan, they're not creating a good enough opening for the next generation. They should have something like NextGen traders' program, with perks for "qualified" junior traders.

obviously their own staff would be among the nextgen traders. They could find other nextgen juniors too - i mean clients with less than 50k household savings - if they put their minds to it. Sometimes it seems to me that tdw is not doing enuf to cultivate the seeds of tomorrow.

anyhow can you get them to give you a break with respect to naked option selling. (in the pair trades i've described, trader mostly has to go naked short first.) Also get them to wuffle on the 50k minimum.

if i were a big nob at tdw i'd be favourable to this.


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## humble_pie

here is an example of getting a good deal on a handworked spread.

i've been eyeing a call spread in merck. Buy ditm leaps 25 calls of 2014, sell slightly otm short-term calls 40s or even 45s. Then continue selling the short-terms throughout the 2-year life of the long-term leap.

the hard part was to nail down the 25s of '14. Yesterday there was a seller out there obviously trying to unload a bunch at 13.80. Stk was around 38.40, intrinsic value in the 25s was therefore 13.40. He was offering a great price. I didn't buy, though. Just thought about it.

today the seller had vanished & the dealer was asking 15.10 for the same 25s of '14. This is ballpark standard dealer ask price. But i thought yesterday's seller might still be lurking, so put in a lowball order at 13.60 to see if he could be sniffed out.

bingo ! order was filled. He was there after all. Just not actively offering.

after that it was easy to sell the matching short term calls.

there is no software or phoned "spread order" that could ever have done this.


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## atrp2biz

atrp2biz said:


> Ok folks, sorry to break up the party. Here are my thoughts.
> 
> Upon expiration of the options, one will be buying the underlying in CAD AND selling the underlying in USD if X>S. To use the TD example, this amount is $8000 per contract.
> 
> What happens if USD plunged (for instance to zero)? Your overall portfolio position is zero, but your cash flows would be
> 
> $-8000 CAD
> 0 USD
> 
> How do you protect yourself from this? You have to sell forward the USD/CAD pair. How much? $8000 worth.
> 
> Now, what happens if X<S. Now you're short USD/CAD ($8000 worth) but now both options positions expire worthless and you have this short USD/CAD exposure.
> 
> Bottom line, this is not arbitrage because there will be FX exposure. The exposure is different depending on if the options are ITM or not. The only way you can protect both ways is to be long a put on the USD/CAD pairing--which costs money. My guess is it is the difference between the calls on the underlying stock.


Not really explicit errors, just concepts that have to be considered. If the USD went to zero, the underlying in USD would be infinity. Instead, let's look at realistic scenarios.

1. What happened if the USD went down 10% relative to CAD when the positions were opened with the USD/CAD at 1. If TD was at CDN$80, it would be at US$88. The short calls would be ITM and the long calls would expire worthless. Ouch!

2. The second error/concept is that the long USD/CAD put would only be needed if (1) X > US$80 AND (2) the USD went down. This is where those structured products marketing gurus can make their money with ultra-customizable products. That would be such a fun business to be in.


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## Miser

Argonaut said:


> Humble will be happy to know I made my first option sale today. Sold GLD June 155P and bought 145P for the spread. The only crappy thing is that you have to phone Questrade to do this but it saves one side of the commission. He said it will appear in my account tomorrow.. all very questionable, I don't like not having control.


 Looking at a LEAP in GLD ....whats with this call thing?
How ya like the Beta platform?


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## Argonaut

Hey Miser, the beta platform is okay but it has some bugs. I had to call yesterday to figure out how to cancel a GTC order (which I had forgotten I even had), the rep didn't know and I finally found it while I was on hold. Cost me about $40 because of the wait.

Hey humble, what are some attractive stocks on the TSX to sell puts on? I've briefly glanced at some of the interlisteds and sometimes it's tough to tell whether there's more action in Montreal or Chicago/NY. Let me know if you can what names are efficient trades on the Canadian side.


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## humble_pie

argo the only puts i'd ever sell on montreal are those that belong to long-stock-short-strangles whose options still trade primarily on montreal. For me these would be canadian banks plus, sometimes, bce, although at the moment my short bce calls are US & have no bce puts.

for everything else i go to US option markets.

option prices may superficially look parallel to a quick glance, but one has to look at the open interest in a particular option, compare the sizing in the B/As in both markets, see what kind of spread is being asked in always-outrageous montreal.

ps efficient & montreal options do not really go together imho ...


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## Argonaut

You're right, I'll stick to US markets. Broker wouldn't even let me sell SLV naked put even though I have plenty enough margin and cash to cover if silver went to $0. I'll see if I can ask to be put on the higher options level by virtue of TFSA balance.


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## Lephturn

I do almost all my options trading in my US account - I use OptionsXpress for it and they are excellent. Highly recommended.


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## Rusty O'Toole

My experience of option trading is that trying to get a better price is a mistake. If I bid low and the underlying goes my way, I never get filled. The only time I get a fill is when I am wrong, the trade goes the wrong way and I lose money.

So, when I bid low I save a few bucks and lose a few hundred (when I am wrong) or a few thousand (when I am right).

What am I doing wrong?


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## Causalien

You are on the wrong side of the trade.


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## Rusty O'Toole

Doesn't matter if I am buying or selling the result is the same. If I hit the bid or offer, or close to it, I get filled. If I try to chisel I don't unless the underlying is moving the wrong way. So I lose the good trades and catch the bad ones all for trying to save $5 per option.


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## humble_pie

since when was knowing how to trade properly ever referred to as chiselling lol.

what you're doing may feel like chiselling to you but it looks like aimless blundering to me.

markets are closed on the weekend. To find out what you're doing wrong you'd need at least a couple detailed quotes from a live market. Including the ticks in the underlying stock, sizing of the bids & asks, open interest etc.

my best guess is you don't know how to interpret this information, so you're not getting a proper sense of what is really going on.

hint: with illiquid stocks & their highly illiquid option markets, there are no trading opportunities. Solution: don't trade those options. Move elsewhere.

hint: sometimes even with a fairly liquid option, dealers will not budge from their wide spreads, while at the same time they are transparently willing to make a decent market in the next strike up or down, or the next date out. Solution: move to those decent markets.


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## Rusty O'Toole

I use Scotia Itrade which gives me 20 min delayed quotes. Is that close enough or do I need to look elsewhere ?


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## Causalien

You can just get a real time option quot and enter the limit order in scotia. My guess is, you problem is due to delayed quote.

Then again, I would never trade options with a delayed quote. It's like trading with your eyes blindfolded.


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## Miser

I read this on line.

Put options on bond ETFs provide a form of insurance against rising interest rates.

How would I go about this. Bit of a newbie to options but want to protect against increased payments while still staying with a variable mortgage.

Any inverse ETF bond funds that I could buy a call on?


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## tinypotato

whoa, 20 minute delayed quotes for options...avoid that

If you are on Scotia iTrade, and do not qualify for the FlightDesk platform for free (i.e. min 30 trades a quarter or 250K in assets) I suggest you use their "trading desk" page instead. Don't use the simple options trade entry page.

Go to the Platforms & Services tab and select "Trading Desk". This page should give you real time option quotes. You will need to manually click "update" to get a real time quote but that's better than paying if your trade volume isn't that high.

The page also lets you adjust your trades quickly...


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## humble_pie

delayed quotes are not close enough to work with.

as a matter of fact obtaining live quotes one at a time after elaborate navigation on a broker site is not good enough to work with, either.

one needs a group of detailed option quotes in real time - bids, asks, no. contracts bid, no. contracts offered, last price, open interest, underlying last price, volume, tick, bid, ask, underlying in US if interlisted, sometimes a sector index, sometimes a competitor stock.

one needs to see all these detailed quotes together on the screen at the same time.


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## Causalien

Having 6 monitors helps in humble's suggestion. At the cost of $1000 (for monitors and graphics cards) you get

1 monitor for the 4 futures tracking.
1 monitor for the main order issuing/Big drawing graph
1 monitor for the graph of the option strike/date you are particularly interested in
1 monitor for Internet news
1 monitor for Alerts, file browsing, internet traffic congestion monitoring
1 monitor split top to bottom for TA signals of the stock you are interested in.

Setup the platform so that when you select and click something, all of the graph changes to the stock you are interested in. Save different layout profiles for different investment styles at login.

And that's all you need to trade options.

PS. my Internet monitor is actually a text editor for coding. Web browsing is done on iSomething. Separation of production and virus infected web.


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## humble_pie

no, one doesn't need multiple monitors or anything special. The td supplies all this data for free. On one screen. Real time. To all clients, even the smallest. 

hint: in options, it's the sizing (number of contracts bid, number offered) & the open interest that are important. Avoid illiquid markets.


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## HaroldCrump

Scotia iTrade's options trading page has all the above requirements from humble_pie's message as well - on the same screen.
Except for the following : _underlying in US if interlisted, sometimes a sector index, sometimes a competitor stock_.

If you select All Strikes, it will show all the information for all strikes all dates.


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## humble_pie

harold i've never been a scotia client so i don't know for sure, but what you seem to be describing is a full chain display of all the options for a particular stock.

all chain displays i've ever seen don't include details for each individual option that are crucial, such as number of contracts bid, number offered. Trader usually has to toggle for these.

for me, the ideal display is the full list of details i mentioned. Page can be freely edited. I wouldn't leave home without it.


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## HaroldCrump

Below is a partial screen print of the options quote page for the basic web trading platform.
This is for RY.TO (Royal's TSX listing).
I could not capture the full screen but the same table is repeated for all available expiry dates.








.

The Trading Desk tool that tinypotato referred to above is a more condensed version of this and provides a way of viewing multiple securities at the same time and place orders from the same screen.

It has many - but not all - of the data points you listed.

P.S. I am not promoting or putting down any particular brokerage, just saying what's available out of the box with iTrade.
I believe the subscription only Flight Desk platform has much more, based on their advertisements and promotion videos.
But I am not a flight desk client (yet).


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## humble_pie

this is exactly what i meant, it's an option chain.

missing is the crucial sizing for each option. The number of contracts bid. The number of contracts offered.

sizing does not matter so much in your example because these are the februaries & they will expire in 3 days. Therefore the B/As are very close together.

but go out in time, say to the july of 2012 or the januaries of 2013, & you will see big gaps or spreads between the bids & the asks in many of the individual options. This is precisely why it's important to know the sizing, ie no. contracts bid, no. contracts offered.

for example, i did 5 options this am. In every case i obtained a far better price than the natural. I was guided in part by how many contracts wanted to buy, how many wanted to sell.

sizing is crucial information. It tells you if there's any market out there for you & if there isn't, it tells you to go away & try again another day.

specific example: stk is 58. I'm selling a call. Market is 2.32 bid, 2.68 asked. Sizing is 2 contracts x 118. Will i be able to sell at 2.60 ? No. At 2.50 ? Perhaps, if stk rises. At 2.40 ? Yes.

now another version: stk is still 58 but all is ticking up. Option is still 2.32 bid, 2.68 asked. But now the sizing is 341 x 26 & i am still the lucky seller. Will i be able to sell at 2.60 ? Perhaps. At 2.50 ? Yes.

you can see the difference & it's all due to knowing the sizing.

it's true that from these option chains - which are fairly standard presentations - the trader can toggle into an individual option for more details. But i for one find it's nice to have everything spread out on the screen in front of me ...


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## tinypotato

Regarding Flightdesk...

From what I see, Flightdesk does not provide the bid / ask size for options (it does market depth for stocks however)...

Flightdesk does provide tick by tick changes in the bid/ask along with letting you tile different windows with live charts, news, etc.


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## avrex

I have been using *Interactive Broker's* WebTrader platform.
You can create multiple <tabs> for each security (AAPL, IBM, etc.) that you are interested in.
Within each tab, it shows the underlying security details and below that the options chain details.













humble_pie said:


> one needs a group of detailed option quotes in real time - bids, asks, no. contracts bid, no. contracts offered, last price, open interest, underlying last price, volume, tick, bid, ask, underlying in US if interlisted, sometimes a sector index, sometimes a competitor stock.
> 
> one needs to see all these detailed quotes together on the screen at the same time.


@humble_pie, if I may ask, what platform do you use?


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## humble_pie

avrex thankx for the pic. Those were after hours quotes, ie no markets, but i am wondering whether clicking on the blue arrows next to the option bids & asks might generate the sizing details.

there are nice details for the stock up top ... but ... i'm wondering where are volume & open interest figs for each option. It's IB, one of the best brokers in the land, so i'm sure these details must be close by.

where do i find these details myself. At the good old td, is where. They offer live detailed quotes to every single client. Even very small clients.

there are option chains, of course. These are great for birds-eye viewing. But it's also extremely easy to build a customized list of 10 items with much greater detail than the chain provides. Both canadian & US items can be added to the same list.


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## Argonaut

I was thinking today about collaring a stock to collect its dividends without risk, but it looks like that kind of strategy is already priced into options. 

For instance, Intel is sitting at 26.58. For Jan 2013, buying a 25 put costs 2.30, but selling a 27 call only nets 2.22. This is despite the underlying being closer to 27. By the time commissions are factored in, the strategy isn't worth it. I'm sure there is a way to play it but like everything else it requires some effort. No free lunch.


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## Causalien

Yes, there are no free lunch in options. It has existed for a long time. We are not pioneers. 

I wouldn't get discouraged either. Sometimes when I think of a great strategy, I know that it won't work against big famous stocks, but it is still worthwhile to do a scan on all S&P options against your idea.

This is also when you are about to realize how the underlying stock prices are sometimes "locked " by options when there are enough open interest to warrant a stake in the price movement by the market makers to ensure maximum expiration.


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## Causalien

Question

How do you report a tax when a naked short option has been infinitely rolled over forever?


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## Argonaut

Broker approved upgrading me to highest options level. It looks like the maintenance excess calculations are for absolute worst case Ontario, so I can only sell puts on what I can afford to buy. This is good, it keeps me in check. Selling SLV Jan 27P.


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## atrp2biz

Causalien said:


> Question
> 
> How do you report a tax when a naked short option has been infinitely rolled over forever?


http://www.m-x.ca/f_publications_en/brochure_fiscalite_kpmg_en.pdf


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## avrex

Causalien said:


> Question
> 
> How do you report a tax when a naked short option has been infinitely rolled over forever?


Can you clarify what you mean by rolled over? 
I'm assuming that every options transaction has a tax implication.


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## Causalien

Rollover as in, moving the maturing date forward to the future and sometimes the strike price up so that the option has less of a chance to being exercised.

Atr2: The document never mentioned anything about roll over. A search for both roll and rollover in the text confirms that. So is this up to our own interpretation?

Technically, a rollover is a sell and rebuy, so is that how it should be recorded? Using the date of the roll over?


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## humble_pie

a rollover involves 2 separate taxable entities. One option is bought & a different one is sold. They are reported separately on the list of capital gains & loss transactions, imho.

ex: in january taxpayer sells an april option, say ry apr 56. In march he buys it back & sells ry july 56. And on & on.

that april 56 number has a cost & a proceeds. These get reported. Same thing for the july number & all its successors.

assignment is different. To be avoided for many reasons.


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## avrex

*Options Expiry Date*

... speaking of avoiding assignments.

I'm a dummy.
In my job, I usually get a day off of work, a couple of times a month. That gives me the chance to make a trade or two when I'm off, at home. The problem is that my work has been so busy lately, that I haven't had a day off, for quite some time.

Friday is options expiry day, and I was finally able to secure a half-day off. I left it too long. Now I've got 3 long calls and 3 long puts, all in-the-money, that I need to close, to avoid automatic assignment. I'm a dummy because I should have closed these positions at least a week ago. Plus, I don't always choose the most liquid options, so I'll probably get screwed by the market makers prices.

Lesson learned.


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## humble_pie

the half-full part of the cup is that you did realize all this in time to rescue your positions tomorrow, before assignment on saturday, plus you did learn the lesson perfectly.

i remember mark wolfinger saying that pro traders get out at least by early in the week of assignment. I get out quite a bit earlier myself. At the very end, there's nobody left except the dealer. I am so sorry about that, for you.

it could have been much worse. Some might not notice. Some might not even understand what is going to happen. Come monday & there'll be a great big fat margin debit in their accounts, ooh là.


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## atrp2biz

Rolling over would absolutely involve different securities, so each would have to be treated independently for tax purposes.

I agree that most positions should be exited probably by mid-week of expiration Friday. I'm a fan of neutral strategies and there is just too much gamma risk as you approach Friday, despite the high positive theta. 

If anyone has a strategy that is positive both theta and gamma, please let me know.


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## Causalien

Challenge accepted. I'll see if I can construct something like that. Might not make any sense though.


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## humble_pie

this is so refreshing, cried the Dormouse. He was standing up in Alice's straw bicycle basket, sniffing the spring air & looking for robins in the hedgerows, as Alice biked along the country laneway.

fresh air must be so nice for you after being squashed up in the teapot, said Alice. But why did he say he was worried about the gamma.

*Αυτό είναι σαφές, όπως ένα κουδούνι, είπε ο τυφλοπόντικας*, said the Dormouse.

don't you think that by thursday an in-the-money option expiring on friday would have reached 100 delta & the rest of the greeks won't matter at all, asked Alice.

yup, but tell that to the bankers, said the Dormouse.


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## atrp2biz

Alice, the inquisitive one she is, then asked, "What about those at-the-money options with deltas of 0.50? Surely those gammas must be mighty high?" 

Hmmm...c'est vrai ça. Donc, je crois que ça c'est la raison que la decomposition de temps est aussi élevée. C'est aussi la raison que theta pour les options ITM est zero.


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## avrex

Argonaut said:


> humble, I assume you were holding some short options during the flash crash in May '10.. did anything happen?


I've always wondered about this too. I'm worried that there might be automated programs that request an early assignment on the calls that I write. Ah, maybe I just worry to much. I'm assuming the flash crash happened so quick that there wasn't any time for early option assignments.


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## avrex

humble_pie said:


> i've cranked out 2 simple formulas for anayzing early assignment risk a couple times already. Avrex copied them, i remember. I don't mind cranking em out again, because every option trader should have these formulas. They're fast n easy. They reveal what could be subject to early assignment & what, although in-the-money, is still buffered by enough premium that it won't be assigned.


CALLS: when (stock minus strike) > option bid = risk of assignment

PUTS: when (strike minus stock) > option bid = risk of assignment 

Yep, these are definitely included in my options spreadsheet that I use to monitor my open positions. Very useful.


----------



## avrex

atrp2biz said:


> I'm a fan of neutral strategies


@atrp2biz, when you say neutral strategies, are you speaking of volatility strategies?


The way I see it, there are three main strategies when utilizing options (ya, I know, I'm really generalizing here and many of these strategies overlap.)

*1) Hedging strategies*
You own or have an interest in the underlying. You are protecting a position, or are trying to gain additional income via this option strategy.

*2) Directional strategies*
You have a uni-directional bias of the underlying. You may be utilizing options to gain more leverage than you could vs. owning the underlying.

*3) Volatility strategies*
You prefer delta neutral strategies. You have a directional bias in the volatility of the underlying.


My own preference, thus far, is to utilize 2) directional strategy. 

*Premium strategy. *
However, I am also trying to collect premium dollars over time. 
My ratio of selling short (puts and calls) vs. buying long (puts and calls) is about 2 to 1. 
Therefore, my strategy is to collect more premium dollars than I pay out.


*Where do all of you option traders fit within these classifications?*

- atrp2biz. It sounds like you use Volatility strategies.

- humble_pie. It sounds like a lot of your positions are hedged against the underlying that you actually own and you gain premium dollars from your option positions. For example, you have mentioned diagonal spreads in the past. In that case, you are attempting to take advantage of the time decay, via a spread, to gain premium dollars.

- Argonaut. It looks like you are similar to me in the use of directional strategies.

How about,
- Causalien
- Lephturn
- HaroldCrump
- cannon_fodder
- andrewf
- mode3sour
- ddkay

I'm curious what your strategies are.


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## Causalien

Depends on which portfolio. 
The prominent one I discuss on CMF is high theta burn. Also known as writing options. Also known as writing with certain conditions that needs to be met to create a high theta decay.


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## Argonaut

avrex: Since I foolishly gambled away the money won on GRPN with LKND I've decided to change strategy for the mean time. Buy-and-hope-something-happens has become sell-and-hope-nothing-happens. Will be keeping a number of put credit spreads open that are comfortable and easy enough to keep an eye on. 

Perhaps as the contracts expire I may leverage some of the returns into a directional bet, to use the house's money against itself so to speak. June is a bit of a cutoff in my mind right now for keeping credit spreads open, as summer tends to be the selling season.


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## humble_pie

well, that didn't take long. Argo we already had this conversation did we not. In the long run it's the option sellers who ...

avrex i do different things, perhaps not a good idea to try to nail folks into categories esp folks one has never even met.

yes quality canadian stocks w significant eligible dividends plus short strangles. For US stocks in non-registered account, no stocks, nothing but long-life diagonal or (rarely) vertical spreads. Most are call spreads, but a few are put spreads. One objective among others is to avoid fully-taxed US dividends by transforming them into favourably-taxed capital gains.

i also have mono-directional bullish plays both US & canadian but these are always short naked puts. I'd never be one to buy a plain call. If somehow fatally seized with a bullish lust to buy a long call, i'd wrestle the craving under control by turning it into some kind of spread configuration.

& i trade some small caps that have no options at all.


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## atrp2biz

Neutral and volatility strategies are not necessarily synonomous. For example, both calendars and butterflies are neutral, but calendars are long volatility while butterflies are short.


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## Argonaut

Possible rule for trading spreads, needs more analysis:

Net Credit Spread: Keep the spread tight, with higher number of contracts.
Net Debit Spread: Keep the spread long, with lower number of contracts.

Also, keep your friends close and your enemies closer.


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## humble_pie

_Also, keep your friends close and your enemies closer. _

lol i first heard that from a local politician who i swear is going to be our next mayor, although it's many years off.


----------



## avrex

*Canadian TMX Options*

Thus far, I have only traded options on the US markets.

I was recently wondering, if there were suitable option candidates on our Canadian TMX exchange.

Back on Feb 23, I grabbed a snapshot of the TMX option action, and just now, have had a chance to analyze it.
I decided that I would be only interested in a security, if it traded over 500 contracts in a day. 
By my definition, this demonstrates a reasonable level of liquidity.

In total, there are around 240 securities on the TMX that offer options. 
Of those, only *38* securities traded over 500 contracts on that day.

Of those, I noticed that *10* of those securities, actually provided more liquidity/volume, if you went to the US markets instead.
i.e. if currency isn't an issue for you, go to the US market instead.

Here's a list of those 10, and their interlisted US ticker symbols.


Code:


                                                 Feb 23    Interlisted 
Ticker   Company             Sector              Volume    Ticker      
------   -----------------   -----------------   ------    ----------- 
ECA.TO   Encana Corporatio   Energy                1074    ECA         
RIM.TO   Research In Motio   Information Techn     1154    RIMM        
AEM.TO   Agnico-Eagle Mine   Materials              657    AEM         
ABX.TO   Barrick Gold Corp   Materials             1647    ABX         
G.TO     Goldcorp Incorpor   Materials             2088    GG          
K.TO     Kinross Gold Corp   Materials              976    KGC         
PAA.TO   Pan American Silv   Materials              531    PAAS        
POT.TO   Potash Corporatio   Materials              643    POT         
SLW.TO   Silver Wheaton Co   Materials             1529    SLW         
YRI.TO   Yamana Gold, Inc.   Materials             1383    AUY


*Possible Option candidates*

Here are the remaining *28* securities, that in my opinion, are possible option candidates for trading on our Canadian TMX exchange.


Code:


                                                 Feb 23
Ticker   Company             Sector              Volume
------   -----------------   -----------------   ------
THI.TO   Tim Hortons Inc.    Consumer Discreti      527
AAV.TO   Advantage Oil & G   Energy                 604
ATH.TO   ATHABASCA OIL SAN   Energy                 682
BNK.TO   BANKERS PETROLEUM   Energy                 566
BIR.TO   BIRCHCLIFF ENERGY   Energy                1852
CCO.TO   Cameco Corporatio   Energy                 774
CNQ.TO   Canadian Natural    Energy                 917
COS.TO   CANADIAN OIL SAND   Energy                 807
CVE.TO   Cenovus Energy In   Energy                 586
HSE.TO   HUSKY ENERGY INC.   Energy                1562
PRE.TO   PACIFIC RUBIALES    Energy                 649
PBN.TO   PETROBAKKEN ENERG   Energy                 673
SU.TO    Suncor Energy  In   Energy               11941
TLM.TO   Talisman Energy I   Energy                 525
UUU.TO   URANIUM ONE INC.    Energy                1021
BNS.TO   Bank Nova Scotia    Financials             652
BMO.TO   Bank Of Montreal    Financials            1419
CM.TO    Canadian Imperial   Financials             910
IGM.TO   IGM FINANCIAL INC   Financials             748
MFC.TO   Manulife Financia   Financials            1091
RY.TO    Royal Bank Of Can   Financials            1377
TD.TO    Toronto Dominion    Financials             929
BBD-PB.TOBOMBARDIER          Industrials            971
FM.TO    FIRST QUANTUM MIN   Materials             1153
OSK.TO   OSISKO MINING COR   Materials              518
TCK-B.TO Teck Resources Lt   Materials             3564
BCE.TO   BCE, Inc. Common    Telecommunication      546
RCI-B.TO Rogers Communicat   Telecommunication      685


For each candidate above, on the day of the trade, you'd need to drill down to a specific strike price to see if the volume and bid-ask spreads warrant a possible trading position.
Good hunting.


p.s. I've only discussed individual companies above. As far as ETFs are concerned, XIU is the only product, with the necessary volume, to be a candidate for options trading.


----------



## Argonaut

Great work, avrex. Much appreciated. When I was randomly looking at it a while back, Suncor looked like the one to play.


----------



## Causalien

Argonaut said:


> Great work, avrex. Much appreciated. When I was randomly looking at it a while back, Suncor looked like the one to play.


Great job. It further strengthened my belief not to do options in Canada with only banks and resources. The list did show me one potential candidate and that is THI.


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## Causalien

I just tried some options in the Canadian market and find it to be a cesspool of manipulation. Low volume (Hurray, mine accounted for 50% of the market volume) and lots of suckers who got front ran by the market makers as is obvious by the out of whack "last" exchange price versus the current bid ask spread. Honestly, you are a noob if you put in a market order in a low volume environment, but it is everywhere on the CDN option market.


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## humble_pie

_never place an options market order._

everyone agrees montreal is great for food & girls & restos & clothes & smoked meat & Old Port & Mount Royal & ice cider & grand prix & cagey politicians. But it's the nadir for options & now the best artisan wineries in niagara district are tops in canada i hear.

always, always go to US options. There can be the rarest of quirky little exceptions (thomson is one), but generally a US market will be faster. At lease it will be alive.

_never, not even in US markets, place an options market order._

if for some reason you feel you must go to montreal exchange, stalk your option. What you are looking & waiting for is a counterparty, not the specialist.

even in a worst case scenario, where there is no true counterparty & the executioner awaits, remember that the specialist is always, always going to give up that nickel, if you remember to ask for it.

*and never. ever. place. an. options. market. order.*


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## Causalien

I love sending my orders on ex day by 2 cents below or above the bid ask. Price isn't going to move and you know they don't want to take it, but by the end of the day they will have to take the bad deal. 
I feel bad for my market makers sometimes.


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## webber22

Maximum option pain for SPY: $138 http://www.optionpain.com/OptionPain/Option-Pain.php
Current price SPY $138

Coincidence ?


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## Causalien

Yeah, this opex is a very typical manipulatied opex. All the signs are there...Other months... not so much.


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## dotnet_nerd

webber22 said:


> Maximum option pain for SPY: $138 http://www.optionpain.com/OptionPain/Option-Pain.php
> Current price SPY $138
> 
> Coincidence ?


SPY is an index tracking stock. It's price is derived from the broad market (dog wagging the tail) so how could be anything other than coincidence?


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## webber22

Yes the SPY is an index. I'm sure there's programming out there that manipulates the S&P components like AAPL, XOM etc to achieve maximum pain across all stock options


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## dotnet_nerd

And let's not forget The Plunge Protection Team if you believe in that sort of thing


_



Y'know, I seen me a mermaid once. I even seen me a shark eat an octopus. But I ain't never seen no Plunge Protection Team

Click to expand...

_-Watson, the Hunt for Red October


----------



## avrex

Causalien said:


> I love sending my orders on ex day by 2 cents below or above the bid ask. Price isn't going to move and you know they don't want to take it, but by the end of the day they will have to take the bad deal.


Is this really true? 
I didn't think the market makers were under any obligation to accept a 'bad deal'.

Can you provide an example of the 'bad deal' that they took? (so that I can understand this scenario)


----------



## humble_pie

Causalien said:


> Canadian market ... lots of suckers who got front ran by the market makers as is obvious by the out of whack "last" exchange price versus the current bid ask spread.


cause it's a good idea to understand how the options exchanges establish the so-called last price. It is not the true "last traded price" as these often occurred days or even weeks ago, especially in montreal.

institutions including funds, pension funds & brokers all need realistic last prices so they can calculate house positions, margins, etc. This need for a reasonable "last" price is the driving priority. There is little need to preserve an actual traded last price that was executed, say, 3 weeks ago.

so what the option exchanges do when there is no trading all day in a particular option is this: they take the bid & ask at the close of trading & call one of them the "last price."

of course, if an option has traded, then there is a real last price. But it's common in montreal for large groups of options to never trade at all on any one particular day.

here's an illustration. XYZ jan 50 calls of 2013 last traded way back in march, when stock was 43.60. Let us say this call did actually trade at 1.65, but has not traded since.

however stock continues to trade & today has dropped to 28.40. The jan 50 call has not traded, but it's .20 bid, .50 offered. The exchange will release one of these figures - probably the .50 - as its "last" price for today.

suppose investor is short this call option in his margin account. His broker will calculate the margin debit based partly on this last price. You can see why the broker needs to use .50, which is close to market conditions, instead of the unrealistic historic last traded price of 1.65, which would distort the margin grotesquely.

one of the reasons why "last" option prices coming from montreal often look so bizarre is because montreal spreads beween bid & ask are so ginormous. On almost all exchanges, these spreads tend to widen in the last 30-60 minutes of trading.

in addition, just to keep montreal option traders alert & on their toes, mx-ca always has numerous glitches & random exceptions to this general practice.


----------



## Causalien

avrex said:


> Is this really true?
> I didn't think the market makers were under any obligation to accept a 'bad deal'.
> 
> Can you provide an example of the 'bad deal' that they took? (so that I can understand this scenario)


Nah,

Just my own tail wagging the dog from my own trades. There's no concrete evidence.
Bid ask spread of 0.16 and 0.17. Large open interest large volume (mine = 0.00001%) I put in an order for 0.15 bid (MM selling for 0.17) It was the end of the day and no other trades were happening. Yet mine went through, price wasn't moving either.

I formed this weird idea after the number of times I got the order through.

Note: I do think they are under obligation to make the market, which means stand in front of the bus like a suicide bomber.


----------



## Causalien

Hi Humble, 

There should probably be a lot of that, but I know better than to report option trades in the past. Notice that this particular one I am talking about, I said my volume = 50% of the day. Most of the discrepencies I am looking at are same day trades. Could be because the stock moved a lot on the day. 

We should agree that. Newbies beware on the canadian options market.


----------



## Betzy

Causalien said:


> Hi Humble,
> 
> There should probably be a lot of that, but I know better than to report option trades in the past. Notice that this particular one I am talking about, I said my volume = 50% of the day. Most of the discrepencies I am looking at are same day trades. Could be because the stock moved a lot on the day.
> 
> We should agree that. Newbies beware on the canadian options market.


What the deal today? TMX has like no orders hardly on anything I am looking at. What happened to all the contracts???


----------



## humble_pie

Betzy said:


> What the deal today? ... What happened to all the contracts???



the thomson reuters feed from the montreal exchange has failed all day. All brokers relying on thomson quotes are up a crick.

i did manage to get some options done on montreal this am by looking at the delayed quotes on montreal exchange website (functioning fine, but delayed) & refreshing the B/As for myself by referring to live quotes on the underlying stock.

parties who cannot do this should refrain from trading montreal options until quotes are restored. Information shown is gibberish.


----------



## Causalien

Here's a tax question that I find unnerving. It's about writing put option and getting it exercised.

From the guide that someone posted on the previous thread, in this scenario, the capital gained on options sold of that year will be set to zero and subtracted from the adjusted cost basis of the stock. If the stock is then not sold on the same year, the captial gain never shows up in your tax report.

Am I the only one here seeing the potential for abuse? Sell large amount of same year put options that is sure to exercise and keep the capital gains and the stocks tax free. Of course, it'd suck if the stock continue to go down, but this sounds like the perfect way to play a stock that's nearing a bottom.


----------



## caricole

> Causalien.....Here's a tax question that I find unnerving. It's about writing put option and getting it exercised.
> 
> From the guide that someone posted on the previous thread, in this scenario, the capital gained on options sold of that year will be set to zero and subtracted from the adjusted cost basis of the stock. If the stock is then not sold on the same year, the captial gain never shows up in your tax report.


Anyone thinking they found the way tu burry a capital gain that should have been reported could come to an abrubt awakening a couple of years down the road if ever audited

Their are differend ways to report the capital gains and losses on options, covered, uncovered, naked calls, naked puts etc.

It seems these differend ways are acceptable, as long they are CONSISTEND AND DEFENDABLE

It is wise to be prudent....any false move ...and they can transfer you from CAPITAL TRANSACTIONS to INCOME TRANSACTIONS....which could become less pleasant :hopelessness:

If you have to do an ACB because of an assigned naked put....just do it..if you dont .....trouble ahead eventually


----------



## humble_pie

there's no potential for abuse. There is no tax-free. Capital gains/loss tax treatment awaits the sale of any stock acquired via a put assignment, as surely as it awaits every other stock an investor owns.

cause are you by any chance making the mistake that many in cmf forum seem to be making. They think that the broker's annual trading summary of buys & sells is, in fact, the capital gains/loss statement that should be submitted to the CRA as part of an individual's income tax return. This idea is not accurate at all.


----------



## caricole

I am quiet satisfied with «MY» lists of stocks and options related to reporting capital gains or losses

The brokers list servs only tu doubleckeck the transactions and their dates

Never botherted about «THEIR» figures, mines are clear, simple and verifiable

Never had any trouble or questions from CRA


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## Causalien

No, humble.

Future sale will get taxed with capital gain for sure. But the short term put sale will not.


----------



## humble_pie

yes cause it will get taxed.

proceeds received from sale of a put that gets assigned are to be used to adjust down the cost base of the put stock by exactly the amount of the put proceeds.

this amount will get taxed when investor eventually sells the stock.

example: investor sells a 40 put for $2. The put is subsequently exercised & he pays $40 per share for his stock. However his cost base now becomes $38 per share, because he must include proceeds of the put sale in the ACB calculation.

in due course investor sells the stock for 50. His capital gain is now (50-38), or $12.00.

if he had simply bought stock for 40 & sold it for 50, the capital gain would have been $10.00. But in his case, he took the put sale route, so his eventual capital gain becomes greater.

in other words, there's no escape. All option transactions will be taxed sooner or later. There is an excellent publication about option taxation on the montreal exchange website.


----------



## caricole

humble_pie said:


> example: investor sells a 40 put for $2. The put is subsequently exercised & he pays $40 per share for his stock. However his cost base now becomes $38 per share, because he must include proceeds of the put sale in the ACB calculation.
> 
> in other words, there's no escape. All option transactions will be taxed sooner or later. There is an excellent publication about option taxation on the montreal exchange website.


I do it slitly differend, no ACB but record and declare the capital gain on the put IMMEDIATLY when assigned or exercised

Keeps accounting of values in the portfolio much simplier

Options and stock are kept separate and treated as individual values regardless of their inter-relation

Differend approaches seems acceptable and it is up to everyone to chose the best suited for his own purpose

In any case, their are not 2 «PROFESSIONALS» who preach the same approach on options, simply because they do not transact options and have alle the misery in the world to UNDERSTAND the workings

Even the TAXTREATMENT of options transactions is open tu multiple interpretataion

But one thing is sure, anybody claiming to found a way NOT to report a realized capital gain....on options, will eventually wake-up the hard way:hopelessness:


----------



## humble_pie

caricole we have ventured into a strange & exotic land where very few, including the tax revenue departments themselves, understand the option taxation signposts.

i used to do options your way. But then a good friend - who is credit manager at a large online options trading broker - imparted to me the horrifying news that the proceeds of each option sale are to be taken into income unless that particular option is bought back, ie option must be closed out.

only at that moment does the wretched option cease being an income transaction & become a capital transaction.

of course, if the option is exercised, then its cost or proceeds value will become attached to the cost of the assigned stock whenever it is sold. That's the other way that an option can be capitalized.

i then read the above-mentioned publication on option taxation on the montreal exchange website. It said the same thing.

richard croft, the well-known options guru who free-lances to the montreal exchange, often says the same thing.

all this is why i have a total & passionate commitment to buying-back-my-options-rolling-em-forward-upward-downward-for-better-or-for-worse-but-never-never-ever-being-assigned. I am an extreme assignmentphobe.

the result is that my option reports look like yours, save & except that otm positions don't expire passively all by their lonesome selves. They get bought back, relentlessly. In order to make sure they will be recognized as capital transactions.

ps are you getting a nice straw summer hat now that the warm weather has arrived.
.


----------



## caricole

humble_pie said:


> caricole we have ventured into a strange & exotic land where very few, including the tax revenue departments themselves, understand the option taxation signposts.
> 
> i used to do options your way. But then a good friend - *who is credit manager at a large online options trading broker *- imparted to me the horrifying news that the proceeds of each option sale are to be taken into income unless that particular option is bought back, ie option must be closed out.


@HP

This is the fun with option writing. We both read the same things over and over again. But it is full of contradictions, including the interpretations of the gurus and the CRA personnal

I remember one little sentence from a CRA personnel who was questioning me on OUTSTANDING OPTIONS (coverd, uncovered, long etc.)

"What tax treatment do you reserve on your outstanding options»

My answer

"To my understanding and interpretation, I choose to give the same tax-treatment to any options as their underlying shares, and all options will have the same treatment"

He mumbled OK, and never heard from him again...

Its suits me, and I dont rock the boat ( since 25-30 years)
============================================
As for the professionals and their softwares....its all made to suite INCOME TRANSACTIONS....no thanks...not for me..:stupid:


----------



## jet powder

Argonaut said:


> Options keep creeping up in various topics, and I love the discussion behind them. They definitely deserve their own thread. I especially would like to feed on some of the knowledge from the veteran traders on this forum.
> 
> First question:
> Which is the truer maxim for the options trader?
> "A bird in hand is worth two in the bush" or.. "Stick to your guns".
> 
> My own concrete example, is that I am sitting on a good profit in some out of the money calls on LULU, which has definitely come to play today. These were bought with the intention of playing their earnings in September, and my eyes are fixed on some outlandish gains. But although I am still bullish on the stock I'm somewhat worried the congressional shenanigans might unfairly put LULU in the slaughterhouse before they report, leaving my options worthless.
> 
> What say you, options traders?



Argonaunt

The little guy usualy buys the out of the money calls. When you do the math it is better to buy deep in the money calls with little or no premium but are mostly intrinsic value. When the market moves in your direction you make more point for point then you lose when the market moves against you because the premium will expand as the option gets closer to the money. I dont like to hold them till exploration but a few months before so if the market moves against me the premium will expand more.

If your day trading the @ the money options will be more liquid.

@ some point in the future NADEX might allow Canadians to trade the box spreads & digital options


----------



## Causalien

humble_pie said:


> yes cause it will get taxed.
> 
> proceeds received from sale of a put that gets assigned are to be used to adjust down the cost base of the put stock by exactly the amount of the put proceeds.
> 
> this amount will get taxed when investor eventually sells the stock.
> 
> example: investor sells a 40 put for $2. The put is subsequently exercised & he pays $40 per share for his stock. However his cost base now becomes $38 per share, because he must include proceeds of the put sale in the ACB calculation.
> 
> in due course investor sells the stock for 50. His capital gain is now (50-38), or $12.00.
> 
> if he had simply bought stock for 40 & sold it for 50, the capital gain would have been $10.00. But in his case, he took the put sale route, so his eventual capital gain becomes greater.
> 
> in other words, there's no escape. All option transactions will be taxed sooner or later. There is an excellent publication about option taxation on the montreal exchange website.


Humble, this is what I meant by future sale. However, take your case and say that the investor never sells the actual stock while it is going up and earning dividends. You still haven't been taxed. At this point, I believe an option available to whales is to borrow money against their stocks, which, if I assume correctly, can be deducted.

This is what I am just now seeing.


----------



## Causalien

caricole said:


> I do it slitly differend, no ACB but record and declare the capital gain on the put IMMEDIATLY when assigned or exercised
> 
> Keeps accounting of values in the portfolio much simplier
> 
> Options and stock are kept separate and treated as individual values regardless of their inter-relation
> 
> Differend approaches seems acceptable and it is up to everyone to chose the best suited for his own purpose
> 
> In any case, their are not 2 «PROFESSIONALS» who preach the same approach on options, simply because they do not transact options and have alle the misery in the world to UNDERSTAND the workings
> 
> Even the TAXTREATMENT of options transactions is open tu multiple interpretataion
> 
> But one thing is sure, anybody claiming to found a way NOT to report a realized capital gain....on options, will eventually wake-up the hard way:hopelessness:


I used to do this your way as well, then I read that paper and realized that it only applies to long term options. If the options are exercised in the same year, the capital gains are to be nullified and the ACB adjusted for the stocks assigned. Which made this whole taxation thing a mess. The worst thing about it is, that it says it is up to the CRA to determine whether or not you are "income" or "capital gain" and once you accidently gets declared "income" you are income for life for options.


----------



## Causalien

jet powder said:


> Argonaunt
> 
> The little guy usualy buys the out of the money calls. When you do the math it is better to buy deep in the money calls with little or no premium but are mostly intrinsic value. When the market moves in your direction you make more point for point then you lose when the market moves against you because the premium will expand as the option gets closer to the money. I dont like to hold them till exploration but a few months before so if the market moves against me the premium will expand more.
> 
> If your day trading the @ the money options will be more liquid.
> 
> @ some point in the future NADEX might allow Canadians to trade the box spreads & digital options


Have no idea what drug your are on. Your statements contradicts themselves.


----------



## jet powder

deep in the money call the market moves up 5 dollars you make close to 5 dollars, If the market goes down 5 dallars you often lose a lot less then 5 dollars because the option will gain premium ( maybe not the right word) as it losses intrinsic value.

Iam not good @ explaining that which Iam thinking. Maybe someone else can explain it


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## atrp2biz

I think jet powder is correct. With the impacts of gamma, delta increases as the ITM call becomes more ITM and the delta decreases as it approaches ATM. The problem is, you're still short theta.

From a conceptual stand point, the deeper ITM, the more it resembles the underlying itself, which is why the premium decreases.


----------



## avrex

A repost of Lephturn's option learnings, taken from another thread.
Thanks for the info, Lephturn.



Lephturn said:


> I have been learning about options for the last few years.
> 
> My starting point was the OIC's great free education site. That's the Options Industry Council - run by the exchanges.
> http://www.optionseducation.org/en.html Lots of great basic education there and they have a simulator you can practice on.
> 
> I would also suggest you do some reading - I would start with Options as a Strategic Investment by Lawrence G. McMillan
> 
> Then move on to Option Volatility & Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg
> 
> humble_pie will let me know if I'm missing something key or leading you astray.
> 
> There is also a ton of great information and education available free from one of the brokers I use - OptionsXpress. https://online.optionsxpress.ca There are tons of free education resources there you can use for free - they also have a virtual trading platform you can practice with.


----------



## Lephturn

jet powder said:


> deep in the money call the market moves up 5 dollars you make close to 5 dollars, If the market goes down 5 dallars you often lose a lot less then 5 dollars because the option will gain premium ( maybe not the right word) as it losses intrinsic value.
> 
> Iam not good @ explaining that which Iam thinking. Maybe someone else can explain it


It depends how deep in the money the option is - and how large of a move $ 5.00 is based on the price of the underlying security. A true deep in the money option will have close to 100 delta (moves exactly with the underlying) and no gamma.

AAPL Jul12 450 Call
Implied Volatility 43.44
Delta 0.97
Gamma 0.00
Rho 0.42
Theta -0.09
Vega 0.13

AAPL can move $ 5.00 and gamma won't change on this option. Now if it's a RIMM call moving $ 5.00 that's is a completely different story as it would be a massive move compared to the price of RIMM.

I think what you are referring to is Implied Volatility (vega) - as when a stock moves rapidly the IV will often rise increasing option premiums. Based on the downside skew observed in equities this will work much better with Puts than calls - but if you are really dealing with a deep in the money option I would not expect IV to make up for the lost intrinsic value. If you really want some insurance against big moves you are far better served to pick up some units - by which I mean far out of the money options with a tiny delta of .10 or less. If a stock makes a big (more than say 2 standard deviations) move very quickly the price of these cheap options can explode as gamma and IV pump the values of these up quickly to help insure you against losses in your core position.


----------



## Causalien

I am trying to explore this weird idea I just had.

Short stocks and use the proceeds to buy calls. I lose money if stock doesn't move. What are some pitfalls for those of you who tried it?


----------



## HaroldCrump

Causalien said:


> Short stocks and use the proceeds to buy calls.


Calls for the same stock or different?
If same, you are essentially creating a hedge.
With every price movement, you will lose money on one side of the trade, and gain some on the other side.
How much you lose/gain on the options side will depend on the delta of the option.


----------



## humble_pie

this is a common institutional strategy.

they short the stock & buy calls as a hedge. The strike they buy is usually below their shorting price, i believe. The risk window is between the short sale & the call strike.

this is why, when one sees an option chain with ginormous open interests in a few calls but not in the others, one can wonder whether it's really an institution that went short & bought its cover.

many believe the above - big open interest in a few calls - is a bullish sign, but i believe it is often the opposite.


----------



## Causalien

humble_pie said:


> this is a common institutional strategy.
> 
> they short the stock & buy calls as a hedge. The strike they buy is usually below their shorting price, i believe. The risk window is between the short sale & the call strike.
> 
> this is why, when one sees an option chain with ginormous open interests in a few calls but not in the others, one can wonder whether it's really an institution that went short & bought its cover.
> 
> many believe the above - big open interest in a few calls - is a bullish sign, but i believe it is often the opposite.


I assume this is done to hide their real hand from other market participants? I am wondering about this because I am looking at all these analysts citing their reason for being bullish a stock is because of the short interest. All I can think of in my mind when reading that is "bullshit", nothing in the market is THAT easy.


----------



## Causalien

HaroldCrump said:


> Calls for the same stock or different?
> If same, you are essentially creating a hedge.
> With every price movement, you will lose money on one side of the trade, and gain some on the other side.
> How much you lose/gain on the options side will depend on the delta of the option.


So, if it's a high enough delta, I will always make money? Assuming a big move is coming like Greek default? If the stocks go down, the short sale covers the call options, if it goes up, I just need to have a call option with delta higher than par? This is too good to be true.


----------



## Lephturn

Causalien said:


> So, if it's a high enough delta, I will always make money? Assuming a big move is coming like Greek default? If the stocks go down, the short sale covers the call options, if it goes up, I just need to have a call option with delta higher than par? This is too good to be true.


That's because it is. Delta cannot exceed 1. Now you can ratio the trade so that your net deltas are greater than the short stock.

My question is... why not buy a strangle? That's effectively what you are doing. With the strangle at least you can gain from the rise in volatility if the underlying moves quickly due to some event. You do need to be correct in fairly short order however as theta is eating away at a position like that. If you want some theta protection but you still want to play the vol increase you can buy a reverse iron condor. Buy the guts and sell the wings - it will limit your potential gains but keep the theta from eating your lunch as quickly. What I like about this trade is that you are simply trading the volatility run-up in the underlying so you can make nice gains ahead of an event such as earnings then sell it before the event for a nice gain and never have to guess on which way the underlying will move (or if it even will) post event.


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## atrp2biz

Another way to think about this is that it is a reverse long stock with a protective put. As Lephturn has said, theta is negative and is the insurance policy in case things go "well". Unless you're with IB, I wouldn't go too exotic with condors, butterflies, etc. since the commissions would eat up an potential positive expectations (if any). If you want a volatility play, calendars/diagonals would be my preferred way to go as I feel they are easier (and cheaper) to manage.


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## humble_pie

it's true that buying a strangle would replicate the short stock/long call strategy.

but i wonder why few institutions seem to do this. Is it perhaps because costs of long strangle would be somewhat greater than short stk/long call, provided a trader has chosen a stock with no dividends.

also a strangle has time limits on both sides whereas in short stk/long call one of the sides can run on more or less endlessly.

moving on to the next level in complexity. In a reverse condor, investor is essentially buying a strangle or a straddle with wings, as lephturn says. Here he wants the stock to move smartly either up or down, so that the net return of the option pair on the winning side will be greater than the overall debit cost of the condor.

on the other hand if the stock sits & rots, investor will lose his debit cost. Once again, a short stk/long call strategy could mean that the loss would be smaller.

there's another factor mitigating against quadruple option spreads for condors & flies. It's that most online brokers will charge big commissions to execute the 4-legged creatures. For example, some online brokers will only take such orders by phone & will apply a full agent-handled commission to each of the 4 legs. Also, at more than a few online brokers, it would be difficult to find a licensed rep who could even take the order.

so the client needs to have an account at a specialized options broker with low commish.

PS as atrpdocbiz says, diagonal/vertical/calendar structures are easier on the brain & the commish. A simple-minded impecunious pretzel agrees.

.


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## Lephturn

I will sometimes use reverse iron condors for pure volatility plays. I really don't care if the underlying moves as long as the volatility ramps up ahead of an event. In many cases I don't have to run a RIC - a strangle will do - but I am still working on when I should do one vs. the other.

Agreed you need a broker that can swing spreads like this - OptionsXpress is such a specialized brokerage. Their commissions are what some might consider high ($ 14.95 for most options trades) but they have great support, execution, and for complex orders I can get something like a 4 legged spread done for $30 even with multiple contracts. You have to be extremely careful about execution with a complex spread like this as they are not easily traded and you can have one sit there as a 4 legged spread and not get filled even though you are within the NBBO. It is more time consuming but often I'll need to leg into these spreads to get good fills. With a good platform this is more manageable as I can set up two verticals either as saved orders and work one at a time, or even use a complex OTO order to have one fill trigger the second side of the spread. I am normally only running these on the highest priced and most liquid names that tend to have a volatility run up ahead of earnings like AAPL. OX are great to deal with and I can always call them to go over these trades before I execute for no extra cost.

The problem with diagonals and calendars is that the back months are not as sensitive to event driven vol increase so it doesn't react the way I need to for a volatility increase play. In a calendar or a diagonal I would have to sell the front month and own the back month - not what I want when I expect a vol increase in the front month with much less reaction in the back month. I suppose I could sell the calendar or diagonal but with Reg. T margin that's not really feasible. What I mean if you are new to this terminology is that if I buy the front month and sell the back month I am short a naked option and there will be a large margin requirement - I will have to tie up a significant amount of cash for the trade, likely so much that the expected gain as a % of margin is no longer an acceptable gain to make the trade.

A plain old strangle is suitable in many cases as a pure play on increasing volatility but sometimes I need to sell the wings to make it work. I will use calendars and diagonals but not for the same situation - those strategies are good for exploiting the volatility differences in the term structure but they don't work as a pure long vol play into earnings - something I have been dabbling in recently. I like this trade because I always sell before the earnings release so I don't really care if or which way the stock moves.


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## humble_pie

plenty food for thought in lephturn's post.

re difficulties in getting the 4-legged positions done, i often think this is because canadian brokers are all using jitneys. No exception. Even the full service shops. Jitney trades all the way.

it occurs to me that either trading control at the home broker in canada or else the jitney breaks the 4 parts into 2 separate orders & these then get farmed to 2 different US exchanges, which is how one of em can get sidelined.

i'm not much of a crumb for 4-legged positions. I can get my poor brain around 3, but the cake usually falls over the 4th.

i like legging em in though. I like to fancy to myself that somehow i can manage a killer trade. Even when the big green finally manages to stumble itself forward into the previous century with its next generation mainframe - the one that will offer US rrsp, option spreads & other tweaks that most US brokers had 20 years ago - i will still be putting the left leg in, take the left leg out, give yourself a shake, etc.

mega thanks lepht. Gonna digest those earnings plays.

.


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## Lephturn

Oh I don't touch these kinds of trades at a Canadian brokerage! That's why I'm using OptionsXpress.

The other thing you can do is on any platform where you can control routing, turn OFF the "smart router" (it's normally only smart for the brokerage and bad for you) and pick the exchange you want to work the order on. So I'll look at the order book and the spread book and watch the exchanges and then try to get my trades done on say the CBOE specifically where I think there might be a market maker who will take my action. It may not match the NBBO (National Best Bid and Offer) for the spread, but I have a much better chance to get it executed. This is why I'm only running 3 and 4 legged spreads on the absolutely most liquid names with the most options volume and open interest.

Just the thought of running an iron condor through RBC DI on a Canadian name on the MX makes me shudder... they would hurt me so bad.


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## avrex

canadian_investor said:


> I've played options a little bit but mostly covered calls and cash secured puts.
> there are two problems that have prevented me from using them more heavily.
> one is the commissions.
> there is a trade commission and then a per contract commission.
> it adds up.
> if it is just one directional trade every now and then it is ok. but when you have to close out one position and open a new one the commissions are killing.
> like when i am closing out a 10 contract covered call and selling another 10 for a higher strike with a longer expiry date i am ending up paying 2 trading commissions + 20 contract commisisons.


_The above post was taken from another thread, as I felt it could be addressed in this thread._

*Costs*
a) For the non-registered portion of my options portfolio, I use Interactive Brokers.
b) For the registered (RRSP, TFSA) portion of my options portfolio, I'm with TDW. You can go with any of the Canadian banks, since the commissions all seem to be about the same.

US options at Interactive Brokers cost USD 0.70 per contract.
(Although there is a $10/month fee if you don't incur $10 in commissions. I don't worry about this myself, as I usually make more than 3 transactions per month. i.e. my average commission break even point.)

Meanwhile at the Canadian banks (TDW, Scotia iTrade, etc.) the cost is $9.99 + $1.25/contract.

Example, 5 US equity option contracts:
Interactive Brokers (IB) = $ 3.50 USD
Canadian Banks = $ 16.24 USD


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## avrex

*Re: Is Options trading stressful?*



humble_pie said:


> long & short option strategies clustered around quality underlyings are a more peaceful way to extract excellent capital gains from a sideways or basking stock imho.
> 
> option strategies are easier on the investor since there is no immediate black-and-white win-or-lose consequence. Option positions are far easier to repair than a stock sale that goes wrong (as in stk immediately rises) or a stock buy that goes wrong (as in stk immediately plunges.) These latter are stark, irreversible events.
> 
> the investor who sells a stock for short-term profit but the stock continues to rise strongly is unlikely to ever buy that stock back.
> 
> however the investor who sells an out-of-the-money call on the same stock will continue to hold the stock through the rise & will have plenty of time to roll his option upwards & outwards in order to protect long-term gains in his rising stock. Even if his option falls into the money - i always have a few in-the-money - in nearly every case sufficient premium will still be present in the option to buffer the position & prevent the counterparty from exercising





Toronto.gal said:


> Some Option strategies are indeed excellent/superior to traditional trading, but not all that 'peaceful' until you fully understand how they work, but I guess that could be said for anything.


The ups-and-downs of stock day-trading, stock swing-trading or options trading all come down to your emotions.

I would agree that humble's method of options trading is indeed more 'peaceful'.

My method of mono-directional option positions, could be considered equivalent to stock swing-trading (with contracts durations of anywhere between 3 months and 1 year). And, yes, this can be very stressful for investors.

Similar to stock swing-trading, the key is to keep your emotions in check. 
When I first started, I worried about each of my individual mono-directional option position that I took on. Over time, I'm learning to remain calm. 
I will have winners and I will have losers (i.e. I will be right sometimes and I will be wrong sometimes). 
The important thing is to keep my eye on my aggregate total to ensure that, overall, I am making profits.


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## humble_pie

it's eerie how argo & avrex keep clocking in with opinions & strategies that are right-on-the-money.

neither has been trading options for very long, i believe only a year or 2. But both are exceptionally talented. They have the knack. As i mentioned upthread, both have learned more in one year than i ever learned in 10.

as for me, i would seldom take on a monodirectional option bet without some sort of hedge. Even in the uncovered puts i frequently sell - & quite apart from the fact i could raise the cash if assigned - the fact that these puts commence otm plus the time value of money plus the low probability of assignment i rate them at constitute a surrogate hedge of a sort.

i have an allergy to buying calls as speculation on the stock. For long-term directional call plays i am fond of my old friend, diagonal call spreads. Right now i have 17 beauties in PG that are turning out so nicely now that ackman has appeared. The long side is 2014 $50 leaps calls. The short sides are a mixture of jan/13 65s & jan 67.50s. The theoretical gains may be $15 & 17.50, but the cost of these structures is 11.12, so i'd have max gains of $3.88 & $6.38 if closed, which compared to a cost of 11.12 over 10 months since inception would be plenty good enough for this doughnut.


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## humble_pie

in another thread avrex recently asked How to Get a Better Price for an Option than the Natural.

i scribbled a few things & decided that the result looked like a haystack. So instead of a messy haystack i am proposing Option Tip Monday. One straw at a time.

we used to have Recipe Monday & it was such a treat booting up at 6 am at the beginning of each week & discovering a sensational brand-new recipe from brad, all fresh & waiting.

for tomorrow, i'll go first with a no-brainer.

- montreal exchange dealers will always surrender a nickel. They are the hardest to deal with, compared to US exchanges, but even they will routinely give up that nickel. So never, ever let em keep it.


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## Causalien

I find that MTL exchange always price options outside of the synthetic values by a lot and you know this because your one bid is the only volume for that day. I've since tested my theory that they must take my price at the end of the day (maybe because they are "supposed" to do market making?) if I price my options at the synthetic value. I can see this as being "hey, 1 volume is better than no volume."

The funniest part is how once you placed your order, they try to adjust the bid ask spread to "scare" you into their bid-ask price and you can call them bullshit because you can see that the volume for the day remains at exactly 0. So a strategy of pricing an options with no volume: Give the market makers the finger and price it at the synthetic value, wait till the end of the day and watch the $$$ come in. The way of the ostridge is essential in this manipulated and illiquid no man's land.


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## Rusty O'Toole

humble_pie said:


> as for me, i would seldom take on a monodirectional option bet without some sort of hedge. Even in the uncovered puts i frequently sell - & quite apart from the fact i could raise the cash if assigned - the fact that these puts commence otm plus the time value of money plus the low probability of assignment i rate them at constitute a surrogate hedge of a sort.
> 
> i have an allergy to buying calls as speculation on the stock. For long-term directional call plays i am fond of my old friend, diagonal call spreads. Right now i have 17 beauties in PG that are turning out so nicely now that ackman has appeared. The long side is 2014 $50 leaps calls. The short sides are a mixture of jan/13 65s & jan 67.50s. The theoretical gains may be $15 & 17.50, but the cost of these structures is 11.12, so i'd have max gains of $3.88 & $6.38 if closed, which compared to a cost of 11.12 over 10 months since inception would be plenty good enough for this doughnut.


Humble Pie I am trying to figure out your diagonal or so called "voodoo" spreads (I know that is just a joke name). If I have it right, you buy an ITM call or Leap call a year or more out, and sell the ATM or OTM call, which has a higher strike and shorter expiry to defray part of the cost of your call. Best case, the stock goes up slowly, the sold call expires OTM, and the stock continues rising and gives you a nice profit a year or more hence. Or, if the stock goes up faster than you figured, you can close it out with a profit when the sold calls go ITM because that is as good as you are going to get. Worst case, the stock bombs, you get out with a small loss.

Did I miss anything?


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## humble_pie

rusty you pretty much got it. 

except that the best case is that stock soars immediately. As you've noted, because of the opposing pair structure a certain gain is delimited which is "as good as it gets." So it's always hyper-best when that gain arrives ASAP.

at the other extreme, one might have to wait until expiration of the long leaps call. While waiting, one continually rolls & sells the short OTM call side, thus lowering the cost base. This, in turn, increases the gain limit (note: one can also adjust the gain limit by selling closer-to-the-money or farther-out-the-money short-term calls.)

my extremely rough rule is to take both sides out when the total return is more than 20-25%.

what my experience has been is that these are more volatile than the underlying stocks. Some can go to zero - i had that experience with a dry bulk shipper & also with arna in 2010 when it first tried & failed to obtain FDA approval for its weight-loss drug. At the same time, some can appreciate 50-80% or occasionally even higher. On the average, i find that they return 10-18% per annum.

it goes without saying that i only do these in US stocks. Part of the objective is to avoid fully-taxable US dividends & harvest 50% taxable capital gains instead. 

my own quirk is to buy a leap that is ditm. These are expensive. They do, however, act as insurance if the worst happens; that is, if markets tank & the particular stock should crater. In such a scenario, the trader still has short term calls that he can sell & the diagonal spread will remain profitable. Even during the worst of 2008/09, there were still calls that i could sell at strike prices higher than the ditm leaps.

at the end of the day, a diagonal call spread is a covered call on a buzz, with the long leaps replacing the stock.


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## Lephturn

Heh - humble used the exact correct term for that trade, it is called a diagonal. I think I'd save "Voodoo" for something with more parts to it.  It is essentially a covered call where the long stock is replaced by a long term in the money call to reduce the capital require. Because the long dated call is very far out and in the money, it's theta or time value will decay very slowly. The shorter dated OTM calls he is selling against it are entirely time value, and as time value decays more and more quickly as you get close to expiration humble is pocketing that time decay. The best case scenario is that the stock runs up to the short strike but does not cross it - in this case $ 65.00. If it goes beyond that humble's gains are capped but he has time to wait for it to slip back or if it goes in the money but stays close to the short strike he can still collect the time decay. 

It's a covered call essentially - so he's still going to lose if the stock goes down, but he's going to lose less than holding the stock for two reasons. 1) The premium he has collected selling the calls reduces his overall cost basis so he wouldn't lose quite as much as just owning the stock and 2) He can only lose 100% of what he paid for the Jan 14 call - and although it would be 100% of his investment it is some fraction of what it would have cost to buy the stock. The net of it is that it's likely that in the absolute worst case scenario he can lose less than 1/2 of the amount of $ he would have lost buying the stock.

So - little quiz for you folks learning about options based on the above position: (humble_pie will throw a pie at me if I'm ruining his first Option Tip!) What option position is equivalent to a covered call? To work it out, take a look at the Profit/Loss at expiration graphs at the OIC, on a brokerage site, or in your favourite options reference.

We are awaiting humble's tip for this week - but in the mean time let's see what you guys think and we'll discuss further.

Great discussion guys. BTW I just got my hands on Larry McMillan's "McMillan on Option" book that I'm flipping through - a great one so far. Got to love the library system!

I see I timed that exactly wrong and humble_pie posted while I was reading/writing!


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## humble_pie

re greeks & the long leaps call ... actually i look for 2-year calls that are so ditm there's no time value present, or almost no time value. Such a leap is trading on intrinsic value alone, plus sometimes a slight premium. That way i can convince myself that i'm buying 2 years worth of the stock at today's price but paying zip extra.

an example of a leaps call with a low TV today is the GG 20 call of 2014.

ultra-low long-term leaps prices reflecting nearly all intrinsic value are related to the stripping of dividend income, i believe.

re pie-throwing, i overheard Alice say this am that a smashing pie-throwing fest at the tea table every now & then is a great way to reduce market-caused stress & anxiety.

plus it appeals to all those carbohydrate-averse dieters in the forum. A pie in the face is never a crumb on the tongue.

Alice said she's baking a tiny raspberry tart for the Dormouse to hurl next time his whiskers quiver.


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## Rusty O'Toole

Covered call = short put the hard way. Ironically I got sucked in on that deal 7 years ago. Bought a book or "course" from this guy Joseph Hooper who was promoting covered call writing, did not realize that it amounted to the same risk as selling puts even though I have McMillan, Natenburg, Tharp, Caplan, Van Peebles etc on the book shelf. After reading the book I even did a couple of deals that went sour before I clued in.


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## atrp2biz

It's still considered a conservative strategy--at least more conservative than holding the underlying outright. In my mind, in the long run, the short call position has an expected value of zero, resulting in a lower standard deviation with the covered call strategy with the same EV of the outright underlying.


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## Lephturn

Right on Rusty.

With that bookshelf you have the reference material - but in the end we all need to trade it to learn. I too have gone through that process, and I came out with the collar as my interim solution. Collars would not be my choice in an open money account, but in registered accounts they won't let me do spreads so it's what I'm left with.  Will they let you do that diagonal in a registered account humble?

I assume regulations won't let us sell cash secured puts or spreads in registered accounts. Or is it just clueless brokerages? humble_pie maybe you can shed some light on this one? I can't really find "the rules" for what I can and can't do in my registered accounts. If I can find such rules to reference, maybe I could push the brokerages into letting me do what I want.

atrp2biz - check out http://www.marketwire.com/press-rel...tegy-improves-performance-reduces-1652781.htm
and http://www.optionseducation.org/documents/literature/files/options-based-risk-mgmt.pdf
and http://www.optionseducation.org/documents/institutional/research/oic-buy-write-strategy.pdf

I was surprised to see that the collar actually out performed - I thought it might trail a bit but have lower volatility. Granted this period included a large pullback in price where a collar will excel compared to a covered call or just long underlying.


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## humble_pie

Lephturn said:


> ... Will they let you do that diagonal in a registered account humble?


no, not in registered account because the short side would be seen as a naked short call. In a margin account i do get some margin credit for the long leaps side, though.



> I assume regulations won't let us sell cash secured puts or spreads in registered accounts. Or is it just clueless brokerages? humble_pie maybe you can shed some light on this one? I can't really find "the rules" for what I can and can't do in my registered accounts. If I can find such rules to reference, maybe I could push the brokerages into letting me do what I want.


i believe the rules for options in reg'd accounts are set by the minister of finance. After that each brokerage has its own "take" & all would, i imagine, err on the conservative side. Nyet is the operative word.

i have a couple of times splayed a diagonal across & between a reg'd account & a margin account. The long side being in reg'd & the short side in margin. The first time it worked beautifully. I got to take the loss in margin acc't when i bought back the short calls. I got to take the gain in reg'd acc't when i sold the long leaps. At the moment i have another one going on in potash & this is not working out well, although there is still half-a-year yet to go.

i find the niceties of rolling covered calls in reg'd accounts to be exasperating. Normally i begin by working the more difficult side & normally this means selling the forward call. This in turns means being naked short for a while. One is short the near call that one has previously sold plus one is short the new call which is farther out in time. Usually, one will get around to closing the old short, although there are times when i just let em run the brief time that's left until they expire. In a margin account all this works perfectly.

but a reg'd acc't can't support the double short. I have taken to phoning a licensed rep to do these trades (i don't have too many in reg'd accounts) whenever i spot that a better opportunity than buying/selling at the natural exists. The broker involved has very kindly agreed to do these agent-handled conditional pairs at online commish (avrex & lepht with your rrsps at tdw & roybank respectively, won't you please listen up.)

see, the cool spread in rrsp is an agent-handled conditional spread, but at online web commish.


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## Rusty O'Toole

itrade is quite the pain in the neck. Cranky, hard to use, and prone to breaking down or going offline. No way to do a spread as one transaction, you can only buy or sell options 1 transaction at a time. A butterfly or condor would be 4 transactions, 4 commissions and 4 chances of "slippage".

You can phone a broker (if you can hack your way through their phone system) but don't know if they charge extra for this "service".


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## Rusty O'Toole

Ha ha ha I must have hundreds of books on markets and trading. The ones that bother me most are Van K Tharp's books on what it takes to be a good trader. I have hardly any of the desirable qualities. On the other hand I have no wish to manage a billion dollars of other peoples' money and run around like I have a fever of 103 and the rent due tomorrow. So maybe I can muddle around and make a couple of bucks.

I am heartened by his idea that position sizing and money management are more important than having the best system.


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## mrPPincer

Toronto.gal said:


> I think one of the reasons people avoid options, is the language & the other, the learning curve involved. I would agree with author Michael Sincere, who said in his book 'Understanding Options', that a lot of books written on the subject, sounded as though they had been written for lawyers & mathematicians, so it's important to start with a basic book, and as much I love the 'Dummy' series, for Options, I did not like it much.


Thanks for the book recommendation Tgal, I have it incoming through an interlibrary loan, looking forward to it, as I don't understand most of the lingo in this thread, yet I find it quite interesting nonetheless.
(Reading William Bernstein's Investor's Manifesto right now.Very easy read so far. According to the intro he's dumbed it down so his american audience can comprehend it more easily compared to his first 2 books.)
Would like to become a more active investor at some point if it seems practical for me.


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## Causalien

Is there a reason for using bullish put spread and bearish call spread instead of just selling naked put and naked calls? I mean, theoretically, if I double the capital used in the bullish put and bearish call, I end up with the same amount of exposure... except twice the commission. Strategically, what is the advantage of the bearish call and bullish put spread?


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## Argonaut

Bullish put spread is easier on margin maintenance and minimizes risk. I sold 3 GOOG puts last week, and in a worst case Ontario I obviously cannot afford to be put with $150,000 worth of Google. Hence the 3 bought puts at a lower strike (500/490).


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## Rusty O'Toole

Causalien said:


> Is there a reason for using bullish put spread and bearish call spread instead of just selling naked put and naked calls? I mean, theoretically, if I double the capital used in the bullish put and bearish call, I end up with the same amount of exposure... except twice the commission. Strategically, what is the advantage of the bearish call and bullish put spread?


Selling a naked option means taking on unlimited risk. You can sell naked options and make money for a month, a year, 5 years, but eventually you will get killed. 

If you look at financial markets, like everything else, they tend to repeat the same behavior. Once in a while something radical happens. At even greater intervals, you get the equivalent of the "perfect storm" or "100 year storm". But in the markets, these 100 year storms happen every 10 years. In other words markets are exceptional in that their bell curve shows "fat tails" where unusual events are far more common than expected.

This can cause problems almost no one sees coming.

A fine example is Long Term Capital Management. This firm was set up to exploit small differences in the bond markets. They took small profits on large, safe trades. But they leveraged up their positions by borrowing 50X their capital base.

I think the first year they made 35% on their invested capital. Next year, 40%. Next year, 45%. Fourth year, they blew up. The Russian bonds collapsed causing a panic in the bond markets and their 50X leveraged positions went down the crapper overnight. They literally lost 50% of their capital in a day, amounting to billions of dollars.

Of course they knew this was theoretically possible - the firm was run by 2 Nobel Prize winning economists after all - but their calculations were that this kind of thing could only happen once every hundred years.

I'm sure you can think of other market shaking events no one saw coming. Like the bankruptcies of Iceland, Ireland, Greece and Spain. The sub prime collapse that nearly brought down the banking system. No doubt there have been others that only affected one market sector, one industry or one company

Nassim Talib writes about this kind of thing in "Black Swans". A black swan being inconceivable in a world of white swans - until someone goes to Australia where they have black swans.

So, if you sell options you have to have something to back yourself up. You have to be smart enough and quick enough to bail if the trade goes against you - not so easy in this time of flash crashes and manipulated markets. Or you have to have enough cash to cover any eventuality - I don't think anyone should take that much risk. You have to own the underlying stock or commodity you are selling options on. Or you have to back yourself up with another option.

Hope this makes sense.


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## canadian_investor

humble_pie said:


> first of all the trader should *never* be doing this as a spread - ie contingent - order with a licensed representative. As you say, the commish will kill ya.
> trader should learn to leg his spreads in online one side at a time, both at low online commish.
> for 10 plus 10 contracts, the online commish is generally less than $22.50 per side, a rate that i find entirely acceptable.


thank you for your input.so you are saying don't do the spreads or roll overs by calling it in?
instead do it all ourselves online?
yes commission will be about 22 per side so a total of $44 to roll over 10 contracts.
i suppose this will only work with those stocks that have high option premiums.
not for stocks that have a few cents call premiums.
like one of the stocks i have discussed options about before is Uranium One (uuu) on Tsx.
A Jan '13 $3.50 strike was 21c. last trade.
if this is one of the sides of my rollover i will get $190 for this even if i manage to get the 21c. bid
if i am closing out a short call of another 10 contracts then it will be less.

so i guess I should only play those underlying that have high option premiums.


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## Lephturn

Rusty O'Toole said:


> Ha ha ha I must have hundreds of books on markets and trading. The ones that bother me most are Van K Tharp's books on what it takes to be a good trader. I have hardly any of the desirable qualities. On the other hand I have no wish to manage a billion dollars of other peoples' money and run around like I have a fever of 103 and the rent due tomorrow. So maybe I can muddle around and make a couple of bucks.
> 
> I am heartened by his idea that position sizing and money management are more important than having the best system.


Check out The Complete Turtle Trader for an interesting read. http://amzn.com/0061241717
Basically it's Richard Denis' experiment that demonstrates that you can basically train anybody to trade for a living.


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## Lephturn

humble_pie said:


> The broker involved has very kindly agreed to do these agent-handled conditional pairs at online commish (avrex & lepht with your rrsps at tdw & roybank respectively, won't you please listen up.)
> 
> see, the cool spread in rrsp is an agent-handled conditional spread, but at online web commish.


Yep, I've been doing the same thing with RBC-DI, they seem happy to send me to an "options trader" to do the trade for me at the online commission rate. I normally just cite that their web site won't let me do the trade I want to do and they are happy to do it for the online rate.


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## humble_pie

Lephturn said:


> ... I normally just cite that their web site won't let me do the trade I want to do and they are happy to do it for the online rate.


the best argument & it should work most places


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## humble_pie

it's said that long term capital management collapsed only because a leading counterparty collapsed. That's hearsay.

myron scholes, chairman of LTCM, went on to enjoy a lucrative career on wall street as founder & chairman of hedge fund manager Platinum Grove. That's a fact.

Black/Scholes option theory was debated & disproved as long as 35 years ago. That's hearsay.

myron scholes is the scholes of black/scholes. That's a fact.

black/scholes is still officially taught as the dominant option theory. That's hearsay.

platinum grove never recovered from big losses in 2008/09. That's a fact.

myron scholes retired from platinum grove & from wall street in 2010. That's hearsay.

i for one do not like etfs built on futures - & there are many - because of the counterparty risk. That's a fact.


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## Lephturn

Causalien said:


> Is there a reason for using bullish put spread and bearish call spread instead of just selling naked put and naked calls? I mean, theoretically, if I double the capital used in the bullish put and bearish call, I end up with the same amount of exposure... except twice the commission. Strategically, what is the advantage of the bearish call and bullish put spread?


Margin and loss limitation. The big one for me is margin. Write a naked put on AAPL... for example to write an Sep12 550 Put on AAPL right now I'd need about 10K in cash tied up in the account. Looking at my % gains, that seriously limits it since I am effectively investing $ 10k to make $ 900 or about 9% on that investment. By buying a further OTM Put to turn it into a vertical spread Sep12 550 Put sold and Sep12 500 Put bought I now need $5k only in margin and have a maximum loss of $ 4,400 for a potential $ 600 profit and 12% ROI. Now that changes the greeks for the position (I get less Theta and less Delta but more Vega) but at expiration it's a better trade.


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## Lephturn

canadian_investor said:


> thank you for your input.so you are saying don't do the spreads or roll overs by calling it in?
> instead do it all ourselves online?
> yes commission will be about 22 per side so a total of $44 to roll over 10 contracts.
> i suppose this will only work with those stocks that have high option premiums.
> not for stocks that have a few cents call premiums.
> like one of the stocks i have discussed options about before is Uranium One (uuu) on Tsx.
> A Jan '13 $3.50 strike was 21c. last trade.
> if this is one of the sides of my rollover i will get $190 for this even if i manage to get the 21c. bid
> if i am closing out a short call of another 10 contracts then it will be less.
> 
> so i guess I should only play those underlying that have high option premiums.


I shudder to think about trading something that illiquid on the MX. I generally don't trade anything with a nominal price under about $ 20.00 - it's cheaper to just trade the underlying. I also will only trade the very highest volume options on the MX, and then only because I need to do Canadian stuff in my RRSP account. UUU has um... zero volume today in options. Zero. Even at the money options have no bid. That is a market maker buzzsaw that I don't want to step into. Sure you can use limits and work it to get the price you want in some cases - but if it's that illiquid good luck getting out. The mm on the other side can hedge with the stock for almost zero cost - you can't. Run away.

I looked at that Jan13 call you mentioned: Last Traded On 05 Jul 2012 at 3:05 PM EDT - It's not good when you can come in and do a trade and I can pick it out as the only trade that week or even month! Also at that price how many contracts do you do to make any money? The total open interest on that strike is 112. So do one trade and you are basically 1/2 of the market - if you have to get out you are going to get reamed.

Basically I'm saying that I will only trade options on higher priced stocks that are extremely liquid and have good options volume. The vast majority of my options trades are done on the US securities on US exchanges on the highest priced and most liquid names out there. You will have to make your own decisions but


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## Rusty O'Toole

Today put on a spread trade involving selling 2 puts and buying 2 puts on a certain ETF. Just found out my commissions will be $28.95 X2. Ow! Ow! Ow! This is ridiculous. 

Plus, itrade is awkward hard to work with and breaks down several times a day.

Who can recommend a decent broker?


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## humble_pie

well.

now that we have recovered from that interlude during which our esteemed member quite rightfully scorned illiquid montreal options with an aristocratic sneer ...

i just want to put up my poor peasant hand & say heh-i'm-one-who-has-2000-shares-of-UUU-&-it-is-trading-around-my-cost-base-&-i-don't-plan-to-dump-the-stock-&-its-call-options-are-typically-20-pennies-twice-a-year-which-brings-in-40-pennies-for-a-16%-annual-return. So. What. Is. Wrong. With. That.

(to canadian investor) i wouldn't attempt to roll UUU calls. I would just let existing calls expire or come close to expiration & then, if i intended to keep the stock, i'd sell another batch several months out.


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## humble_pie

rusty i'd phone them pronto & complain. Remember that each rep to whom you speak has the discretion to accommodate customers' complaints to the tune of a fixed number of $$. You will not be asking for very much.

at tdw, the online commish would have been 12.49 each side, assuming you qualify for the reduced 9.99 trading platform (need a certain dollar amount such as 50k in the account.)


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## Rusty O'Toole

Lephturn said:


> Check out The Complete Turtle Trader for an interesting read. http://amzn.com/0061241717
> Basically it's Richard Denis' experiment that demonstrates that you can basically train anybody to trade for a living.


Thanks, I have that book plus Curtis Faith's book on the same topic, also a copy of the original Turtles' Donchian formula.

There is a lot of food for thought in that experiment. For one thing they took a group of very smart people who wanted to trade commodities, set them up with an office, and a substantial account. Trained them to use a very simple trading system that a 12 year old could learn in a day. Promised to pay them well if they only followed the rules and did exactly as they were told. And most of them couldn't do it.

That was the biggest lesson. There is something in this giant human brain of ours that prevents us from trading successfully. All our instincts tell us to do the wrong thing.

Another lesson was how much money can be made using a simple, not very brilliant formula if it has a positive expectation with good money management rules and you follow it like a robot.

As far as proving if traders are made or born... the experiment was flawed from the start because they hand picked the participants, weeding out those who were not "born" with the right qualities. And even then, these hand picked carefully trained stars performance resembled random chance. So it seems the secret is neither nature nor nurture but a combination of both.


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## Argonaut

Rusty: At Questrade, commission would have been $14 total, though you would have had to phone them. At Interactive Brokers, commission would have been $4, or possibly less if it was a US ETF. I've been gnawing about switching to Interactive Brokers, only need $3000 deposit since I'm less than 26 years old.


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## humble_pie

tdw imho is fine for options. Always has been. Dates back to the days of their founding when they wanted to rapidly build up to a high volume of trades & they knew options traders would by definition trade a lot, so they catered to em.

to this day a client can still find many personnel at tdw with advanced options knowledge.

par contre, at my backup account, which is bmo investorline, the level of options knowledge among the staff is basic & primitive. No investor seriously trading options should ever remain at bmo, imho. BMO obviously does not have an option-trading clientele & they are not willing - most understandably - to recruit the skilled personnel necessary to support the same.

an excellent alternative to tdw would be interactive brokers. Low commish prices to die for. Advanced trading platform. Forex trading. There are limitations, as in no registered accounts.

ps: i wouldn't go to questrade


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## Rusty O'Toole

humble_pie said:


> rusty i'd phone them pronto & complain. Remember that each rep to whom you speak has the discretion to accommodate customers' complaints to the tune of a fixed number of $$. You will not be asking for very much.
> 
> at tdw, the commish would have been 12.49 each side, assuming you qualify for the reduced 9.99 trading platform (need a certain dollar amount such as 50k in the account.)


I already did. Had a long talk with a rep this morning re the lousy broken down system that is supposed to furnish live quotes. I have devised workarounds for some of their apcray. But every once in a while the system just quits. Then I have to go back to the log in page, enter my 16 digit log in number, plus 8 digit password to get back in. Then page thru 4 or 5 pages to get back to where I was. Then enter a trade by filling in 8 boxes. Lots of fun when the market is moving and you want to make a trade, or even worse, get out of one that is going sour.

(By the way there is a workaround for that too. Don't go from page to page, keep opening tabs instead. Lots of tabs. That way when the system logs you off you only lose the tab you are on. When you log back in the other tabs still work)

So, I had long conversation with a nice rep. Taught her a couple of workarounds she did not know. Eventually the system creaked back into operation (about 10 am). But she gave me her phone # so I don't have to go thru the automated system. I called her, she wasn't there so I left a message, still waiting for a return call.

By the way I legged in the trade. As soon as I put on the first leg and saw the commish I decided to forget the spread and just get out as soon as I got to break even. But the system went down again before I could take off the second leg and it got filled. OOps.

Also, I deliberately keep $50,000 in my account to qualify for the cheaper commissions. Right now I have a couple of ETFs which are slightly higher than when I bought them. But because they are US, and the US dollar is low, they discount the position so this morning my account was a couple of bucks below $50,000. OOps. Plus it seems that when you sell options for a credit that money does not show in your account. OOps.


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## humble_pie

Rusty O'Toole said:


> I already did. Had a long talk with a rep this morning re the lousy broken down system that is supposed to furnish live quotes. I have devised workarounds for some of their apcray. But every once in a while the system just quits. Then I have to go back to the log in page, enter my 16 digit log in number, plus 8 digit password to get back in. Then page thru 4 or 5 pages to get back to where I was. Then enter a trade by filling in 8 boxes. Lots of fun when the market is moving and you want to make a trade, or even worse, get out of one that is going sour.
> 
> So, I had long conversation with a nice rep. Taught her a couple of workarounds she did not know. Eventually the system creaked back into operation (about 10 am). But she gave me her phone # so I don't have to go thru the automated system. I called her, she wasn't there so I left a message, still waiting for a return call.
> 
> Also, I deliberately keep $50,000 in my account to qualify for the cheaper commissions. Right now I have a couple of ETFs which are slightly higher than when I bought them. But because they are US, and the US dollar is low, they discount the position so this morning my account was a couple of bucks below $50,000. OOps. Plus it seems that when you sell options for a credit that money does not show in your account. OOps.


this sounds like the brokerage from hell. How have they managed to survive so long ? & they were supposed to have inherited all that e-trade experience, too.

plus that bit about credit for proceeds of option sales not showing in acount. Very puzzling. Cash is cash. On settlement day - for options, day after trade day - cash from option sales will settle in account. It should qualify in every way. Towards the 50k threshold & also in margin calculations.

small suggestion: don't keep account hanging so low down near the 50k threshold. What are you going to do if markets dive 15% ? start paying $25 or $29 commish, whatever they are ? & rusty no lip please about don't-have-those-extra-3-thousand-bucks. Just stop buying all those 100s of expensive how-to-invest books, says the pie.


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## Rusty O'Toole

'i just want to put up my poor peasant hand & say heh-i'm-one-who-has-2000-shares-of-UUU-&-it-is-trading-around-my-cost-base-&-i-don't-plan-to-dump-the-stock-&-its-call-options-are-typically-20-pennies-twice-a-year-which-brings-in-40-pennies-for-a-16%-annual-return. So. What. Is. Wrong. With. That."

Slippage and commissions. I calculated a while back that if you are careful you can keep the vig down to 17%, about the same as they ding you at the track.

The greatest stock market masters of all time made 12% sometimes even 20% compounded. Deduct a 17% rakeoff and you have to beat the best in the world to break even. Before taxes.


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## humble_pie

what slippage ? nobody's rolling here.

20 contracts will bring in $400. Commish will be 34.99. Reasonable enough.

this is a stock being held in a long-term bet on the uranium market. In the meantime $365 over 6 months for a far otm call is reasonable enough.


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## Rusty O'Toole

Ha ha I just deposited $9000 last week to top up the account. Today it slipped below $50,000 without me noticing, literally $49,900 due to the deterioration of the US dollar and a slight drop in one ETF. I didn't notice, you would not notice either due to the weird way they post the accounts, unless you went looking for it.

The sold options showed up in my account in red ink, the bought ones in black ink. I suppose the system is clear to whoever invented it. Just like all computer programs are crystal clear to the guy who invented them. If you have ever dealt with computer geeks you know what I mean.


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## humble_pie

Rusty O'Toole said:


> ...The sold options showed up in my account in red ink, the bought ones in black ink. I suppose the system is clear to whoever invented it.


it's a common system. What they're trying to show you is that your account is short the sold (red) options & these are dragging on margin. Normally in the statement of holdings, as a cost they would be using a sold option's offer/ask price at last night's close.

at the same time they're trying to show you, in your holdings statement, that your account is long the bought (black) options, so these add somewhat to margin.

lists of holdings are not the same thing as cash statements. In your cash statement, proceeds from option sales should show up as positive cash the following day, no later.


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## Rusty O'Toole

Just rechecked my account. All my investments are worth more than I paid for them, all my positions show a loss, and my total account is now $50,007.07. So why I don't get the lower commission is a mystery. Known only to the bank employee in charge of collecting fees.


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## HaroldCrump

Rusty O'Toole said:


> my total account is now $50,007.07. So why I don't get the lower commission


Because the commission tiers are set quarterly.
If your balance is comfortably above $50K, call iTrade and ask them to change your commission tier immediately.
They will do it (I have done this), and it will be effective within an hr. or so.
However, if you are just barely above $50K (as you are - by $7.07), they will probably not do so for obvious reasons.
Better to top up by another $2K or so.


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## Rusty O'Toole

To get back to trading for a minute... I am very bullish on gold for both fundamental and technical reasons. The chart looks like it is ready to explode. Probably to the upside. So I am thinking of doing a Humble diagonal spread in GLD, PHYS or some other gold ETF. 

Any thoughts?


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## Rusty O'Toole

HaroldCrump said:


> Because the commission tiers are set quarterly.
> If your balance is comfortably above $50K, call iTrade and ask them to change your commission tier immediately.
> They will do it (I have done this), and it will be effective within an hr. or so.
> However, if you are just barely above $50K (as you are - by $7.07), they will probably not do so for obvious reasons.
> Better to top up by another $2K or so.


I just topped up the account last week at their request. They sent me an Email telling me if my account was over $50,000 I would get $9.95 commissions. Not starting next quarter, now. When I topped it up I was a few hundred over the limit, since then my investments have moved HIGHER but they say my account is lower due to the US dollar.

I'm not complaining about the rules. I followed the rules as they laid them out. They are not holding up their end of the bargain. I expect we can come to some agreement if I can talk to their rep again. Just waiting for her to return my call.

............................Later...........................................

Angela returned my call and agreed that my commission rate was supposed to go to $9.95 when I increased my account to $50,000 and it was supposed to stay there for the quarter. She corrected the error and gave me the lower commission on today's trades. The new commission is in effect until September 30.


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## Dopplegangerr

Hello my Option trading friends!

I am approved now for "Buying puts and Calls" at questrade (I know some people dont like questrade but never mind that right now.) 
I have never done any option trading but have tried to read lots about it. I am hoping some one can give me a good first time Options trade with the idea of learning as the main objective. I am not thinking about getting rich on my first trade or anything like that, I would like to understand and add an additional method of investing to my repertoire.

Here are a few stocks I own that I thought might be appropriate for option trading and what I paid for them. 

100 x POT $39.32
200 x G $36.18
500 x COS $20.59
150 x RY $46.55 (I know have to option trade in multiples of 100)

If these stocks are not good for options, what should I be looking for in a stock?

How do I actually place an options order?


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## atrp2biz

Rusty O'Toole said:


> To get back to trading for a minute... I am very bullish on gold for both fundamental and technical reasons. The chart looks like it is ready to explode. Probably to the upside. So I am thinking of doing a Humble diagonal spread in GLD, PHYS or some other gold ETF.
> 
> Any thoughts?


You wouldn't use a diagonal or any other variation of a time spread if you think the underlying will explode. These positions do well in boring environments that hover near the strike price of the short-side of the position. You could certainly pick a short strike well above the current underlying, but there are better ways to position yourself if you believe this is the case (reverse condor/butterfly for an "explosion" or a simple bull spread for a move up).


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## Rusty O'Toole

Dopplegangerr said:


> Hello my Option trading friends!
> 
> I am approved now for "Buying puts and Calls" at questrade (I know some people dont like questrade but never mind that right now.)
> I have never done any option trading but have tried to read lots about it. I am hoping some one can give me a good first time Options trade with the idea of learning as the main objective. I am not thinking about getting rich on my first trade or anything like that, I would like to understand and add an additional method of investing to my repertoire.
> 
> Here are a few stocks I own that I thought might be appropriate for option trading and what I paid for them.
> 
> 100 x POT $39.32
> 200 x G $36.18
> 500 x COS $20.59
> 150 x RY $46.55 (I know have to option trade in multiples of 100)
> 
> If these stocks are not good for options, what should I be looking for in a stock?
> 
> How do I actually place an options order?


There is a very simple, safe way to get started in options and that is to sell "covered calls" calls means you sell someone the right to buy your stock for a certain price, during a certain time. "covered" means you own the stock.

Here is how to figure out a good trade.

1) Look at the chart of one of your stocks. Figure out where it is NOT going to go. For example a quick look at your POT chart shows it has had a considerable run up lately. Do you think it will go much higher or do you think it will drop back down? Let's say you don't think it will go over 50, at least not for long. Right now the August 50 Call is selling for 18c or $18.00 per call. Not enough. But the December is $1.60. You could pocket $160 by selling the option. Then await developments.

Here is what would happen:

A) Nothing. POT farts around for the next 5 months and goes noplace. You keep the $160 bucks.

B) POT takes off like a rocket. You end up selling your $39.32 stock for $51.60 ($50 + $1.60)

C) Pot hits the skids. Too bad, but you also keep the $160 which softens the blow a little.

Now remember, stocks don't usually go straight up or straight down for 5 months. You also don't have to keep the option position all that time. If the stock drops, the option loses value. As time goes by the option loses value. You might keep an eye on the option and buy it back if it goes below $80. Many investors do this, then sell another different option. As a rule, there is no commission for buying back an option you sold, or selling one you bought. So this costs nothing.

Since you are already familiar with those 4 stocks you own, you may do better selling options on them than on stocks you don't have a feel for. Try and figure out where the stock won't go in the next few months. If it has run up and you feel it is running out of gas, might be a good time to sell an option for a good price.

As far as placing an options order goes you will have to go to your account, look for a tab "options" and see what information you can find. When you click on "trade" it should give you the real time quote. There will be fields to fill in such as, which kind of option (put or call), strike price, what kind of order (market or limit, chose limit), the limit price, etc.

I like to look at the chart and try to figure out where today's trading might go. It's best to do your trades between 10 and 3. The market is more active then and you are apt to get a better price. Friday afternoon may be a poor time to trade because the traders do not like to hold a position over the weekend and are likely to quote a bad price. On the other hand I like to sell options on Thursday or Friday, especially before a holiday weekend because I get an extra 2 or 3 days of time decay on my side.

Don't put too much stock in what I say, there are lots better traders than me around here. Just some ideas to think about, and check out on your charts and option price lists.


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## Rusty O'Toole

atrp2biz said:


> You wouldn't use a diagonal or any other variation of a time spread if you think the underlying will explode. These positions do well in boring environments that hover near the strike price of the short-side of the position. You could certainly pick a short strike well above the current underlying, but there are better ways to position yourself if you believe this is the case (reverse condor/butterfly for an "explosion" or a simple bull spread for a move up).


Perhaps explode was putting it too strong. I don't believe gold has reached its peak. The last few months it has been consolidating in a smaller and smaller range. I expect it to break out and resume it's rise, when I don't know. Could be tomorrow, could be in the fall, who knows? But I would like to be in a position to take advantage of it without risking too much money.

Spreads are good. I tend to avoid more than 2 legs because of commissions but I feel strongly enough about this one to do some size, like 10 or 20 lots.


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## humble_pie

Dopplegangerr said:


> ... I am not thinking about getting rich on my first trade or anything like that, I would like to understand and add an additional method of investing to my repertoire.



they are all highly appropriate for options trading. As a matter of fact it's an excellent list whether for holding or for options selling or for both. each:

first you should decide where are you on the mount etna eruption/fukushima meltdown spectrum.

how do you predict for each of your stocks plus the market in general for the next 6-12 months.

of your 4, i'd be somewhat inclined to select G as a first learning candidate because a) it's a wild card, being a gold; & b) your cost base is significantly above present market price of stock, which cannot be making you feel totally cheery.

in G, one would naturally go to US options - symbol is GG - because these are more liquid than montreal. If you sell a USD call, you will receive US rather than canadian dollars. For some people, this is a positive, since there is no FX fee on those dollars (in their own way, they are gambit dollars.) But how will this structure affect the margin in your account.


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## humble_pie

(to DG) ... just as i thought. The goldcorp dividend is paid in USD only. It's only 18 pennies per annum, but folks should get used to the fact that many canadian companies pay dividends in USD only & if they keep those stocks in canadian account their brokers are going to charge fierce FX fees on those dividends. This troubling issue has been well discussed here in cmf forum.

solution to this problem is to keep goldcorp & every other stock paying dividends in USD in the US account. Every brokerage offers one. It's a snap for the broker to switch the stock from canadian to US account, although it may take couple of days to work through the system.

so the answer to the margin question with goldcorp is to put that stock in US account where it will generate the margin necessary to carry short US calls. Plus you will be receiving the USD dividend without any FX fee from the broker.


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## humble_pie

atrp2biz said:


> ... there are better ways to position yourself if you believe this is the case (reverse condor/butterfly for an "explosion"


hey doc i'm glad you came. The party out on the rear deck is getting noisy with all these conflicting conversations, no. People talking across each other in every direction. Great sangria. A whole salmon piled w rosemary, mangoes & peaches on the bbq.

won't you grab yourself a drink & perhaps you'd be kind enough to show us a reverse condor or a reverse fly in GG ... i'm not too good at these 4-legged plays.

after lepht put up his ric in apple recently i worked one out - bt the body & sld the wings - theoretically speaking - but it didn't seem like it would pay. Then i reversed it - sld the body & bt the wings - but still it didn't seem like it would pay. So i must have been doing something wrong.

otherwise in GG we are back to square one. If somebody is convinced of an imminent explosion he'd be best off with a plain straddle, no.


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## Dopplegangerr

Hey Rusty.
I started looking for the POT on options trading and the dates that are showing are: aug 18th 2012, october 20th 2012, and then straight to jan 19th 2013?
Also it only goes from 42-48 in increments of $2 but doesnt reach $50. Am I doing something wrong or is this questrade.


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## Dopplegangerr

Humble

In my account I can hold both USD and CAD in the account simultaneously. I also have a few thousand in USD in the account but no US stocks at the moment.
I would love to be able to make a little on G because I bought at 38 and then averaged down when it bottomed last week. I am pretty bullish on the stock though and think as a long term hold I will be fine.


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## Dopplegangerr

Opps figured out how to get more strike prices, sorry


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## Rusty O'Toole

I am using a site called Poweroptions, they show options for each month until December 2013 and LEAPS after that. Strike prices at $1 intervals until August, $2.50 intervals starting in September. itrade shows options each month at $2 intervals.

The web sites don't necessarily show all the strike prices available. Usually $1 intervals.


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## Rusty O'Toole

Dopplegangerr said:


> Humble
> 
> In my account I can hold both USD and CAD in the account simultaneously. I also have a few thousand in USD in the account but no US stocks at the moment.
> I would love to be able to make a little on G because I bought at 38 and then averaged down when it bottomed last week. I am pretty bullish on the stock though and think as a long term hold I will be fine.


If you want to average down you might think about selling puts on G. I see the August 34 Put is about $1.65. You could sell one tomorrow and pocket $165. If G goes down you end up buying 100 shares @ (34.00 - 1.65 = $32.35). If it goes up you make $1.65 for nothing. Of course you can sell lower strike prices but get less money, may hardly be worth it after commission. Or you can sell farther out in time. A good money making strategy is to wait till your stock dips, when it starts back up sell a put that is ATM (at the money) or slightly ITM (in the money) and see what happens. Worst that can happen, it keeps going down and you end up buying the stock at too high a price. But if you had bought it and then it went down it would have been the same, without the option money.


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## humble_pie

Dopplegangerr said:


> Humble
> 
> In my account I can hold both USD and CAD in the account simultaneously. I also have a few thousand in USD in the account but no US stocks at the moment.



we're not quite on the same page. I'm not talking about your 2 currencies. I'm talking about which side of the account, whether canadian or US, is holding your goldcorp shares. Because the stock is being held on one side, or the other side, but not both.

if you bought G in canadian $$ you are likely to be holding it in canadian account. Some brokers' websites & statements are not clear about this distinction.

what i am suggesting is move it to your US account. You will likely have to ask the broker to do this.

another one you should be moving is potash. Check first if it pays dividends in USD only - a good place to check is toronto stock exchange at tmx.com. Currency of the dividend is correctly displayed on the main quote page.

while you're on tmx website, please also check out COS' dividend, is it paid in CAD or USD. If paid in USD it's another one to move.

actually i do know the answers, but i'm making you do the legwork ... because ... it's the best way ... to learn ...

royal bank div is paid in CAD btw so it can stay in canadian account.

(for canadian stocks held in US account, you will receive full canadian eligible dividend tax credits.)
(for canadian stocks held in US account, there will not be any US withholding tax on their dividends.)

do not go to canadian options in goldcorp or potash. If you compare open interests in main series & classes of options you will see why. Main markets for these options are US. So one has to go there. Only a masochist would try to trade options for these 2 in montreal.


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## Dopplegangerr

Hey Humble.
I went and checked the TMX website. COS is payed in CAD but the G and POT are both paid in USD. I am still not fully grasping the significance though of why I should own GG instead of G and the NYSEOT. Is it because there is more people looking to buy and sell options on the USA side of the market?


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## Dopplegangerr

rusty so if I sell a put tomorrow on G like you suggested the max up side would be $165 minus commission and the max down side would be the difference between $32.35 and how ever farther it dropped, correct? 
If I understand it right it seems like a pretty safe bet to me


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## Rusty O'Toole

Dopplegangerr said:


> rusty so if I sell a put tomorrow on G like you suggested the max up side would be $165 minus commission and the max down side would be the difference between $32.35 and how ever farther it dropped, correct?
> If I understand it right it seems like a pretty safe bet to me


That is correct. If you would be happy buying 100 shares at that price. 

By the way that was only a suggestion. I wanted to get you thinking about different possibilities. You will have to work out for yourself, the best time to do a deal, such as when your stock goes to an extreme (high or low) and you see it start to swing back. And the best or least risky price.

Look at the charts, check out the news, form an opinion of where you think the stock is going. Look at the option price list and see if you can figure out a good trade. Always figure out what happens if it goes up, what happens if it goes down, or stays the same.

You can also make adjustments, such as buying back an option if the price drops ($$$ in the piggy bank) or, if the trade goes against you, you could sell 2 options farther out and use the money to buy back the "bad" option.


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## Rusty O'Toole

Here is a trade I have been mulling over. Just for fun, would like to hear what you think.

I'm bullish on gold. the GLD Spyder ETF closed at $153.38 today.

What if I bought 15 Jan 2013 155 calls @ $7.55 and sold 10 June 2013 155 calls @ $11.85?

The result would be a credit to me of ($11850 - $11325) = $525.

Now what might happen in the next 6 months?

I'm dead wrong, gold breaks through the support it has been bouncing off of for almost a year and it tanks. Value of all the options drops drastically. Before the end of the year, I buy back the position cheap and close it out.

I'm spectacularly right and GLD soars. Both options go deep in the money. When that happens intrinsic value goes up dollar for dollar with the underlying and time value drops away. If GLD goes to say $175 my position will be worth ($30,000 - $20,000) = $10,000.

Nothing happens. Gold keeps dithering around and going nowhere for 6 months like it has for the last month or 2. At the end of that time, I have to buy some farther out options to protect myself. Not necessarily the June but maybe the March which will be cheap, $4 or $4.50 ($4000 or $4500) and give the GLD another chance.

So, what do you think? What are the odds?


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## Dopplegangerr

Rusty I just realized I am only able to buy not sell puts and calls at this level


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## atrp2biz

Rusty O'Toole said:


> Here is a trade I have been mulling over. Just for fun, would like to hear what you think.
> 
> I'm bullish on gold. the GLD Spyder ETF closed at $153.38 today.
> 
> What if I bought 15 Jan 2013 155 calls @ $7.55 and sold 10 June 2013 155 calls @ $11.85?
> 
> The result would be a credit to me of ($11850 - $11325) = $525.
> 
> Now what might happen in the next 6 months?
> 
> I'm dead wrong, gold breaks through the support it has been bouncing off of for almost a year and it tanks. Value of all the options drops drastically. Before the end of the year, I buy back the position cheap and close it out.
> 
> I'm spectacularly right and GLD soars. Both options go deep in the money. When that happens intrinsic value goes up dollar for dollar with the underlying and time value drops away. If GLD goes to say $175 my position will be worth ($30,000 - $20,000) = $10,000.
> 
> Nothing happens. Gold keeps dithering around and going nowhere for 6 months like it has for the last month or 2. At the end of that time, I have to buy some farther out options to protect myself. Not necessarily the June but maybe the March which will be cheap, $4 or $4.50 ($4000 or $4500) and give the GLD another chance.
> 
> So, what do you think? What are the odds?


You might have margin issues with this position since the long position expires before the short position. Again, time/horizontal/calendar type spreads (whatever you want to call them) are not really intended if you have a bullish/bearish outlook on an underlying.


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## atrp2biz

Rusty O'Toole said:


> Nothing happens. Gold keeps dithering around and going nowhere for 6 months like it has for the last month or 2. At the end of that time, I have to buy some farther out options to protect myself. Not necessarily the June but maybe the March which will be cheap, $4 or $4.50 ($4000 or $4500) and give the GLD another chance.


The risk of this occurring and the impact to the position is more damaging than you make it out to be. Analyze the greeks, especially theta to get comfortable with what will happen if nothing happens (or worse yet, gold is crazy volatile, but ends up near the strike at the end of the year).


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## Dopplegangerr

I have just had them upgrade me to level 3 option trading. By Monday it will be active. Gives me the weekend to think about what I want to do


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## Rusty O'Toole

Dopplegangerr said:


> I have just had them upgrade me to level 3 option trading. By Monday it will be active. Gives me the weekend to think about what I want to do


Good luck.


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## Lephturn

humble_pie said:


> well.
> 
> now that we have recovered from that interlude during which our esteemed member quite rightfully scorned illiquid montreal options with an aristocratic sneer ...
> 
> i just want to put up my poor peasant hand & say heh-i'm-one-who-has-2000-shares-of-UUU-&-it-is-trading-around-my-cost-base-&-i-don't-plan-to-dump-the-stock-&-its-call-options-are-typically-20-pennies-twice-a-year-which-brings-in-40-pennies-for-a-16%-annual-return. So. What. Is. Wrong. With. That.


Nothing is wrong with it if it's a covered position and your "worst case" is that the options expire worthless or your stock gets called away. Also nothing wrong with selling calls on it if you use limit orders and wait for your price. My concern comes from the situation where you need to liquidate an option - you get taken advantage of in such an illiquid market. I was just shocked that it was THAT illiquid. I'm concerned that I would be selling insurance too cheaply in that case.


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## Rusty O'Toole

To be a bit more serious. I am bullish on gold, I believe it will soon resume its upward march. What would be the best option play for say six months or a year out?


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## Dopplegangerr

Hey I was thinking all weekend of what I wanted to do but am still unsure, can I have a little more guidance please. I am not so keen to add more to gold, POT maybe but the two stocks I am really looking at these days are CCO and PAA. I am bullish on both and would like to own both but right now I only have margin available to me but will have more cash in the next month or so. I was thinking about selling puts on them both but I am not sure. Any help would be lovely


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## Rusty O'Toole

If you don't have the cash then you need to look at selling options or doing a credit spread. In your case the safest and simplest would be selling covered calls, especially just starting out.

You need to develop your own trading plan and your own judgement. Look at the charts of your stocks. Use the knowledge and experience you have. Are they high? Low? Likely to go higher? Lower? With option selling you need to figure out where the stock won't go not where it will go.

Take a theoretical example. You own 100 shares of National Bon Bon which you bought at $37. For the last year National Bon Bon has been trading in a range of $35 to $40. It might go as high as $43 or as low as $31 but that's about it. Last week as usual it went a little over $41 and today is dropping back. So, if you want to make some money, you could sell the National Bon Bon $45 call. If you wanted to be really safe, the $50 call. Sell one 30 days to 60 days out and there is very little chance of it being exercised and if it is, at least you made a profit.

This is the sort of opportunity you need to watch for. It may take a month or 2 before your stock sets up an opportunity you like. In the meantime you can check the stock and price the options each day, get the feel of how they move. For example, if something radical happens and your stock moves a bunch, that's what they call volatility which makes the price of the options go up. So if the stock shoots up, the options get more expensive, if you watch the rise and it seems to have run out of gas, that might be a good time to sell a call at a high price, and watch the value collapse as the stock moves down.

If you want to sell puts you should wait till the stock dips and sell the puts when you think it is going to move back up. Of course there is no guarantee, so you have to have something to back yourself up. Either the money to buy the stock, or buy another put farther out to protect yourself. If you know you will have the money when the put expires, if you have to buy the stock, that is OK too. Even margin is a good backup. Because there is a very rare chance someone will exercise the option before expiry. Nobody does this because you can get more by selling the option due to the premium, but the option holder has that right. It does happen occasionally if the option is deep in the money and has no time value left, or if it is at the money and 2 or 3 days to expiry, sometimes the buyer will chose to exercise but not very often.


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## Lephturn

Rusty O'Toole said:


> To be a bit more serious. I am bullish on gold, I believe it will soon resume its upward march. What would be the best option play for say six months or a year out?


Completely depends on your forecast of where it will or will not go in your time frame. If you want to leave your upside un-capped you should have a look at the vols and strikes for a back spread of some description. If you think GLD could just sit where it is in a tight range in that time frame this isn't the right choice but it can be a decent play if things go the other way to really limit your downside.

You could also look at a risk reversal equivalent to long the underlying - sell a put and buy a call - but you have downside equivalent to owning the stock. If you are happy to own more GLD at the lower strike this might be a good choice.


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## Lephturn

We'll see how AAPL works out for me. Just to provide a seed for discussion I opened a Sep 555 520 bull put spread on AAPL today. I managed to get it done while AAPL was still $ 591 - so not the low of the day but not far off. Even if AAPL misses I don't see it blowing through 555 but I will be ready just in case to manage this one tomorrow.

After earnings vol comes out I'll have a look at what I'm left with. I still have a Jan13 $ 545 call that is left over from a risk reversal I did back in late may. I closed my short Jan13 $ 505 put when AAPL bounced up over $ 615 last week for a nice 18.5 % gain on margin - my call I'm leaving on for now as I expect some additional upside in the stock later this year.


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## Dopplegangerr

Hey rusty
I have looked threw each of the stocks I own to try selling a covered call a couple months out, as your example shows but most are worth next to nothing. Like I would only collect 40-100 dollars for selling these contracts, then when you take away commission it does not seem even close to worth it. 
For example: If I were to sell 5 covered calls (I own 500 shares of COS.TO at a average price of $20.59) for October 20th at a strike price of $23 I only collect $0.10 or $50 then minus the $14.95 in commission and I am left with around $35. I am long on COS and could see it actually going past $23 

What am I missing here?

PS. Thank you for walking me threw this


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## Argonaut

Dopp: You're going to have to look a bit farther out with covered calls. Try the January edition. It may have to be an annual or bi-annual thing on the covered calls, though selling puts can work as a quarterly exercise. If you're very bullish on COS, don't sell the call at all and leave the upside uncapped. Maybe sell some January puts @16 or 17 to grab some extra cash with an unlikely assignment.

Lephty: I also like to do the bull put spreads on AAPL, as well as GOOG. I'm going to do a September AAPL this week to go along with my GOOG. I like to go deeper with my numbers though, and do tighter spreads with more contracts. Something similar to my GOOG 500/490 x3 contract edition. I did this before GOOG earnings so it's worked well.


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## Rusty O'Toole

You aren't missing anything. That is what they are selling for. There are certain ways to get more money. Sell farther out calls time wise as Argo suggests. Sell calls that are closer to ATM. Wait for volatility to increase prices.

This is where the skill comes in. The options you are looking at, must have very little chance of being exercised and therefore are cheap. If you sell them after a bounce in the stock, as it is starting to retreat, you are picking up an extra $35 with very little risk. If you do that 4 times a year that is an extra $140. Or you can be a little more chancy with closer in options or longer term ones.

Or, you may feel that it is not worth the bother. That's the way I feel a lot of the time.


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## Dopplegangerr

I told the lady at questrade the other day that I wanted to be able to sell puts and she said she would upgrade me to level 3 option trading (they will not upgrade me to level 4 yet) I believed that with level 3 I would be able to do this, but I was wrong.
So now I have figured out that it works like this:

This is what I can do:
1. Buying Puts and Calls 
2. Covered Calls 
3. Spreads 

And what I am not able to do right now:
4. Uncovered Calls/Puts

So working within these confines lets figure out something else to let me get the hang of option trading.


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## Dopplegangerr

Hurray I have done my first option trade. 
I placed a covered call of POT with a strike price of $48 and a premium of $1.45 for October 20th. Seems like a nice conservative first time trade considering I bought into POT at $39.32 a few months ago.
Please some one give me a pat on the back


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## Rusty O'Toole

Dopplegangerr said:


> Hurray I have done my first option trade.
> I placed a covered call of POT with a strike price of $48 and a premium of $1.45 for October 20th. Seems like a nice conservative first time trade considering I bought into POT at $39.32 a few months ago.
> Please some one give me a pat on the back


That is actually a pretty shrewd trade. POT has had a nice run up and is starting to react downward. The S&P seems to be in retreat (short term market trend). You have a lot of upside protection, a nice premium, and worst that could happen, you sell your stock at a profit. Congratulations.

Have you thought about your next move? Will you buy the option back if it drops to say less than half what you got for it? Have you thought about how you will feel if POT goes up and the option goes in the money?


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## Dopplegangerr

I was thinking I will buy it back if it comes in the money and re sell some farther out. But if it did get exercised I would'nt mind taking the $1000 profit. 

Next I am waiting till G has a bit of a run and then sell some covered calls on that as well.

I also uped my position in RY today to a total of 300 shares so its an even number and can sell some options on that as well.


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## atrp2biz

What you purchased POT at shouldn't have any bearing on your decision to write a covered call. It should be based on the current opportunity cost (ie. the upside you are giving up if POT goes above the strike + premium received vs. the CURRENT price of POT less the premium received).


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## Dopplegangerr

atrp2biz I will keep that in mind next time. I had kinda been holding POT till it went to 50 so thats what made me say that. Cheers


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## Rusty O'Toole

You need not be too quick to adjust your position if the option goes ITM. What goes up can come down, and time is on your side. As always you have to use your own judgement.


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## Dopplegangerr

what price would it likely go to before it was exercised?


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## Lephturn

Dopplegangerr said:


> what price would it likely go to before it was exercised?


As long as there is some time value left on the option it will not likely be exercised. Unless it's very deep in the money if there are even a few days of time left on it, it's unlikely to be exercised. Just watch for the dividend - if you have written a call option and it is just at or barely in the money with say .15 cents time value left you would normally be safe - unless there is a .14 cent dividend in which case the stock could be called away just before the stock goes ex-dividend. Make sure you review your covered calls and track when the company goes ex-dividend - review any short calls that are close to the money and decide what you want to do so you don't get picked off for the dividend. I like to close those positions that might be at risk the week before just to be sure.


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## humble_pie

options that are likely to be exercised early - be sure to factor in a looming dividend:

- calls: when (stk minus strike) > option bid, there is risk of assignment.

- puts: when (strike minus stock) > option bid, there is risk of assignment.

note that a looming dividend (calculate this for the X date) can up the ante for the above formulas, ie a call can be assigned early when [(stk-strike) + dividend] is greater than the option bid.


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## Lephturn

Thanks humble_pie, I was hoping you'd drop in with your simple formula. 

Another thought - as I chafe at being unable to run my favourite strategies in a registered account - I now have a new plan for contributing to TFSA or RRSP:
1. Put cash to contribute in open money margin account.
2. Sell cash secured puts on stocks I want to own or own more of.
3. When stocks are eventually assigned - contribute in-kind to registered account immediately
4. Sell calls against stock until stock called away at some point
5. Use cash in registered account from dividends, option sales, and called away securities to rebalance periodically (once per quarter?)

Thoughts?


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## humble_pie

i can see, well, issues with this.

first of all, how does it really differ from plain old buying XYZ in reg'd account along with plain old selling a rolling series of XYZ puts in margin account ?

i know i know in your plan the cash is present to secure the put whereas in the above scenario there is no cash specifically earmarked against buying XYZ. So for some investors your plan would have this positive aspect.

but then we come to the date or rather the timeliness of the put assignment. The way i see it investor needs to contribute X number of $$ to his reg'd plan in a particular year.

however the above plan if successfully carried out could mean the running on of the put selling plus concomitant delaying of the stock acquisition transaction - which is in fact the contribution - for many years. For many many years, perhaps. One could even argue that the most successful execution of the strategy would mean always selling puts & never being assigned or acquiring the stock.

so timeliness is your achilles heel.

i do occasionally - occasionally but rarely - have stocks & their options crossed between a reg'd account & a margin account. Would only happen when far too good of a selling opportunity for an option would present itself but the wretched reg'd account is not allowed to go naked option. Most of these rare cases have ended up being danged nuisances.

all this being said, & knowing how dear to your heart is the issue of selling puts in rrsp, there's really nothing whatsoever that is wrong with your plan imho ... other than the above-mentioned achilles heel ...


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## Lephturn

Great feedback humble.

I think to make this work I'd need to time limit it - if no assignment by X date contribute cash.

The reason I couldn't just use a rolling series of put sales in the margin account is that I won't have enough funds in there - I don't have the extra to both fund that AND make my registered contributions. I am basically looking to try and put the money aside earlier and use put sales to get me in at a price I like effectively. I can always sell ITM puts with a nice hefty premium to increase my chances of assignment, but have a time limit on the trade so that at say March end I push the cash in if I have not been assigned.

I'm not married to it - just kicking around the idea.. Thank you for your insight.


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## HaroldCrump

Lephturn, I bow to both you and humble when it comes to options of course, but I do not understand any inherent advantage for registered accounts in getting assigned and then contributing in-kind.
All registered accounts have contribution limits on the way in, and tax implications on the way out (except TFSA).
i.e. there is no easy arbitrage to be had here.
The only arbitrage opportunities in registered accounts were the TFSA<>RRSP swaps, but the CRA put a quick and decisive stop to it in 2010.


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## humble_pie

good we're on the same page (harold will join us soon)




Lephturn said:


> I think to make this work I'd need to time limit it - if no assignment by X date contribute cash.


definitely



> The reason I couldn't just use a rolling series of put sales in the margin account is that I won't have enough funds in there - I don't have the extra to both fund that AND make my registered contributions.


i can't resist teasing you a bit & saying this is what you deserve for splitting your accounts & handing your non-registered option trading over to a US firm like options express.



> I am basically looking to try and put the money aside earlier and use put sales to get me in at a price I like effectively. I can always sell ITM puts with a nice hefty premium to increase my chances of assignment, but have a time limit on the trade so that at say March end I push the cash in if I have not been assigned.


yes & yes. ITM put sales will help to force the assignment as long as the broker doesn't rob you with the assignment commish. But i imagine you would not want to go so deep ITM that you'd sell that 100-delta option with no premium or hardly any premium for your trouble.

another slight cloud on the horizon - not enough to blemish the plan, just a small cloud - is that proceeds of put sales will be in taxable account, not in registered account where the ultimate tax benefit would be greater.

i've attempted to guesstimate as best a poor piecrust can do as to whether you'd end up effectively paying tax on the put proceeds twice. Once when you sell em in taxable non-reg'd account. Again at the end of your life when you withdraw the funds from what will then be a rrif. My working conclusion is that put proceeds will *not* be taxed twice.


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## Lephturn

HaroldCrump said:


> Lephturn, I bow to both you and humble when it comes to options of course, but I do not understand any inherent advantage for registered accounts in getting assigned and then contributing in-kind.
> All registered accounts have contribution limits on the way in, and tax implications on the way out (except TFSA).
> i.e. there is no easy arbitrage to be had here.
> The only arbitrage opportunities in registered accounts were the TFSA<>RRSP swaps, but the CRA put a quick and decisive stop to it in 2010.


I'm only doing it because I can't sell the cash secured puts in a registered account and I'd rather collect some premium and try for a lower price than just outright buying the stock and writing calls on them in the registered account. Basically I'm only talking about using cash I was planning on contributing anyway, but writing a cash secured put in the margin account first to attempt to get that advantage since I am not permitted to do that in the registered account.


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## humble_pie

a lot of selling options is small stuff.

it's like eliza doolittle in the flower stalls before enry iggins found her.

in covent garden ere i stand
selling the finest lavender in the land
one put one call an option or two
for a farthing kind sir & a good night to you.


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## mrPPincer

Lephturn said:


> I can't sell the cash secured puts in a registered account


Bad news for me then, was just thinking on that exact detail, was gonna sell covered calls in my rif and buy back using naked puts (understanding that this potentially limits upside potential to an extent). 
Just blasted through Understanding Options in 2 days, possibly a record for me with a book of this type.

Very thumbed over, smudged, coffee stained, food stained etc, & really enjoyed the comments & scribbles somebody had made (the book was an interlibrary loan from mississauaga) In contrast, from here in my county library, I have a copy of The Investor's Manifesto that was in almost mint condition after 2 years and was somewhat mortified to be responsible for an accidental coffee stain absorbed by the last few pages :hopelessness:

Will eventually sell coverered calls in the rsp, but sounds like I'd have to buy back my positions if they got called away, unless I buy back the covered call first.
I doubt I'll ever be much of a speculator.
Still, seems not a bad way to look at rebalancing.

Following this thread with great interest


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## Lephturn

humble_pie said:


> good we're on the same page (harold will join us soon)
> definitely
> 
> i can't resist teasing you a bit & saying this is what you deserve for splitting your accounts & handing your non-registered option trading over to a US firm like options express.
> 
> yes & yes. ITM put sales will help to force the assignment as long as the broker doesn't rob you with the assignment commish. But i imagine you would not want to go so deep ITM that you'd sell that 100-delta option with no premium or hardly any premium for your trouble.
> 
> another slight cloud on the horizon - not enough to blemish the plan, just a small cloud - is that proceeds of put sales will be in taxable account, not in registered account where the ultimate tax benefit would be greater.
> 
> i've attempted to guesstimate as best a poor piecrust can do as to whether you'd end up effectively paying tax on the put proceeds twice. Once when you sell em in taxable non-reg'd account. Again at the end of your life when you withdraw the funds from what will then be a rrif. My working conclusion is that put proceeds will *not* be taxed twice.


I have a margin account at Questrade along with registered accounts - so no worries there. I still do have an account at OptionsXpress but that is my trading money - I use other money to contribute to registered accounts so no worries.

In regards to the sales proceeds being taxable - while true it just winds up getting deducted back when I transfer those proceeds into the registered account at some point. When I do hit the end of the time period and contribute, I push the securities and the cash from the puts over as a contribution - so in effect I am contributing 100 cent dollars (non taxed) and I will be taxed on the way out for an RRSP. Basically I either put the proceeds in RRSP and take the tax break now or I put it in TFSA and get the tax break later as usual. In both cases if all goes well I have a little bit more to contribute.


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## canadian_investor

*stocks with good premiums*

what are some Canadian stocks with healthy call premiums?
ideally stock price under $20 a share so I can buy 1000 shares and write 10 calls.
the 5 banks are too expensive to buy so much and there is no point selling 2 or 3 calls.
stocks under $5 don't seem to have good premiums
so i guess between $5 and $20 is the sweet spot.
i found Eca to have good call premiums and in the right range.
even pays a dividend.
what else is there?


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## humble_pie

in my view - if i may suggest - it's not a good idea to commence by picking stocks whose options have pricey premiums.

nor is it a good idea to restrict the list to stocks trading between $5-20. The universe of hi-quality canadian stocks with both liquid markets plus pricey option premiums is already too limited to impose another restriction like >20.

better to draw up a list of canadian stocks that you like for fundamental or technical reasons & are seriously prepared to invest in. Then work through that list, eliminating names with frail, meagre or illiquid options markets. Be sure to include US markets as some canadian stocks will have their primary options markets in the US & will be much easier to trade stateside than montreal.

your final short ace list will contain the usual culprits. Banks, big energy including pipelines, big miners mostly gold, big ag, big telcos, a railroad if you don't mind the high price of the stock.

my own short list of canadian eligibles is further reduced by restricting it for the most part to stocks that consistently pay high dividends.

encana doesn't come to mind as an ideal candidate. Plus i would not exclude canadian banks unless i belonged to the school - a minority at present & lately a shrinking one - that believes global bank stocks are going to collapse.


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## humble_pie

Lephturn said:


> Another thought - as I chafe at being unable to run my favourite strategies in a registered account - I now have a new plan for contributing to TFSA or RRSP:
> 
> 1. Put cash to contribute in open money margin account.
> 2. Sell cash secured puts on stocks I want to own or own more of.
> 3. When stocks are eventually assigned - contribute in-kind to registered account immediately
> 4. Sell calls against stock [in reg'd account] until stock called away at some point.


this short, simple strategy from lephturn presented just upthread works to harvest extra $$ from an rrsp contribution by selling puts first in the margin account.

i haven't seen this discussed anywhere else, so it's another CMF Forum First. Shall we call it the Left Turn ?

parties practicing the Left Turn should always have a plan B, imho. There will always be the risk that share price of XYZ will decline so the sold put will not be assigned. Nevertheless our investor will need to make his contribution to registered account by X date, so he needs plan B in case there's no Left Turning when he gets to the intersection.


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## HaroldCrump

I like the "Left Turn".
As HP said further above in the thread, timing will be crucial because of the contribution requirements of registered accounts.
Which may not be a bad thing, after all.
You could sell the puts at slightly higher strikes than you otherwise would.
i.e. you can consciously increase your chances of getting assigned to get higher put premiums than otherwise.

You would be trading off the higher assignment commissions for higher put premiums.

There is a school of thought that states _never buy the stock outright, always sell puts for the price you want_ and _never sell a stock outright, always sell covered calls for the profit you want_.


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## Lephturn

In order for this to really work I think I need to put the cash in non-reg at least 3 months out - then simply add to my rules - 5. Regardless of assignment contribute all cash and securities at the target date - say the end of Feb.

Good thoughts HaroldCrump. I need to investigate what the fees/commission will be for assignment. The result will be that it will only be worth doing if I can do this with a large enough amount. I'll need to do some thinking about what that amount would be.


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## Dopplegangerr

I am thinking about buying a call option on CCO, I think that Uranium could rebound very well by the end of the year but not sure it will happen that quickly, I really think long term the company is at a good price now for a buy, but dont have the cash at the moment to purchase out right. I have been rereading everything I can about Options and it seems the ones who make the money are the sellers of options, not the buyers, but there must be a reason people buy. 

Right now I can buy Calls of CCO for Jan 19th 2013 with a strike price of $21 for between $1.61 and $1.74 (say an average of $1.67)
I could buy 5 contracts for $835.00 and resell them between now and before Jan 19th for the intrinsic value, and maybe even some time value depending how fast it goes up. Percentage wise I stand to make a much larger profit this way yes?
Should I be hedging this? Is the volume to low on this stock? Is this just to risky of a play and maybe just a waste of money?

Please give me feedback


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## Causalien

Too short of a time frame. If you are betting that the us Iran war will drive up uranium. Then this call is the right bet... However you are too early since the war won't start until after the election. Or the month before if Obama wants to play the wartime prez card. Either way you are looking at October at least.

Other factors that will make ura go up is Japan's restart of nukes, which is a PR event now. Or China suddenly finish building all it's planned nuclear reactors.


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## Dopplegangerr

But for January 19th you think its to early? Need to go till later next year?


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## Murph

Causalien said:


> Too short of a time frame. If you are betting that the us Iran war will drive up uranium. Then this call is the right bet... However you are too early since the war won't start until after the election. Or the month before if Obama wants to play the wartime prez card. Either way you are looking at October at least.
> 
> Other factors that will make ura go up is Japan's restart of nukes, which is a PR event now. Or China suddenly finish building all it's planned nuclear reactors.


I bought URA back at about $10 only to watch it wither to $7, good contrarian play with significant upside but not for the faint of heart...


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## Causalien

Sorry when I said ura I meant uranium. Typing on an iPhone is a pain.


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## Causalien

If war were to start, it is too early to buy the Jan 2013 options for it. Things are still at the posturing stage and the 5th aircraft carrieris. isn't in position yet. 

The US is taking advantage of the false peace to position it's ground troops and carriers in place while Iran can't do a thing about it. If I were to play this with only game theory, Iran must do a preemptive strike while the 5th carrier is en route, to catch them by surprise. But even then, all that Iran is doing is whittling down US army strength. If Russia or China wants to pick up the war after Iran, this will make sense, but currently neither Russia or China has the firepower to do so.

So Iran, not wanting to be a sacrifice, will wait and hope thenukes can come out before the election. US in the mean time is content with dissolving Syria, an ally of Iran who has a mutual defense pack signed. So US will drag it out with a president who campaigned on peace deadlocked by his own promises. 

So yes, too early... if war is what you are banking on.


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## Dopplegangerr

Interesting thoughts. And on the restart of Japanese nuclear power plants, or the mega tons to mega watts


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## Lephturn

Hmmm - if it's really going down with Iran need to look at options plays on oil.

Last I heard Iran had hundreds of small boats each with a single mine to deploy spread all out along the coastline. They can completely close the straight of Hormuz and there is not a damned thing the US Navy can do to stop it. If they are going to try anything that might be it.

Agreed though too early - maybe sell a calendar instead, sell the near term and buy the long term if this is your forecast.


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## humble_pie

closed out 6 LEAPs call spreads in PG today. Commenced a year ago, in august 2011, these 6 yielded a nifty 26.98% return, all to be favourably taxed as capital gains.

i still have 11 PG diagonal spreads left whose long side are the 2014 50s. Their short sides are the jan 2013 65s. They could have been profitably closed today as well; however their lifetime is longer as they are 2014s whereas the 6 taken out were 2013s; so i decided to let em run on longer.

btw the closing trades just mentioned illustrate perfectly why it's often best to ignore option bids & asks in liquid markets & proceed instead with one's own best bid or best offer. When i set out to sell my 6 jan 2013 $50 calls to close, they were 13.70 bid/16.05 asked. Stock was around 65.63. One can see that the intrinsic value of this option was 15.63. A market order - effectively to sell at 13.70 - would have been beyond suicide.

only one option had already traded, at 15.50. I offered to sell my 6 calls at 15.60. My price was already a dime too low, but i wanted a good chance of getting the trade done plus even at 15.60 i would have a gorgeous profit on the 6 diagonals.

within seconds the dealer or someone else had jumped up from 13.70, like a trained fish jumping out of the water at zoo feeding time, & coughed up my 15.60. I probably could have gotten 15.65, possibly 15.70, had i not wanted to get the entire deal including the still-to-be-negotiated buyback side done before the glow from the earnings report this am faded.


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## mrPPincer

humble_pie said:


> "(a bunch of stuff)".


liked the part about choosing your own prices.
Gratz on the paycheck!


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## londoncalling

humble_pie said:


> a bunch of INFORMATIVE stuff


I keep following this thread attentively, reading and re reading the posts, in the hopes to become a successful options trader. I think I am almost ready to run a trial account for a year or so before diving in. Of course, with all types of investing, market conditions change over time and I must prepare myself in the event that the world becomes bullish as the options strategies that are fruitful will definitely change.

Thanks to all who have helped educate a neophyte such as myself. I have learned more about options from this thread than the 3 or 4 books I have read thus far. Unfortunately/Enthusiastically I have much more to learn.


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## Dopplegangerr

A couple weeks ago I sold covered calls on POT and pocketed $135, now with POT going down a couple dollars the option is trading at $35 even. Should I close to position and wait a little bit till POT goes back up and then can resell the option again, or just wait till October and let it expire worthless?


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## Lephturn

londoncalling said:


> I keep following this thread attentively, reading and re reading the posts, in the hopes to become a successful options trader. I think I am almost ready to run a trial account for a year or so before diving in. Of course, with all types of investing, market conditions change over time and I must prepare myself in the event that the world becomes bullish as the options strategies that are fruitful will definitely change.
> 
> Thanks to all who have helped educate a neophyte such as myself. I have learned more about options from this thread than the 3 or 4 books I have read thus far. Unfortunately/Enthusiastically I have much more to learn.


I highly recommend spending some time paper trading - most brokerages offer this. The idea is to execute a relatively large number of virtual trades to work out some of the obvious mistakes on a virtual platform. I slowed down my own learning curve by not doing enough virtual trading - meaning I traded too infrequently and too small to really learn some of the lessons I could have learned relatively quickly by virtual trading.

I also suggest you listen to the free podcasts and read the articles here: http://theoptionsinsider.com/

Excellent content there. I also got good value out of Mark Sebastian's book "The Option Trader's Hedge Fund" - although the "good part" is the bit done by his co-writer. This book helps you think of option trading as a business and helps you get things in perspective the right way - I wish I had read it early in my options education.


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## Lephturn

Dopplegangerr said:


> A couple weeks ago I sold covered calls on POT and pocketed $135, now with POT going down a couple dollars the option is trading at $35 even. Should I close to position and wait a little bit till POT goes back up and then can resell the option again, or just wait till October and let it expire worthless?


First - you should have this exit plan already written down before you enter any trade. Lay out "I will sell at X, or at Y, or after Z time etc. You can then even place orders that sit there and wait to get hit automating the whole process so you don't have to worry about it.

Second - not enough information there. In my trading I like to look at time vs. % of max profits. So for example if I can get 50% of my max profits in less than a week (after comissions) I take it. Within the first month I'll take 75%. Etc. - scaled obviously depending on the time frame. When I am net short options I am always happy with 90%, I don't leave the risk on trying for 100% of max profit.

Now it's just a matter at looking for some nice juicy vol to sell in the term structure and fishing for nibbles like humble suggests to place your next trade.


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## Lephturn

humble_pie said:


> within seconds the dealer or someone else had jumped up from 13.70, like a trained fish jumping out of the water at zoo feeding time, & coughed up my 15.60. I probably could have gotten 15.65, possibly 15.70, had i not wanted to get the entire deal including the still-to-be-negotiated buyback side done before the glow from the earnings report this am faded.


Nice work humble_pie.

One would think there is a market maker firm running an algo that will jump up and bite on anything cheaper than intrinsic by the merest fraction of a penny. I'm sure the software is sitting there waiting to jump on those penny shavings.


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## avrex

*Lephturn Options Tip*



Lephturn said:


> Theta decays exponentially as you get closer to expiration - that means that if you are selling options you can sell options 6 months out 4 times and harvest more premium than you would selling an option 24 months out - all other things being equal.


Agreed. Great tip.

When *selling* calls/puts, you should utilize shorter contract lengths. Then rinse and repeat to gain more premium income.
When *buying* calls/puts, you should utilize longer contract lengths. This will reduce the amount of premium that you pay.


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## atrp2biz

This is true, but the flip side is gamma. Shorter contracts have higher theta, but in turn also have higher gamma. If you are short shorter term options and the trade goes the wrong way, one better have a quick exit plan since the high gamma will result in accelerated losses.


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## humble_pie

the conventional wisdom preaches that the best short call approach is to sell the nearest strike, nearest month.

this is the practice that got all those covered call etfs into so much trouble.

greeks aside, the intensity of the requirement to pick the right short-term strike price increases inversely to the time length of the contract.

at 30 or 60 days, i often find that time decay has already eroded a significant portion of the call i'm looking to sell. Roybank calls tend to illustrate this perfectly. Near the money RY calls retain significant premium until 45-65 days prior to expiration, then plunge rapidly towards intrinsic value.

when selling, i usually go out 6 months. If stock soars i'm ready to roll out into LEAPs if necessary to prevent assignment.

i also think it's more profitable to look for a counterparty willing to pay or sell at an atypical high/low price than to keep pushing out the calls according to some machine calculated value formula. This means avoiding low open interest series, looking for high open interest options where traffic clusters.

lastly, i'm mindful of my time in fielding these operations. Over 6 months, it's far more profitable to collect 1.85 in just one move than to collect .62 x 3 in 3 separate transactions. It means a single commission vs 3 commissions; it means not fretting away time & energy on trivia; it even means positive interest or leverage on the 1.85 gained, although in this era of low interest such amount is somewhat notional.


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## Dopplegangerr

On Aug 8th I bought 5 call options on MCD after there was a drop in the share price for $1.73 or $865 total with a strike price of 90 even. MCD is trading at $88.12 right now. 
How do I use the greeks to figure out how much say a 2, 3, 4, or 5 dollar increase in stock price will change the option premium. 
And right now with 129 days till expiration when will time decay become a major factor and how do i account for this using the greeks. 
Is the first greek Delta and the second Theta I need to calculate?


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## Lephturn

I'm with you humble_pie - there is diminishing returns once you get to small enough time frames - depending on the underlying security and your commission structure. Where it is sometimes worth selling weeklies in a big dollar fast mover like AAPL, I'm going to sell between 3 and 6 months in most of the Canadian names.

Great advice on looking for strikes with lots of OI and then fishing to get a great price.


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## Lephturn

Dopplegangerr said:


> On Aug 8th I bought 5 call options on MCD after there was a drop in the share price for $1.73 or $865 total with a strike price of 90 even. MCD is trading at $88.12 right now.
> How do I use the greeks to figure out how much say a 2, 3, 4, or 5 dollar increase in stock price will change the option premium.
> And right now with 129 days till expiration when will time decay become a major factor and how do i account for this using the greeks.
> Is the first greek Delta and the second Theta I need to calculate?


Your broker should give you this. I'm spoiled at OX for a US brokerage - they give me Delta and Vega right in the options chain - and a quick hover will show me all the greeks as well as the market depth. If I click on an option for details I get this:


MCD	88.19	+0.07(+0.08%)	88.18	88.19	88.27	88.12	88.39	88.13	881,170	
SYMBOL	LAST	TODAY'S CHANGE	BID	ASK	OPEN	PREV CLOSE	HIGH	LOW	VOLUME
MCD Dec12 90 Call

Last Trade	1.87
Today's Change	-0.05( -2.60%)
Bid	1.87 Ask	1.91
Today's Open	1.95
Today's Volume	8 Bid Size	461 Ask Size	95
Day Range	1.87 - 1.95 Contract Size	100
Open Interest	2,432
Expiration Date	12/21/2012 Days to Expiration	128

*Theoretical Data*
Implied Volatility	14.9967
Gamma	0.0491
Vega	0.1945
Delta	0.3727
Theta	-0.0122
Rho	0.1068

So this means what? First Delta says that for a $1 move in the underlying we get a $0.37 move in the option price ( x 100 so it will theoretically change the price of our option by $ 37.
Gamma is the rate of change of Delta - so on your $ 90 call as the stock price approaches $90 this measures how fast Delta will increase. An at the money option will generally be close to .50 Delta when there is little time remaining. As mentioned above, as you get closer to expiration delta will increase as will gamma - meaning the stock will be more sensitive to moves in the underlying and that rate of change will accelerate quickly as the underlying price approaches the strike price of the option.
Vega is Implied Volatility - so basically it is the bit we can't calculate. The Black Scholles formula calculates all the other bits - what's left is the Implied Volatility - this is the true "price" of the option.
Theta is time value - so this option loses $ 0.0122 per day in value * 100 so every day this option loses about $ 1.22 in value. This will accelerate as you get closer to expiration.

If you can't find these values in Questrade you can get them from http://www.tmxmoney.com/en/index.html


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## Dopplegangerr

Lephturn thats great thanks so much.

So just to clarify the Theta in the entire life of the option should account for $1.22 of the value?

So to make the money I am hoping for I need a 2 dollar positive move in the stock price to come out with a close to 50% gain on original investment. I think that should be just fine


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## Lephturn

Dopplegangerr said:


> Lephturn thats great thanks so much.
> 
> So just to clarify the Theta in the entire life of the option should account for $1.22 of the value?


No - sorry I should be more clear. That particular option when I quoted it last traded $ 1.87 - or $ 187.00. That theta of -0.0122 means that theoretically tomorrow (if nothing else changed at all) that option would be worth $ 185.88. So that is the position loses $ 1.22 PER DAY in value theoretically. That theta or time decay accelerates as we get closer to the expiry date. Theoretically that time value will come out in a smooth curve - but in reality it won't work that way. For example, you might think that by selling the option on Friday and buying it back on Monday you would get to collect two days of free time value - but of course it doesn't work. Market makers will start taking the weekend premium out on Friday or sometimes even Thursday depending on the situation. If there is something coming up on the weekend like an EU announcement then the premium may not come out much on Friday but then drop on Monday. In reality that premium comes out unevenly in fits and starts.


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## Dopplegangerr

Okay I can understand that. 

So is it possible to calculate what the option will be selling for with a 90 even stock price in say a month. I just want to make sure I have lots of time to dump it before the Theta kills me


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## Lephturn

I thought I had posted a reply... sorry it must have gotten eaten. There are tons of calculators that will let you do exactly what you are looking for. I have a good one at OptionsXpress, but there are free ones available as well.

The Montreal Exchange
Options Industry Council

You can put in all of the details and then change one or more variables and see how it will work out. THEORETICALLY that is. Reality may differ from theory and usually does. The big issue is that normally multiple variables are changing at once. One thing to keep in mind is that in most equities if the price of the stock goes down, implied volatility goes UP, while if the price moves up, IV goes DOWN. Also keep in mind as you get closer to ATM delta goes up and gamma goes up - keep those things in mind. One great way to do this is to look at the vega of an option further up or down the chain - so if you want to see what would happen if the stock moved up $10 in a week, you can reduce the days to expiry by 7, then look at a strike $ 10 lower than the strike you are considering and use those greeks to run your calculation.


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## Argonaut

Bobbing for AAPLs today. Sold a 525/515 three contract put spread for January. Was bobbing for a $1.40 limit order spartan apple, and it finally filled after about a half an hour of searching in that barrel.


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## humble_pie

i was snacking on a couple athenian delicious myself. April 520/475 vertical puts. CR 8.15 each.

ps have you seen gob's tiny aapl pilot project. It's actually the Left Turn in non-registered format. The Left Turn was invented or at least polished up by lephturn here in cmf forum, although it's based on standard old-fashioned put selling as a way of snagging cheaper stock.

gob's version has speeded up micro-trading aapl options & pushed everything into hypersonic mach 6. It's at IB, which would be pretty much mandatory for the low commish plus generous margin terms.


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## Lephturn

Good move for both of you - we are running at the all time high - damn this working for a living thing, I wanted to get long yesterday but couldn't do it.


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## Argonaut

Minor but interesting note.. I had the limit order set for $1.40, and it hung for half an hour before it actually filled at $1.42. Nice little bonus, I can get a bag of apples from the grocery store with the extra $6. I'll pop over to see how one can GOB for AAPLs too.


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## peterk

Another noobie question. You folks taking about multiple apple options, is there some trick to participating in options trading with these high value stocks? or are you guys just high rollers playing around with >50k of stock or margin on a single transaction?


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## humble_pie

no, no high rollers here. It's the old story. We're not buying these pricey options, we're selling em. Of course a prudent trader needs a hedge in place so a lot of the AAPL threads is about creating the hedge.

serendipitously, gob has recently opened up a thread about his tiny new AAPL pilot project. It's as frugal as one can get. He only injected $20,500; the rest is running on margin. Gob has a good grip on the risk.

perhaps you would care to study the thread ? it's just below in the forum.

http://canadianmoneyforum.com/showt...come-Portfolio?p=139043&viewfull=1#post139043


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## Dopplegangerr

So I guess there is an important thing I did not understand when selling covered calls. I thought once the option would come in the money or worth a little more the stock would be called away. But that doesnt happen does it. It just sits there and you watch profits that you could have been making go to some one else. I guess you need to sell them farther out of the money and take less of a premium. 
I kept looking at as what I would be happy to sell my stock at. Then I could take that money and go buy something else. 

Like RY for example, after months of it hovering around the same price I decided to sell some covered calls for a 52 strike price. Well a few days later it flew up to $53.90 and I feel like an idiot. I have just closed the position and taken a loss of $300 bucks. So now am I supposed to just set out to sell another covered call with a higher strike price to recoup that $300?


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## Lephturn

peterk said:


> Another noobie question. You folks taking about multiple apple options, is there some trick to participating in options trading with these high value stocks? or are you guys just high rollers playing around with >50k of stock or margin on a single transaction?


Nope - that's why we are using options! I can't swing 100 share blocks of AAPL - but I can buy a call for $ 1,500. Or I can sell a spread of some sort that ties up on few thousand in margin. The "trick" is basically the leverage inherent in options - so for a small premium I can buy a contract that lets me control 100 shares of stock. There is much more to it than that, but the essence of it is that I can buy or sell options contracts for fractions of what it would cost to actually buy 100 shares.


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## humble_pie

DG something that is making options a bit challenging for you, i believe, is the proliferation of your positions. I think i remember pmming you back in the day that one or 2 positions at first are best. The idea is not so much to make $$ from them but to learn from them.

however you seem to have quite a bunch of options & perhaps some others not mentioned in cmf forum. These are too many for a beginner to handle imho.

what have you learned from roybank ? RY calls have a habit of retaining their premium value stubbornly until about 60 days prior to expiration, when they start to plunge precipitously. Flip this fact around & it means that an RY short-term call is peanuts to sell, not worth selling; whereas a longer-term call, say a january/13, is likely to have premium & be worth selling.

i would imagine that the 52 call you sold was short-term; that at the time you sold it RY short-term calls were well into their final stage of draconian downsizing; that there was no money in 56 or 58 calls; therefore you selected the 52s.

yes you can sell another RY call to compensate for the loss you took; but i would like to mention that, properly speaking, these should be plotted out together. You would have been buying the short-term 52 & selling another at a higher strike, at least as far out as next january. You would want to identify the spread (B the near, S the far) & track that for a while to see how it will expand & contract. For tracking purposes one would take the buy side as the offered price & the sell side as the bid price. 

overall, DG, what i would like you to do is slow down & try to reduce the emotionalism. It takes a long time, as much as a full year & a couple hundred option trades, to grasp how lephturn's friends the gamma/theta/delta elves are dancing together with IV the wizard. Some geniuses are able to zip effortlessly through this learning period & we have a few of these options post-docs here in cmf forum. Alas i am not one of them, i have to work hard at learning.


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## peterk

Oh ok. So you are selling naked calls, and naked puts, and if the stock moves how you weren't expecting and becomes ITM you just buy the option back?
Do you require margin/cash to cover the full stock price to execute these naked tranactions?

Edit: read the GOB thread and it was enlightening.


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## GOB

Dopplegangerr said:


> So I guess there is an important thing I did not understand when selling covered calls. I thought once the option would come in the money or worth a little more the stock would be called away. But that doesnt happen does it. It just sits there and you watch profits that you could have been making go to some one else. I guess you need to sell them farther out of the money and take less of a premium.
> I kept looking at as what I would be happy to sell my stock at. Then I could take that money and go buy something else.
> 
> Like RY for example, after months of it hovering around the same price I decided to sell some covered calls for a 52 strike price. Well a few days later it flew up to $53.90 and I feel like an idiot. I have just closed the position and taken a loss of $300 bucks. So now am I supposed to just set out to sell another covered call with a higher strike price to recoup that $300?


You need to maintain a level head and not lose your composure. Sure, selling a covered call and getting it called away when the stock has rocketed feels like a waste, but on the other side selling a put or covered call that isn't assigned to you is virtually free money. Take comfort in the fact that educated options trading is a phenomenal way to boost returns, and that options sellers statistically do better than options buyer, putting you at an immediate advantage. 

If you don't want to roll options out, don't sell calls at strikes where you wouldn't like to sell the stock. Simple. Also, don't sell puts at strikes where you wouldn't want to buy the stock. This can greatly simplify things, and while it may somewhat limit opportunities there are still tons out there that you can pursue.


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## Dopplegangerr

GOB said:


> You need to maintain a level head and not lose your composure.


Fully composed dont worry  I am not emotional about it. If I came across as getting emotional that was not my intention. I was being honest when I said I did not understand and that I had learned something. Now that I do understand it, it just seems a little self evident and that I should have understood this while I was doing my research and reading. 
I was fine with selling it at that price but not with having to own the stock past this price and not profit from it. I would like to use the 15k capital to buy something else. Take my 10% profit and move on. But never mind, stocks didnt get called away so I decided to BTC and STO a new position on RY with a higher strike price and a farther out expiration date. No harm no foul


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## Lephturn

peterk said:


> Oh ok. So you are selling naked calls, and naked puts, and if the stock moves how you weren't expecting and becomes ITM you just buy the option back?
> Do you require margin/cash to cover the full stock price to execute these naked tranactions?
> 
> Edit: read the GOB thread and it was enlightening.


Sometimes naked sales, but no I do not need to hold all the cash required to buy the security. More often I use spreads, positions composed of multiple contracts, some bought and some sold, that limit risk.


----------



## Lephturn

Dopplegangerr said:


> So I guess there is an important thing I did not understand when selling covered calls. I thought once the option would come in the money or worth a little more the stock would be called away. But that doesnt happen does it. It just sits there and you watch profits that you could have been making go to some one else. I guess you need to sell them farther out of the money and take less of a premium.
> I kept looking at as what I would be happy to sell my stock at. Then I could take that money and go buy something else.
> 
> Like RY for example, after months of it hovering around the same price I decided to sell some covered calls for a 52 strike price. Well a few days later it flew up to $53.90 and I feel like an idiot. I have just closed the position and taken a loss of $300 bucks. So now am I supposed to just set out to sell another covered call with a higher strike price to recoup that $300?


Good lesson there - options will not get exercised when there is still time value left in them. That means that you have to either sit with them or buy them back for a loss if you want to hold on to the stock. Just remember, you have time left. Just because RY jumped up at the moment doesn't mean it's going to stay there until expiration. When you are selling options far enough out, you have time to be right. Just realize that if you are selling a call 6 months out at $ 52 you need to be happy with the return you will get when you sell at $ 52 + the option premium (and any dividend) over that time frame. Sometimes that means that when the stock is down for a while you just wait and do nothing. It's not always a good time to sell calls, better to wait for a run up in price that will get you a good return over that period, so that when you sell the calls you can look at that 3-6 month time frame and be comfortable with the return even if the stock blows past your short strike.


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## HaroldCrump

Lephturn said:


> Sometimes that means that when the stock is down for a while you just wait and do nothing.


If you are still comfortable holding the stock, in that case, you can buy more and sell another call with a slightly lower strike.
This works better with nice dividend payers such as the banks and insurance cos.
You will be averaging down your stock price as well as getting more call premium.
Over time, you will have a lower cost base and increasing premiums.

And yes, wait for an upswing day(s) like this week to sell the calls. Not the day you buy the stock.


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## Red

How option fees work?

I have a TDW margin account charging 9.99 commission + 1.25/contract + $43 'for each transaction'. For each transaction is the wording used by TDW

I am not sure how the $43 charge works - is it possible for each of the 5 contracts to be exerised separately (for instance on different days) meaning the cost of the option would be $232.64. ($9.99+ (5 * 1.25) + (5 * 43)). I suspect this would be a remote situation but I want to know my possible maximum cost. 

Thanks
Steve


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## humble_pie

Red said:


> How option fees work? I have a TDW margin account charging 9.99 commission + 1.25/contract + $43 'for each transaction'. For each transaction is the wording used by TDW


just to be clear, for an ordinary option buy or sell done online, the tdw commish will be 9.99 plus 1.25 per contract. For example 10 contracts will be 9.99 + (10 x 1.25), or 22.49. That extra $43 in your formula doesn't apply to online option trades.

option trades handled by phone by a licensed representative are considerably more expensive.




> ... is it possible for each of the 5 contracts to be exerised separately (for instance on different days) meaning the cost of the option would be $232.64. ($9.99+ (5 * 1.25) + (5 * 43)). I suspect this would be a remote situation but I want to know my possible maximum cost.



this paragraph is interesting, because yes it can happen that only part of an option holding gets assigned. In such a case, a $43 commission will be charged for each assignment. For example, if 2 contracts are assigned prior to expiration, a $43 commission; & then if trader is foolish enough to let the 3 remaining positions sit around to ITM expiration at a later date, another $43 commission. However, the $43 exercise commission is a flat fee at tdw. There is no additional fee per option contract.

at other brokerages the exercise commission can be much higher. Several of the other bank onliners, for example, are charging the full agent-handled commish & apparently at least one loads on an extra $10 for its "trouble."

the solution to all this is. Never. Get. Assigned. Exercise does *not* automatically take place when an option falls into-the-money. In most cases, there is still sufficient premium in the option that the counterparty will sell his option into the market instead of exercising it.

there are simple formulas that help to identify a put or a call which is at risk of early assignment due to a looming dividend X date or a complicated reorg being picked over by the arbs. Here are the formulas:

CALLS: when (stock minus strike) > option bid = risk of assignment
PUTS: when (strike minus stock) > option bid = risk of assignment

you can prevent assignment by rolling your option forward. If a call, roll it up a notch or 2 in strike price. If you work at this properly - ie keep monitoring your positions & watch for approaching risky zones - this can usually be done as a credit spread.

if you are determined to get out of the stock, you will see that it's always cheaper, commission-wise, at tdw to buy back your 5 options (commission 16.49) & sell your stock (9.99) than to let em exercise your option against you.


----------



## Red

Thanks Humblepie

So in the example above

Sell 5 contracts - $16.49
Get exercised for 2 contracts - $43
Get exercised for 1 contract on different day - $43
Get exercised for last 2 contracts on another day - $43

Just want to be sure I correctly understand the pricing structure. All trades would be online.

Steve


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## humble_pie

Red said:


> Thanks Humblepie
> 
> So in the example above
> 
> Sell 5 contracts - $16.49
> Get exercised for 2 contracts - $43
> Get exercised for 1 contract on different day - $43
> Get exercised for last 2 contracts on another day - $43
> 
> Just want to be sure I correctly understand the pricing structure. All trades would be online.
> 
> Steve




more than 1 partial assignment against a single option holding has never happened to me. In my personal experience, partial assignments almost never happen because i'm an assignophobe. I almost never get assigned. Maybe once in 500 trades, ie a blue moon.

if a broker were to do something as unjust as assign 2, then assign 1 on a different day, then assign the final 2 in a holding of 5 options, i'd definitely phone them & ask for the 2nd commission to be cancelled. What's more, i believe they would. Cancel, that is. I'd bring up some argument like they're-required-to-carry-on-business-in-good-faith, blah, blah.

in a case like this, a standard bank onliner like tdw is likely to agree. A deep discounter like IB or VB might refuse.

about assignments in general, remember that 2 assignments actually take place, although only the 2nd one involves the investor. Both assignments are random.

the first one occurs when counterparty exercises. His broker notifies clearing corporation immediately. That night, CC randomly assigns the exercise to one or more brokers that are holding the option short side.

the assigned broker then assigns the contracts to one or more of its clients' accounts on a random basis. This is where an individual client can have a partial exercise.

but i'm still baffled as to why you'd ever want to let yourself be assigned. At tdw it's usually the most expensive exit route. To repeat, upthread i posted formulas that clearly define early assignment risk & suggestions for how to wriggle out of assignment risk zone for less than the $43 flat commish.


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## Argonaut

Option commissions are outrageous everywhere but Interactive Brokers, it seems. I wouldn't mind selling a few covered calls here and there, but to get say $70 per 100 shares.. then having to pay $10+ of that to the broker is robbery.


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## alexei

Does anybody know what the option assignment commission is at Virtual Brokers? On the website these are the only fees outlined:

Options
$9.99 + $1.00 per contract (USD)
$9.99 + $1.50 per contract (CND)

https://www.virtualbrokers.com/contents.aspx?page_id=100


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## Lephturn

With OptionsXpress I am getting:

Options Active Trader Rate Standard Rate
1-10 Contracts $12.95 Flat $14.95 Flat
10 + Contracts $1.25 / contract $1.50 / contract

Spreads, Straddles & Combos Active Trader Rate	Standard Rate
2-10 Contracts $12.95 Flat $14.95 Flat
10 + Contracts $1.25 / contract $1.50 / contract

I was just shy of "Active Trader" status last quarter which is 35 options trades in a quarter. I should soon hit that. The nice thing is I can do a butterfly or a condor and I'm almost always simply paying $ 15.00. These guys are not the cheapest around but I like their execution and their tools - far above the others I've tried.

If any of you are interested in trying out OX - please private message me. I'll refer you in their site and if you do join we both get $ 100. Don't let that sway you, but hey if you are planning to try them out it's a free $ 100!


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## Toronto.gal

FYI: Options Education Day in Toronto on September 29, 2012.

http://www.m-x.ca/envoi/oed/tor_201209.html


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## Lephturn

Hmmm - I wonder if they are going to do Ottawa again this year. I don't see it so far.

I don't think I can swing Toronto this year what with a 2 year old and 5 month old twins on top of that.  I wonder what I would have to buy my wife to be able to run down to TO for that day?


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## Toronto.gal

There is Montréal on Sept.8th; also Calgary & Edmonton on Oct. 20th/21st respectively. Ottawa might be added later in the Fall.


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## mrPPincer

Toronto.gal said:


> FYI: Options Education Day in Toronto on September 29, 2012.
> 
> http://www.m-x.ca/envoi/oed/tor_201209.html


Thanks Tgal. Definitely considering catching this one; if I can get over the mental hurdle of Toronto driving... :cower:
It sounds like those of you who went last year found it quite worthwhile.


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## Lephturn

It's a good event, can't beat it for the price, and well worth your time. I have attended in both Ottawa and Toronto in the past and highly recommend it.


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## bayview

Thks for the heads up! Dumb qt: looks like there is no way to do package 1& 2 on the same day. Registration is for either package. Correct? Or one is allowed to register for both and pay $90?

@Lephturn: Gold could hit $2k before Christmas and warms her heart


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## Lephturn

The two tracks are parallel, so you can't attend both. That said, just pay for whatever one - no need to pay twice. What I did was the morning on one track and the afternoon on another. You can bounce between sessions, they don't mind.


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## Toronto.gal

mrPPincer said:


> Thanks Tgal. Definitely considering catching this one; if I can get over the mental hurdle of Toronto driving... :cower:
> It sounds like those of you who went last year found it quite worthwhile.


Don't know where you're coming from, but traffic early Saturday morning should not be bad at all. 

If you're interested in Options, I would encourage you to go; very informative & was a great event for the price indeed.


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## bayview

Leph- thks for the clarification. You are right! My eyes shifted too fast when i first read it.


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## Argonaut

What does one think of selling call spreads at this time? I'm thinking specifically of Google Jan 2013.. something like a 800/810 spread x3 contracts. Basically betting that it doesn't shatter all time highs in the next few months. Or does GOOG continue on its bull run? I would probably play the other side once my September put spread expires. Maybe sell a 550 Jan put spread to make an ultra wide condor or butterfly or what-have-you.


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## Causalien

Goog continue bull


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## Lephturn

Vol is on the upswing but kindof in the middle of the range here.

I'd rather see IV in the 30's somewhere. I don't have as good of a handle on GOOG's business as I do AAPL - but technically it's looking extremely strong.

I might do something if we get another big up day and really blow through the upper Bollinger Band - right now it's just up touching the top of it.

It's got no recent supply over it here - hasn't been here since 2008 - so it could keep climbing.


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## humble_pie

jam factor is low in your proposal ... argo i take it you are wanting to avoid exercise.

goog option quotes are this moment set at closing prices, so the B/As are very wide. What i see is a credit of only one measley dollar (S at 8.90, B at 7.90.) Surely there might be a put spread that would be more appetizing ?

it's so hard to believe that spreads in mighty GOOG have been reduced to a dollar ... as for myself i crumble along selling my lonesome goog puts which are less lonesome now that i've increased to a pair. I've always sold lonesome googs. It would take more than a measley dollar to dislodge me from this familiar rut.

a while ago i compared put spreads in aapl & goog. The aapl spreads were so so so much more lucrative ! i pretty much gave up thinking about goog spreads at that moment.


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## Argonaut

I would never trade the bid/ask, but somewhere in between. I imagine it would net 1.35 (x3 is $400) at least if kept open as a spread order all day, based on past experience.

The puts are more expensive than the calls though, so they might be better for selling. But for some reason I wouldn't be super comfortable selling puts above 550.


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## humble_pie

Argonaut said:


> 1.) I imagine it would net 1.35 (x3 is $400) at least if kept open as a spread order all day, based on past experience.
> 
> 2.) The puts are more expensive than the calls though, so they might be better for selling.


1.) or you could leg it in yourself.

2.) yup it's a put market. Maybe there's a warning there.


----------



## atrp2biz

How are the puts worth more than the calls? If that were the case ATM, there would be an arb play of selling the put, buying the call and selling the stock.


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## humble_pie

atrp2biz said:


> How are the puts worth more than the calls? If that were the case ATM, there would be an arb play of selling the put, buying the call and selling the stock.


he's right
sob
never argue with the Doc


----------



## Argonaut

I was looking at out of the money options. GOOG was at $700, the 600 put was a couple bucks more expensive than the 800 call. My wee little brain cannot comprehend the arbitration play behind this.

Still, I don't think I'll be selling calls. GOOG has been a steady juggernaut, and one is not compensated fairly enough for selling the call spread.


----------



## atrp2biz

If the strikes are different, they are cannot be compared--it's apples and oranges. With this comparison, you can't say the put is worth more than the call.


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## Argonaut

They are different, and one of the differences is that the put is more expensive despite being the same distance away from the price.

Either the market sees more downside than upside, or puts have a tendency to be bought and calls sold. This makes sense because it complements the "normal" strategy of being long a stock.


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## humble_pie

yesterday i was able to sell my 20 call spreads in banco santander for a net 3.65, or 7,230.00. These had only cost me 4,540 on 3 june/12, so altogether it was a fine runup of nearly 60% over 3 months.

the maximum gain would have been $4, or just over $4 if i were lucky ... but possibly strung out as far into the future as january 2014. What i held were 20 long LEAPs 2014 calls with a strike price of 3. Then i was short 20 2013 jan 7s. Everyone can see the potential $4 gain sitting there. 

(no ?) (hint) (if stk is at 7 or higher in jan 2013, the short calls would be exercised & i would owe to deliver 2000 shares at 7) (i would then exercise my 2014 $3 LEAPs & buy 2000 shares at 3) (credit is $4). 

at 3.65, the spread had not yet matured into its finest hour, but i weighed up the risk that it might take all of the next 18 months to watch it slowly inch & crawl up the last 35 pennies. Clearly the remaining potential return on this diagonal was low.

then there was also the risk that the structure could collapse & all profits would vanish. So i felt it was the moment to sell all. I regretted giving up my interest in SAN, though, & will be looking for other option plays in this bank in order to keep my foot in the door.


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## avrex

You harvested a majority of the gains here. Nice. Now you're off to find another profitable risk/reward option. 
thanks for the update, humble_pie. I always like to hear and learn from the transactions that you make.


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## Lephturn

Argonaut said:


> I was looking at out of the money options. GOOG was at $700, the 600 put was a couple bucks more expensive than the 800 call. My wee little brain cannot comprehend the arbitration play behind this.


It's called equity skew - in equities put premiums are usually higher than equivalent call premiums. This did not exist prior to the 87 crash as I understand it, but since then in equities there is more premium in the puts than the calls in most cases. This is due to the fact that the vast majority of the market players are long-only so they tend to do two things 1) bid up puts as insurance and 2) sell calls to generate income. Yes there is an arb play there but you'd need to be very well capitalized to do it - basically a market maker. Add to that the key term "usually" - the skew changes over time so your nice little arb can blow your account up over night when some event moves the skew curve way off of "normal".

If you look at many commodities they do not have the same skew, and indeed gold is usually skewed the other way. Oil is similar - the big market players in something like oil are buying it for their businesses and hedging, so their big risk is if the commodity goes up too much, hence the skew is the other way and calls have a bit more premium. This is something I am learning about now - the shape of the skew curve affects options positions and you need to look at the whole volatility surface when trading - what does the term structure look like in each week/month and how do they relate to each other.


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## mrPPincer

Signed up for options education day.
Just one dumb question, parking, what's the cost for parking at the Hilton?
I have a nephew in the distillery district, maybe I could park there and walk over.
The other option was to park at Stratford the night before and take a leisurely train ride over, but that's 70 bucks return, so not seriously considering it.


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## ddkay

Municipal parking lots (look for the Green P) cost about $6 evenings and weekends. Same as 1 round-trip on the TTC. The closest lot is at 110 Queen Street W http://parking.greenp.com/find-parking/?a=M5H2L2&x=0&y=0


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## mrPPincer

Cool, thanks ddkay, that works, I'll probably just do the drive in the morning, see ya's all there, whoever is going


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## Dopplegangerr

This is the spread I am shopping for at the moment. 
CCO is a company I have been bullish on for a while but there volume for options is not the greatest so I go to the USA side for CCJ.
I am keen to do a debit call spread for Jan 19th
I can buy calls with a 21 strike price for 2.00
and sell calls with a 25 strike price for 0.50 

So thats a net outlay of 1.50

Now I was thinking about putting a third leg on this to further reduce the debt this creates with selling a put with a strike of 20.00 for 1.08 so this reduces the cost of this spread to $0.42 

So my max profit for 10 contracts is $3230 if the stock jumps 3.23 from the price its sitting at now of 21.77. Basically a 752% gain on initial capital.

If the stock closes anywhere about 21.35 in the 4 months I am profitable.

If the stock sinks below 20 I acquire 1000 shares of CCJ (a company I am happy to own) for basically a cost of $20.42 still 1.35 less then it is trading at today. 


Considering I sold out of some long positions today in some other stocks for a 4k gain I feel pretty good about risking some of the capital for a great potential return.


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## Toronto.gal

mrPPincer said:


> I'll probably just do the drive in the morning, see ya's all there, whoever is going


Depending where you're coming from, you might want to park the car and take the subway downtown. Here is a list where parking is available: [short 1/2 hr. ride directly to the Hilton from many of the listed stations]
http://www.ttc.ca/Riding_the_TTC/Parking/index.jsp


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## Dopplegangerr

Fished all day for what I wanted but could not get it, so I moved the date back to March 2013 and BTO ten calls at 2.45 with the same $21 strike price. 
Will set up the rest of the spread on Monday, not enough time left in the day now.


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## mrPPincer

Thx TG, I'll be coming from the west on the 401, so I could park at the Yorkdale station, unless I just use the municipal parking.
I've never used the subway there so it'd be another complication for my tired brain (working a 10 hour day the day before).
Maybe I'll be more alert for the workshops if I drive over after work and sleep at the nephew's place.. meh I think I'll end up doing that after all :indecisiveness:


----------



## humble_pie

Dopplegangerr said:


> Fished all day for what I wanted but could not get it, so I moved the date back to March 2013 and BTO ten calls at 2.45 with the same $21 strike price.
> Will set up the rest of the spread on Monday, not enough time left in the day now.


yikes too late now but MMS (my money says) don't ever do this again ... don't ever split up a spread because it's friday pm (it's OK to split up knowingly because one anticipates a price shift in the underlying but OMG don't split late on a friday.)

perfectly OK for you to give me bloody hell on monday when it turns out you are right, cameco soared, your 10 calls are worth $3.25 ... :biggrin: :biggrin:

still, i am not getting the beauty of this triad. Perhaps we might call it the Dopple Topple ...:listening_headphone :cool-new:


----------



## Dopplegangerr

Well while everything else is soaring Cameco is down, I wanted to make sure at least I got the first part of the spread. I have been watching this stock like a hawk for months now and am very sure I can get a better price for selling the call next week. Anyways by the time I had the first leg in the door it was 10 min to three, so I was a little SOL.
I thought selling a put for a price I thought the stock unlikely to reach a nice way to shave down the cost of the premium. And if everything goes totally pear shaped I will have purchased a company at a discount I could easily hold long term and profit from.
Do you disagree humble? You know options much better then me, your the Jedi I am just the Padawan  Please tell me because it my mind it all makes sense lol


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## humble_pie

def do not disagree. I just think it's a little bit ... quirky. But not so much as to be a little bit ... kinky.

keep in mind that right now you have long calls in CCJ but no spread. Other positions might be added later next week but right now you are a serious ccj bull.


----------



## Dopplegangerr

Yea I have really focused my reading and studying on things like Uranium and really believe this is such a great time to get in. Commodities are so interesting, trying to understand the relationship between supply and demand is not always easy but it is starting to fall into place for me now. I will be adding legs to this to make it a proper spread, and your right if it works out we will call it the DoppleTopple with pride okay


----------



## Causalien

Too early, I don't get why there's a sudden influx of ppl interested in Uranium. Did you read the same article?


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## humble_pie

cause you're right, too early for uranium.

but he's an option beginner who's seriously trying. No need to discourage. The worst case scenario in this irregular configuration is that stock will get put to him at $20 & he'll be stuck with a losing commodity play for years on end. 

in that sense he'd be no worse off than investor who plain buys long CCJ. He might be better off, because he would have had a valuable lesson.


----------



## Dopplegangerr

If it was trading at 40+ less then two years ago and 26 six months ago how can you be so certain it will stay at 20 for years on end. Even if I just leave out the third leg (which I still think was cool) and just do a normal vertical spread what is my valuable lesson?
They are going to restart the Japanese reactors, we use more uranium then we produce, the megatons to megawatts is coming to a finish, they are building new reactors around the world in the next ten years, we having a growing population and shrinking fossil fuels, nuclear is the cleanest most substantial option the world has. And if nothing else the company still has a 31% stake in the bruce nuclear power plants in Ontario that are already running and is the second largest nuclear set of reactors in the world.


----------



## humble_pie

good points :applause:

but if U feel so bullish on U why didn't you go out further ?

i have call spreads in CCJ but the long side is 2014, as far out as i could get. Because timing of increase in nuclear use is still so severely clouded & uncertain.

parties babbling about cessation of russian weapons extraction are talking about the past imho. This has been factored into uranium stocks for several years. Also, i belong to the school that believes uranium is not a rare metal & am sometimes flabbergasted at pumps trying to pretend it is.


----------



## HaroldCrump

Dopplegangerr said:


> If it was trading at 40+ less then two years ago and 26 six months ago how can you be so certain it will stay at 20 for years on end.


What price a security traded at 2 years ago is mostly irrelvant to current valuation.
Markets are forward looking, not backward.
RIM traded at $148 barely 3 years ago - what does that prove about its current valuation?



> They are going to restart the Japanese reactors


No, my friend - they are _shutting down_ the reactors slowly.
They plan to substantially reduce nuclear use by 2020, and wrap up everything by 2030.

http://www.bbc.co.uk/news/world-asia-19595773

I'm not saying you are wrong about the direction of nuclear power, but Japan is not where the growth will come from.


----------



## humble_pie

there's china nuclear.

& france nuclear.

he'll always have Paris.


----------



## Dopplegangerr

I believe the USA is also in the works for more nuclear plants as well. But for sure China is where it is at. I had read a report that they had the green light to restart the Japanese reactors and had secured any weaknesses so there would never be a problem like they did after Fukushima.

I think that a lot of the bearishness in U is the sentiment about what happened in Fukushima and there is still blood in the street so to speak. It seems to me to be buying something where there is less supply then demand and that when people realize this the price of good companies like CCO will advance rather rapidly. Of course I am speculating and I know this.

Humble, why I did not go further out? well because I didnt know it was a good idea to, you are right I am new, and you are right I am trying, I will keep it in mind in the future. I guess I think about how much can change in 6 months (look at my own life....) and seems the markets could be in a completely different place next march. I have to say QE3 is a bit of a mystery to me, everything I read and research contradicts it self and the other reports written. Am I alone here or is this one very hard to decipher?


----------



## Causalien

Heh, don't drag me into this debate.

I don't want to tell dopple what to do, nor do I want to strengthen Humble's position.

All I am trying to do, is pre-announce my prediction so that people can verify my claims and worship me as an oracle. This call is for my Opex call this week of $21.85 and what I think of an option play within the year. 

I am, frankly, too jet lagged to get dragged into this.


----------



## humble_pie

DG you are doing a good job. Things *are* hard to decipher. C'est la vie.

re your 3-legged option structure in cambior, you mention you see it as a vertical spread with a short put off to one side. Myself, i think it's a short strangle with a long call near the middle. Whatever, it's bullish, although it's not crazy bullish.

what i like about the Topple is that you have already moved to US options in cambior. This is important, because the montreal exchange is a strangulator. For many reasons, it's always been too difficult to carry on at mx-ca. In many cases, such as cambior, canadian stock is interlisted & hi-volume options US markets operate efficiently, so you are right, it's best to go there.

the concern i have is that the outlook for the underlying is ambiguous & clouded. This is tied to the 2nd concern which is that your time frame may be too short, since expecting an upswing in uranium within the next few months seems uncertain to me. One way of adjusting for that less-than-rosy short-term prospect would have been to lower the strike price of the call that was sold; this would have made the structure less theoretically profitable but it would have gained a higher probability of a more modest success.

another way of adjusting for an uncertain short-term ride is to go out longer-term on the long side. This is what i did. So far, the call spread has been zip. I had 20 of these in 2010 & they ended up well, so perhaps once more into the trenches. Or tranches as toronto.gal would say. Meanwhile i am making some $$ rolling naked puts in cbj.


----------



## Dopplegangerr

Alright wonderful advice Humble, I will try and take what you have said on board. I am also looking at doing a vertical spread with POT. Any red flags I should be aware of before I start plotting out a trade?


----------



## Lephturn

Dopplegangerr said:


> Alright wonderful advice Humble, I will try and take what you have said on board. I am also looking at doing a vertical spread with POT. Any red flags I should be aware of before I start plotting out a trade?


Credit or debit? What's the implied volatility vs. historical volatility of the underlying?

VIX is low at about 14 flat - POT's historical and implied have both been declining all year. IV is at about 26 with HV at 23, and both are close to the lows for the year. To me that says two things. 1) I'm probably going to favor a debit spread in this environment and 2) vol could easily stay low and even drift lower if we get a slow gain in price.

I don't think you want to be short a lot of vega in this environment - a quick move down in the stock and the vol could jump up and bite quickly.

What's your forecast for POT over what time frame?


----------



## Lephturn

*Vol of vol*

Interesting volatility situation recently.

The VIX has been bouncing off of the mid 13's - but the volatility of realized volatility - the vol of vol if you will - is extremely high. Like 1987, gulf war, financial crisis high.

Historically the last 5 times in history the vol of vol has been this high extremely bad things have happened. Hmmm.

Got units? (far OTM puts)


----------



## mrPPincer

Options education day in toronto was a rewarding experience as expected.

Got up at 4am, left Tim Horton`s at 5, pulled into downtown on the gardiner expressway in time to see the sun rising over the CN tower and the downtown skyline, turned out to be a beautiful day.
Parked under Nathan Phillips Square for only 6 bucks and arrived at the Hilton in time to get the best seat in the house, right front and center to the podium in the second conference room.

Actually I had signed up for the basic package, but decided to go to the advanced instead and am glad I did because the instructors were all quite good at making it seem simple even to a newb like me.

I did wonder which of the people there might be some of us here on CMF, and which I may have met in person.
I think I may have recognized Rachelle, one table to my right, and one table back, but hard to tell just from the avatar picture.
(gotta go back to walmart and trade in this cheap new Logitech keyboard, the question mark comes out like this- É)

Very good educational value for the 50 bucks and the food was good, the coffee stong, and of which I for one consumed a small lake`s worth.


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## Argonaut

Sounds like fun, Pincer. Though I can't imagine paying $6 for parking and thinking it a good deal.

Tip: Look on the bottom right of your taskbar for the keyboard icon. Click this and change Canadian French to US. Good to go.


----------



## HaroldCrump

Argonaut said:


> Though I can't imagine paying $6 for parking and thinking it a good deal.


I take it you haven't been to Toronto.
$6 for the whole day in downtown Toronto on a week day is not just a good deal, it is a _stark, raving, explosive_ deal.


----------



## Argonaut

Well travelled internationally, but only been to two Canadian provinces.


----------



## mrPPincer

It was on a Saturday, if it was during a weekday it would have been a lot more for the whole day.


----------



## Sampson

Argonaut said:


> Sounds like fun, Pincer. Though I can't imagine paying $6 for parking and thinking it a good deal.


Sounds like about 1.5 hours in Cowtown.


----------



## avrex

*Weekly Options + Earnings Season = Danger*

Hey, I just wanted to share what I've been up to in the options market...

Besides my regular portfolio of options, I will occasionally dabble in the Weekly options.
I don't usually employ a spread. By not capping one end of the price-profit chart, I have assumed the risk of unlimited losses.

My strategy for Weekly options is to always sell the option. I want to gain income/premium.
The higher the implied volatility, the better. The upcoming earnings announcement will pump up this volatility level even further.

Let's look at a Weekly trade that I performed today.
At the time of my trade, Amazon (AMZN) was 240.50. (It closed today at an even 240.00)
The implied volatility was 77%. Normally, this option, at a month or two in the future would have a volatility of around 40%.

*I sold short 3 AMZN weekly Oct 26 calls - strike 260 @ $3.23.*

Amazon reports earnings on Thurs Oct 25. 
*Here are some scenarios for this transaction.*

*1. * The stock price stays below *260*.
The 260 call option would be out-of-the-money and would expire worthless. * I would keep the $969 premium.* (3 x 100 x 3.23).
In this scenario the price rises no higher than 8.3% after earnings are announced. 

What would happen if Amazon announced knock-them-out-of-the-park earnings?

*2.* The stock price jumps 9.7% to *263.23*. 
That happens to be the break-even point of this transaction (260 + 3.23). 
I would lose the premium and the *net result would be zero.*

*3. * The stock price jumps 12.5% to *270.00*.
*I would lose $2,000* on this transaction. 

*4. * The stock price jumps 16.6% to *280.00*.
*I would lose $5,000* on this transaction.
I would need 5 similar positive transactions to make up for this disaster scenario.

As you can see, this is very risky. *Why would I do this? * 
I believe that the probability of finishing out-of-the-money is higher than the pricing action would indicate. Likewise, 
I believe that the probability of the disaster scenarios happening, is far less than the pricing model indicates.

I wouldn't recommend this weekly earnings strategy to others. Perhaps, you would even call this gambling. 
However, I only do this occasionally on a small portion of my portfolio, and I am comfortable with this level of risk.


----------



## metatheta

I prefer to wait putting on this trade until early Thursday afternoon to eliminate price movement risk leading up to the earnings report. There's a wild card event on Tuesday with Apple's product announcement which may be a Kindle competitor. It is better to select the strikes based on where AMZN is trading on Thursday afternoon.

I also prefer to play it as a short strangle but further out by 30-35 points on both sides compared to the 20 points you're giving it. With the short strangle further out, I collect less per side but may collect about $3 in total for both sides.

This is a high probability trade but if it goes bad, it will be a hairy Friday morning to work out of the trade.

I think that if you are playing AMZN's earnings on Thursday in this manner, you need to be playing AAPL's earnings too using the same strategy. It will make it an even more fun Friday morning.

Trades like this need to be done very small.


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## humble_pie

avrex i hear you, esp the part about believing that "the probability of finishing out-of-the-money is higher than the pricing action would indicate."

i think this is true in options with rich premiums even for out-of-the-money strikes, due to volatility in the underlying stock. For several years now i've been selling naked US OTM calls in CNQ. I also sell OTM puts so the operation is actually a short strangle. Puts are usually 25P; calls have varied between 40 & 45. I usually sell 10-20 of each. These are not weeklies; usually about 3-6 months out.

i've never been assigned, not even during 08/09. As a matter of fact i've never even felt uncomfortable, although there have been brief periods when the share price rose sufficiently that the calls were in the money (there was always sufficient premium to prevent assignment.)

so far, so good. But there's more. Avrex i know that you understand the risk perfectly, but perhaps if some option newcomers are reading here i might add that a naked or uncovered call is the riskiest position of all. Although it is sometimes classed as equal in risk to a naked put, it is, in fact, far riskier.

risk in a naked put cannot be greater than the strike price of the put. In other words, if one sells a $40 put & stock-is-assigned-but-company-then-goes-bankrupt, the maximum loss is capped at $40 per share. In naked calls, on the other hand, the risk is theoretically without limit. Naked calls are riskier than shorting stock because of the leverage & the speed with which a position can change.

now that i think about it, perhaps we should transfer all posts dealing with naked calls to a password-protected thread !

there's also a precaution i'd like to mention if i may. I would only ever sell naked calls in an option that has a LEAPs series. These are the last-stage rescue points, the ultimate fortresses to which one can roll an option in a collapse scenario (they won't make good trades, but by the time they are needed the place will be burning out of control anyhow.)

i don't know amazon as a stock but i believe it would indeed be a suitable candidate for selective OTM naked call selling. The volatility has to be sufficient to generate rich premiums even in options that are several strikes out-of-the-money.

right now, inspired by gob & lephturn, i'm planning to focus more on AAPL options. I won't be doing naked calls in AAPL, though.

PS meta's idea to move to a short strangle while raising/lowering the strikes one or 2 increments on each side sounds good to me ...


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## Lephturn

I find it disturbing that we are discussing not only selling premium but even strangles and nobody has mentioned volatility. Implied volatility is in many ways the true price of an option. Your probability of being successful when buying or selling options largely depends on your purchase or sale price of an option vs. the realized volatility of the underlying.

I personally try to avoid earnings as it can be a coin flip. I do make exceptions of course, but we should be discussing the vol of those options relative to realized volatility (also called historical) and what tends to happen to it around earnings or other events. Selling options or spreads into earnings can often work simply because IV collapses after these announcements - but the problem is when you are wrong and lose on those events you lose big. When you win you win small. In many cases you may be better off buying premium instead of selling it depending on the volatility environment. Of course when buying premium into earnings you lose most of the time, but when you win you win big.


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## humble_pie

but lepht i did mention volatility several times each: IV is absolutely what drives these high premiums. I'm sure that avrex & co all understand this.

a key word avrex used is "probability." Once a trader gets several strikes away from market the probability of exercise fades fast imho.

you are right about volatility of course but i'm a bit puzzled here because previously - in AAPL i believe - you have posted about reverse iron condors you've done to capture earnings. That's how i came to believe you are a big iron earnings trader. As a matter of fact, huge numbers of traders are doing iron condors & flies over earnings. As a matter of fact, often i think everybody else in the world is doing iron cs & fs over earnings except for the poor dumb pie who hasn't caught on yet ...

avrex & meta seem to be doing the weeklies. Me i go out farther in time, sell strangles so as to collect premium on both sides plus i utilize strike prices that are noticeably farther away from market than a weekly trader would use.

strangles enhance return but do not increase risk imho. After all, only one side is going to end up anywhere near the risk zone. Meanwhile the trader collects premium from selling not just one but 2 options.

me i'm less hung up on earnings, far more interested in observing a stock's trading band over 6 months-2 year time frames so that i can perch calls & puts near the upper & lower edges. It's possible that AAPL has recently shifted down from 600-700 to something like 550-680, for example.

i for one would not buy into an earnings play. I have no interest in winning a few big while losing many small. My entire options life is built on winning many small while dancing fast to avoid the few big. Like i've said before, it's eliza doolittle selling lavender outside covent garden, in the days before enry iggins found her & tarted her up.


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## metatheta

avrex, you have an earnings play winner with AMZN even days before earnings have come out. You got the direction right. Is it still worth it to wait for the event and the impending volatility crush? In fact AMZN volatility is still rising as we get closer to earnings.


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## Lephturn

When I do a RIC - reverse Iron Condor - so I sell a strangle and buy a further OTM strangle - I do it on the run up into earnings - but I close it normally on the day before the earnings come out. The plan is not to gamble on the earnings at all, but rather to play the rise in volatility that often happens ahead of earnings for some of these stocks. I only do this on stocks that regularly exhibit a measurable rise in IV ahead of earnings. By exiting the position prior to earnings I can side-step the big moves - dancing fast as you say. 

I didn't do it this quarter for GOOG or AAPL (two normally good candidates for a RIC ahead of earnings) because AAPL was hurting me already and I never like it when the market is up and AAPL is getting hurt - it's a warning sign for me.

humble pastry - I know you understand volatility, and yes we speak about "high premiums" but I find it strange we aren't kicking around implied vs. realized vol numbers as we discuss these trades. I'm as culpable or more so than anyone. I guess it's a bit of a wake-up call on my part - when we are discussing these trades let's quantify that a bit more.

Hmmm... I need to look at my options playbook of strategies and think about classifying each strategy based on the volatility environment and probably skew as well. I'll have to noodle on that one - I'm thinking I divide strategies into bull/bear/neutral and then try to chop them up from there by vol environment and maybe skew. IE: For a Reverse Iron Condor only use when IV is low - medium and there is some catalyst to drive it higher such as upcoming earnings or another event. I'll have to think a bit more to work out how skew is going to affect these positions - that's grand-master level territory and I'm not intuitively grasping how skew and changes in skew will affect my positions yet. Some day!


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## avrex

Lephturn said:


> ... and nobody has mentioned volatility. Implied volatility is in many ways the true price of an option.





humble_pie said:


> but lepht i did mention volatility several times each: IV is absolutely what drives these high premiums. I'm sure that avrex & co all understand this.


Yes, I'm definitely *selling volatility* here to collect premium.
100 day Historical volatility for AMZN is 25. At the time of my transaction, the implied vol for my strike price was 77.
Yep, I'll take that premium (and risk).



Lephturn said:


> Selling options or spreads into earnings can often work simply because IV collapses after these announcements - but the problem is when you are wrong and lose on those events you lose big.


I completely agree with this statement. I'm counting on the IV to collapse after earnings. However, it is a big risk. 



Lephturn said:


> Your probability of being successful when buying or selling options largely depends on your purchase or sale price of an option vs. the realized volatility of the underlying.


Very true. Perhaps instead of talking about probabilities, an alternative statement that I could have made would be,
"I believe that there is a positive Expected Value (EV) for this trade."
i.e. By selling that high implied volatility, I'm hoping to make a profit.



metatheta said:


> In fact AMZN volatility is still rising as we get closer to earnings.


Yes, Implied Volatility at this strike has risen from 77 to 82 in one day. 



metatheta said:


> avrex, you have an earnings play winner with AMZN even days before earnings have come out. You got the direction right. Is it still worth it to wait for the event and the impending volatility crush? In fact AMZN volatility is still rising as we get closer to earnings.


It looks like I got lucky with the today's AMZN price drop. I've already gained half of my premium ($471 out of $969) in one trading day (Monday). 
Your question is a good one. Do I sell now for a nice profit? Or do I stay, wait for earnings day, in order to possibly gain the remaining $498 of premium?
I guess this question could be applicable to any options position. At what point do you take your profit and move on to another contract?

*btw, I like hearing about everyone's strategies.* Most of you guys are more options sophisticated than I.
metatheta, it sounds like you've got lots of experience.
Lephturn's RIC and other items from his playbook.
Humble's short strangles and diagonals.
*So yes, keep sharing your thoughts and strategies and thanks.*


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## metatheta

avrex said:


> So yes, keep sharing your thoughts and strategies and thanks.


Options give you options.

Here are some options:
- Close it and move on. Lucky or good - it doesn't matter.
- Turn it into a vertical credit spread by buying a higher strike call. You reduced the risk by turning it from unlimited risk to defined risk but you lower your profit potential.
- Turn it into a short strangle by selling a lower strike put. Your risk remains the same but you can press on the trade to make even more.
- Take some contracts off. You reduce your original risk from unlimited risk to less unlimited risk. (Does that even make sense? It's like infinity - 1.)
- Do nothing and let it run. Your risk remains the same plus the unrealized profit you have now.


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## Argonaut

What does one think of this debit spread strategy.. long strike in a registered account, and short strike in non registered. If the trade goes your way, you'll likely get a big tax free gain for the long side, as well as a claimable tax loss for the short side.

Of course, the downside is that it will eat up a lot of margin. And you'll have to keep up with the position to avoid assignment, but I'm sure everyone does that anyway.


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## humble_pie

argo could you please give an example.

if by any chance you would mean long call in reg'd account + short call at same strike in non-reg'd, this is an interesting concept i haven't seen before. But i also see other drawbacks in addition to the drag on margin in non-reg'd.

principal drawback imho would be the challenge of getting the underlying stock's future direction right in the reg'd account, where the long call would be bought. Argo you do have this talent but imho it's a rare talent. As we discussed long ago it's generally the sellers of options who make money, not the buyers of cherrypicked long calls or puts.

if the strategy turned out to work in reverse gear for the most part, the results would be dismal. Investor would end up bleeding his registered account dry with losing long calls while whipping up taxable current gains in non-reg'd with winning short call.

the way i see it, the proposed strategy might be interesting for hi-volatility situations but the necessity of calling the direction correctly so that the reg'd account always benefits changes the animal's stripe entirely ...


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## metatheta

I sold a 50/80 weekly strangle on NFLX yesterday afternoon for an earnings play. High probability but unlimited risk. It should be a winner today. I just need it to hold the 56-57 level so I can take it off this morning.

I will also take off my Nov 18 FB short puts. I got the move I wanted. No need to wait for expiration.


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## metatheta

Here's my earnings play today. 

I just did a CROX Nov 16/17 ratio spread (buy 1x16, sell 2x17) for a 0.22 credit. High probability but unlimited risk.

If CROX tanks, I keep the credit. If it stays under 18.22, it's a winner. If it goes over 18.22, I'm screwed but I have 3 weeks to work my way out of it. I'll just hope NKE doesn't buy them out in those 3 weeks.

Full Disclosure: I don't own any CROX shoes.


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## metatheta

Another earnings play.

I just got filled on an FFIV weekly 80/85/105/110 iron condor for 1.15. High probability with defined risk.

I did an iron condor instead of a short strangle because I won't have enough time to work my way out of it should it go bad tonight.

Full Disclosure: I don't know what FFIV does. Did they manufacture the F5 key on my keyboard?


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## humble_pie

metatheta said:


> Another earnings play ... Full Disclosure: I don't know what FFIV does. Did they manufacture the F5 key on my keyboard?



lots of action today in FFIV options heading towards earnings release which is probably coming out this very minute while i type.

http://www.schaeffersresearch.com/m...sblog&utm_campaign=marketcenterfeed&c=obsfeed

article points out that the nov 100s are volume leaders today with a "healthy volume" of trades being buy-to-open orders paid to the ask price, ie new money crowding into earnings play.

what does seattle-based F5Networks do for a living ?

_" F5 Networks, Inc. provides application delivery networking technology that optimizes the delivery of network-based applications, and the security, performance, and availability of servers, data storage devices, and other network resources in the Americas, EMEA, Japan, and the Asia Pacific."_


.


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## metatheta

I'm going to need some F1 from the option gods on my F5 trade. I wish I could just hit the refresh button and place that wider short strangle I originally planned. I'll now have to roll down the calls to get more premium.

I really liked my CROX call ratio trade. I was playing for a small move up for a decent winner. The stock is now collapsing after earnings. I was dead wrong but it is still a small winner because of the credit I collected.

I also did a call ratio spread on MSFT earnings last week playing for a small move up. MSFT blew it and I was dead wrong again. All I got was a tiny credit for a small winner.

If I am a small winner when completely wrong on direction, I can only imagine if I were right.


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## Lephturn

You gotta love ratio backspreads - if you are going to roll the dice into earnings and you can find a ration backspread for a small credit, that's a trade I love. If you are wrong you win small. If you are right you win big. The only loss comes if the thing sits right at your long strike - but again you can adjust that trade given enough time.

Have you looked at doing any of these as a diagonal? What are the greeks like on these trades?


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## metatheta

I don't have a good grasp of diagonals and calendars so I don't do it. The complexity of the back month confuses me. I also don't know how to manage it when it goes against me.

I really don't focus on the greeks on the trade. I primarily use the probabilities at each strike level to decide on the trade. The probabilities should embed all the greeks and IV. AFAIK, the thinkorswim (TOS) platform is the only retail platform that shows probabilities.

For example on the CROX trade, the 18 level showed some resistance and congestion in the past. The 18 strike had a 20% chance of being ITM. A 16/17 call ratio spread gives a breakeven at the 18 level. So I had an 80% probability of not losing on the trade. I saw that I could get a credit on the call ratio spread so it could not hurt me on the downside. I didn't think a company like CROX could blowout earnings so a breakout past 18 was unlikely. It was a high probability trade. I saw the exact same situation on MSFT the week before.

I'm locked and loaded for tonight. I'm staying small.

- AAPL Nov 530/705 short strangle
- AMZN Nov 185/265 short strangle

I had to do the Nov monthlies rather than the weeklies. I needed a chance to defend the trade in case it goes bad tonight. A vol crush is guaranteed. I just hope I gave it enough room. Hope and pray strategy is in effect!

mΘ


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## metatheta

avrex said:


> I sold short 3 AMZN weekly Oct 26 calls - strike 260 @ $3.23


Gutsiest move I ever saw, av. You can be my wingman anytime. It's time to buzz the tower.

Congrats.

mΘ


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## avrex

metatheta said:


> Gutsiest move I ever saw, av. You can be my wingman anytime. It's time to buzz the tower.


haha. thanks.

Your own trade (AMZN Nov 185/265 short strangle) is doing very well. 
I'm at work and can't use my platform to view the IV. But I'm assuming that AMZN IV got crushed today and hence, you're making a nice profit as well.


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## Lephturn

metatheta said:


> I don't have a good grasp of diagonals and calendars so I don't do it. The complexity of the back month confuses me. I also don't know how to manage it when it goes against me.
> 
> I really don't focus on the greeks on the trade. I primarily use the probabilities at each strike level to decide on the trade.* The probabilities should embed all the greeks and IV.* AFAIK, the thinkorswim (TOS) platform is the only retail platform that shows probabilities.


Emphasis mine... I think you are mistaken. The question is, how is TOS calculating probabilities? I'm on OX and they also show probabilities in the trade calculator. I can adjust the probability graphs by changing options like interest rate, annual realized volatility, current price, and days to expiry. I would be interested to learn exactly how these tools are calculating probability, but I'm thinking it's pure realized volatility. Maybe I am simplifying, but I do not think the other greeks are being taken into account. This is pure delta - pure direction. The annual volatility is only being used as a measure of long term realized volatility. Critically, I do not believe Implied Volatility - or vega - is taken into account at all.

As options traders we are essentially trading implied volatility - my concern is that you are simply using a probability calculation and trading delta if all you are looking at is the probability of the underlying finishing above or below a certain strike. You really should be comparing Implied Volatility to Realized Volatility to see if that risk you are taking is over or under priced. The question is not simply the probability - but based on that probability are you being compensated enough for taking that risk.

I know you have some idea about volatility - your reference to the vol crush after earnings - but I think you need to evaluate vega vs. realized vol when you are planning these trades.

Not that I have this all figured out of course... but I have recently caught myself making some dumb moves in AAPL options because I got sucked back into trading direction instead of focusing on the volatility. I still need to take direction into account of course, but I keep reminding myself that amateurs trade direction while the pros trade volatility.


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## metatheta

TOS uses a proprietary probability model. I don't have any hard evidence but I believe they do use implied volatility and realized volatility to derive their probabilities. TOS can display IV and Probability of ITM on their option chain for all strikes and expiries. I want to simplify my trading decisions so I feel comfortable using their probability model rather than listening to an analyst's prediction of AAPL 800 or AAPL 500 with no context of probability.

I am no math wiz so I don't want to get bogged down in all the metrics. It's all greek to me.

I base my trading decisions on more than just the probabilities. I typically look at support and resistance then check their corresponding probabilities. I also look at the underlying's liquidity as well as the options' liquidity. I won't trust the model or option pricing if there is no liquidity.

As for being compensated for the risk, I believe that high liquidity underlyings and options are efficiently priced. This means that the option premium is already priced fairly for the given risk or probability. For low liquidity (ie Canadian) underlyings and options, there is room to play the over and under priced risk. I prefer to stay with highly liquid options.

mΘ


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## humble_pie

lepht you remember we were recently marvelling how individual option players can be so different from each other here & yet each is pursuing a winning path. Each is taking home worthwhile results. Which, in the end, is all that really matters.

then we somehow stumbled on the happy idea of sharing around our approaches.

everything that meta says above makes perfect sense to me. I don't know TOS but agree with meta that liquidity of both options & underlyings is super-important. Also agree that highly liquid options & underlyings tend to be efficiently priced.

lepht here you are thinking with regret about your - ow - short nov 625Ps:



Lephturn said:


> ... but I have recently caught myself making some dumb moves in AAPL options because I got sucked back into trading direction instead of focusing on the volatility.


but i for one don't yet see any ow in short nov 625P. Please remember that the move permitted you to capture a small premium so cash was secured. Yes with stk at 604 the overall margin picture has worsened, but cash remains cash & cash is king. I don't suppose you are paying any margin interest yet ? imho ow begins only at that point.

looking ahead you have nearly 2 weeks to adjust the ow factor. At one extreme, it can be rolled forward for credit (cash is king) for a long time to come. If aapl steadies or rallies some there are far, far worse things in life than having to roll forward a slightly itm put for weeks or months.

if aapl crashes significantly more from this point, then we all have, er, problems. But as of this am i believe it would be twilight zone to start fearing that aapl will unravel into another rim or another nortel story.

so many differences among us. I for one don't mind these didn't-quite-win trailing option leftovers in the least. I accept em as a cost of doing business. As Gob says, we will get out of this mess.


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## Lephturn

humble_pie said:


> lepht you remember we were recently marvelling how individual option players can be so different from each other here & yet each is pursuing a winning path. Each is taking home worthwhile results. Which, in the end, is all that really matters.
> 
> then we somehow stumbled on the happy idea of sharing around our approaches.
> 
> everything that meta says above makes perfect sense to me. I don't know TOS but agree with meta that liquidity of both options & underlyings is super-important. Also agree that highly liquid options & underlyings tend to be efficiently priced.


I agree completely that highly liquid options and underlying are key! Although options on these liquid names do "tend" to be efficiently priced, I see too many large swings in IV and skew for that to be true. Especially in AAPL! This is a name that swings around to a commodity style skew where upside calls are priced higher (in terms of IV) than downside puts - and then when the stock pulls back that skew flips over to a normal skew where the puts are priced higher than the calls. When the realized volatility barely changes and the skew flips like that can you really call it efficient? When AAPL is running up the calls get bid up out of control and the puts can't catch a bid - yet put-call parity says that even when the realized volatility changes the IV of both the calls and puts should be affected identically. I just can't reconcile these big swings in the skew curve with small changes in realized volatility and think it's efficient.



humble_pie said:


> lepht here you are thinking with regret about your - ow - short nov 625Ps:
> 
> but i for one don't yet see any ow in short nov 625P. Please remember that the move permitted you to capture a small premium so cash was secured. Yes with stk at 604 the overall margin picture has worsened, but cash remains cash & cash is king. I don't suppose you are paying any margin interest yet ? imho ow begins only at that point.
> 
> looking ahead you have nearly 2 weeks to adjust the ow factor. At one extreme, it can be rolled forward for credit (cash is king) for a long time to come. If aapl steadies or rallies some there are far, far worse things in life than having to roll forward a slightly itm put for weeks or months.
> 
> if aapl crashes significantly more from this point, then we all have, er, problems. But as of this am i believe it would be twilight zone to start fearing that aapl will unravel into another rim or another nortel story.
> 
> so many differences among us. I for one don't mind these didn't-quite-win trailing option leftovers in the least. I accept em as a cost of doing business. As Gob says, we will get out of this mess.


I really hope so - but at this point I am in a pretty good hole with it. Would I be in better shape if I bought it back or rolled it down before it passed the short strike?


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## Snuff_the_Rooster

I keep seeing the term efficient, or in this case we're speaking of the options being in-efficient. 

I'd like to point out that in fact the options are efficient. If they were not you would have an arbitrage situation which for all intent and purpose we don't have.

The reason I think that this misunderstanding exists is because people are trying to use the greeks in a way everyone should know simply doesn't work. By all means use the greeks, but what you can't use the greeks for is to divine the future move of the stock.

It will be a lesson in futility.

Don't forget what you're using to measure all of this craziness. You have a cumulative normal distribution calculation combined with stock price, strike price, cash, volatility(within the norm dist calc), a term and a risk-free interest rate. That's all it is people. It truly is a form of snake-oil as you're seeing. That's not to say it's all bad. I prefer it verses a dart toss - maybe. :smilet-digitalpoint


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## Argonaut

If AAPL calls are more expensive than puts, couldn't you collar it and collect the dividend?


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## Snuff_the_Rooster

Argonaut said:


> If AAPL calls are more expensive than puts, couldn't you collar it and collect the dividend?


this is what I'm getting at. the options are efficient because this type of thing isn't possible.

Let's think about it guys. Do you really think they're going to give you free money?

When they do, i expect a call -errr, phone call that is.. :smilet-digitalpoint


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## humble_pie

Lephturn said:


> ... but at this point I am in a pretty good hole with it. Would I be in better shape if I bought it back or rolled it down before it passed the short strike?



lepht we're below both your long & short strikes are we not ? & you have 4 of each n'est ce pas ?

i think if i were bullish i'd begin looking into ratio spreads at ultra-low strike prices, like the 550s, 530s or less. Because of the ratio (ie sell 5 new puts, buy only 4 new puts to cover) i'd be able to roll way down to safer far OTM strikes. I'd also go forward in time, even as far as july, to help this along.

i might end up with a cash credit now of up to a couple thousand dollars but i'd be tying up capital & locking up some margin for the next several months. I wouldn't go as far as to say this sucks, because for me the alternative (take the loss now) would be worse.

may i go on record as saying a) i don't think it's snake oil & b) yes highly liquid options are efficient. Illiquid options are another story. Now there's snake oil with generous dash of rat poison ...


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## Snuff_the_Rooster

what kind of hole are we talking about here? long 605P short 625P? Is that what I heard somewhere?


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## humble_pie

Snuff_the_Rooster said:


> what kind of hole are we talking about here? long 605P short 625P? Is that what I heard somewhere?


i think so
they're the novembers, the 17 novs if i recall

you have to be tolerant with us snuff, we're not as laid back as U are each:


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## Snuff_the_Rooster

humble_pie said:


> i think so
> they're the novembers, the 17 novs if i recall
> 
> you have to be tolerant with us snuff, we're not as laid back as U are each:


OK, thanks. 

The good news is it was a spread and he can't lose much more than he has now so there's no real reason to panic.


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## Lephturn

Here it is:
Put Spread TOTAL COST VALUE	GAIN/LOSS DELTA GAMMA	THETA	VEGA
AAPL Nov12 605/625 Put Spread	4 / -4 -$2,904.00 -$5,740.00	-$2,836.00 72.57	0.96 -49.94	48.05

And yes now we are below both strikes. I am still a LONG way from max loss, which would be $ 8k.


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## Snuff_the_Rooster

Sure AAPL is $599 now, not so well $ $590.00 and under. There's no need to make a panic decision. Since i wasn't given any numbers I was just looking at your time to X and the strike-spread. You were about done losing down at $590 for the most part as a good guide.

Not pretty, but it has been moving your way and is looking good. It's possible we did get close enough to that 200 dailyMA and you've weathered the storm.


EDIT: Hey Leph, could you give me your exact buy and sell #'s? on the put contracts? I figured you wouldn't care much since everything else is out there..


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## humble_pie

Lephturn said:


> Here it is:
> Put Spread TOTAL COST VALUE	GAIN/LOSS DELTA GAMMA	THETA	VEGA
> AAPL Nov12 605/625


how are those dates again ? those options don't expire until fri 16 nov/sat 17 nov, right, lepht ? 

certainly not the 12th & hopefully not this friday the 2nd.

if the 16th there's still plenty of time to work em.


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## Snuff_the_Rooster

I thought the same thing when I first looked at it, Humble. 

They're nov 16, 2012 i am assuming, and not nov 2.

I knew he was into negative theta so he still had more to lose but with 16 days left and under $590 at the time....

i don't want to jinx him by talking it up too much. Especially since I am in what I will call a surrogate-long AAPL play myself as of this morning.


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## metatheta

Lephturn said:


> Here it is:
> Put Spread TOTAL COST VALUE	GAIN/LOSS DELTA GAMMA	THETA	VEGA
> AAPL Nov12 605/625 Put Spread	4 / -4 -$2,904.00 -$5,740.00	-$2,836.00 72.57	0.96 -49.94	48.05
> 
> And yes now we are below both strikes. I am still a LONG way from max loss, which would be $ 8k.


I prefer to see the premium received or paid for a 1-lot option trade without commissions. It makes for easy calculations and trade decisions.

I am calculating that it was a (2904/4) 7.26 credit to open the trade. With a 20-point wide spread, your max loss is (20.00-7.26) 12.74 per lot. I calculate (4x12.74) $5096 as your max loss rather than $8K.

Do you trade each leg separately or as a spread for a net price?

Are you planning to manage this trade or just let it go and hope for the best?

If you are going down, you need to take something down with you! You can sell a Nov 625/645 call spread and turn it into an iron butterfly. Further out would make it an iron condor but you won't collect much. Selling the 20-point call spread should not use up any more margin. Otherwise, you can buy more time by rolling it out to Dec for a small debit.

mΘ


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## Snuff_the_Rooster

metatheta said:


> I prefer to see the premium received or paid for a 1-lot option trade without commissions. It makes for easy calculations and trade decisions.
> 
> I am calculating that it was a (2904/4) 7.26 credit to open the trade. With a 20-point wide spread, your max loss is (20.00-7.26) 12.74 per lot. I calculate (4x12.74) $5096 as your max loss rather than $8K.


Oh yeah. I wasn't going to complain with the info given along with the format because I am going blind as a bat, but I am in your camp. I like to do the math myself from the raw numbers as it causes less questions later when stuff don't add up, plus i don't need no greeks to camouflage what i actually need to see.


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## Lephturn

No problem - happy to put all the details out there. I learn from sharing the losers far more than sharing the winners.

Click here to see the a screen grab of the position.

I sold the spread like so:
AAPL Nov12 625 Put -4	11/16/2012 $23.19	Currently $36.35
AAPL Nov12 605 Put	4	11/16/2012 $15.93 Currently $21.55


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## Snuff_the_Rooster

Ah that's easier on the eyes. Better than my guess and now the math even works as per metatheta.
I also see where you're getting your $8K from in your terminology. It's not standard terminology from what myself and meta are used to but i get what you're saying now.

You should be safe now because I closed my aapl proxy-long position at the close. :smilet-digitalpoint


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## humble_pie

metatheta said:


> You can sell a Nov 625/645 call spread and turn it into an iron butterfly.



respectfully, i disagree. Right now there's risk to the downside only. Turning it into an iron fly will mean risk upside & downside. The dynamics of a bear call spread like the one suggested are very different from a bull put spread. IMHO more dangerous.

if he does nothing, the loss is already fixed if AAPL is below 605 at expiration.

if he does nothing, from aapl 605 to aapl 617.75, the loss at risk shifts at each price point in the underlying, up to about 617.75 depending on whether one includes commish or not.

if aapl ends up 617.75 - 625 at expiration & he does nothing, the $7.26 (or total 2,904.00) that he has already collected will offset the loss, imho. In other words, if stk stays north of say 618, lephturn could be assigned, could sell stk at a loss but would still make money on this total operation.


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## Snuff_the_Rooster

lol. Have I ever mentioned how much I absolutely loath trading equities or any derivative thereof? 

It's real tough for me to say much here since I simply don't have enough information from the people trading these options. I can't assume they're bullish AAPL. I can't assume they've accepted losing $X in a months time as a reasonable number to them. I don't have a clue if their funds would have been more suited to keep to 1 contract pair vs 4, or is 4 a drop in the bucket at maximum loss? What is their performance record at trading this spread?

I just don't know the answers to these questions.

I can say a spread is a great way to define the most important parameters. Assuming the parameters of the current position are acceptable, then this trade was a smart trade regardless of how it turns out, as far as an equity or a derivative of, trade goes anyway.

What would I do? If I assume I am bullish aapl and if I assume that I'd be OK losing say $5K on a trade, and if I assume that since I'm trading 4 pairs that I (personally) must have enough funds to actually buy (tie up) at least 100 shares of AAPL (actually a heck of lot more than that but let's just use 100 shares), then I'd give this entire current trade until the end of this week to shape up -two more days- or I'd put a bullet in its head and take the loss on it ($2K-$2.5K) before it possibly went to max loss. Since I was bullish on aapl a month ago I suspect I'd still be bullish on it at 595 so I'd buy 100 shares and a june 2013 640 put and sit on it until or if, aapl made a positive move that i could work with.

Along the way I'd pick up about $500 in dividends and I'd be 8 months losing at worst $4K (incl div) as the trades stands, which isn't where it would likely end up I'll tell you that. Hmm 8 months to lose $4K tops. That's about $500 per month isn't it? (speaking linear of course, which it isn't). The honest truth is I'd have to try real hard to lose $5K on aapl on over 8X the current time frame these trades are running at.

Anyway, that's what I would do if i had a gun to my head and had to trade aapl stock and deriv's thereof to the long side. The only unanswered question for me is actually how many shares I would trade given I'd willingly do 4 pairs of the spread trade.

Did I mention how much I can't stand equities or all their deriv's? :smilet-digitalpoint


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## humble_pie

what, now you want to know our net worths snuff ? what kind of pushy is that ?

i'm a bag lady who spends her days cruising alleys to pick up items to feed & clothe her 11 barefoot brats. Somehow i sold 2 july 600 puts & it's not a spread either, i just forgot to put on my knickers & take an umbrella that day.

would you have any advice for me snuffters. Or better yet for the broker. They haven't been able to figure out that i don't have 120k.


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## Snuff_the_Rooster

humble_pie said:


> what, now you want to know our net worths snuff ? what kind of pushy is that ?
> 
> i'm a bag lady who spends her days cruising alleys to pick up items to feed & clothe her 11 barefoot brats. Somehow i sold 2 july 600 puts & it's not a spread either, i just forgot to put on my knickers & take an umbrella that day.
> 
> would you have any advice for me snuffters. Or better yet for the broker. They haven't been able to figure out that i don't have 120k.


lol. I don't want to know anything about anyone, nor do I need to. What I'm hoping to do is teach something subtly here to those willing to think about the things they should be thinking about before they put a trade on. If this spread trade fits the criteria of the trader as I said directly in my previous post, then it was a good trade regardless of how it turns out. Ya know, from an equity perspective and all.

If it turns out there is buyer/seller remorse this time, then that is what we need to look at and think about. I personally just can't know if that's the case so I can't speak to it directly as if I knew.

Your 2 short puts using the above 1/4 idea would equal about 50 shares plus a penalty for not being a spread as far a position sizing goes. No need to have 200 shares worth tied up in the box. It still needs a plan as do all trades, but it's not near as pressing as the options that expire in 15 days. The last I check this is the trade we were talking about.

Time is a good thing to have even if it's eating away at you a little bit, so maybe that penalty gets annulled by a premium choice of time.


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## Lephturn

That spread was originally a higher strike spread only $5 wide. So there is some remorse - I rolled down from a spread that met my requirements (Max loss about $ 1,500) to one that exceeded it. I widened the spread to roll it down for a credit as I did not think AAPL would wind up this low. I am bullish AAPL long term and have done very well trading it this year - but I made mistakes and now I've basically given back everything for the year.

My second mistake was widening the spread. The first one was not having well enough defined rules around when to take the loss vs. roll it.

This account is my open money US$ learning account. I am trading this as I educate myself and learn - this is not my retirement nest-egg, that is much larger and invested/traded far more conservatively (think married puts and collars on solid dividend payers) so if I lost everything in this account it would suck but it would not affect my lifestyle.

Snuff if you hate equities I take it you are a futures guy? Or Forex maybe? There is something to be said for trading only things that you can drop on your foot.


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## metatheta

humble_pie said:


> respectfully, i disagree. Right now there's risk to the downside only. Turning it into an iron fly will mean risk upside & downside. The dynamics of a bear call spread like the one suggested are very different from a bull put spread. IMHO more dangerous.


I just wanted to present the options to the options.

If Lephturn is still bullish on AAPL and sees 618-625 and beyond as an easy target in two weeks time then doing nothing to the bull put spread is the thing to do.

The Nov 625/645 call spread was trading around 2.50 yesterday. If this call spread was sold, collecting the extra premium lowers the breakeven on the downside to (625-7.26-2.50) 615.24 and reduces max loss. In exchange for the extra premium, there would now be an upside breakeven at (625+7.26+2.50) 634.76. Although there would now be risk on both the downside and the upside, the dollars at risk is reduced to (20-7.26-2.50) 10.24 and he cannot lose on both sides. I don't think it is more dangerous.

I know that selling the call spread gives up the potential huge upside gain by Nov expiration but with a losing trade like this I prefer to make breakeven my priority first before making it a winner.

I think Lephturn is long-term bullish on AAPL anyways so I think that rolling out to Dec for a small debit may be the best adjustment. The small debit buys him another month to make it a winner.

Go AAPL - but not too far. I sold a Nov 550/555/640/645 iron condor last week for 1.30. I'm hoping to take it off next week for 0.80.


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## Lephturn

This is what I love about options - there is a way to trade any forecast you can come up with. Options can be used to build a trade that is so much more nuanced than trading just the underlying could ever be.

Thanks guys - I have some options to examine. @meta I need to build that position and examine it - specifically I need to look hard at the volatility were I to modify the position by adding the call spread.

But certainly rolling out to Dec. is on the table.


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## Snuff_the_Rooster

Lephturn said:


> Snuff if you hate equities I take it you are a futures guy? Or Forex maybe? There is something to be said for trading only things that you can drop on your foot.


haha good one. I think I must have a sickness. I truly loath dealing with the inherent unpredictability of stocks but I will on occasion when our parameters are met delve into them. We only have a single process we run on them and it does positively affect our outcomes and our track record is good enough with it to keep us doing it. Since our process is mechanical, it takes no effort. 99% of the time we are doing nothing. Does that make us Couch Potato's?

Since you've mentioned futures, yes I can confirm what you already know. It seems to me that yourself, gob and avrex? to name a few, are putting in a decent effort into studying their trades, that I'll happily toss out our thoughts on this but caution that our thoughts have assumptions that may be incorrect for the individual. I try to point that out to avoid miscommunication. I mentioned in my previous posts how I would run aapl, the stock, as a trade. How I do trade appl is through a simple futures play. It's pretty standard stuff for futures players. We basically arbitrage two futures vehicles. We have more parameters that must also be met and although it's a highly correlated aapl play, it's not 1. Our probabilities for a profitable trade in general are much better this way given that stocks and their derivatives are not always the easiest to play. Most of our futures plays are not of the equity index variety.

Thanks for your effort in this.


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## avrex

*Same-Day Substitution*



humble_pie said:


> perhaps we should transfer all posts dealing with naked calls to a password-protected thread !


haha. You might have a point there. Option newcomers, be wary. Naked calls are very dangerous. 

But, you got me thinking, humble. You've made me wonder what 'exactly' would happen.
I have not yet been assigned a call. (I was assigned a put back in 2011). I guess I'm a newbie at 'being assigned'.
I thought I understood the call assignment scenario. But now I'm not so sure. Let's work through a scenario. 
Let's assume my upthread AMZN weekly option trade was not successful, and blew up.

First some background on my situation
I have a margin account with Interactive Brokers. 
Any short calls or short puts that I open are cash-secured. 
I always make sure that I have enough margin backed by cash before I proceed.

Ok, here's what I think would happen in my disaster scenario.
Anyone feel free to jump in and correct any points here. These are just my assumptions.

*1. The position is opened. * 
I sold short 3 AMZN weekly calls – strike 260
The amount of margin that I'm utilizing for this position is approximately 15k.

*2. Assignment.*
AMZN stock rises to 270. 
The Call is assigned to me.
(Either through an early assignment or because I wasn't paying attention and it gets assigned to me on the options expiration date.)

*3. Short Stock*
That evening, I am short 300 shares of Amazon at $270.
The margin that I was utilizing (15k) is returned to me with the option assignment.
However, this new short position is now going to use approximately 24k of margin (i.e. 300 x $270 x 30% rate at Interactive Brokers).

*Lesson of the dangers of the Short Call.*
In this disaster scenario, I would have needed an additional 9k (24k - 15k) of margin, beyond what I opened the transaction with.
If I didn't have the cash, the broker would start charging me interest on this amount.

But, I found something else...

*4. Same-Day Substitution*
Now, I can't find any documentation from Interactive Brokers, but I'm reading on the internet about brokers that allow "Same-Day Substitution". 
Here is what I think happens. 
I am short 300 shares of AMZN. The next trading day, I buy those 300 shares on the open market. 
This is done at a higher stock price. (270 -260 = 10 x 300 shares = 3k) I had to spend 3k more in order to close my short position.

Even though this occurs the next day, it is considered a same-day substitution by the broker.
I never reach the 24k total of margin used. 
If I act quick enough, the highest amount of margin that I would use for this transaction is the original 15k of margin.

Now, jump in where you see holes in the analysis of this scenario.


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## humble_pie

the aapl option trader who is sitting pretty right now is argo. He's home free with his short puts in the low 500s.

argo collected less premium up front but over time he could become the turtle in the race.

(aside to avrex) a problem associated with exercise of naked calls is that not every stock that is optionable is also marginable.

an option trader could have his naked call in XYZ assigned but the broker - oops - doesn't have any XYZ shares to loan out for shorting that day ... this would force the broker to liquidate enough of the account to go buy the necessary shares in the open market i would imagine (brrrrr, never been there.)

as for your calculations, so sorry avrex but i'll pass on these. Are they not something that should be discussed with IB itself, so as to find out what exactly is their policy.

i do recall - from gob's thread - that IB's overnight margin rate is higher than the day rate. The overnight rate is close to other brokers. Are you taking this into consideration.

not meaning to rain on your parade. I thought the 3 AMZN calls were nifty. A ten. U are a person who can do this successfully from time to time. Edit To Add: although i'm a person who would have picked a higher strike price & been happy with half the premium each:


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## Lephturn

There are two risks here - gap risk and slippage. The stock could open substantially higher and cost you more money, but it could also open lower in your favour. My second concern is that I suspect the substitution order will simply become a buy at the market on the open - and that will get you scalped for an additional loss.

Need any more reasons to make sure you do not get assigned?


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## Snuff_the_Rooster

I'm really not sure exactly which problem you're trying to solve for, so I'll just provide you with links that describe the process you're speaking about. I'd read them in this order as well.

http://ibkb.interactivebrokers.com/node/1767

http://ibkb.interactivebrokers.com/node/222


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## Lephturn

Snuff_the_Rooster said:


> Thanks for your effort in this.


Hey I haven't really contributed much - thank you for all you are bringing to the table. 

All I am doing is serving as a warning to others as I get pummelled on my AAPL positions.

Still deep under water here on that Nov spread but I'll roll it out if I don't get some relief shortly. I want to see the iPad Mini first weekend numbers and see if it gets a lift from that before I roll it.


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## Argonaut

I don't know if I'm sitting pretty, I'm actually sweating it out where I'm at. I can only imagine how those in a deep hole must feel. Lots of pessimism right now, which could mean a turning point to the upside.


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## humble_pie

re deep holes, been there, done those.

unfortunately in major downward plunges ultra long-term premiums tend to flatten. That is, the bid gaps from a jan/12 to a jan/13 to a jan/14 to a jan/15 will be far less with stk at 578 than they were only a few weeks ago when stk was 680. This is disappointing for traders who want to escape by rolling out.

still, in parlous times some traders will decide that any escape is better than none. AAPL is still rich with escape routes. Others may choose to wind everything up & take the loss, which is also a legitimate solution.

argo you were in the low 500 range as best i can recall ? the fortress should hold ...


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## Snuff_the_Rooster

Lephturn said:


> Hey I haven't really contributed much - thank you for all you are bringing to the table.


No problem. 

I need an AAPL position like a hole in the head but I've got an order in on stock plus long put out in july 2013. We're arguing about $45 right now lol.

Either I get my price or i walk because it's not near enough in the ditch for me to give an inch, but is enough fear on that $585 break on a friday to take a piece if I can get it.

Oh, just took as i was writing this. Total price $673 w/AAPL @ $575.90

I'll adjust as required which isn't going to be much trading at all. If we see $530 it'll be the area where I'll bust a move all else being a go.

There's just no worry about losing much because it's defined very well and won't amount to much either way.




PRICE EDIT as per time stamp. My cost is $673 Total, but the AAPL price is 575.60, not the 90 cents shown above. Not that it'll make a difference either way but I did want to note my error. Sorry about that.


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## Snuff_the_Rooster

i just wanted to let you know how that futures (aapl-proxy) trade ended up at here today. It was just a day-trade for me 2 days ago but it's still at the same level i sold it at back then. This is what I mean about only being a proxy. There are other factors involved that make it not a perfect correlation. Sometimes good, sometime bad. today it was better even though AAPL was down as the rest of the market for the big-boys - mostly the oils, was down equally bad.

Have a great weekend guys. I'm sure there'll be lot to talk about and ponder over the next couple of days.


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## Snuff_the_Rooster

just because i mentioned i took a position, i'm going to pre-let-you-know that I'll be tapping out today north of $7/sh if i can get it once the market opens up.


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## Snuff_the_Rooster

Snuff_the_Rooster said:


> just because i mentioned i took a position, i'm going to pre-let-you-know that I'll be tapping out today north of $7/sh if i can get it once the market opens up.


Love the fear and panic. Rolled down to 600puts of same month for -19.50 w/AAPL @ 566.00

I'll update the numbers later.


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## GOB

Just saw your comment in the other thread. Can you explain what you did with this trade? I don't really understand it from what you posted. Thanks.


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## Lephturn

Weeklies - note that they just launched 5 weeks rolling at a time for select stocks, one being AAPL of course.

Here is the available expirations this morning:
AAPL Expiration Months: NovWk4 | NovWk5 | DecWk1 | DecWk2 | Dec12 | Jan13 | Feb13 | Mar13 | Apr13 | Jun13 | Jul13 | Oct13 | Jan14 | Jan15

Thoughts? This changes the game... glad they finally did this. The futures options have been doing this for a while, it makes sense. Now I just have to start watching the open interest and thinking about how to use these tools. This will definately change the pattern in terms of how vol comes out of these products.

There could be an opportunity here very short term. Although the pros will know about this, I suspect the retail masses will be slow on the draw. I'm going to look at last week and watch this week - I'm thinking selling options 1.5 weeks out on a Tues. or Wed. then buy them back Friday afternoon after the regular weekly sellers pound them down.

I'd like to hear your thoughts.


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## avrex

Lephturn said:


> Weeklies - note that they just launched 5 weeks rolling at a time for select stocks.
> I'm thinking selling options 1.5 weeks out on a Tues. or Wed. then buy them back Friday afternoon after the regular weekly sellers pound them down.


Not a bad idea. I guess you would be taking advantage of the dwindling implied vol.
@Lephturn, are you saying you would hold these positions for 3 days or 8 days?

Here is the list of 11 that have 5 consecutive weeklys. AAPL, BAC, BP, C, EEM, GLD, IWM, QQQ, SPX, SPY, and XLF. 
I think the only one that I like from this list, as the potential to trade these expanded weeklys, is AAPL.
For other stocks, I'll stick to my monthlys and the occasional 'regular' weekly.

Perhaps a strategy would be to buy 6 month ITM calls (as a hedge).
And then week-after-week-after-week, sell OTM calls.
(That's probably too much work for me. )


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## humble_pie

lepht whatever happened to the man who posted, 2 months ago, that if he played his options wrong he'd take his losses up front & try to "learn" from the situation.

here you have just survived a loss of 8k in the weeklies. There's a loud message here that says Don't Do Weeklies.

don't do weeklies unless you happen to have an extra $8k in your pocket to put in harm's way every 7 or 10 days, the message hollers.

for true "mordus" (bitten ones) avrex has a good suggestion:

_Perhaps a strategy would be to buy 6 month ITM calls (as a hedge).
And then week-after-week-after-week, sell OTM calls._

this is my old friend the diagonal call spread. These do work. I like em much better when the long hedging leg is a LEAPs option, not a 6-month.

the worst feature of a compressed time period for any option is the total impossibility of predicting direction of the underlying imho. A trader can be right on a long-term forecast but dead wrong on short-term swings. Ultra-short-term swings become crap shoots imho. Doesn't matter how dressed-up they are in algebra, they are still crap shoots imho.

in the recent raid on the castle, everybody guessed wrong. But those who guessed wrong on the ultra-short-term swing got hurt the most. Those w longer-term options survived better.


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## Lephturn

humble_pie said:


> lepht whatever happened to the man who posted, 2 months ago, that if he played his options wrong he'd take his losses up front & try to "learn" from the situation.
> 
> here you have just survived a loss of 8k in the weeklies. There's a loud message here that says Don't Do Weeklies.


I didn't get hit on the weeklies - I got hit on the monthly Novs that I had held for 7 weeks. I just didn't roll them early enough and got hit a few days before expiry. But yes I would have been much better off to define an acceptable loss upfront and then bail out and live to fight another day.

The point here is that they are listing the weekly contracts now 5 weeks out - that means one could sell a 4 or 5 week out option and then sell it on the Friday the week before expiry. I am thinking this would avoid the crazy final week mode where the greeks go nuts and you end up trading gamma pretty much exclusively. It would also take advantage of two patterns: 1) The moment weeklies are listed the vast majority of paper flow seems to be selling the heck out of them, especially on the call side (traders doing covered calls) and 2) market makers will "take the weekend out" some time on Friday so you can often capture the majority of the theta the weekend will bring without being exposed to event risk over that final weekend.

Now as to how many days to hold these trades, it depends on how the paper starts to flow as to how far out makes the most sense. The shortest trade might be to sell premium on the Wed of the week before expiration and buy it back Friday afternoon for a 3 day trade. That's a quick one hoping to capitalize on those who normally close their about to expire positions on Thursday and then blast out premium in the next series. A safer and slower bet might be to sell weeks out and then close on that same friday of the week prior to expo.

This might not work at all, it might only be short term, but I believe it is worth examining. At the least you now have the flexibility to do a 1 month out trade and roll it every week if you wanted to - do 5 weeks to 2 weeks and roll, whatever is best. It's just a lot more flexibility than we've ever had.


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## humble_pie

lepht i'd remembered that you'd commenced with a monthly. But by the time they assigned you it was down to couple days before expiration in the final week, ie same turf as the weekly, was it not ?

(i'm keeping in mind that original counterparty is not the same counterparty as he who holds the opposite side days, hours or even minutes later)

i'm definitely going to think about your 3-4-5 week options although probably not until after Xmas when i'll have more time. In the meantime a january is as short-term as a poor pie wants to get.


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## Lephturn

Yes, my mistake was not closing it the week before. It was the monthly series, but my mistake was not closing or rolling it at least 1 week before expiry. The mistake was letting it get too close to expiration.

So, what did I learn? I review my positions daily and weekly. One of the things on my checklist when I enter a position and when I review my positions is to set a calendar reminder 1 week and a day before expiry to do something with that position. On my position review checklist I review time to expo and verify the calendar reminder.


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## humble_pie

Lephturn said:


> ... get too close to expiration



i think it was Mark Wolfinger (a former cboe pit trader & author of several options books) who said that most pro traders are gone monday-tuesday-wednesday-at-the-latest of an option's final week. After that there's nobody left in the game. 

it's been some time since i've tried to buy back in the final 2 days (these days i hang in the ramparts.) But my experience was that the dealers would widen their spreads during those final days. They knew they had victims only. Really one could see em drooling.

on the other hand your idea of juggling the earlier days may be good. I'd like to think about this, but cannot until after the holidays, xmas is bulking up already ...


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## avrex

avrex said:


> 2011 ends my first year in utilizing options. My options return was +1.6%.


It's time to look at my 2012 results.
My second year of options was quite successful. My return was *28%*

Now before we get too excited, let's remember that this is just one year. As you can see, my 2011 results were quite different and 'ok', at best.
There will be some up years and some down years. Let's break down the 2012 option positions.

I was very lucky with my long option selections. It looks like I made a number of correct directional picks (including holding an AAPL call in 2012 Q1).
Many of my long options positions are highly correlated to the underlying (high delta), as I use these as stock replacement positions in my RRSP. 
For the sake of argument let's throw out these long positions, as they are highly volatile, and just look at my short call/put selections.

The return with just short positions was still an impressive* 25%*. 
Once again, this is just one year's results and could be considered lucky.

In 2013, I'm hoping for another good year.
I invite you to watch my progress, by following my Money Diary thread located here,

2013 Avrex $100,000 Options Challenge

Best wishes to all option players in 2013.


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## Argonaut

Good show, avrex. I don't even know the proper way to record return on options so I'll leave it. All I know is that I made a couple grand in USD to spend on Hawaii.


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## namelessone

What's the chance of getting assigned? I sold an 1 month ATM call. Now It's 20% ITM, with only 12 days until expiration,it's still not assigned. If assigned , does the share got sold instantly? I made 7%. I want to get rid of it because I don't like the business.


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## avrex

@namelessone, I'm assuming that you own the underlying stock. If so, it will be 'called away' on the expiration date. You'll get your wish of not owning the stock anymore.


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## avrex

@Argonaut thanks.
I have to admit, I don't do a detailed XIRR calculation.
I know that amount of money that I had allocated towards options investing for the year.
I know the amount of profit that I made. So, I just divided one by the other.

I hope Hawaii was great!


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## Islenska

A general question (I think)
Do many buy and sell a call option, day to day, playing the volatility for small gains,
I've done this a few times for small gains
but I have some Apple calls at $600 and $570 but imagine they are toast in Jan.


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## avrex

If you are talking about buying and selling an option on the same day (i.e. day-trading), then the answer is, "I do not"


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## Lephturn

@namelessone, if it's that far ITM you may well get called away a few days early - which is fine as long as you understand the process and costs. Have you spoken to your broker to discuss the process when you are called away and what the fees will be? It may well be cheaper to buy back the short calls and sell the stock. Your broker may even do it as a single transaction to remove the risk of losing money as it moves. Depending on your broker and the fees, you may find one option cheaper or if costs are similar you may be able to close the trade 10 days earlier for essentially the same net result and use that capital somewhere else.


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## Lephturn

@Islenka

I do not believe many people day trade options on this board. I do not - I would be more of a swing trader. In the larger scheme of things I think you will find most options players on this board are premium sellers overall relying on theta and vega to make gains more than delta or gamma. Day trading short-dated options you are really scalping gamma - which is fine if you can do it, but I don't believe there are many here that trade that way.


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## Toronto.gal

For anyone interested, the 2013 'Options Education Days' are back!

*Toronto *— February 16 
*Vancouver* — May 4
*Montréal* — September 7
*Toronto* — September 28

http://www.m-x.ca/educ_oed_en.php


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## humble_pie

Islenska said:


> A general question (I think)
> Do many buy and sell a call option, day to day, playing the volatility for small gains,
> I've done this a few times for small gains
> but I have some Apple calls at $600 and $570 but imagine they are toast in Jan.



this Q reminds me of a funny story haha. When castor & pollux were starting out not too long ago i posted that it's the option sellers who make money, not the speculating short-term buyers who are usually the ones who lose money.

castor posted back in his sometimes cheeky style that why would a short-term option buyer be willing to give up unlimited possible success in return for the pittance a seller would receive.

it didn't help my case that castor was on a spectacular run of beginner's luck. Every short-term option that starry constellation bought soared to the moon. This streak of luck would last for several months.

finally groupon had its IPO. Castor & pollux got ready to buy calls the moment trading would start. The night before, they exchanged knowing little messages here in cmf forum. They were going to bet a lot of $$. They were salivating. Ooh.

next day, grpn ipo'd & promptly fell into the garbage can. Woe.

when i eventually caught sight of castor again in the forum, he was trading pairs. He had an option alright, but now he also had its hedging mate, its opposite or paired counterweight.


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## Sampson

Toronto.gal said:


> For anyone interested, the 2013 'Options Education Days' are back!
> 
> *Toronto *— February 16
> *Vancouver* — May 4
> *Montréal* — September 7
> *Toronto* — September 28
> 
> http://www.m-x.ca/educ_oed_en.php


No love for cowtown 

Boy, I'll bet all the info about options one needs is in this thread, but reading through #658 posts... Maybe I need to just read 10 per day. At least everything is being documented, thanks posters, one of the only true instructional and 'helpful' threads here. Somehow you have all managed to keep the critical folk outside of this thread to which allows for civility and deep thoughtful conversation.

Maybe pie, in the spirit of the head Spud, you can write an e-book about options for us simple folk.


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## Toronto.gal

Sampson said:


> 1. one of the only true instructional and 'helpful' threads here.
> 2. Somehow you have all managed to keep the critical folk outside of this thread to which allows for civility and deep thoughtful conversation.
> 3. Maybe pie, in the spirit of the head Spud, you can write an e-book about options for us simple folk.


*1.* If that's what you think, then you're saying that 99.9% of the members here are uncooperative/unhelpful. And If I misunderstood, then please accept my apologies in advance.

*2.* It's simply because most members are not participating in this thread because they don't understand the subject. I don't think there are more than 10 people [if that], who discuss options here, so the 'civility/deep thought conversations' are far easier to achieve when dealing with such a figure.

*3.* I would pay hp $3K gladly to transfer hp's knowledge into my brain! :encouragement: 

This forum consists of many threads/subjects, and is full of great contributors from all walks of life. Unfortunately, with members possessing all of the 'Big Five' personality traits as well, but c'est la vie.


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## mrPPincer

Sampson said:


> No love for cowtown


Surpising that there's nothing for Calgary, Winnipeg or Halifax but Toronto gets two.
Not enough people interested maybe?
I'll be going to the february one if the weather is decent and to the september one for sure.


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## namelessone

Both stocks and options can be either speculation or investments. It depends on how one use them.
For example, if a stock continues to go up. A call is changed hand many times. None of the call buyers lose money. Some do missed the gain. Options tracks the stock price and stock price tracks business fundamental.
Some say one sided call buyers are risky.
Consider this: when you leveraged invest using a line of credit, if stocks go to zero you still have debt to pay back. When you use call options , stock goes against you only lose money invested and no debt remaining.
Overall I don't like buying one sided calls


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## Sampson

Toronto.gal said:


> *1.* If that's what you think, then you're saying that 99.9% of the members here are uncooperative/unhelpful. And If I misunderstood, then please accept my apologies in advance.


Not my meaning at all (but no need to apologize). "Helpful" was the wrong choice of words. Lots of helpful, friendly people here.

I meant to say this is perhaps one of the only detailed instructional threads. One could easily read only this thread and learn how to trade and use options. Even the Couch potato threads don't have this level of detail since they always come with the caveat of trying to determine the whole picture. In most other investment threads, some underlying issue is usually discussed.


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## Sampson

Toronto.gal said:


> This forum consists of many threads/subjects, and is full of great contributors from all walks of life. Unfortunately, with members possessing all of the 'Big Five' personality traits as well, but c'est la vie.


Seems exaggerated as of late, since New Year there have been several voracious flurries.


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## humble_pie

elsewhere folks are talking about questrade's new no-commish etf purchase policy & how maybe the etf product vendors are subventioning this program just a l'il.

so it reminds me how that old options oscar grouch has stuck his ugly kickback head up again in recent months.

the sad fact is that US options exchanges pay to buy order flow. There are 11 US options exchanges & they pay brokers to route their orders.

not all canadian brokers accept these payments, but many do.

to combat this injusice to clients, the SEC created the NBBO - national best bid offer system - which is supposed to help in routing an option trader's order to the right market where trader can best get his order executed.

except in a bad world, too many orders get routed to dead-end exchanges where they sit & rot while business pops on other exchanges. Will a broker pull that order from the exchange that has just paid it to bring its business there ? no. Will the broker make any effort to route that order from a dormant exchange that pays the broker to a live exchange that has a realistic chance of being able to fill the order ? no.

i see that IB has a file on its website saying that its statements disclose whether or not it has accepted payment for order flow for a client's trades.

IB is an american broker with a canadian subsidiary. I don't think one single canadian broker, authentic son of the true north strong & free, has ever had the honour to say Boo on its statements about how it receives kickbacks for option order routing. I've never seen em say one word.

what i have seen lately is an increase in the dead-end scenario. I've had a couple of orders that sat unfilled in dead-end exchanges while rip-roaring trades were carried out at my exact prices & even better on other exchanges. It's impossible to remedy this because there's always too much din & confusion in optionland.

something. is. going. on. But i haven't been able to figure out what it is yet.


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## Canuck

I'm just learning about options and want to try selling some covered calls on Manulife.

Why does the bid/ask always seem to have such a big spread on all the call options that i look at (for all stocks)? and why is the "last" price always the "ask" price? 

Right now the bid is .11 and the ask is .16 and last price is .16. Will I sell my calls if i put them in for .16?

thanks in advance if anyone answers


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## HaroldCrump

Canuck said:


> Why does the bid/ask always seem to have such a big spread on all the call options that i look at (for all stocks)?


The gap between bid and ask indicates the liquidity of the options market (for that stock).
An illiquid options market (with low volume and low OI) will often have wide bid/ask spreads.
It is usually only the market maker playing.

Canadian options market is usually pretty illiquid for most stocks (except the banks and some energy companies).
If the stock in question is inter-listed, try the US options instead.

Also, options for a few months out are the most liquid, compared to those that are approaching expiration, or those too far out in time (1 yr +).



> and why is the "last" price always the "ask" price?


Not always.
Last price is the price of the last trade.
Ask is the current ask.
They may be the same number, but they are different things.



> Right now the bid is .11 and the ask is .16 and last price is .16. Will I sell my calls if i put them in for .16?


No, you are trying to _sell_, therefore, the price that matters to you is the bid, not the ask.
Ask will matter to you if you are trying to buy.
If you are desperate to buy _right now_ you can put in a limit order for the highest bid (i.e. 11c.) and your order should get filled fast.

Keep in mind that in addition to bid price, you have to look at the bid lot size.
If you are trying to sell 10 contracts, but the bid is only for 5, you will get a partial fill.

If the next highest bid is for 8c. your order will "sit" with 5 unfilled contracts until either the party bidding 8c. decides to up their bid or you decide to down your ask, or meet somewhere in the middle (say, 9c.)

But, whatever you do, never ever put in a market order for an option, esp. on the Canadian ex.


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## Canuck

so do you think if I'm trying to sell that i just put in an ask price of .11? or should i put in higher and hope it gets filled? with stocks that i'm trying to sell i almost always put in the bid price so they'll sell immediately but it's usually just a penny spread....this is a .04 cent spread or a 25% difference, maybe I put in an ask price somewhere in the middle? or is it common to just always put in the bid price when selling an option?

Are you saying that if I'm holding Manulife in my Canadian Margin account that i can sell covered calls on MFC on the U.S side? where would the money settle if the calls got executed?

Sorry total beginner here, I really appreciate your help I'm jut doing a super safe transaction just to actually see the process, I will study much more before doing any other trades.


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## Lephturn

HaroldCrump said:


> But, whatever you do, never ever put in a market order for an option, esp. on the Canadian ex.


Big amen to this. Great answers HC - I would also add don't ever EVERY submit a market order pre or post market. Your market order rule should prevent that anyway - but just in case - you'll get hammered if you ever do this. Even in a really liquid option like AAPL.

If you know your price - and you should - don't be afraid to work your order. Use limit orders and then cancel them and move them when you can. Start mid market (between bid and ask) and then you can start working it back toward the bid. Sometimes there is a buyer out there you don't see that will move his bid to take your order. No matter what understand what implied volatility you are buying or selling at that price and ensure it makes sense. With options you can be right on direction but long on volatility and still lose money. If you are wrong on direction but right on volatility you can often still make money, or at least lose very little. Hence my suggestion to pick your price - what volatility will you buy or sell - and then choose your option price accordingly.


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## HaroldCrump

Canuck said:


> so do you think if I'm trying to sell that i just put in an ask price of .11? or should i put in higher and hope it gets filled?


What strike price and expiration are you looking at?
You should not accept the highest bid unless you are desperate to sell (for whatever reason).

As Lephturn said above, start with a limit order mid-point of the bid/ask and then work down.
But you should give it some time - it's always possible that some buyer will emerge and out-bid the highest bidder and fill your order.

That said, today is perhaps not the best day to sell a covered call.



> Are you saying that if I'm holding Manulife in my Canadian Margin account that i can sell covered calls on MFC on the U.S side? where would the money settle if the calls got executed?


I haven't done this personally, but I think you will require Options Level 5 approval for your account to be able to do that.
The broker will consider that short call as a naked call.
But yes, it can be done.
If you are about to get assigned, you will have to get your broker to journal the shares over to the US account to cover your short call position.



> I'm jut doing a super safe transaction just to actually see the process, I will study much more before doing any other trades.


Understood.
But as I said, today is perhaps not the best say to sell a MFC call.
Stock is down about 0.50%.
What strike and expiration are you looking at?


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## Canuck

K I'll always do limit price..thanks

I'm looking to sell 4 covered calls on Manulife at $15 - March 16th.

I keep refreshing my screen to see how the bid/ask change with stock price. My account was just changed to allow option trading, so actually being able to see the platform is very helpful in learning.

right now bid is .12 and ask is .17


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## HaroldCrump

Canuck said:


> I'm looking to sell 4 covered calls on Manulife at $15 - March 16th.
> right now bid is .12 and ask is .17


IMHO, March is too close.
There isn't enough premium for the March expiration to make it worthwhile (IMHO).
Even if you manage to sell this at 15c., it will net you $60 before commissions.
Add in a $10 commission and $1.25 or so per contracts and you will make barely $45.

If you are looking for a safe test trade, you could try going another month or two out.
Say, the July expiration for $16 strike.
Current bid is 17c. which is higher than the 11c. for the March.
You might be able to sell this for 19c.
You will extract more premium and your strike is safer at $16 instead of $15.


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## humble_pie

Canuck said:


> Why does the bid/ask always seem to have such a big spread on all the call options that i look at (for all stocks)? and why is the "last" price always the "ask" price?
> 
> Right now the bid is .11 and the ask is .16 and last price is .16. Will I sell my calls if i put them in for .16?


actually, last price is *not* the true last price, although this is a very common misconception.

in illiquid markets, a true last price might have occurred weeks or even months ago. 

meanwhile, brokers require realistic last prices in order to calculate clients' margins. Institutions need realistic prices for funds under management. Neither brokers or institutions could ever put up with true *last* prices, which may be so old as to be many dollars away from reality.

therefore a quoted *last* price will nearly always tend to be yesterday's bid or ask at the close. This will give the brokers & the institutions the most realistic notion they can hope to get for pricing purposes.

today, for example, i noticed a quoted *last* price in a call option that i sold last friday for 60 pennies. No other contracts in my series traded, mine was the only transaction in this option on friday. However, the quoted "last" is .70. This was the bid or the offer at last friday's close.



> Right now the bid is .11 and the ask is .16 and last price is .16. Will I sell my calls if i put them in for .16?


this sounds like montreal ... but even in the US you won't be able to sell your calls for .16. In fact, the broker is not even going to send out such an order, it's too unrealistic (brokers don't tell clients about these details.)

(option orders that are not priced at the natural market have to go into an electronic book at the option exchanges. After some short time frame like 15 minutes brokers have to pay to maintain such unfilled orders in the e-books. If a client sends a wildly unrealistic order price, no broker is going to pay to keep that order alive in any e-book at any exchange, so these kinds of orders don't get sent, they just sit quietly at home in the brokerage.)

depending on what kind of an underlyingl stock it is - & what kind of market it has - on montreal one might fetch .12-.14 for those calls. The .14 is extremely iffy & really will only happen if the underlying stock climbs a little.

the question is, Why would you choose to sell anything for such a low price ? there will be a commission, might it not be better to search around until you find a more profitable call to sell ?

LATER: ah, i see, you are hoping to sell manulife march 15s on montreal. IMHO march is far too soon for a sleepy thing like MFC on montreal, that's why the premium is zip. Might i suggest that you look farther out in time, in order to harvest a reasonable premium.


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## Canuck

thanks HaroldCrump, that does make more sense.


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## Canuck

i guess when i choose "canadian market" on TD it is always the Montreal exchange? am i correct in thinking that is the only canadian exchange that trades options?

"the question is, Why would you choose to sell anything for such a low price ? there will be a commission, might it not be better to search around until you find a more profitable call to sell ?"

cuz I'm a newbie and still figuring things out

I will look further out and see what's out there.

thanks guys!


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## humble_pie

yes, montreal is canada's sole options exchange.

trading itself is difficult to carry out on montreal, but it has a great website for options education.

m-x dot ca offers the best little short book on options trading for beginning & middle investors. It's the 50-page PDF entitled Equity Options Reference Manual on this page. Beginning traders actually only need to master the first 13 pages - but the rest of the nifty 50 will take the trader through the greeks to binomial theory & beyond.

http://m-x.ca/educ_guides_strat_en.php

there are excellent webinars & blogs on the m-x.ca website. Plus the exchange is offering another of its always-popular Options Education Days in toronto on feb 16th.


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## namelessone

I read that time value decay speeds up at the end. How come some time value remained persistant close to expiration? Example GMCR Feb 8 strike 44+


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## Argonaut

I assume you mean puts. That's not time value, that's expected volatility. Why? Earnings release today. You really should keep track of those sort of events when using options. Nay, I shouldn't say should.. it's mandatory.


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## andrewf

Not mandatory. The other speculators will gladly take his money.


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## metatheta

I took someone's money this afternoon on the GMCR monthly Feb 40 puts. In addition, I took in more money on the Feb 49/50 vertical call spread for a total of 1.26 credit. I'm hoping that the after hours prices hold till tomorrow morning so I can give back a tiny bit of the money I originally took.


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## metatheta

I've held TSX:SU stock for quite a while now and decided to sell covered calls just before earnings yesterday. I was able to sell Mar 35 calls for 0.57. Today the stock tanked and the call can be bought back for 0.10.

I don't know if I should be happy or sad. The short calls worked out but the long stock didn't. I lost big on the stock but partially offset it with the now cheaper calls. 

As a premium seller, I find it hard to find plays on Canadian options because of the lack of liquidity and not enough premium. The only plays I find are just selling covered calls on any of my long stock leading up to earnings. There seems to be more volume near earnings and premium is a bit richer.


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## namelessone

Argonaut said:


> I assume you mean puts. That's not time value, that's expected volatility. Why? Earnings release today. You really should keep track of those sort of events when using options. Nay, I shouldn't say should.. it's mandatory.


No it's a covered deep in the money call I sold. I thought I could sell it before the earning day with profit but I was wrong. The decay was so little. The volatility was big enough to even out the time decay. 
Even the stock plunged 7% after hour, I am still in the black. I expect to make 5% if the stock remains flat or higher on Friday.


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## andrewf

I would stay away from Canadian options. Lack of liquidity/wide spreads makes it tough to change your exposure.


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## Lephturn

namelessone said:


> No it's a covered deep in the money call I sold. I thought I could sell it before the earning day with profit but I was wrong. The decay was so little. The volatility was big enough to even out the time decay.
> Even the stock plunged 7% after hour, I am still in the black. I expect to make 5% if the stock remains flat or higher on Friday.


I would say that implied volatility is one component of extrinsic value or what could be called time value or premium. If you use an options calculator you can break out the greeks - which attempts to calculate how much of an options price is attributed to the various risks associated with it. Run the option in question through the option price calculator at MX.ca or your brokerage and take a look at the greeks. Theta is time, Vega is volatility.

That said - a deep in the money option with little time left will have very little extrinsic value or premium. Generally when selling options you want to sell out of the money options that are entirely extrinsic value - IE: they have no intrinsic value at all, that way as you get close to expiry the quickly become close to worthless.


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## Canuck

thanks humble, I'll check out that short book


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## Canuck

so say i sell 4 covered calls for manulife/July/$15, and manulife goes up to $16 in March - do I have to do anything? or do my shares just disappear in my TD holdings? and if they just disappear do I have to pay any commission?

I sold 4 calls for .54 this morning. I'm not sure if that was the smartest move but I wanted to try something, and I only bought the 400 shares of Manulife a week ago just to try selling a covered call (cuz manulife was listed as an active options stock). Kinda feel like I can't lose, I made $200 of the options this morning, I'll probably get the divi on Feb 16th, and i'll make a profit if I have to sell at $15.... of course I might totally be missing something


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## HaroldCrump

Canuck said:


> so say i sell 4 covered calls for manulife/July/$15, and manulife goes up to $16 in March - do I have to do anything?


If you do not want to lose your shares, then yes, you need to close that short call position by buying the options back.
That is known as a _Buy to Close_.
If you don't close that position, you will get _assigned_ and your shares will be sold for $15 (although the stock is already at $16).

You can (and this is what many regular covered call sellers do), buy to close that option position, and then sell the same number of contracts for a higher price further out in time.
So, for example, in March, you can close the July $15 position and sell a Jan $18 position.

Also note that you shouldn't wait until MFC stock is nearly $16 to close your position.
You should probably act sooner than that.

Our very own humble_pie has a handy formula to determine when there is a risk of assignment.
That formula has been posted on this thread (and others) a few times before, but for quick ref. here it is again:

_when (stock minus strike) > option bid = risk of assignment_

This is a general guideline, but makes logical sense.



> or do my shares just disappear in my TD holdings? and if they just disappear do I have to pay any commission?


If you do nothing, you will be assigned the option and the next business day, you will see the cash from the sale in your account.
And yes, you will be charged assignment commissions, which are often very high (far higher than regular trading commissions).
For instance, it could be $45 + $1.25 per contract.
In your case, it will be $50.


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## Canuck

or can i just assume if the strike price is $15 and I sold a call for .54 that as soon as Manulife goes over $15.54 i risk being assigned? 

crap i didn't realize i got charged a commission for being assigned. I'd be fine with them just taking my shares at $15 and not buying the options back, especially if there was no commission. I guess if I made $200 selling the options and they get assigned at a cost of $50 then i Still make $150.

I'll have to read up on "buy to close", i don't fully understand that part yet. I'm assuming though that the closer Manulife gets to $15 the more money I'm going to have to spend to "buy to close", and that it will for sure cost me more to do this than what I made selling those 4 covered calls.

I'm getting yelled at over here to just read my books just seems easier to ask you guys though..


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## HaroldCrump

Canuck said:


> or can i just assume if the strike price is $15 and I sold a call for .54 that as soon as Manulife goes over $15.54 i risk being assigned?


No, that is not how the formula works.
The 54c. that you sold the call for is now history, so forget that number.

When stock is at or above $15, and you want to buy to close, you have to look at the lowest ask for your lot size (4 contracts).
That is what it will cost you to close out your position.

What the formula refers to is the highest bid price at that time.
If the stock is already at $15.54, the bid will be higher than 54c.

The way that formula works is that a counterparty will not assign you as long as they can simply sell the option back to the highest bidder and make more money rather than assigning and then selling the stock.
Therefore, as long as the highest option bid stays higher than stock - strike, you are safe.



> I'll have to read up on "buy to close", i don't fully understand that part yet.


For a covered call, when you sell, you are doing a _Sell to Open_.
When you are closing that position, you have to buy the call back.
Therefore, you are doing _Buy to Close_.

For long calls, it's the other way round - Buy to Open, and Sell to Close.



> I'm assuming though that the closer Manulife gets to $15 the more money I'm going to have to spend to "buy to close"


Yep - now you are getting it.


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## Canuck

thanks Harold, appreciate your help with this!


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## humble_pie

canuck it's very nice to welcome an options newcomer who has the guts to post up one or 2 of his early trades. This is the best way you are going to learn imho.

nobody is yelling at you. There are probably lurkers on this thread who are interested in learning just as much as you are, so they are silently benefitting from the trouble you are taking with your questions.

imho u are actually in fine shape. Yes, theoretically speaking, the counterparty could call your stock away at 15, but there's no chance of that happening at present. All of your july 15 premium is tv - theoretical value, aka time value, aka extrinsic value as lephturn says - so this premium (roughly .50 at today's bid close) plus the gap between stock price & your call strike (roughly .47) together constitute close to one dollar, which is fantastic buffer. Nobody will move against this.

you're also set to receive the dividend that goes X later this month plus the next one that goes X in may.

could i make a suggestion. I'd love for you to track a trio of quotes. 1) MFC stock on toronto; 2) also your july 15 call; 3) also - just as an illustration - the 16 call of 18jan14. Try to take detailed quotes that will show you bid, ask, sizing (# of contracts bid & offered) plus open interest.

watch the spread between the ask for your short july 15s - this was .57 at the close today - & the bid for the jan 16s - this was .59. In other words, at the natural prices a trader wishing to roll over his july 15 calls near the close today would have considered paying .57 to close while receiving .59 to open a new jan/14 position.

right now this is a miserable credit of .02 & certainly never to be executed at the present time. But what i would like you to do is track this spread among this trio of quotes over the next several weeks & observe how it fluctuates. Specifically, you will see it decrease & possibly even turn to negative in rising MFC markets, while you will see it increase in falling markets.

are we on the same page ? never mind, eventually we will be. You see, what you will want to do to rescue your MFC stock & prevent it from being assigned is roll over those july 15s during a falling market.

explanations later. It's the greeks, of course. Meanwhile, july is a long time off. For now, nothing to do except sit back, track the pair of options mentioned above & feel a bit smug about your accomplishment.


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## Canuck

K i had to read your post about 5 times but I do get what you're saying, and I will do exactly that. 

I felt like I had to make some kind of a trade to actually see it in "action" so to speak, and I think your suggestion of tracking those 3 items will probably help me to understand more than reading a chapter in a book, and I will read that PDF file on the Montreal site tonight!

I wish the Canadian option market was more liquid, I have a lot of Canadian holdings. Is it hard to trade even the bigger companies like Enbridge, BCE, Trap, Fortis etc..?


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## humble_pie

Canuck said:


> K i had to read your post about 5 times but I do get what you're saying, and I will do exactly that.
> 
> I felt like I had to make some kind of a trade to actually see it in "action" so to speak, and I think your suggestion of tracking those 3 items will probably help me to understand more than reading a chapter in a book, and I will read that PDF file on the Montreal site tonight!
> 
> I wish the Canadian option market was more liquid, I have a lot of Canadian holdings. Is it hard to trade even the bigger companies like Enbridge, BCE, Trap, Fortis etc..?


gosh, 5 times. Good thing i said Laters. What you have is enuf for now.

when you watch the spread widening & shrinking, it will be the greeks in action. You'll learn from the experience. It's the best way to go imho.

liquidity on montreal ... many of us do have canadian holdings, especially (of course) the good dividend payors. Many of these stocks have US options; some have primary markets in the US as defined by volume. Those with signifidcant US options will tend to be the big miners, the big energies, the big ags, the big resource stocks.

a helpful guide is to look at the open interest on both exchanges. Not just open interest for one series or one class, but open interest for the entire chain. You will see immediately which is the more liquid market.

for many canadian stocks it's a tie. I have BCE in canadian account but i sell options either in US or canadian market according to what i think is the best deal at time of sale (keep in mind that the US options mean a bet also on the future of the currency, because if a US call is exercised & stock is delivered at a future date, then the payment for said stock will be - obviously - in US dollars.)

in general, it's the institutions that provide liquidity to the montreal exchange. Once you notice which options have the heavy volume, ie which options are institution-traded, this info will also suggest to you where & when to stick with montreal.


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## Canuck

Harold and Humble, how many years have you two been trading options?


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## HaroldCrump

Oh please, I can't even hold a candle to humble_pie.
humble_pie and I are like Luke Skywalker and Yoda


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## Canuck

haha


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## Lephturn

LOL - and here I am still bullseye'ing womp rats in my T-16.


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## Argonaut

Well, for the last two months I've been out of the country or out of the loop while working. Now that I have a moment I see that my AAPL spread is not looking very good. 

March 16th 525/515 put spread. To buy this back would cost me roughly 9.00 debit per contract on a good day. To roll forward and open the same spread in May or later would only net me a credit of about 7.50 per contract. Is this salvageable or do I go ahead and take a loss in some form? Hang on and pray AAPL runs to 525 in the next month? I have an inkling which way I'm leaning, looking for thoughts. I know there must be some folks out there who got burned on the AAPL puts frenzy, perhaps worse than I did.


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## humble_pie

Argonaut said:


> ... take a loss in some form? Hang on and pray?


it's common in options to have some that go into dead ends. All the money that was ever to be made gets made on the first or maybe the 2nd trade; but at some point the stock goes wrong & after that it's a question of stick-handling the option, not to make money, but just so it doesn't get assigned or cost buy-back premium.

usually i accept these situations as part of the overall strategy (the same thing can happen with calls when underlying stock goes to the moon.) I accept that good money was made at the outset but now that particular tweak in the overall portf is finito. I work my injured option down or up in strike price - whichever is required - in order to keep it out of harm's way, but i expect nothing more from it.

translation: i'd go farther out in time than may; i'd look for lower strike prices; park that thing in as safe a place as i could find without paying loss dollars; & then i'd look around for greener pastures.


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## metatheta

I do my options trading in an IB USD non-reg account and really like their commissions and ease of placing trades. I want to do more covered calls on my TDW RSP CAD account but always hesitated because of the high commissions, difficulty in placing orders and wide markets.

I've sold some covered calls in the past near earnings or near highs on Canadian stocks I already owned to take advantage of higher premiums. Today I did a buy-write for the first time with TDW where I bought stock and sold calls simultaneously with a net limit price. This is so easy to do online with IB but I had to call this trade into TDW. The commish really sucks - $10 on the stock and another $10 on options plus $1.25 per contract. Every leg gets a base commish so a vertical is at least $20 and an iron condor is at least $40. That explains why Canadian option markets are illiquid with these high option commissions. They need to lower commisions to get more players. They also need to allow online spread orders. It took 10 minutes to place the order with the rep. It was so retro.

Anyways, for this buy write covered call trade, I chose BB Feb 17. I liked it because it was a nickel-wide (that's as tight as it can get in the MX), decent open interest and high vol with one week to go. My 16.15 limit was filled this afternoon with 16.75DR stock and 0.60CR calls. I plan to buy back the Feb calls if ITM (via calendar or diagonal) then sell the next strike up Mar calls. I think I can get at least 0.90 on next strike up Mar calls after Feb expiration. I will continue to sell monthly calls as long as possible to get my cost basis down to nothing. If BB explodes to the upside then my covered call campaign will most likely end.

I actually don't want BB to take off. I also have a BBRY Mar 12/14/19/21 iron condor. Go BB, but not too far!


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## metatheta

Argonaut said:


> Hang on and pray AAPL runs to 525 in the next month?


I think AAPL will have a hard time to get past 500 in the near term. There's a lot of bag holders who are praying to get back to even and waiting to sell at that pre-earnings level. The recent rally may help you a bit but you really need 520 soon.

You can roll this put vertical as long as you can do it for even or a credit. The trade is over if you have to pay to roll. Don't send in live soldiers to rescue dead soldiers.

Here's an interesting repair strategy for you to think about as an alternative to hanging on. Let's say you did this spread 3 times and there is 1.00 or $300 left to hope and pray with. The probability of this trade is now very low. Also, let's say you are still mildly bullish on AAPL given this recent cash pile suit. You can buy back the 3 put verticals and buy 1 call vertical in the same month. The Mar 490/500 call vertical is selling for around 3.00 and has a higher probability than the Mar 525/515 put vertical. Basically, you are swaping your remaining $300 to lose on the short put vertical for a shot of getting $1000 back with the long call vertical should AAPL go back to 500. It is easier to get to 500 than 525. At 500, the put vertical is a max loser but the call vertical is a max winner.


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## andrewf

But it isn't the lowly retail investor on TDW that is providing liquidity. It's the market makers/HFTs.


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## humble_pie

metatheta said:


> ... repair strategy ... Basically, you are swaping your remaining $300 to lose on the short put vertical for a shot of getting $1000 back with the long call vertical should AAPL go back to 500



i don't think so ... as i recall argo has 5 puts so he has $5000 to lose, not $300. This is not a time to add more risk.

do ya'll recall gob's elephant ? argo does not have a full-grown elephant here but it's still a pachyderm that weighs down his account too heavily, imho.

what damaged gob's account - possibly irreparably - was the fact that, as aapl began to crater down from 700, gob kept on selling puts in the ultra-high 600 range. Gob was, as we all remember, an ultra-bull, at least at that point in time.

i remember tentatively mentioning in gob's thread at the time that the roll-down should be to a 650 put. But, bullish as always, gob chose a 680P. The rest, as they say, is history.

argo has something of this situation now. There is very clearly a risk that aapl will remain range-bound below his 515/525 put strikes throughout all of 2013 & possibly beyond.

controlling that risk is more important than putting on another what-if-win-type-call-option strategy in aapl imho. To control that put risk, i believe that argo would have to roll down his strikes while avoiding paying for dead soldiers by going way further out in time.

that's what i mean when i say these kinds of residual option positions - the ones whose underlyings have undergone megachanges - become dead ends. They are dying soldiers. It's all one can do to look after them in the hospice, where one will stick-handle the vitals by rolling down & further down in the case of a put, or up & further up in the case of a call.

no life support, no extraordinary measures. In the end, the old soldier, who served so honourably in the beginning, will die with no pain & no suffering whatsoever.


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## Argonaut

Now I've finally seen first hand the wisdom of humble pie's jam factor. Using a vanilla spread instead of my more-contracts-closer-together equivalent results in a far lesser loss in this situation. Anyway, nothing I can do about that now. But I'm in a situation where I do not want to lose this money, or want to make it back shortly. Since the spread is so close to maximum loss I may hang on here and see how this little run plays out. It has 10% yet to climb, which isn't unattainable. 

If that doesn't work I may break a few cardinal rules by rolling out and increasing the number of contracts. Send a couple more soldiers over the trench and see what happens. I'm not a huge AAPL bull, but 31% of its market cap is in cash and growing. I'd make a bet that it reaches 525 at some point in the future to get my money back for sure.


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## humble_pie

Argonaut said:


> ... increasing the number of contracts. Send a couple more soldiers over the trench and see what happens


sometimes i think of the $$ involved if assigned, for example:

2 aapl mar 525P = 105,000
3 aapl oct 500P = 150,000
4 aapl jan 450P = 180,000, etc

these kinds of thoughts sometimes - although not always - cure any passing fancy i might have to increase the selling number of puts.


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## metatheta

humble_pie said:


> i don't think so ... as i recall argo has 5 puts so he has $5000 to lose, not $300. This is not a time to add more risk.


I used 3x as an example to show the strategy. Also I didn't know he had a 5x spread.

With a 5x spread, his remaining risk is $500. I'm not talking about the original risk but the remaining risk. If nothing is done, this remaining $500 has a slim chance of being recovered. With the repair strategy I suggested, the remaining risk (if he chooses to still risk it) can be turned into a smaller lot long call vertical with a better chance of retaining value or higher. With $500 recovered from buying back the 5x put spread, you can buy a 2x Mar 475/480 call vertical for around $235 each or $470 total. In fact this lower strike call vertical has a better chance than what I originally suggested since it is near the money.

This strategy does NOT add more risk. It just takes the remaining amount at risk on a low chance spread into one that has a higher chance spread.

I don't expect @argo to follow this suggestion. I am merely showing what can be done given some creative thinking.

Also, I can't see how you can collect a credit by rolling this out in May at the same strikes.


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## thenegotiator

I am really enjoying reading this thread .
thks for all the contributors
i am also learning a lot of deeper option trading strategies beyond puts, calls and simple strategies like covered calls and married puts.
as for Argentum's trade i have to agree with the savvy options traders here that AAPL at 525 is a long shot at this moment.
again ... thks for the deep lecture here.
GL


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## humble_pie

*Saving Old Soldiers*



metatheta said:


> With a 5x spread, his remaining risk is $500. I'm not talking about the original risk but the remaining risk. If nothing is done, this remaining $500 has a slim chance of being recovered. With the repair strategy I suggested, the remaining risk (if he chooses to still risk it) can be turned into a smaller lot long call vertical with a better chance of retaining value or higher. *With $500 recovered from buying back the 5x put spread*, you can buy a 2x Mar 475/480 call vertical for around $235 each or $470 total



meta we are not on the same page ! i am so not following your math, especially the phrase in bold that goes "with $500 recovered from buying back the 5x put spread."

the figs i see tell me that argo won't recover anything from buying back the put spread, instead he'll pay through the nose. Just to confirm, the 5 spreads are the 515s at 43.50-44.40 & the 525s at 52.35-53.00. Assuming a close at the natural, cost will be $9.50 or $4,750 for the 5 contracts.

this cost can only be offset by selling something else. The likeliest candidates are put spreads priced a few increments lower.

also, i actually never said anything about may (if u look.) What i said - twice - is that argo would have to go out later than may in order to get down to a healthy put strike price without having to pay $$ for it. Perhaps now i'll take the opportunity to say later-than-may a 3rd time !

the notion of may came from argo himself, when he first raised the situation. But it was also clear, in that paragraph upthread, that argo wanted to believe ("hang on & pray") that the old soldier was going to make a decent recovery.

as for myself, i might do options, but i tend to stick to the conservative side of things. I do sincerely think the old soldier might be weaker now, i think it's time to contact the hospices, see who's got room, where he might go if, alas, it comes to that.

at the same time, meta, i really like your idea. Find him a sexy 22-year-old redheaded girlfriend, that might improve his health in no time flat, you say. I agree, it's worth a shot. If she doesn't cost anything i might even be enthusiastic. Although i have to say the filly you seem to be proposing sounds expensive.

what's positive in this story is that argo has plenty of time to manoeuvre. Oddly enough, the lead time he's giving this option expiration date - more than 2 months - is just about the lead time i usually start with myself. Not necessarily to act, during this early phase. But more to reconnoitre, to check out the possibilities, to look far off from the high ramparts, to formulate a variety of plans.


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## metatheta

Yeah, let's get on the same options chain and sort out the math.



Argonaut said:


> March 16th 525/515 put spread. To buy this back would cost me roughly 9.00 debit per contract on a good day. To roll forward and open the same spread in May or later would only net me a credit of about 7.50 per contract.


I was using numbers from @Argo from Thursday so quotes will differ after that AAPL rally. @Argo said he can buy it back for 9.00 so that implied that there was 1.00 left to lose on this 10-point wide spread. 1.00 on 5x spread is $500 left to lose.

I was also referring to his same strikes roll to May which I think cannot get a credit. He said that he can roll forward getting a net credit of about 7.50 per contract. I will assume he meant per spread. The May 525/515 put vertical was around that price on Thursday. The real net for rolling forward would be a 1.50 debit. I know you suggested a further out month to get more credits but this trade is now a real drag taking it out that far. If you go out this far, it is best to close it and find a better trade.

So going back to the $500 recovered, I may have chosen the wrong wording. I meant that if he were to close the 5x Mar 525/515 put vertical by paying 9.00, he would avoid losing the remaining $500 on this trade. If this remaining $500 was destined for hope and pray, buying a near the money call vertical like the 2x Mar 475/480 for 2.35 (mid-price today) or under $500 would be a higher probability trade.

So basically what trade would you rather have on today that has a mark to market of $500?
The 5x Mar 525/515 short put vertical or the 2x Mar 475/480 long call vertical. Both have the same money at risk but the former has a lower probability of profit than the latter.

I realize that to pull off the repair strategy on this loser takes quite a bit of tweaking. Markets move and you have to find ways to get filled. Some platforms like IB and TOS can put in a custom order of up to four legs with one net price. The desired price is even or a credit.

I still maintain that this repair strategy adds no additional risk to what the original trade had.

The ultimate decision here on hope and pray, cut bait or repair is based on @Argo's faith on AAPL 525 by March expiration.


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## Argonaut

All very good discussion. To clarify I was contemplating rolling forward to May for a net debit of 1.50. I think y'all are discounting a bit too much the ability of AAPL to reach 525 at some point. Back at 700, I too thought the possibility of my assignment at 525 was near impossible. And here we are. 

Anyway, we have $50 to climb and it's not too much of a stretch for that to happen by March, May, January, or whenever. I'm just trying for a soft landing, and to protect my annual return calculations and that sort of thing. This is the worst situation I've ever been in investment-wise. I'm curious to how the other folks in GOB's thread made out. As I recall my puts were on the lower end of things, so there had to be some losses for those selling in the 600's.

I'm opening up an account at IB so I can do a bit of a cross-broker position dance with cheaper commissions on the new account. The metatheta call spread is interesting, but right now I'm more concerned in preserving my thousands instead of my hundreds. I still haven't officially lost anything yet.


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## metatheta

So you want to roll to May. Let's get creative here. Rolling to May will be a net 1.50 debit. Let's try to finance that debit with selling an upside call vertical. The May 540/550 call vertical is midprice 1.50. There you go - a free roll. You would then have a 5x May iron condor 515/525/540/550. This would be a 6-leg order roll and I don't think platforms can do it in one order. You may have to buy the put vertical first as one order then sell the iron condor after.

If AAPL lands between 525 and 540 on May expiration then you've made your money back and more.

Rolling to the May iron condor does NOT add any more risk.

I can hear @humble saying again that this adds risk. He always says that when I suggest a repair. The whole point of repair is to reduce risk or not add more risk while putting yourself in a better position than before. I define risk as the money that can be lost on the trade. You already set your risk when you entered the Mar 525/515 put vertical. Your risk was 10.00 less the credit collected. That was the most you could lose. Rolling to this May position maintains your risk with a shot to make your money back with additional duration.

One might say - What if AAPL gets to 545 by May? I say - Let's get out of this hole first. We're in defence mode right now.

Take my creative suggestions as purely academic. I hope you see what you can do with options. Options give you options. You don't have this flexibility in trading stock. All the guys who bought AAPL above 500 are sweating it out. They are smoking the hopium but still have a huge downside risk should AAPL go down to 400. Their consolation prize was a recent dividend.


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## humble_pie

*Saving Old Soldiers*

meta - very nice. Not a bad-looking girl at all, in fact she's halfway pretty.

plus she's much lower maintenance than i'd thought. Who knows, maybe the old warrior will revive.

.


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## humble_pie

on 2nd thought, the alluring redhead does add considerable risk, the way i see it.

if argo keeps rolling his $10 put vertical sedately lower, sooner or later that $10 risk will fade into nothing. Nothing will happen unless the very faint statistical chance of armageddon happens.

on the other hand, turning the thing into an iron condor means that the ITM 515/525 put risk continues exactly as it is now - which might be a bad consequence - *plus* there will also be an upside 540/550 call risk. Although it's true that only one side risks being the losing side.

about these may risks, it seems to me that meta's suggestion amounts to Let's. Jump. Off. That. Bridge. When. We. Get. To. It.

like, meta says "_Let's get out of this hole first. We're in defence mode right now_."

the point of the iron condor is that prices should not move too much either way out of the trading band. But I clearly remember in the crash of 2008/09 the general manager of a major option house groaning to me about how so many of their clients were desperately going under.

"Option strategies that have served them [his clients] so well for years & years have broken down completely," my friend said.


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## metatheta

I knew it. humble_3.14 is saying that the repair adds considerable risk. Please quantify the added risk.

I maintain that the repair strategies I suggest add no additional risk.

I define risk as the money that can be lost on the trade. I don't know what Argo collected as credit on the Mar 525/515 short put vertical so I will make an assumption on his credit. 

Argo - please tell me the credit you received. Don't include commissions. I find that commissions and taxes cloud trading decisions, but that's another discussion.

Let's say he got 3.00 credit on the Mar 525/515 short put vertical. His risk is 10.00 less the credit collected or 7.00. He can roll into the iron condor for even. The iron condor is 10-point wide. The risk is the width of the spread less the credit received. His risk is still 7.00 on the downside and on the upside. Money can be lost on both sides but the risk is not additive. Therefore the risk remains 7.00 to lose.

What changes on the roll are probabilities of profit but the risk still remains as a 7.00 loss.

The iron condor can be tweaked with lower strikes if you want as long as you roll for even or less to keep the risk the same.


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## humble_pie

i indicated the redhead risk in message #712. No reason to go back.

meta the "repair" strategy you suggest doesn't repair imho. It just postpones the $10 risk.

why $10 ? because your definition is unnecessarily fancy. Never mind what argo received in the original trade - although as best i can recall it was far, far lower than what you're assuming, because he was already rolling from a january pair (so are u going to go all the way back to the original trade, which was like maybe lightyears ago ? please, let us not go in for forensics.) Instead, let's keep it simple & just take things from here.

like i say, the redhead is a risk postponement in the wistful hope that maybe-just-maybe-keep-all-fingers-cwossed, AAPL stock will recover to 525 but not shoot past 540. You say yourself that you don't have a plan if things go wrong.

i agree that the dollar risk your fancy girlfriend is demanding does remain the same. But the way i see recent history in AAPL is that a loud thunderbolt warning blasted down from the gods & in the storm that ensued all tiny humans on earth should have gotten a lot more respectful. That's why i for one would be looking to take put risk down to maybe a 500 level, not postpone @ 525.

it's also the may timing that i question. Preferred shares might indeed boost aapl stock but i don't see the board OKing such an event until summer 2013. Until then betting on a pfd issue looks like a crap shoot to me. I don't see much else coming that can elevate the former $700 dazzler. Apple TV ? Apple eyewear ? nah, they were last year ...


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## metatheta

Argonaut said:


> Is this salvageable or do I go ahead and take a loss in some form?


Argo was asking if the March trade was salvageable. I wasn't aware of the January roll. I guess I didn't have all the facts. That's why I lay down my assumptions so I can be corrected on it. I tend to give a repair just one attempt. If the first repair doesn't work, sometimes you just have to say the stock won and you lost. Time to find a better trade.

There's an Options Education Day in Toronto on Feb. 16. The agenda has Repair and Exit Strategies. If anybody is going to it, please share what you learn. I think repair strategies are important as part of one's option trading playbook.


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## humble_pie

from chicago, via the montreal exchange folks who stage Options Education Days in canada:

http://www.m-x.tv/media/repair-and-exit-strategies


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## metatheta

Very nice. Thanks. Watched the intro and will watch the whole thing later.

Maybe there may be something that may help Argo in this video.


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## metatheta

Argonaut said:


> March 16th 525/515 put spread. ... I know there must be some folks out there who got burned on the AAPL puts frenzy, perhaps worse than I did.





Argonaut said:


> As I recall my puts were on the lower end of things, so there had to be some losses for those selling in the 600's.


This got me thinking for those who were short put verticals when AAPL was at 700.

AAPL was at an all-time intraday high on 9/21/12 so I'll pick this date. If Trader A sold a 1x Apr 650/640 put vertical and Trader B sold a 1x Apr 550/540 put vertical, who is in more pain today if they still have the trade on?

I had to use April 2013 options because there were no March 2013 options back in September.

You can reach the answer in two ways - You can look up the spread's closing mid-price on 9/21/12 or you can use your understanding of trade risk.


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## Argonaut

I see your point, but other folks tended to be short the put without a spread.


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## Lephturn

In order to get out of Virtual Brokers and move to IB I had to slaughter my elephant.... my $ 675 AAPL put. It wasn't quite as bad as it looked - I picked up some long puts in the $ 525 and $515 levels that I cashed in to limit the damage somewhat. It was still about at 12k loss. Ow. Ameliorating that somewhat was the 7k or so I made on the way up - but still.

Some painful lessons learned here. Chiefly - always use spreads. (This was a risk reversal - short put long call) Always adjust before or when the price crosses the short option going the wrong way. Never let short options get more than 10% in the money. (Second rule should prevent this anyway.)

I made a very common mistake - I fell in love with a stock. I stopped trading the options and technicals and got naked long using leverage and justified it with the fundamental story. Not something I ever thought I'd do. So which emotion did it to me, fear or greed? In this case it was greed as I did so well on the way up doing something I shouldn't have done (leveraged long by buying a call naked) instead of sticking with my higher probability, lower return, and lower risk strategies that I normally use.


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## humble_pie

mr Cheeky have i got a story for you about 600 puts.

my 2 july 600s were exercised early, before christmas. There was a margin call. I thought about selling the children because never before had i owned any actual aapl shares & these were irresistible, lying there under the xmas tree with all the holly & the ribbons on em.

i was only planning to pawn the children & then i'd pay to buy them back using the $$ harvested from selling calls on my new aapl shares. That's what i told myself.

but the minister told me i was in the grip of a fierce addiction & either i'd have to sell my brand-new shiny apples or he was going to call Child Protective Services, like within the next 10 minutes, he said. It broke my heart. Never again will i see $120,000 go marching out as 200 shares worth $538.00 each. It left a great big fat margin debt in my account.

all this drama put a severe crimp on our Xmas. So much so that in the uproar i forgot that i had another short put. This one was a jan 500.

it, too, was assigned on fri 18 jan/13. Over the weekend i discovered another 100 shiny new apples in my US account along with another great big fat margin debit. You'll remember that monday 21 jan was martin luther king day, a US market holiday, while wednesday 23 jan was AAPL earnings day.

it was touch-&-go all that long weekend until US markets opened tuesday morning. How would aapl open, on this fateful day before earnings? down? up? hallelujah stk opened higher on the tuesday & this time i was able to dump my margined apples at $503. My youngest breathed a sigh of relief.

soon after that, the broker converted my account to all-cash & cancelled my levels 3, 4 & 5 option trading status. The manager i used to think was my friend told me i was a moron who better learn about hedging & then he stopped taking my phone calls. The bank has put 30-day holds on my cheques. Such are the life & times of an option trader.


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## andrewf

Lepht, 

Sorry about the loss. There certainly was a speculative frenzy last year in AAPL, and acting as a devil's advocate made me pretty unpopular in the Apple thread. I think your points about take-aways from this experience are quite valid. The idea of being short calls or puts always makes me nervous about events that seem impossible at the time coming to pass (ie, AAPL down 30% to absurdly low valuations). There were quite a few people talking up AAPL and betting large parts of their portfolio on it. I think a lot of other people got burned on it, too.


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## Lephturn

andrewf said:


> Lepht,
> 
> Sorry about the loss. There certainly was a speculative frenzy last year in AAPL, and acting as a devil's advocate made me pretty unpopular in the Apple thread. I think your points about take-aways from this experience are quite valid. The idea of being short calls or puts always makes me nervous about events that seem impossible at the time coming to pass (ie, AAPL down 30% to absurdly low valuations). There were quite a few people talking up AAPL and betting large parts of their portfolio on it. I think a lot of other people got burned on it, too.


Thanks andrewf. It's tough to take my lumps in public - but it was a valuable lesson and I will be very happy if somebody else learns it a bit more cheaply than I did.

I was lured to the dark side of rolling out and away - a mistake I will never make again. Although I have read and understood the following rule, it bears repeating now that I have had it beaten into my head with a multi-thousand dollar hammer. This was apparently Jesse Livermore's top rule:



> Lesson Number One: Cut your losses quickly.
> 
> As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.


Such is the difference between knowing something intellectually and building it into your trading behaviour.


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## humble_pie

lepht it appears u had something like a net 5000 loss. I for one fail to see what is so terrible about that? Surely you used it to offset 2012 gains?

each year, i stop selling both options & stocks for gains sometime around labour day & i start hunting for losses that will offset the taxable gains ytd.

always, i want those losses. I actively recruit those losses. Prominent candidates on the 2012 loss list were my 2 july 600 puts.

they were my only 2012 aapl option losses. Net, the loss on these 2 puts was 8,400, or taxable 4,200, a very small amount that was highly welcome because the loss total i was seeking in late 2012 was north of 80,000. I had more than 80k in capital gains in 2012 ...

my only other aapl options are 3 diagonal call spreads. They are still intact & in OK shape. The long leg is 2015 LEAPs 400 calls, so these are still ditm. This means that short-term otm calls can still be regularly sold against them. These 3 spreads are progressing normally. There is a distinct possibility they will work out profitably. In any event they have 2 more years to run.


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## andrewf

Isn't it better to not lose money and pay a bit of tax that to have losses that offset your gains?


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## Argonaut

humble, are you switching brokers? If they cancel your options level, what happens to current positions? That all sounds very blood-boiling, especially around the holidays. The best holiday strategy I seem to have found is hanging out on the beach with European girls. They don't worry too much about short puts and margin maintenance.

AAPL has legs in the last week. Only 9% more to go.


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## Lephturn

Yes the net was not so bad and I will use the losses to offset other gains - but it still stings. It's a good kinda pain - enough to make me remember it and learn but not enough to wipe out that account.

Sorry to hear about your assignments. ouch! If you remember I had one holy &^$ moment last year where I woke up assigned 400 AAPL and with a margin deficit of... well a quarter million or so.  Now that was a spread so I got hit on the short side but was covered by the long calls. Luckily OptionsXpress was fabulous to work with and allowed me to contact them and work it out on the phone. I still cry a little that they spun off their Canadian operation, they are an awesome brokerage.

I would still be rolling out that elephant if it wasn't for the brokerage changes, but I did eventually play it safe and cover the risk off with some long puts.

I rolled everything to Jan and Feb before the holidays so I didn't have any sweating to do in the assignment department - I learned my lesson from the earlier assignment and heart-stopping moment when I realized I technically owed almost a quarter million. Talk about a wake-up call!


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## humble_pie

Lephturn said:


> Sorry to hear about your assignments. ouch!


lepht i accept that some folks won't know when i'm joking & when i'm serious ... but you? lepht-who-always-get-it-right?

seriously in reality i had one (1) aapl put assigned. It was the jan 500P. 100 sh assigned the weekend before the infamous jan 23 earnings that were to batter the stock once again.

for a split second it crossed my mind to keep the shares. I mean i'd never owned aapl stk & the margin was still fine & i had the cash to pay.

fortunately this madness was immediately followed by the sober reflection that overall my options experience in aapl was not going too well so it would be better to let the old soldier go to his sweet bye & bye. IE it seemed too dangerous to risk earnings. 

on the tues before wed earnings announcement, stk opened higher. I promptly sold for 503 & change.

this is my sole aapl assignment to date. It was a benign experience. In at 50,000, out at 50,300. It paid for dinner at one of those edgy new restaurants that keep opening up that aren't top dollar. There's a new italian/fusion in the emerging Overdale district, formerly an industrial slum ... join me if u come to town ?


----------



## HaroldCrump

humble_pie said:


> lepht i accept that some folks won't know when i'm joking & when i'm serious ... but you? lepht-who-always-get-it-right?


I read the story in shock, and believed every word of it, up until the last para.

_soon after that, the broker converted my account to all-cash & cancelled my levels 3, 4 & 5 option trading status. 
The manager i used to think was my friend told me i was a moron who better learn about hedging & then he stopped taking my phone calls. 
The bank has put 30-day holds on my cheques._

The last part was the ultimate give-away :rolleyes2:


----------



## Lephturn

humble_pie said:


> lepht i accept that some folks won't know when i'm joking & when i'm serious ... but you? lepht-who-always-get-it-right?


LOL - I think I have turned that title into an ironic one in this very thread!

While I was (reasonably) certain you did not contemplate the sale of your offspring, I was unsure of where the line was between the seed of truth and the flower of wit.


----------



## metatheta

Sometimes I just don't understand the riddles and humour here.

I like to keep my posts related to option strategies.

I see that some of you had AAPL naked positions. Personally, I like opening spreads with two legs - one short, one long. I don't do it deep and wide. I prefer it tight at 5-point wide. I like the protection on a tight spread.

If I go naked on a short put, I like to strangle it with an upside short call. If my position starts to hurt, I try to be mechanical in either rolling down the call or rolling up the put to tighten the strangle. I may even straddle it.

That's how I do it.


----------



## Canuck

so who knew that manulife was going to fly up more in 3 days than the last 6 months

anyway, I'm keeping an eye on my July/15 calls and the Jan 2014/16 call, they both seem to be moving up roughly the same percentage. I suppose I'm watching these so I can buy back my July 15 calls and then immediately sell jan/16 calls so I'm not out any money? but selling these calls so far out means that I have to hold onto Manulife shares for so long right? unless i guess manulife starts to come down in price...hmmm, am i getting this? 

I really just bought Manulife to practice trading an option. So it's a no lose situation at this point (bought 400 shares at $14.50), but ideally I just want those shares taken from me, so I can take my profit and move on. 

HaroldCrump you mentioned "when (stock minus strike) > option bid = risk of assignment"
But the "option bid" keeps rising along with the stock price. Does this gap narrow with time? 


I did make my first option trade with Teck today, yay! I bought 3 contracts for $1.30 on friday and sold today at $1.76, for about a 25% profit on my $400 investment, i see how this can be lucrative


----------



## Canuck

if there is no open interest and 0 volume, but there are still some bid & ask lots, should i not buy any?

Looking at Fortis.


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## Argonaut

Nope, don't play these illiquid options. You're at the mercy of the market maker.


----------



## humble_pie

Canuck said:


> if there is no open interest and 0 volume, but there are still some bid & ask lots, should i not buy any?
> 
> Looking at Fortis.




canuck you're doing well.

but that must be a far-out-in-time fortis, ie a newly-issued option ?

argo is right, do not go near illiquid montreal options. Those B/As u see are the dealer, he is waiting to scalp nice innocent youngsters like yourself.


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## avrex

metatheta said:


> Sometimes I just don't understand the riddles and humour here.
> 
> Personally, I like opening spreads with two legs. I don't do it deep and wide. I prefer it tight at 5-point wide. I like the protection on a tight spread.
> 
> If I go naked, I like to strangle it. If my position starts to hurt, I try to be mechanical in either rolling down to tighten the strangle. I may even straddle it.
> 
> That's how I do it.


For those reading and learning about options here, please keep in mind, that these are legitimate strategies. 
Any double entendres are purely unintentional.


----------



## Canuck

K Fortis April 34 calls are somewhat active. Open interest 1660 and volume 79.

Fortis has come down a fair bit in the last week and down today on ex divi. Fortis is at 33. Everywhere I read I'm told not to buy options that are "out of the money" but they seem to be the only liquid ones (on the canadian side anyway).

I'd like to buy the April calls, right now the bid is .15 and ask is .25 (ask lot is 20, the amount of calls I'd like to purchase). Do I just go in with this ask price and grab them, or do I go in with maybe .20 cents?


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## HaroldCrump

Canuck said:


> HaroldCrump you mentioned "when (stock minus strike) > option bid = risk of assignment"
> But the "option bid" keeps rising along with the stock price.


Yes, and that's logical.
That movement, BTW, is known as the Delta of the option.

http://www.investopedia.com/terms/d/delta.asp#axzz2KiDJXWNb



> Does this gap narrow with time?


The last para in the above article answers that question


----------



## Canuck

thx!


----------



## humble_pie

Canuck said:


> I'd like to buy the April calls, right now the bid is .15 and ask is .25 (ask lot is 20, the amount of calls I'd like to purchase). Do I just go in with this ask price and grab them, or do I go in with maybe .20 cents?


why would you, though.
generally w canadian stocks that pay good dividends, we buy the stock - nice dividend tax credits - & then plod forth with the position on a long term basis.

if one were seized with a flaming lust to do this wretched buy, one would - i hope - have enough presence of mind to bid only 20 pennies. Hint: we're getting near the end of the day, the last thing you want is a partial fill. You'd put up your .20 price, then watch closely to see if somebody would sell to you. If not, cancel the order fairly soon, at least by 2:30 this pm.

don't be fooled if a computer dogs you & offers to sell to u at .21.


----------



## Argonaut

I agree; Canuck there is no reason to do this trade. If you must, just buy shares of Fortis now and set a sell order for $34. Or $33.99 like I sold it for one year ago. Given that it's struggling around the same levels and raising its dividend by a measly penny every year, you may fall into a coma by owning it. Going long calls in FTS is like waterskiing behind a rowboat. You're going to need something with some torque or you'll just slowly sink into the water.


----------



## metatheta

avrex said:


> For those reading and learning about options here, please keep in mind, that these are legitimate strategies.


Avrex, thanks for acknowledging these strategies. I'm surprised you picked up on it considering you are a one-legged naked guy. (I actually just read your challenge thread last night which prompted me to make my post today.)

Just to illustrate this strategy, I had to apply it when I was threatened on an IBM earnings play on 1/22. I sold the weekly Jan 185/205 strangle for 0.77 credit on earnings day. I didn't think IBM would be a big mover. IBM gapped up the next morning to 208 past my short call 205 strike. I had to play aggresive defence because they were weekly options with undefined risk. I rolled up the 185 puts to 205 for an additional 0.80 credit and turned it into a straddle. IBM looked like it was going to pin 205 on Friday expiration. I was able to buy it back for 0.50 debit 15 minutes before expiration for a 1.07 net credit.

This trade turned out better than I expected but it wasn't easy. I was hoping to originally get 0.77 but got 1.07 out of it because of the roll.


----------



## Canuck

ok i won't do it. I just thought that spending $500 to buy 20 calls seemed like a better investment then say buying 200 shares at $33 ($6600)

If that call goes from .25 to .35 then I've made $200 minus about $40 commission so $160. I'd have to hold Fortis for 8 months to get that much in Dividends, all the while tying up $6600.

of course I'd get the appreciation in Fortis if it went up by $1.00, i realize that, but this just seemed like a way to make a bigger percentage gain on my money.

Don't get me wrong, I'm a big fan of buying and holding dividend stocks. Fortis just trades in a crazy tight range and it's at the lower range right now.


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## Argonaut

You won't be profitable in the long run paying so much of your returns in commission. And $160 is not enough profit for the buy-side of options. You can make $160 here and there on the sell side, but when you buy you want to hit jackpots. Or at least have a defined trade.

For example, say I want to buy the Jan 2014 150/160 call spread on GLD. I can do this for about 5.70. This means I'm risking $570 to make $1000. As long as GLD closes in January at 160 or higher, I make my full profit. If it closes at 155.70, that's my break-even point.

I kind of like that trade, actually.


----------



## Canuck

hmm being a newbie I'm not that far in.

I think what you're doing is this?

http://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_call_spread.html


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## metatheta

Canuck, if you want to continue with options, your next step is to open a US trading account at a low-commission broker so you can trade more liquid underlyings.

A lot of US options have penny-wide spreads. The best we have are nickel-wide spreads in Canada because they recently got rid of the Canadian penny.


----------



## Canuck

@metatheta

Td did open a U.S margin account for me at the same time they changed my Canadian account from "Cash" to "margin". And I'm charged $9.99 a trade plus $1.25 a contract....not too bad.

But I hear you, the U.S side makes much more sense, I should transfer some cash into that account and fool around with those options.


----------



## humble_pie

Canuck said:


> I just thought that spending $500 to buy 20 calls seemed like a better investment then say buying 200 shares at $33 ($6600)
> 
> If that call goes from .25 to .35 then I've made $200 minus about $40 commission so $160. I'd have to hold Fortis for 8 months to get that much in Dividends, all the while tying up $6600



it's to compare mangoes & potatoes. The risk with the mangos is that they could expire worthless in 2 short months. No such risk in potato stock.

you do say you understand the benefits of dividend investing. An appropriate option strategy imho is long stock + collect dividend + sell otm call to boost the return + sell otm put to boost the return even further.

this option pair is a short strangle. Partially covered, partially naked. For how-to advice, please consult metatheta the tantric expert.


----------



## Canuck

thanks Humble, I didn't factor in the fact that I could lose my entire investment if they expired worthless, i knew that, i just conveniently forgot in my excitement of making money off my first trade

Yes about 95% of my stocks are Dividend payers and long term holds, some bigger companies where call options are possible and some smaller ones (Ipl.un, DR, NPI,WTE) where options don't seem to be an option.

I'll research your strangle suggestion for my bigger holdings on the tsx.


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## humble_pie

canuck i hope u don't mind if i make a suggestion. 

esp for option newcomers i think it's a good idea to sell otem calls & puts that are pretty far otm, so as to drastically lower the risk of assignment.

yes the premiums will be less but in early stage option trading the idea - i'm hoping - is to learn, not to try to score the big bucks straight out of the gate since it rarely happens like that.

the reason for far otm calls & puts is that, when time is up & push comes to shove, it will be considerably more difficult for a newcomer to roll his option position than it ever was for him to sell a one-sided option in the first place (the rolling optimally will require judging the market & second-guessing who is going to pay what, unless a trader intends to lie down like a meek little lamb & do all sides at the natural.)

so having those strike prices somewhat father away from market than a new trader might do after he has a little bit of experience will help to buffer the new trader against assignment.


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## Canuck

"yes the premiums will be less but in early stage option trading the idea - i'm hoping - is to learn"

totally!

I will follow your advice, especially now seeing as you were joking about having your level 3, 4 and 5 taken away and your cheques being held for 30 days


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## avrex

lots of joking on this thread.

@metatheta, as you can tell, I was trying to be funny back on Post 745 

I do enjoy reading your posts, and others, as we all continue to learn and expand our option strategies.


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## metatheta

Canuck said:


> Td did open a U.S margin account for me at the same time they changed my Canadian account from "Cash" to "margin". And I'm charged $9.99 a trade plus $1.25 a contract....not too bad.


I like IB. I get an average of $0.70 per contract to $1.50 per contract. No base commish.
$9.99 per leg + $1.25 per contract, $45 assignment - FU TDW.

With lower commissions, you can make better trade decisions and apply strategies when called for.


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## Canuck

this IB?

http://www.interactivebrokers.com/en/main.php


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## andrewf

Yes.


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## metatheta

Yup.


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## Canuck

is this the only broker you use? are they good for buying Canadian stocks as well as options?


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## humble_pie

Canuck said:


> this IB?
> 
> http://www.interactivebrokers.com/en/main.php



no

you want interactivebrokers dot ca

that's the US site, they can't take you as client although they would redirect you


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## metatheta

I only use IB for US options but they can do Canadian options.

Reluctantly I use TDW for my CAD RSP and try to do covered calls with their high commissions. Because of this, I try to sell at least 0.55 premium per contract with a minimum of 3 contracts. An assignment costs $45 so if this happens, one contract will end up paying for that fee.


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## Argonaut

I'm in the process of signing up for IB but have hit a bit of a quagmire. The signup process forces you to fill out a W8 form, but I cannot do this as a dual-citizen. I need to fill out a W9 instead. Have emailed IB about it with no response thus far. Perhaps I will call them.

Those commissions are so juicy.


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## Canuck

Can IB link to your regular chequing account (TD, Vancity etc..) for transfers?

It looks like you need a minimum of $10,000 and if you don't spend at least $10 a month on commissions then they'll charge you the difference.

Anything else I'm missing that might be important?

Does anyone use this for their entire portfolio or are you guys just using this for option trading?


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## Lephturn

I don't think they do registered accounts at this point - at least I am only looking at it for open money and options trading.

I am currently yanking everything from VirtualBrokers and then I will fund it over into IB.

I still miss OX - those guys are far superior to anything in Canada IMO.


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## Argonaut

Luckily I'm still 26 and only need $3000 to fund. I could do the $10k but it would require more fussing around with moneys.

AAPL is losing steam. Looks like I will have to get my elephant tranquillizer ready.


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## avrex

Canuck said:


> 1. Can IB link to your regular chequing account (TD, Vancity etc..) for transfers?
> 2. It looks like you need a minimum of $10,000 and if you don't spend at least $10 a month on commissions then they'll charge you the difference.
> 3. Does anyone use this for their entire portfolio or are you guys just using this for option trading?


*1. Yes.* I link it to both my TD chequing account and I also link it to my TD US Borderless account. In this way, I can easily withdraw US dollars to take with me when I go on vacation in the US. Of course, these are cheap US dollars that were transferred from IB. This allows me to avoid the typical TD Bank 1.50% currency charges.
*2. Yes.* Be aware of these additional charges. There are months when I don't do any option trades and I get charged the $10. I accept this cost, because overall, it is still way cheaper to do options at IB than at TDW.
*3. * I use IB almost exclusively for options trading. I will also complete the odd US stock swing trade in my IB account as well. However, my main registered portfolio is with TDW.


----------



## Canuck

thanks avrex


----------



## Canuck

so I now have a Canadian Margin account at TD and a U.S margin account at T.D....just opened for options trading.

If I wanted to buy some call options for say citigroup would I use my U.S account to buy or my Canadian account. Let's assume I have no money in either account but a lot of margin allotted to both.

T.D rep says I pay no currency conversion if i buy with my U.S account (just the margin interest), but I don't believe I'd be charged any currency conversion rates if I bought in my Canadian account either? am i missing something?


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## HaroldCrump

Canuck said:


> If I wanted to buy some call options for say citigroup would I use my U.S account to buy or my Canadian account.


Citibank options are traded in the US in US$.
Therefore, you should do these transactions in US$.



> but I don't believe I'd be charged any currency conversion rates if I bought in my Canadian account either? am i missing something?


You *will* be charged currency conversion.
It will be embedded in the conversion rate.
For example, if the current inter-bank rate is $0.972, you will be charged $1.022 etc.

Note that if you do options trading (or any trading) in US$ from your CAD$ account, you will be charged this spread for each and every transaction.
Overtime, this will be a drain on your profits.


----------



## Canuck

Thanks HaroldCrump, super appreciate all the help you've provided me. Happy Valentines Day!


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## Argonaut

Consider writing a low risk put spread first to get yourself some USD without any conversion. This strategy worked well for me.. until AAPL crapped the bed.


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## Canuck

until i do a test with TD I'm unable to sell uncovered puts, and I think i need to study some more before I feel comfortable doing that test.

Does anyone know if that T.D test is a written test or a verbal test over the phone?


----------



## Argonaut

Today was my first day of trading at Interactive Brokers. I really quite like it. Sold a couple of SLW Jan 2014 puts @28. The commission was a whopping 79 cents, whereas before it would have been north of $12. I also really like how they do their margin maintenance calculations and everything. 

I've abandoned hope and cut losses on all things AAPL put spread related. It's getting quite intriguing though as a dirt cheap stock. I'm thinking the way to make my money back is to buy some kind of LEAP. Something like a Jan 2015 500/550 call spread. I wager this has a high chance to payout within two years.


----------



## Squash500

Canuck said:


> until i do a test with TD I'm unable to sell uncovered puts, and I think i need to study some more before I feel comfortable doing that test.
> 
> Does anyone know if that T.D test is a written test or a verbal test over the phone?


You need to do a verbal test over the phone.


----------



## tinypotato

IB is great. The low commissions make a huge difference in terms of the types of trades you can do.

I don't think naked puts are a good idea. The premium received (relative to the margin required) makes for minimal returns.


----------



## avrex

@Argonaut. Great to see you at IB.
Can't beat the price of options there.


----------



## Argonaut

@avrex: Yeah, glad it's all sorted! What do you use for data? I just have the $1.50/month for US options. Seems a bit ridiculous to pay $6/month for TSX data, along with the other expensive selections. Probably only trading US options with any regularity too.

@tinypotato: Nothing wrong with picking up $500 for the risk of being assigned 200 shares of SLW at a price that I'd buy. Actually if you sell far out of the money the margin maintenance isn't very high at all.


----------



## Lephturn

Just in the process of moving to IB. I had OX but they dumped Canada and sold to Virtual Brokers - who are terrible for options. They can't even do spreads online in any of their platforms. Glad to hear it's going well, I certainly look forward to the low commissions!


----------



## humble_pie

i don't know what the new generation is coming to each: how come they can't work their own spreads?


----------



## metatheta

humble_pie said:


> i don't know what the new generation is coming to each: how come they can't work their own spreads?


Are you suggesting to work the spread as individual orders for each leg?


----------



## humble_pie

metatheta said:


> Are you suggesting to work the spread as individual orders for each leg?



in any kind of illiquid situation, most leaps for example, working each leg separately gives a better result imho. At least that is my experience. Nearly always i start with the most diffiicult side. I'm happy to persist for days or longer if it doesn't work at first.

exceptions of course would be highly liquid options in US markets. But these are exactly where u always go, i believe, theta? me, i am not so much of an earnings player.


----------



## Ethan

Does anyone know when the January 2016 options on TSX listed securities become available? Are they typically made available 30 months in advance, ie January 2016 options would be first available in July 2013?


----------



## humble_pie

offhand i don't exactly remember about mx-ca leaps other than they do appear earlier than US leaps.

new US leaps debut in september/october/november each year, according to whether the options belong to cycle 1, 2 or 3.

i do believe that introduction of canadian leaps is earlier, as you say. However in the early months, the spreads will be so cripplingly huge, even for the handful of montreal options that are generally liquid, that i'm wondering Why Anyone would Want to Trade such ungainly Beasts.

eventually their nightmare B/As will shrink, as liquidity gradually develops. But on montreal, this doesn't happen for months.

even new US leaps, when first introduced each autumn, have spreads that are unworkable. They don't seem to get down to business until after the Xmas holidays, i always feel.


----------



## Ethan

Thanks.

The only ungainly beasts I'm interested in trading are naked put options, and I'm a seller. I find the premiums these sales generate are way out of proportion with their risk. When a counterparty is willing to pay me ~10% of the current market price of a stock I'm bullish on, for the right to buy that stock for 5% less than today's market price, I'm all in.


----------



## humble_pie

Ethan said:


> The only ungainly beasts I'm interested in trading are naked put options, and I'm a seller. I find the premiums these sales generate are way out of proportion with their risk. When a counterparty is willing to pay me ~10% of the current market price of a stock I'm bullish on, for the right to buy that stock for 5% less than today's market price, I'm all in.



a counterparty may be willing to pay you 10% (sounds meagre to me) for the right to sell that stock to you at 5% less than today's market price ... but ... you have to stand ready, willing & able to pay ... 24/7/365 ... for nearly the next three (3) years ! your accountant's brain should be on fire over the time frame !!

i still think the 2014s are ok. The 2015s are only now beginning to settle down into the sweet spot spreadwise.


----------



## humble_pie

i looked up a couple of 2015 puts in liquid stocks from 2 contrasting sectors & found that the bids/asks have settled down by now into a reasonably tight configuration. In both cases - RY & ECA - there was reasonable open interest. In both cases it would be possible to sell at a price noticeably above the bid, i believe.

this will not be true of the 2016s in the early months after they are launched. Their spreads will be gigantic. There will be no liquidity, nothing for a retail trader. This rigid situation will likely obtain until early 2014 imho.

meanwhile, the 2015s are looking nicely workable:

ECA. stk 18.23. jan 2015 17 put 2.41-2.78
RY. stk 63.76. jan 2015 60 put 5.10-5.55


----------



## avrex

Argonaut said:


> @avrex: Yeah, glad it's all sorted! What do you use for data? I just have the $1.50/month for US options. Seems a bit ridiculous to pay $6/month for TSX data, along with the other expensive selections. Probably only trading US options with any regularity too.


Yes, I use my Interactive Broker account, almost exclusively, for trading US Options. (So, I don't bother getting the TSX data.)

I do select the $10/month US Bundle for all of the US markets, for when I use the Trader Workstation application. 

I rarely hit $30 commission level to waive this $10 fee. 
However, I don't mind paying this $10, because overall, I'm still saving a lot of money.
When comparing the option trading costs versus my Canadian bank discount broker ($9.99 + $1.25/contract), I've recovered my $10 fee, after one or two option trades in a month.


----------



## Squash500

This was an excellent thread to read. I'm not afraid to admit when I'm wrong. I just called TDW and cancelled my Option/margin account. I've decided to just stick with my basic ETF trading strategy. I also don't want the ETF/ individual stock margin temptation either. I've decided to just stick with my plain vanilla TDW cash account.

HP I have to give you a lot of credit. You certainly are a true options expert. I had to take 4 tylenols when reading this thread as all this talk about calendars and diagonals was getting too complex for me and giving me a bad headache--LOL.


----------



## peterk

I also get strange head pains when trying to decipher this thread. I hope to one day be able to though. It seems like to actually have a resonably diversified portfolio and simultaneously play with options you need over 100K to hold 100+ shares of 10-20 different equities. It's something I'll revisit in a year or two when I have the funds.

From what I've gathered I'd like to be able to sell covered calls when I feel markets are strong or over bought, buy puts that are 20% OTM for insurance purposes, and sell puts when markets are down.


----------



## humble_pie

peterk said:


> I also get strange head pains ... From what I've gathered I'd like to be able to sell covered calls when I feel markets are strong or over bought, buy puts that are 20% OTM for insurance purposes, and sell puts when markets are down.


so sorry, i didn't think we were that bad.

1) sell calls: this is quite easy to do. You'll see suggestions to canuck a while back to choose a strike price that's a couple increments out-of-the-money. The idea is to prevent or lower chances of assignment, a somewhat easier introduction for a new option trader. The premium earned will be lower but the value of the lesson will compensate.

2) buy puts: not crazy about this because put premiums on individual stocks are expensive to buy. A better way would be to hedge the whole portf with index puts. *However* an exception are collared hi-dividend stocks especially in rrsp. They are a risk-free way to earn more than T-bills. Lephturn is the resident expert in collars.

3) selling puts when market is down is psychologically tricky. People don't tend to want to do this. In late 08/early 09 we did not see hordes chattering enthusiastically about all the puts they were selling. Instead what we saw were experts predicting the collapse of the known world.

example: if selling puts when markets are down would be easy as, well, pie, wouldn't people be rushing to sell AAPL puts? yet we can see argo here - who is a fine option trader imho - saying he's giving up on AAPL puts & thinking about switching to call spreads. As it happens i for one don't agree w argo on this ... i'm one who thinks now may be a good time for aapl put spreads ... this coming week i'm probably going to roll up my 2 short 350 puts to 380 or perhaps even 400 ...


----------



## peterk

humble_pie said:


> so sorry, i didn't think we were that bad.


ha! Don't be sorry. It's my fault I don't understand the lingo...

I don't think I'd make a regular habit of buying puts - only when I think markets are way too high and I want to protect a portion of my porfolio from collapse.

As far as put selling, I guess it's just as tricky as buying stock when markets are down, psychologically, right? Hopefully when I'm dealing with bigger money I'll be able to literally put my money where my mouth is! This is all hypothetical for now anyways, as I only have low 5 figure amounts in my accounts and would have to take too substantial of a hit to diversification and pay too high a commission to make options trading viable yet..


----------



## humble_pie

peterk said:


> ... I only have low 5 figure amounts in my accounts



very nice! i remember recently when you were still an undergraduate looking for your first job, so those 5 figures are a real accomplishment. I applaud your instinct to protect them, it's the best way to go.


----------



## peterk

Thanks hp, I DO mean low!  I've just started my first job recently actually and I'm pretty excited. I'll be starting up a money diary in a couple months once I get my relocation bonus, find a more permanent housing situation, pay for some one time expenses, pay off OSAP in one shot (currently I'm on interest relief so the people of Canada are kindly paying my $30/month in interest) and settle in with a more predictible idea what my monthly income and expenses amount to.

Once that's all taken care of I'll start back into equity investing in the summer. Perhaps by the following summer I'll take a more serious look at how options can be used to increase investment income and reduce losses.


----------



## humble_pie

it's all good. Everything sounds good. GF sounds good, too each:


----------



## metatheta

Back in March I saw LULU just sitting around between 65 and 70. She wasn't getting much action back then so I wanted to do something with her. Her vol was low but higher than others at that time. With VIX so low, I was looking for whatever action I could find.

So with 3 weeks before expiration, I did a March 62.5/65/70/72.5 iron condor with her. I like it tight on the wings but didn't really like the tightness in the middle between the two spreads. She gave me 1.10 credit for it.

During those three weeks, she bounced around between 65 and 70 like I asked her to. She occasionally touched my bottom shorts and my top shorts. On the last week before expiration, she just constantly touched my top shorts. I really thought that she was ready to go and blow past my 70 shorts. I was ready to give up with her and walk away in shame with a loss. I held a little bit longer and took off my bottom shorts for a nickel because it didn't offer any more protection. 

Then, three days before expiration, she started to roll over for me. The 70 handle was just too much resistance for her. I didn't want to stick around to expiration so I paid her back 30 cents for just taking off my top shorts.

All in all I got 75 cents out of LULU (1.10 - 0.05 - 0.30).

The March cycle is now over and I check back on LULU. I now feel like she didn't give it up to me during our three weeks together. All the time she was testing me on the upside she was holding out on me. I would have made more money had she revealed her see-thru yoga pants last week rather than after March expiration.


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## avrex

Your post was a 'sheer' delight.


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## metatheta

avrex said:


> Your post was a 'sheer' delight.


Thanks for your very fitting compliment.


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## humble_pie

it's true, theta is the tantric genius around here.

still, we have to admit that the options gang is not able to compete yet with the biker calendar gang.

options are still putt-putting along on 80cc motahs while the 650-800 biker calendar gang are stripped down to their kevlar jeans.


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## metatheta

I'm far from being tantric and being a genius.

I'm not having a good experience with my bromance relationships with Cliff (CLF) and Walter (WLT). I tried selling the high vol on them and I am not being rewarded for them. The bottom has fallen off on them and I'm on the wrong side.

All I can do for now is look back on my experience with LULU. But not for long - her earnings are coming up.


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## humble_pie

metatheta said:


> I'm not having a good experience with my bromance relationships with Cliff (CLF) and Walter (WLT). I tried selling the high vol on them and I am not being rewarded for them. The bottom has fallen off on them and I'm on the wrong side


walt & cliff look like long-term relationship guys to me. None of this overnight bromance stuff.

plus they're probably old fashioned one-guy-one-gal types, never did go in for foursomes.

am i missing something? they seem to be out of fashion right now, just sitting around quietly at the back of the beer hall, waiting for miss asia.


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## Lephturn

Well the thread I started about the new minis got crickets...

Many of us with accounts that are smaller will be glad to see that mini options have launched on high priced stocks. They launched 10-lot contracts on AAPL, AMZN, GLD, GOOG, and SPY.

Pretty awesome. Us small fry can now run basic strategies like covered calls, married puts, and collars on these high priced issues.

This article and video explains them well. 
http://finance.yahoo.com/blogs/breakout/everything-know-mini-options-173812427.html

PhilX and BATS are also going to trade them for free.
http://www.theoptionsinsider.com/industry/?p=100011082&qcABC=1

Very, very interesting.


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## metatheta

Another guy not treating me well is Russell (IWM). I'm short the market with some bear call spreads.

I'm back with LULU tonight for an earnings play. I am short Apr 65/67.5 call vertical and short Apr 60 put for a net 2.52 credit. The credit negates all risk to the upside because the short call vertical is 2.50 wide. Breakeven on the downside is 57.48 because of the 60 short put less 2.52 credit received. She can hurt me on the downside but not on the upside.

If LULU is below 57.48 on April expiration, I'll be owning her at that price.

I wanted to get wider on my strikes but some volatility came out of LULU after that pre-announcement yesterday. I want her to be between 58 and 64 tomorrow morning.


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## metatheta

My LULU earnings play was a winner but I haven't closed it yet. One of my rules is to take profits if I get the move I wanted. Well, in this case, the non-move I wanted. I am breaking this rule by holding on to the trade. I hope I don't regret it. I got the vol crush I wanted but not as much as I wanted because it is a few more weeks to April expiration. I'm contemplating holding it over the long weekend to get more time decay.

I'm looking at doing the same earnings play for BBRY tomorrow with a short put short call vertical or maybe a short strangle. Vol is high on this so there is premium to be sold.

Although I post options earnings plays, I don't recommend trading it for people learning options. However, I do recommend paper trading it because it is a time-lapsed or fast-forward observation of how options work. Before the earnings, make an assumption on the stock move, pick a strategy, then observe how your strategy would have worked out after the event. The process is identical for longer-term swing trades.

You can look at the option Greeks and imagine how the options will behave over time but it is easier to understand if you put it together with how options behave right after an earnings report.


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## humble_pie

*dancing with lulu*

looks somewhat on-again-off-again but they do say red-haired women are difficult

long-term trend seems to be shaping up well for u, though

good luck, she'll be fun
keep the strangle wide
.


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## Lephturn

metatheta said:


> My LULU earnings play was a winner but I haven't closed it yet. One of my rules is to take profits if I get the move I wanted. Well, in this case, the non-move I wanted. I am breaking this rule by holding on to the trade. I hope I don't regret it. I got the vol crush I wanted but not as much as I wanted because it is a few more weeks to April expiration. I'm contemplating holding it over the long weekend to get more time decay.


You usually don't need to actually hold it over the weekend. By Thursday lunch the weekend will be taken out and you can buy them back with that theta gone. This way you will get the majority of the theta without leaving yourself open to some nasty surprise over the long weekend.


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## metatheta

Lephturn, you are absolutely right. I will try to close it on Thursday afternoon at the latest. I don't want any Cyprus risk. I just hope the bid/ask spread remains tight as traders and market makers leave for the long weekend.


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## humble_pie

metatheta said:


> I will try to close it on Thursday afternoon at the latest.


mieux vaut thursday am before lunch


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## metatheta

humble_pie said:


> mieux vaut thursday am before lunch


I will closely watch how much premium comes out of this 3-leg LULU spread on jeudi midi. It has about 4 cents of theta so three days burn should knock out 12 cents on Thursday afternoon as Lephturn suggested. If the underlying significantly moves, then that changes everything.

I'll just place a limit order out there for them to hit between now and Thursday.

After I close out of this trade, I will watch if LULU establishes a new trading range again where I can lay down another iron condor in May. I will also watch for its implied volatility to pick up again.


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## avrex

*There is no Volatility*

I have a database to track equity options. 

Here's what I investigated today:
- I looked at the top 100 equity options that have the highest monthly volume.
- I looked at the Implied Volatility (IV) for the latest set of expiring options (March 2013).
- I looked at where this IV landed within this equity's historic norm, expressed as a percentile (historic time frame was the last 20 months).

Here's what I found:
- 62 of those 100 equity options, had a percentile of less than 10. 
That means, that for those 62 equity options, 90 percent of the time, each of them have had higher IV.
- 37 of those 100 equity options, had a percentile of less than 2.
In other words, those 37 equity options, based on their historic norms, have rarely had less IV.
These option tickers include names such as: BAC, JPM, MSFT, F, AIG, CAT.


*We are experiencing the lowest levels of Implied Volatility, in quite some time.*

I like to sell volatility. But there hasn't been much of it sell lately.


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## metatheta

avrex said:


> I like to sell volatility. But there hasn't been much of it sell lately.


Just like you, I like selling premium. The VIX says it all. It is historically low so premium selling is really tough right now. Volatility is grinding lower but can easily spike up with any international event. Because of this I am long volatility products (via options) like VIX, VXX and UVXY.

Most vol trades right now are earnings plays. Earnings season is coming up in a couple of weeks so there are opportunities there.

For now trend traders and long investors are making the money.


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## humble_pie

how things coming along w lulu?


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## metatheta

Theta coming out of the LULU spread but I haven't taken it off. I'm just waiting for my limit order to be hit. I will push it to the close.

I did a BBRY short Apr 13 and short Apr 15/16 vertical call for the earnings play as well. (Same strategy as LULU.) It's a winner but I may hold this longer and let them digest the earnings report. Nice non-move on BBRY today. Premium sellers made money on BBRY today.

I also did a MOS Apr 55/62.5 short strangle for their earnings this morning. It was a winner too but I took it off early this morning because it looked like a mover.

I am on a BB.TO covered call campaign in my TDW RSP. I've had two months of rolls already on it and I hope BB/BBRY just hangs around here for the May roll. My goal is to own BB for free before it's stock price goes to zero.


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## metatheta

Bye bye LULU. Sold for 2.52CR. Bought back for 1.36DR. Net 1.16 gain.


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## humble_pie

metatheta said:


> Bye bye LULU ... Net 1.16 gain.



that's wonderful. You spent a few nights with lulu ... & she paid you for it


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## Canuck

so I sold my first put a few weeks ago, 10 puts at .40 for Sunlife at $27....expires April 20.

Sunlife was below $27 for a couple of days, even as low as $26. I thought that I would have been assigned almost immediately after Sun dropped below $27?


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## humble_pie

Canuck said:


> ... I thought that I would have been assigned almost immediately after Sun dropped below $27?



options are not assigned early just because they happen to slip into the money.

if there's enough premium in the option price - calculated by looking at the option bid - a counterparty will not usually assign, because he will get more money by simply selling his option.

it boils down to a formula for puts that looks like this:
when (strike minus stock) > option bid, a risk of early assignment exists.

for calls, it's the reverse:
when (stock minus strike) > option bid, a risk of early assignment, etc.

however a complicating factor can be dividends, especially large dividends such as bank or telco dividends. Options are usually exercised early because a counterparty wants the dividend. 

hmmmn ... can u figure out what the above call formula should be when correctly fitted with the dividend possibility?

as for your suncor puts, they are otm by a few pennies at the moment, but if they should slip itm, you would want to immediately look at the put price in terms of the above formula.

quite likely there will be enough premium to protect them. This may start to decay next week, though, as april options near expiration.


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## Canuck

"hmmmn ... can u figure out what the above call formula should be when correctly fitted with the dividend possibility?" ummm no

thanks humble-pie, I'll keep that formula in mind. I totally thought I was going to wake up with 1000 shares of Sunlife in my account when it dipped to $26


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## humble_pie

Canuck said:


> I totally thought I was going to wake up with 1000 shares of Sunlife in my account when it dipped to $26



canuck please refresh if you have already dealt with this issue. But do you *want* 1000 shares of suncor in your account after april expiration day?

if not, you had best get busy right now & dance your way out of this.

what you did was sell puts with a strike that was fairly close to market of the underlying. This is not really something i like to see new option players doing, because now you are either going to have to dance like a dervish or else you might end up paying $27,000 for those shares, which could impact your margin position if margin is thin, etc.

EDIT: silly me, it's sun life, not suncor. But the questions remain the same.


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## metatheta

AAPL
I have an AAPL Apr 440/435 short put vertical that I did last month for 1.70CR and it's going to be a loser. Max risk of the trade was (5.00 - 1.70) 3.30 when I opened it. I had many opportunities to close this for a decent winner much earlier but I held it for more time decay only to see it go deep in-the-money. Last week, AAPL made an attempt to get back to 440 and I felt that it was an opportunity for me to reduce my risk. I needed to play defense and save some soldiers. I sold the Apr 445/450 call vertical for 1.35CR turning it into an iron condor and effectively reducing my max risk to (5.00 - 1.70 - 1.35) 1.95. This hedge had no effect on margin but created upside risk beyond 445. Upside or downside, my risk remained at 1.95 because of the total credits collected. With this position so deep in the money and expiring tomorrow, I'm glad I sold that call vertical to reduce my loss.

IBM
I sold an IBM Apr 190/195/205/210 iron condor back in February knowing that earnings was a day before expiry. I was hoping to close it well before earnings. IBM exploded to the upside and still remained above my short call strike on earnings day today. This afternoon, I decided to roll the call wing of the iron condor to the same strikes in May because a downside move was the only way to win on the Apr iron condor. I didn't like this because I prefer to be non-directional on earnings plays. With IBM at 207 this afternoon, I was comfortable with the Apr 195/190 short put vertical as my earnings play while the rolled out May 205/210 short call vertical as my post earnings trade.
IBM's after-hours post-earnings trading at 198 indicate that my April iron condor would have been a winner without the roll. Oh well, I didn't like the upside risk of the call wing and wanted more time should it rally up on me. I hope it pins 200 tomorrow.

GOOG
I sold a GOOG Apr 715/720/810/815 iron condor for 1.45CR this afternoon for earnings and it looks like a winner tomorrow morning. It expires tomorrow and I hope to be able to hold it to expiration.


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## humble_pie

hey theta thankx for posting.

re your aapl, i hope u did not have too many contracts. Yes it was (1.95) but not intolerable if only a few.

i am going to study the goog condor. As u know i am never one for trading during the last days & not one either for going after earnings with iron plays. But perhaps i can learn from you, these are good teaching examples.

in goog all i have ever done is sell puts while stk romped from 400 to just under 800. Initially i sold only one. It was my lonesome goog. But sometime during the past year i added a 2nd put. They are both june 600s, veree conservative.

right now my plate is loaded with short otm calls in gold stocks, mittal & ccj. Lordy, how the bottom fell out of those! i believe i'm short 42 calls in barrick, can you imagine such garbage. They will be easy to pick up & sell maybe 26-28s ...


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## metatheta

Yeah, I traded AAPL small. I keep my positions small. No hero stuff.

They really killed IBM today. I could have had a winner at the open but got out with only a 0.10 loss. I really need to work on taking profits sooner. Had I held it to expiration, it would have been a max loss.

I was going to hold GOOG to expiration but I didn't like the rally in the morning. I quickly closed the call wing of the iron condor for 0.04DR and let the put wing expire. I netted 1.41CR on the GOOG earnings play.

I also had an AMZN Apr 240/245/275/280 for 1.75CR that I allowed to expire today. Although it was a max profit, I think that I should have closed it much sooner to book a lesser profit. It wasn't worth it just to squeeze the last 0.50.

Iron condors have been hard to do this year. Vol is too low which doesn't allow you to collect enough premium to get far enough on the wings. Also, the US market just trended up and had no trading range. You want the stock to remain within a trading range with an iron condor.

AAPL, NFLX and AMZN are the big earnings next week.


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## humble_pie

lightbulb! i've always had a block about quadruple positions. I could do 3 but the 4th leg would always discombobulate.

suddenly now i understand all that happened with your iron goog. You are right about trading ranges. I like stocks that stick inside wide bands myself. If the bands are wide enough there will be enough volatility to generate decent premium. CNQ is one of these.


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## metatheta

humble_pie said:


> ... quadruple positions. I could do 3 but the 4th leg would always discombobulate.


Now you are following my tantric ways.:encouragement:


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## humble_pie

metatheta said:


> Iron condors have been hard to do this year. Vol is too low which doesn't allow you to collect enough premium to get far enough on the wings


maybe get farther out on the wings by going farther out in time?

what i don't much like about trading this week or next week's options is that most of the tv has decayed away already.

blockbuster stocks like aapl goog amzn etc will still be ok but most ordinary options will have no premium left at all. In these, one has to go out more than 3 months imho. Six months is good. I know i know, not really tantric om padme.


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## metatheta

Here's something funny, in a nerdy kinda way.

I mentioned earlier that I had an IBM swing trade that ended up being an earnings play last Thursday. I put on a trade on Friday afternoon for Monday morning earnings on HAL.

I just realized the IBM-HAL connection from 2001: A Space Odyssey. Some say that they named the HAL computer in the movie using the letters before IBM.

My HAL trade is similar to the LULU and BBRY earnings trade I did with a short put and a short call vertical (Apr wkly -35.5P/-38C/+38.5C) where the total credit received (0.54CR) is atleast the width of the upside vertical. This trade cannot lose on the upside. With HAL gapping up this morning, this trade is a scratch. I have one week to hope it comes down to become a winner.

+++


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## metatheta

Just got filled on a NFLX Apr wkly +140P/-145P/-210C/+215C iron condor for 1.38. Max risk is 3.62. I'm a bit nervous on this one because NFLX exploded last earnings and range-bound trades like this would have lost money. I'm hoping for a dull post-earnings reaction.

+++


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## humble_pie

metatheta said:


> Just got filled on a NFLX Apr wkly +140P/-145P/-210C/+215C iron condor for 1.38. Max risk is 3.62. I'm a bit nervous on this one because NFLX exploded last earnings and range-bound trades like this would have lost money. I'm hoping for a dull post-earnings reaction


theta which side were you filled on?


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## metatheta

Short. Got 1.38CR. Looks like I will have to fight this one. I will have to sell the 210/205 put vertical at the open to collect more credit. It could be a loser but I will try to lose less. I need a 210 pin on Friday. Good thing that it is defined risk.


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## humble_pie

sorry theta i'm not getting this. Those options are so far otm they're almost over the horizon so i don't quite understand how any were assigned.

perhaps you could indicate which were assigned? then i might have a chance of understanding what's going on. in the meantime i ask myself, who, yesterday (monday) would have exercised either that put or that call ... to me they look as far away as tierra del fuego.

it's true the calls will be in trouble when market opens today.


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## metatheta

The iron condor is basically a short put vertical and a short call vertical. Selling both got me 1.38CR total. My max risk is 3.62 because the width of my verticals is 5.00 and I could only lose on one side. With today's gap up, the 145/140 short put vertical will be close to worthless with 3 days to expiration. If I roll up the short put vertical to 210/205, I should be able to collect a little bit more credit to offset my 3.62 max loss. The position will turn into a +205P/-210P/-210C/+215C iron butterfly with a home run at a 210 pin. My main goal now is defence and to lessen the loss.

There has been no assignment. Expiry is on Friday. I don't worry about early assignment because the counterparty would not max their gain. The counterparty is better off closing the contracts. Should I get assigned early on the short side of a vertical, I will mechanically exercise the offsetting long side.

It is so ironic that I just signed up for a NFLX subscription this month and I really enjoy it. Now I will lose money on this trade because the stock rocketed on me. I separated my opinion about the company/product from my trading decision. Maybe Peter Lynch is right, sometimes.

As always, I trade very small, especially earnings, so nothing will take me down. There's always a next trade.


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## metatheta

I'm taking a shot on AAPL. I'm short May +350P/-355P/-450C/+455C iron condor for 1.38CR. Max risk is 3.62. Similar risk/reward as the NFLX trade but May expiration. More time to repair if necessary.

I was able to get 1.50CR more on the 210/205 put vertical roll up on the NFLX trade so max risk is down from 3.62 to 2.12.

+++


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## metatheta

All this talk about iPhone this, iPad that, iPod this! 

All that matters to me is that my *iRon* worked!


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## humble_pie

theta your iRON examples are teaching me a lot these days!

very dumb Q: why not roll that risky netflix call vertical forward into an otm vertical w higher strikes that's also farther out in time, say the jan/14s? everything would turn green & you could move on to something else.

the only misfortune would be that netflix would take another leap upwards. But even then, leapfrogging the LEAPs is not the end of the world if it means avoiding unnecessary assignments.


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## metatheta

humble_3.14, I'm glad you are getting something out of my tantric escapades. I just hope I haven't scared those new to options but I hope they can sort out the math when I give out numbers.

The NFLX trade is over. I've done what I could to lower the risk/loss and just hope and pray for it to land in a very narrow profit zone in the 210 range by Friday.

I prefer trading the front month with 25-55 days to expiration. I will be in June soon. As a premium seller, I think that this is the best time frame for time decay. Also, I'm not good at stock picking so I don't trust my skills on guessing where a stock will go far out in the future.

Iron condors are basically strangles with protection. I like short strangles because you can go out further and still have a big credit but they have unlimited risk. I'm doing more iron condors on earnings plays for less credit. It is defined risk so I feel more comfortable on the position in case there is an outlier move.

I'm taking a shot on AMZN with a May +245P/-250P/-300C/+305C short iron condor for 1.75CR. Max risk is 3.25. Hope and pray mode on again!


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## metatheta

This is the first earnings season that I have been able to do the three horsemen - AMZN, AAPL, GOOG. I traded them all with range-bound strategies. These stocks behaved well post earnings and stayed within the _expected move_ as priced-in by the options.

For highly liquid and efficiently priced stocks and options, a rough calculation of _expected move_ is if you take the weekly expiring at-the-money straddle mid-price and take 85% of it. That is the _expected move_ plus or minus the closing price before the earnings.

AMZN closed at 274.70 on earnings day. The weekly 275 straddle was priced at 19.00. 85% of this is 16.15. AMZN's after-hours trading range was 258.00 to 290.88. Check this out: +/-16.15 of 274.70 is 258.55 to 290.85. That's as good as it gets.

AAPL closed at 406.13 on earnings day. The weekly 405 straddle was priced at 30.125. 85% of this is 25.60. AAPL was as high as 430 (405 + 25) in after-hours.

GOOG closed at 765.91 on earnings day. The weekly 765 straddle was priced at 36.15. 85% of this is 30.72. GOOG was as high as 797 (766 + 31) in after-hours.

The expected move is simply that - an expected move. It is not guaranteed but it is something you can trade for.

Oh NFLX, you just had to make an _unexpected move_!


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## humble_pie

neat-o

but theta could you please tell me this. Can a counterparty exercise during afterhours trading? tentatively i've been believing that all options trading halts at the 4 pm close except for some index options that trade until 4:15 pm, but this belief could be wrong.

another way of putting the question is: until what hour of the afternoon/early evening can US-based option players exercise their long positions? i mention US-based because canadian brokers might shut their windows early.

it would seem grossly unfair if actual options trading would be shut down at 4 pm while long counterparties could continue to exercise during afterhours. This would make earnings announcement days exceptionally dangerous imho. The short option player would be paralyzed, no exit.

LATER: i just inquired at the broker & was horrified to hear that they accept assignment orders up to 4:30 pm. This would be my worst fear. The short seller of the option would be locked down & paralyzed from 4 pm to 4:30 pm. However, the long holder of the option could exercise against him during that half-hour. Yikes.


----------



## metatheta

Sorry humble, I don't know the exact answer to your question.

It seems that there is a recurring theme on this thread about the risk of being early assigned. I _think_ the risk is slim unless there is an upcoming dividend. Options will always have extrinsic value up until expiry even if it is deep ITM. Exercising early is unwise because the exerciser will forfeit the remaining extrinsic value.

For example, I have ITM BB.TO May 15 short calls as part of a covered call position and I doubt I will be called away early on it.

humble, have you ever been early assigned not as a result of a dividend?


----------



## humble_pie

assigned early other than for a dividend? yes, for example in the ING reorg a couple years ago. Rights were issued on all global markets except canada. Arbs were apparently very active between eurostoxx & new york (ing is a US adr.)

i never clued in. Next thing i knew my ing shares had disappeared & little bo-peep had lost her sheep.

it taught me that a complex reorg can also be an early assignment flash point.

but back to my point: i am surprised to see that a long option holder can exercise afterhours, easily up to 4:30 pm, while his counterparty the short option seller is locked down because trading stopped at 4 pm.

in AAPL for example, so far i see nothing that would have stopped a long holder of a 400 call from selling or shorting stock when aapl rose afterhours to 430, then exercising his long 400 call.

i don't know enough about these iRon earnings plays but to me it looks like perhaps the iRon condor seller should go far enough out on the wings that he won't likely be assigned during any super-crazy hyper-inflated post-earnings after hours trading? the kind of ah trading we saw in netflix & even briefly in aapl recently, i mean.

in general, though, i agree with your point that assignments are more rare than one might think. Here in this thread we've published the early-assignment-detection formulas over & over again. They're very simple formulae that show whether an itm option is at risk of early assignment.

the problem i see is that these formulae would be meaningless & useless during any explosive afterhours stock trading.


----------



## metatheta

Firstly, your ING early assignment is due to an extraordinary event. Extraordinary events are certainly a risk but not one you can factor in when making a trade.

Secondly, your AH trade example is of a trader wanting to lock-in his gains. Shorting the stock at 430 in AH is enough to lock in the gains on the call option. However, early exercising the 400 call will forfeit the remaining extrinsic value. He is better off selling his 400 call when the options market reopens and simultaneously cover the shorted stock. This way, he realizes the full gain and any extrinsic value remaining in the call option. (I don't really want to do the math today.)

Thirdly, I see no need to remember the early assignment formulae. The formulae basically calculates extrinsic value based on a bid. All options have extrinsic value up until expiration so I'm in the camp that doesn't worry about early assignment except for dividend risk. However, I could be wrong with illiquid options where you may not get a fair bid. That's probably another reason not to trade illiquid options.

Fourthly, there's a trade-off in going far out on iron condor or short strangle plays. The further you go out, the less credit you receive. You may not be rewarded enough for the risk you are taking.


----------



## dogleg

Dear Lord deliver me !!! I have been in all levels of the market for years and if there is more to it than supply and demand then I am a monkey's uncle. Pease set me straight.


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## humble_pie

metatheta said:


> ... your AH trade example is of a trader wanting to lock-in his gains. Shorting the stock at 430 in AH is enough to lock in the gains on the call option. However, early exercising the 400 call will forfeit the remaining extrinsic value. He is better off selling his 400 call when the options market reopens and simultaneously cover the shorted stock. This way, he realizes the full gain and any extrinsic value remaining in the call option. (I don't really want to do the math today.)



u are right, your strategy is better. Except for a tiny crack, which i perceive like so:

suppose stk continues to soar to, say, 450 or 460. Trader is already covered at fixed cost of 400 by his long call, but only if he continues to hold that call. If he sells call the following day as u say, he becomes subject to full cost of covering the short (stk now at 453 let us say.)

the number i wish to express in my clumsy crumbly way is that in this scenario, the increase in share price from 405 to 453 will be greater than the increase in bid for his 400 call. If shares continue blastoff, cost of covering his short stk after he sells the call is going to increase at a rate faster than the premium built into the call's B/A. This is how i understand the greeks, maybe i am wrong? gamma/theta will see to it that call bid increase < rapid share price increase.

bottom line is i'm not as canny as you are theta. If i held a loose cannonball 400 call while stk soared during crazy earnings AH from 405 to 430, i'd be so thrilled i'd probably lose my head. I'd short the stk, at least we agree on that. But i'd exercise the call pronto. Bird in the hand is worth 2 in the bush etc.


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## metatheta

No cracks here. I will have to do some math and use my option calculator.









I created a table with theoretical prices of an AAPL May 400 call option if the stock price was at 340, 370, 400, 430, 445, 453 and 460 today. AAPL closed at 445 today.

As the stock price goes up, the stock price goes up faster than the call value (as predicted by the delta/gamma). You are correct here. However, the call value will always have an intrinsic value (stock price - strike price) when it is ITM. (No intrinsic value if OTM.) As the stock price goes up, the instrinsic value increases in parity with the stock price but the extrinsic value decreases in value. It is the extrinsic value that lags.

However, the trader still comes out ahead by closing the call option rather than early exercising it. At all levels of the stock price, the gain from the short and exercising is a constant $30. Covering the short and closing the call option will always be greater than $30. In fact the trader has improved his position over early exercising because he locked in a gain plus the possibility of a home run should the stock tank.

You may disagree with my theoretical pricing of the AAPL May 400 call and you may want to use your own option calculator. However, you will find that the relative price changes will be the same.

There is nothing stopping you from early exercising but traders usually don't do it because you are forfeiting the extrinsic value. It's implied!


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## humble_pie

my superfabulicious ride in MGM diagonal call spreads ended today with a 60.27% gain in 5 months.

the pair was long 2015 jan 8s plus short 2014 jan 17s. In at 4,795.00, out at 7,685.00. 

this was entirely thanks to marina638, the lady with the rose pink cottage, overlooking the sparkling blue ocean, in partridge berry land.

i have enother 240 pairs waiting around, though.


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## humble_pie

another day another dollar

took in USD $600 this am, rolling puts in IMUC


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## Islenska

Humble-good for you!

I'm still in early, early option experience but enjoy the game and will learn more I'm sure, so can't contribute much but follow the threads............


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## humble_pie

lephturn & metatheta were the real artists here, tossing up their four-legged iron plays like tennis balls just before earnings announcements, then smashing them with a forehand topspin in Roger Federer style.

me i crumble along sedately, always several months later, always trying to stay out of the money while keeping an eye on the distant horizon ...


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## humble_pie

going to roll GOOG puts today for maybe $420.

the week has been a progressive decline. Tomorrow is friday. Either i'll quit entirely or i'll be lucky to scrounge up $70.


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## humble_pie

2 goog puts + 505.00, better than i expected

all done for the week now


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## Toronto.gal

The 2013 OE Days are back, for those interested:

- Montréal = Sept.7th
- Toronto = Sept.28th

http://www.m-x.ca/envoi/oed/tor_201309.html


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## marina628

Glad MGM worked for you Humble. I bought in IGT for $15.80 ,LVS $50.80 byd $6.65 and MGM $12.30 .We have invested quite a bit of the corporate money into these 4 stocks when we sold the websites for over 5 Million.$200,000 ,we still have 80% in cash !


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## avrex

@humble_pie. Thanks for continuing to post your option trades. I do like to follow them.
Options discussions here have been pretty quiet lately. Many of the option posters (metatheta, Lephturn, Argonaut) have gone silent or are inactive. So, I do appreciate when you post.

As far as myself, I have been fairly quiet. I hadn't opened up a new option position since Jan.
Lack of time due to, life events and work, have contributed to that. Plus I had to get over some option losses from my Jan trades. 
I hope to ramp up my use of options again soon.

Let's start that with a trade that I made today...


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## avrex

*Bull Put Credit Spread*










Today, I performed a Bull Put Credit Spread. 
This is the first time that I've ever done a spread. 
SNDK Jan 14 Put 55/65. 8 contracts. Spread 9.45-3.80 = 5.65

One of the advantages of utilizing the spread, is that it will limit your losses. 

In the past, I've typically done single naked legs. 
I always had a uni-direction bias in my feelings towards the underlying.
Being naked also means that potential losses are unlimited.
I will continue to do single naked legs, and accept/understand these potential unlimited losses.

For today's spread trade, I can still have a heavy directional bias. In fact, the strike prices that I've selected indicate that I'm very bullish on SNDK. And yes, the downside is that I may experience heavy losses.

However, another benefit of the spread trade, that I want to discuss, is in the use of cash/margin. 

If I performed the above Short Put, naked, my IB account showed that this would have used up $21,500 in cash/margin.
However, when I combined it with the long put, to create the spread, my IB account showed that I was only utilizing $8,000 in cash/margin. 
*This is great.*
(i.e. short put strike - long put strike = (65-55)*8*100 = 8000)

This smaller use of my cash/margin is great, as it allows me to stretch my dollars and implement more trades.


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## humble_pie

sounds good.

but i don't quite agree with this each:



> Being naked also means that potential losses are unlimited


suppose u had just naked short sold the 65Ps. Now suppose the worst happens & stk gets put to you. Your loss is not unlimited. It is, rather, a maximum loss of $65/share, or 6,500 per contract. Because SNDK cannot go lower than zero.

it's only the naked call that's unlimited. It can turn bad even faster than short stock, they say.

whether spread or monodirectional single side, i still think the best strategy for both is watching far ahead with a vigilant eye. Keeping those dance shoes handy. Your jan/14 expiration is good, fall is always a lively season, there's plenty of time for high adventure.


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## HaroldCrump

humble_pie said:


> it's only the naked call that's unlimited.


True, which is why naked short puts is Level 4 tier, while naked short calls is Level 5 tier.


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## avrex

oops. my bad.
You guys are correct.


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## humble_pie

another thing i like about avrex's strategy is the january expiration month.

januaries are nearly always hi-volume months with lots of open interest.

this means that avrex can more easily find partners milling around on the floor, if he wants to dance out at the last minute.

it's those low open interest months that can be BSODs. The kind - especially in montreal - where you see 10 or 20 contracts bid, 10 or 20 offered, big spread plus no open interest. Those 10 or 20 contracts are the dealer talking & he's not going to budge by more than a nickel.


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## metatheta

avrex said:


> Today, I performed a Bull Put Credit Spread.
> This is the first time that I've ever done a spread.
> SNDK Jan 14 Put 55/65. 8 contracts. Spread 9.45-3.80 = 5.65


avrex, allow me to critique your trade.

Your breakeven on the trade is for SNDK to be at 59.35 (65.00-5.65). In other words, you need SNDK to be above 59.35 for any profit. Had you bought the stock at today's high of 58.51, your break even is obviously 58.51. Ideally you want an ITM vertical spread as a stock replacement. The vertical spread is already disadvantaged by 0.84 at the outset if compared to long stock. I know that you very bullish and using less capital using options but I prefer a closer breakeven compared to owning stock.

If I were to make this trade, I would narrow the spread to maybe 55/62.5, 55/60 or even 57.5/62.5 to get a better breakeven point. You would collect less credit but you can adjust your trade size accordingly.


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## avrex

Perhaps, I have been too aggressive with this spread. I will need this stock to rise by 2.3%, by January, just to breakeven.
As you mentioned, humble, I can dance and exit this trade when I want to.

I have created a spreadsheet to try other scenarios.
Avrex Options - Credit Spread scenarios

As you mentioned, metatheta, other spread combinations have a better breakeven point, which I should definitely consider in future trade setups.

You guys have provided very good feedback. Thank you.


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## metatheta

I like your *spread*sheet of trade choices. *Spread*sheet - get it?

Laying out trade choices like this gives you a good idea on strike selection and the tradeoffs among other parameters like max gain and max loss. There really is no right or wrong choice and your bullish or bearish assumption may ultimately guide you.

For me, I like comparing against going long (or short) the stock to see the edge I have in using options. The 55/60 vertical spread shows that the breakeven price is at a discount compared to long stock. However it is also the lowest max gain.


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## avrex

spread sheet lol


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## metatheta

avrex, let me point out something interesting in your spread sheet. 

The absolute value of your Column N (Max Net Loss) is the probability that option market makers have determined that you will make money on the trade. The quick calculation is 1 minus the amount of credit received divided by the width of the spread.

For your spread scenarios, the 55/65, 55/60, 55/62.5, 57.5/62.5 have probabilities of 43.5%, 51.0%, 46.7%, 42.0% of making money, respectively.

Here's another example with an OTM credit spread. The 55/50 collects 1.67 credit so 1.00-(1.67/5.00)=0.666 or 66.6% of making money. Obviously, the further OTM you go on the vertical credit spread, the better your chances. The quick calculation helps quantify that.

Liquid options like SNDK are priced based on a probability model which the market makers use. So you can easily calculate your probability of making money based on spread prices.

The inverse quick calculation works for debit vertical spreads too.

Of course as time goes on, the probabilities will change so the bookies, ahem, the market makers, will price them accordingly.


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## humble_pie

metatheta said:


> Obviously, the further OTM you go (on the vertical credit spread), the better your chances


theta do u think this is why i can consistently make money :biggrin:




> The quick calculation helps quantify that. Liquid options like SNDK are priced based on a probability model which the market makers use. So you can easily calculate your probability of making money based on spread prices


always something new to learn each:


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## metatheta

humble_pie said:


> theta do u think this is why i can consistently make money :biggrin:


I always thought you were printing money.


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## humble_pie

dancing with a new partner

in rrsp this am, i wanted to buy 7 short calls to close, buy 200 more shares of stock & sell 9 short calls to open. The problem is that, in rrsp, the good minister of finance has imposed rules & restrictions to prevent getting all this done instantly online, as in bing bang bong.

a licensed rep, though, is easily able to overcome the restrictons. The broker was busy this am, but i reached a young woman who basically works the fund desk, occasionally taking overflow from the PA lines when call volume turns intense.

could she do my triple option/stock combo as contingencies? no, she said, not as contingencies, because the broker hadn't given her the right software, she being on the fund desk & all. But could she do them as individual trades, one right after the other? i had a strong intuition that she'd be good at it. So off we galloped to the races.

i launched the first order, it was filled, she bought the stock, then - understandably - she froze into a momentary panic in front of the 9 calls. Buy 9 calls, she kept murmuring to herself. Gosh, no, i said, sell 9 calls. Sell? she repeated. Yes, look, there's the bid at 4.95, up from 4.90, hurry now.

somehow the final order in the triad was sent correctly by mademoiselle, it was filled, everything was over in 60 seconds, i could hear her breathing very hard, like a sprint runner.

you have a fabulous, incredible talent for this, i told my new dance partner. Whatever you do, don't stay long on the fund desk.

we curtsied to each other, turned to bow to our corners, & grand-chained away in the crowd.


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## metatheta

humble_pie said:


> The problem is that, in rrsp, the good minister of finance has imposed rules & restrictions to prevent getting all this done instantly online, as in bing bang bong.
> 
> a licensed rep, though, is easily able to overcome the restrictons.


Are there really government rules and regulations imposed on online RRSP contingency or multi-leg orders and thereby must involve a live broker rep to execute?

I know there are rules on naked options for RRSPs but why can't covered call roll orders and buy/write orders be verified and validated in an automated way?


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## andrewf

My guess is that the market for these kinds of orders is too small to justify the IT/legal spend.


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## humble_pie

theta what if there had been insufficient cash or mmf in rrsp unless a rollover were being done? in real life, ie outside a registered account, it works fine to sell the naked side first. But a registered account won't permit the naked short.

also there was a quirk in that i was buying an extra 200 shares, so there were 9 contracts to sell ... the system as it's presently configured would not have been able to recognize that i'd just bought the 200 shares, therefore would have rejected a sell 9 order. Only an agent can override the similar warnings & send such an order through to execution.

alas, long ago i gave up any ambitions for registered account option trading. I accept that the area is severely restricted. I don't mind plodding along in my donkey cart in the slow lane. Things are the same at every rrsp broker, so this is no reflection on the big green. Actually i find more options savvy with TD staff than i could possibly find over at the other broker where i have my backup account.

yes i know that the TOS & IB architectures permit lovely option strategies & combos. But heh, they don't offer rrsps ...

as a matter of fact i do not want the minister of finance to OK penny speculative stock trading or naked option trading in retirement accounts. A lot of people lose money doing these kinds of trades. I don't think folks should be allowed to gamble to this degree with their retirement savings any more than i think they should be allowed to drive at 190 kph or carry handguns.


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## metatheta

humble, if I understand correctly, you wanted to make a complex trade which can be simplified into two trades - a roll of 7 covered calls to a further out month then a buy/write on 2 more covered calls. As quirky as your trade request was, it is just a basic covered call roll and a basic buy/write.

I fully respect the RRSP rules on no naked shorts. Covered calls in RRSPs are allowed so I think that a live rep is unnecessary for covered call rolls and buy/writes. As for insufficient cash or MMF, they already check for this on just buying stock in an RRSP. Buy/writes should be a similar funds check and covered call rolls don't require additional capital. Is the live rep performing a role in enforcing RRSP rules that a system can't?

I tend to agree with andrewf that there isn't much of a demand for this online capability rather than a matter of enforcing RRSP rules.

I recently saw some Questrade ads on multi-leg option orders. I wonder if these orders can be done online and in RRSPs. If so, this is a good step forward for the industry.


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## humble_pie

metatheta said:


> Covered calls in RRSPs are allowed so I think that a live rep is unnecessary for covered call rolls and buy/writes


but theta even outside a registered account - ie in good old margin acct - a live rep is necessary for covered call rolls & buy/writes chez le grand vert!

let's not try to drag em forward into the 20th century

questrade yea thankx for the tip, i'm going to examine the offerings. But the impression i have is that questrade spread orders have to be phoned in. Impression i have is that only IB & TOS can accept spread orders online, especially ones that are not at the natural.

definitely must check further!


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## humble_pie

questrade is definitely worth checking out imho. They're offering 17 preconfigured option strategies plus - here's the one that interests me - an opportunity to build your own. Check out website link in this news release:

http://www.newswire.ca/en/story/117...rade-s-release-of-multi-leg-option-strategies

what's not crystal clear to me are the commish. They seem to be saying 9.99 plus $1 per contract, then scaling down from there. Theta how are you finding this? would appreciate your views each: 

for starters & a preliminary glance, i'd say the combination of USD rrsp plus cheap online option strategy commish in rrsp is hot damm irresistible ...


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## metatheta

I just browsed the Questrade website and they definitely have better commissions and assignment fees. You can even get it lower with their Advantage subscription.

The key differentiator is that you can enter option strategy trades online. Here's a covered call or buy/write entry screen.









However, I noticed this note:


> To place a Canadian multi-leg option order that includes a stock leg, or more than two option legs, please contact the trade desk at 1.866.980.9590.


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## humble_pie

thankx theta.

i realized that the difference in commish between tddi & questrade, for the MRK trades i was describing up thread, was the princely sum of $4. Yea four dollars. Base charges are the same, around 9.99, while the 16 contracts involved would be 25 cents cheaper each at questrade.

there is also certainly the possibility that total costs at questrade could be higher, since their commission doesn't include data packages or ecn fees which would have applied to at least one side of my quirks.

turning now to your screenshot, i don't know if those little drop-downs permit client to enter a price that's better than the natural. For me that would be a dealbreaker, i never trade at the natural. In addition, there's that conflicting message you've noticed, that if a strategy includes a stock leg or is an iron play, client has to phone the trading desk.

(btw u are right about how to deconstruct the quirks into rollover plus buy/write ... but you see ... the nice lady i reached who works the fund desk ... she told me right away she has an option license but the software to take contingent orders was not installed on her workstation ... ok i said we'll do it one trade at a time ... we spun out onto the dance floor in a snappy fox-trot & she did extremely well, even tearing nickels off the bids & asks)

in the end i find myself wondering how well do they dance at questrade. They dance pretty good at the big green.


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## KrissyFair

Hey, guys, so I'm a total newb at options but I've been following the thread and I use Questrade so I thought I could lend a hand here 

Yes, basic commish is $9.95 + 1/contract. It's steep. If you get the data package for $89/month your commish drops to the 6.95 mark. BUT, if you make > 100 trades per month they rebate you the data fee.

And yes, you can put any buy limit you want even on multi-leg contracts so you can get your requisite edge on the market Humble


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## andrewf

I don't think Questrade's options commissions are steep by Canadian standards. Interactive Brokers is a lot cheaper, but I'm not sure the comparison is fair.


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## humble_pie

thank you Kriss ... the focus is coming from advanced option traders who wish to have USD rrps that can float level 2 option trades online at some sort of reasonable price.

even if the online option trades were to be priced the same as the big bank brokers, the possibility of USD rrsp still makes the questrade package attractive.

as we all know, bmo & roybank are the other 2 USD rrsp vendors, in addition to questrade, but they don't have any online option spread trading capability. Such multi-legged trades have to be phoned in; the agents' high fees then apply; & pretty much the story can start going downhill.

i hear, though, that the new questrade platform still has a glitch or 2, one being that it cannot do rollover spreads in rrsp. The dumdum kind of rrsp rolls that i was doing in merck upthread, the kind that theta does in bombardier. Of course, in rrsp - with its already limited option trading - these rollovers are going to be a basic kind of option spread order that the broker will frequently receive.

at present, clients rolling calls or puts in rrsp at questrade must still phone a trading representative. It's my understanding that the firm is working hard to automate this issue; meanwhile the agents are offering the online commish.

postscript to Kriss: are you serious about those data fees! $89/month ouch! what, there's some kind of fancy streamer in there? for a price like that she has to be the mother of all streamers ...


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## metatheta

KrissyFair, it's good to hear from someone who uses the Questrade platform on multi-leg orders.

humble, once again the simpleton in me questions why the platform can't do rollovers. A covered call rollover is simply selling a calendar spread if keeping the same strike or selling a diagonal if changing strikes. Hopefully they can sort it out soon.


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## metatheta

humble_pie said:


> The dumdum kind of rrsp rolls that i was doing in merck upthread, the kind that theta does in bombardier. Of course, in rrsp - with its already limited option trading - these rollovers are going to be a basic kind of option spread order that the broker will frequently receive.


humble, my TDW RRSP covered call campaign was with BB.TO (BlackBerry) not the Bomber. Sadly I ended it a couple of weeks ago.

I originally bought BB.TO at 16.75 and just sold and rolled covered calls. I got my cost basis down to 11.25 after six months from selling calls against it. After the earnings tank, the vol just dropped out of it and I couldn't get the usual 70 to 90 cents of premium I was getting monthly. I started selling more BBRY calls on my IB USD account staggering it out to different weeklies. I was short more calls than I had shares just to take in more premium. The recent headfake surge forced me out so I settled for a scratch. I didn't want to be short naked calls if there was a real takeover. Too bad. I just needed one more quarter of collecting decent premium to get the cost basis down to the single digits.

This BB.TO exercise convinced me to use TDW less often for options. Besides the frustrating time of the month for me on rollovers, the commissions started to add up. When it got really dicey towards the end, I didn't want to dance with the rep anymore with my required adjustments. I had to resort to my self-serve IB account and USD weeklies to salvage the position. I also wanted to save on commissions on all my adjustments. At one point, I sold 5 BBRY calls for a total commission of $1.94. The low commissions permitted me not to hesitate on making adjustments.

I'm still going to do options on TDW from time to time. In fact, I sold next strike OTM Sep calls against my BMO.TO and TD.TO positions yesterday for earnings week. It's just a little protection from an adverse down move. If it blows through my short strike then it's like selling the shares at a higher price.


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## KrissyFair

humble_pie said:


> thank you Kriss ... the focus is coming from advanced option traders who wish to have USD rrps that can float level 2 option trades online at some sort of reasonable price.


Fair enough. I have level 2, and it does allow any of the long options in registered accounts, but I'm more of a short gal, so that pretty much leaves me with covered calls.

And ya, the data fee is insane. 

@meta The lack of rollover capability drives me batty too. Aside from that, I find the system pretty comprehensive and intuitive to use.


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## humble_pie

thankx for input Kriss. It's true that everybody in rrsp proceeds at level 2 at all brokers; i for one happen to believe that such caution is a good thing in retirement savings plans.

are u happy with how cc's are working out? what i find is that down markets are best for call rollovers, especially sharp downs if one can zip to em quickly. Gamma/theta drops the price of the near option (the one that has to be bought) farther & faster than it drops price of the far option (the one that has to be sold.) There's usually a quick 10-25 cent improvement in the spread compared to before the plunge, i find.

i know it sounds funny, but over time i've come to prefer down markets. These are also good times to buy more stock & especially to sell puts! market is falling? happy days are here again! market is rising? gotta worry about the pressure building upon my short calls.

(aside to theta) good for you for adjusting the rrsp w naked options over at IB. Who but theta the master greek could have engineered that? but i can sympathize, what a drag & what a wear-&-tear it must have been each:


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## metatheta

I took a directional shot on AAPL this afternoon for earnings and it's not going my way. This is a departure from my typical vol crush earnings play.

My assumption was an upward move because the other big names like GOOG, NFLX and MSFT had strong upward moves on earnings.

I bought the monthly Nov 525/530 call vertical and financed it by selling the Nov 480 put. I bought the Nov 400 put just to save on margin. Effectively, I bought the 525/530 call vertical and sold the 480/400 put vertical all for a net 0.40 credit.

The breakeven is 479.60 and I will experience pain below this. Between 479.60 and 525 I will just keep the 0.40 credit collected. Above 525 will be a winner in addition to the credit. Max gain is 5.40.

I chose this trade because I wanted to go long AAPL. Buying 100 shares of the stock today would be an immediate loser from purchase price should the stock go down on earnings. My trade provides a cushion of about 50 points on the downside before experiencing a loss. It is a good trade in comparison to buying stock.

Now that the stock is down after earnings after-hours, my 50 point cushion is being tested. I'm hoping that Icahn is supporting this stock at 500.

As I've stated in the past, I'm not good at choosing stock direction. I hope that my choice of trade strategy can still make this a winner. I opened the trade when AAPL was 528. If it stays above 480 at Nov expiry, the trade can still be a small winner even if I was directionally wrong.


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## humble_pie

metatheta said:


> I took a directional shot on AAPL this afternoon for earnings and it's not going my way ... I'm not good at choosing stock direction. I hope that my choice of trade strategy can still make this a winner. I opened the trade when AAPL was 528. If it stays above 480 at Nov expiry, the trade can still be a small winner even if I was directionally wrong.


sure hoping these are not the nov 1s. Hoping these must be the nov 16s at least ... but if short-term stock direction is your achilles heel, then why play so close to expiration?


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## metatheta

Good question. All my option trades have a bias on time decay so I prefer a shorter duration. For earnings trades, I turn to weeklies or within two weeks expiry. For duration trades, I like 21-56 days.

For this AAPL trade, I elected to do the monthlies with two weeks to go rather than weeklies. I did go for the longer duration between my two choices. If I went for my typical vol crush trade for earnings, the weeklies would have been ideal. My trade had a partial vol crush component (the short put) and a directional component (the long call vertical) so I felt that two weeks was ideal. I felt that there was enough time for Icahn to step in to save me.

With pre-market prices this morning, AAPL is sharply unchanged. My trade should be a small winner because the short put should collapse. I have some choices to make now.

1. Close the trade and take profits now and move on.
2. Keep it open and hope for that upward move but keeping the risk on.
3. Buy back the short put and remove the original risk. If I buy it back for 0.40 or less, it would be like a free trade. I would just let the long call vertical run but risk profits I've already made.

There are just too may options.


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## humble_pie

i like bias on time decay too but weekly or even monthly is cutting it too close to the wire for me.

for me the sweet spot is deal 6-9 months out, then clean up roughly 2-6 weeks before expiration. By then time decay has eroded roughly half the tv, plus there are always many other players still actively hanging in, so it's much easier to buy to close if the issue is anything other than a hi-vol like aapl.

in aapl right now the nearest one i have is april/14, it's a short 565 call

i know they don't teach it like this but, truly, life is so much more peaceful. J'aime pas des tracas.


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## metatheta

I took a directional shot on FB this afternoon for earnings and it's not going my way. This is a departure from my typical vol crush earnings play.

Wait. This feels like deja vu! Didn't I post something like this earlier?

My assumption was a downward move. I was mildly bullish a couple of months ago and I just wanted to switch teams today.

I sold the monthly Nov 41/43 2:1 put ratio spread for a 0.12 credit. I sold two Nov 41 puts and bought one Nov 43 put.

The breakeven is 38.88 and I will experience pain below this. Max gain is 2.12 at the 41 strike. I cannot lose on any upward move.

I chose this trade because I wanted to go short FB. Shorting 100 shares of the stock today would be an immediate loser from sale price should the stock go up on earnings. My trade provides a cushion of about 10 points on the downside before experiencing a loss. It is a good trade in comparison to shorting stock.

Now that the stock is up after earnings after-hours, the trade will be a tiny 0.12 winner with no upside risk. Basically, I was paid to take a downside trade that didn't work out. There is still a couple of weeks to expiry and I can hope for FB to make its way down to 41. The dream is still alive and I still have a downside shot with a decent payoff.

I closed my AAPL trade today so I can move on. My net gain was 1.60 which includes my original credit for putting on the trade. Not bad considering that I had a bullish trade and the stock went down.

I really liked my AAPL and FB trades but the stocks just didn't cooperate with me. The best thing was that I structured the trades to provide a cushion in case I was wrong while being rewarded if I was right. You cannot do that with stocks.

I will be right one day!


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## humble_pie

*Collar Me - Tag You're It*

i discovered today that tddi has recently abolished all its specialized teams, ie the fixed income, fund smart, option & PA trading desks are gone.

calls now go to any representative who holds a license.

i phoned today with an order for an option collar in registered account. A collar is a three-legged creature. Due to federal restrictions on options trading in rrsp, such a contingency trio sometimes has to be submitted through a licensed representative. Today was one of the sometimes.

however, i couldn't find anyone who could take the order. This went on for a couple of hours. The first representative gulped audibly when i told him it was a collar. He thought it was 2 separate trades. No, it also has puts, so it has 3 legs, i said. He groaned.

there's a single ticket form you can fill out for the whole shebang, i said, helpfully.

an extremely long silence of 4-5 minutes then ensued. I realized he might be studying the form.

hello? i said, into the silence.

heh, i'm here, he said, nervously. It's just that i've never done one of these before.

oh, my. Wait til theta shows up with his rrsp option stories. Theta used to complain, right here in this thread, about how arduous it was to transmit multi-legged orders to a highly skilled senior representative on the PA team. I can't imagine what he's going to think, let alone say, now that the PA reps have gone & a bunch of novice trainees have replaced them.


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## metatheta

I'm done with TDW on options trading on my RSP. It's just too prohibitive and expensive. Even a simple covered call campaign is difficult to manage. Ironically they offer one of the best options trading platforms in thinkorswim.


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## avrex

@humble_pie. This is not good news.

@metatheta. Does this mean you are going to continue trading options, but only on your non-registered account? 

I still use the ThinkorSwim paper account to analyze potential trades. Then I execute them on my IB account.
(ThinksorSwim Canada thread)


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## KrissyFair

It's my turn for a meta-esque post. I took a directional shot on MSFT and it's not going my way... 

I put a bunch of 38/39 call spreads on for December with the assumption that if the stock hadn't hit 38 in the last 13 years, it wasn't going to do it in the next 2 months. It's approaching 37 in pre-market trading, but there's still time to decide what to do. 

In unrelated news, I bit the bullet and signed up for Questrade's $90/month data package. I spent a fortune on trade fees last month, so it should actually save me some money since it automatically switches me to the cheaper commission structure. So if anyone else uses Questrade and is curious, I'll let you know if it's any good.


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## metatheta

avrex said:


> @metatheta. Does this mean you are going to continue trading options, but only on your non-registered account?


Yes. I continue to actively trade options in my non-reg IB account. Given my strategic use of options, I think this is the only place I can do it effectively.



avrex said:


> I still use the ThinkorSwim paper account to analyze potential trades. Then I execute them on my IB account.


That's exactly what I expect from my wingman. That's the way I fly too.


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## metatheta

KrissyFair said:


> It's my turn for a meta-esque post. I took a directional shot on MSFT and it's not going my way...


I love it. Let the strategy work for you.



KrissyFair said:


> I put a bunch of 38/39 call spreads on for December with the assumption that if the stock hadn't hit 38 in the last 13 years, it wasn't going to do it in the next 2 months. It's approaching 37 in pre-market trading, but there's still time to decide what to do.


MSFT and breakout aren't usually used in the same sentence but this looks like what is happening. Something must be up. Once the news comes out (like a new CEO) there's a good chance of rolling back. You have defined risk so try to hang in there.

If you get deep in the money on this, keep in mind that there is dividend risk on 11/19. You don't want to be assigned short and end up owing the dividend.


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## humble_pie

metatheta said:


> I'm done with TDW on options trading on my RSP. It's just too prohibitive and expensive. Even a simple covered call campaign is difficult to manage. Ironically they offer one of the best options trading platforms in thinkorswim.


i think i've said this? the only way to proceed w options in a td registered account is to plod gently along, sedately selling options - nearly always covered calls - that are 6-9-12 months out.

that way they only had to be adjusted/rolled over a couple of times a year


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## janus10

I'm only about 20% complete in reading this thread from the beginning but I will take my time to go through every bit (including some of the very helpful links posted already).

A ballpark question: if one had a conservative approach to options looking to generate additional income, and wanted to use a 100% Canadian stock portfolio made up of dividend payers (e.g. the banks, and a smattering of others such as Fortis, Methanex, Teck, etc.) what would be a reasonable addition of income percentage wise on an annual basis? I'm trying to gauge whether the opportunity warrants the additional expenditure of time, research and study. Is it 1%? 2%?

I believe that Humble prefers a short strangle strategy for such a portfolio. If it matters, the investment worth is north of $500k.

Does income generated from a short strangle get treated as ordinary income (because of shorting) or is it capital gains?


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## avrex

Welcome to the forum!

There's lots of good information in this thread. Keep reading here. Plus read other Options references mentioned here as well.
I'm continually learning, and thus, my strategies continually evolve.



janus10 said:


> if one had a conservative approach to options looking to generate additional income, and wanted to use a 100% Canadian stock portfolio made up of dividend payers (e.g. the banks, and a smattering of others such as Fortis, Methanex, Teck, etc.) what would be a reasonable addition of income percentage wise on an annual basis? Is it 1%? 2%?


I don't think I understand the question. I don't usually put the word 'conservative' and 'options' in the same sentence.  
There are infinite combinations of strategies, strike prices, etc. to choose from.
The only answer that I can give you, is that individual options have the potential for both unlimited gains and unlimited losses.



janus10 said:


> I'm trying to gauge whether the opportunity warrants the additional expenditure of time, research and study.


Your mileage may vary. Perhaps, start with one or two trades. Only *you* can determine, if this type of activity and study involved, warrants your time.



janus10 said:


> Does income generated from a short strangle get treated as ordinary income (because of shorting) or is it capital gains?


There has been discussion on the taxation aspect of options in other threads and online resources. The answer is not 100% clear and may depend on an individual's taxation circumstances. For myself, I claim all my options trading as capital gains/losses.

You mentioned the short strangle. To me this is two individual taxation events: a short call, and a short put. I treat each 'short' as a capital gain/loss.

Check out the thread, Taxation of Equity Options.


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## KrissyFair

From a Newb to a Newb, here are my thoughts:

1. Get very comfortable taking losses. Some of my early mistakes came from hanging on too long to a position that was going south. I kept thinking it could turn around, and ended up losing more money than I needed to. It's a whole other mindset from buy-and-hold investing.

2. You're not limited to trading only on the stocks you own. When you're new and messing up a lot, you need to stick to heavily traded options so you can get out quickly and easily. (See #1!!) And the stocks you mentioned basically have no options market so you'll probably need to look further afield.

3. In terms of time. It does take a lot of time. It's my biggest source of life procrastination right now  But in a few months I've already gotten to a point where my strategy for opening trades is somewhat streamlined. Also, I'm making better trades to begin with, so they're needing management less frequently. So my point is that eventually the time commitment will be less onerous.

Have fun!!


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## humble_pie

salut janus i'll try to write again later, not quite enuf time now.

i think a conservative option writing strategy on sound mainstream canadian stocks should yield 2-4% as capital gain, in addition to whatever dividend yield plus actual potential gains or losses in the underlying stock. If one thinks dividends now are yielding perhaps 3-4%, one might look for options + dividends to consistently yield 5-7% combined (ottomh i think 8% combined might be hard to attain; some higher-dividend stocks like BCE have pitifully low-paying options.)

not sure what you mean by conservative; to me "conservative" means cruising forward under full steam but never being assigned. This in turns means selling 1-3 strike increments above market price of the underlying. This in turn means going out 6-9, sometimes even 12 months, in order to capture an option premium that's worth while.

eventually what builds up is a kind of optioned common stock ladder. There are always some options with expirations coming up. Right now markets have stormed so much higher so fast that i'm busy rescuing my short january calls that have fallen deep into the money. Some of these stocks have november X dates coming up on their dividends, so unless i roll over the january calls now, they risk to be exercised early.

as for strangles, i sell puts only when i don't already have what i believe is a sufficient inventory of the underlying stock.

i also sell naked puts in cases where stock pays low or no dividend but is volatile enough that options have worthwhile premium.

krissy is right when she says that some canadian stocks have tiny option markets & you never want to get into these. Repeat: do not get trapped in montreal exchange dead ends. For example, i don't know what is going on in Fortis; there may be no option market worth bothering with.

teck, on the other hand, is another story. Teck is one of the canadian companies whose principal options market is US. CNQ is another. RIM/RIMM/BBRY was another. You have to find out for yourself, by comparing stock trading volumes in canada vs US; then look for US options market quotes for the chain & compare to montreal exchange quotes for the chain.

one would always, always take the US options market for an interlisted stock, if strong US market exists. The only exception i've ever stumbled upon is thomson reuters (somewhat to my sorrow).

a byproduct of long-stock-in-canada-but-sell-US-options is that you will be acquiring US dollars with no FX fee.

about taxation, no easy answer. If a trader closes out a position, the resulting sell/buy or buy/sell is a capital gain or loss. Anything else - option expires worthless, gets assigned, etc - is a bit of a dog's breakfast. Is why i avoid assignment & always close positions.


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## janus10

*Methanex - time to say goodbye?*

I had purchased MX.TO about 5 years ago to help balance my unbalanced portfolio of dividend stocks. Methanex never did really offer much on the dividend side compared to my other holdings and still hasn't. But, thankfully it did more than provide dividends. YTD it's doubled in price.

Now it recently reached its all time high and I'm thinking there are better places to have my money. Plus, at almost 3x what I paid for it, this shining star represents the single biggest holding by far of my non-reg portfolio when it used to be "just one of the boys".

I'm looking to rebalance at the end of the year so I'm wondering if there is an option strategy I could use for this stock - buying a put so I don't suffer from a pullback, and selling a call so I can pay for that insurance at a reduced price because I don't mind losing this winner.

I hold 2,100 shares in my Interactive Brokers account. Is there a viable options strategy that can be used here or do I just part company in the old fashioned way?


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## humble_pie

janus10 said:


> I had purchased MX.TO about 5 years ago ... I'm looking to rebalance at the end of the year so I'm wondering if there is an option strategy I could use for this stock - buying a put so I don't suffer from a pullback, and selling a call so I can pay for that insurance at a reduced price because I don't mind losing this winner.



nice run, félicitations!

the option strategy you're thinking of is a collar.

long stock, sell call, buy put. Ideally the put & call have the same strike, however these days it's difficult to find a same-strike collar which is not a debit trade, so i imagine collar-wearers are often descending a strike on the put side, which opens up the small window of risk which is the strike increment.

collars are often used by institutions to lock in a relatively high dividend yield with zero risk, because these days - & for some time now - dividend yields have remained significantly higher than t-bill interest rates.

but retail investors can collar as well. One option member who is not active these days used to collar BCE in his rrsp very successfully.

at $.20 USD, the methanex dividend is not especially exciting, although it might have value to you if you wish to build up your inventory of US dollars obtained with no FX fee.

MX is one of the canadian stocks that pay dividends in USD. Investor should make sure he holds MX in US account or on USD side of a registered account. If held in CAD account, the broker is going to charge nasty FX fees on the dividends, although IB might be an exception.

(tiny factoid: even with questrade, roybank, bmo rrsps, investor has to make sure that these brokers are holding methanex - as well as any of the 20 other canadian payors of USD dividends - on the USD side of the registered account.)

(extremely tiny factoid: IB is said to be a broker that has difficulty issuing a T-5 showing canadian dividend tax credits when an interlisted stock is held on USD side of its account. I don't know how true this notion is. Certainly the big bank discount brokers are able to capture the full value of eligible cdn tax credits accruing to an interlisted stock such as methanex that is being held in USD account; however with a smaller privately-owned broker, an investor would have to confirm how their system operates on a case-by-case basis.)


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## swoop_ds

Just wondering what sort of amounts need to used in order to not be eaten alive by fees?

For example, I looked into questrade options fees:
$9.95 + $1 / contract
$24.95 option assignments

So, if I'm reading this correctly, every covered call that you sell will cost you $10.95 plus a dollar for each additional contract? (and each contract is 100 shares, correct?)
Essentially, you'd want to do trades that are over $500, if not over $1000 for this to make sense? Or am I missing something?
Also, I'm not sure what an option assignment is?


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## HaroldCrump

swoop_ds said:


> $9.95 + $1 / contract


That is quite reasonable.
Most of the big bank brokerages are charging the same or higher per contract, even for premium customers.



> $24.95 option assignments


Again, very reasonable.
Option assignments incur a full agent handling commission, around $45 or so at the big 5 brokerages



> So, if I'm reading this correctly, every covered call that you sell will cost you $10.95 plus a dollar for each additional contract?


Yes



> (and each contract is 100 shares, correct?)


Yes



> Essentially, you'd want to do trades that are over $500, if not over $1000 for this to make sense? Or am I missing something?


To justify the $9.99 fee, yeah sure.
It depends on what you consider a fair fee for your trouble and time.



> Also, I'm not sure what an option assignment is?


Option assignment is when your covered call is in the money and your account got selected to deliver the shares to a random buyer of the call who decided to exercise the call option.
Upon expiry, all in the money options are automatically exercised by the brokerages anyway so you will get hit with that fee if you were short ITM options.


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## swoop_ds

So the option assignment would happen to most of your covered call contracts I would assume? (either by the shares being delivered to a random buyer or at expiry)

Does this 'assignment fee' happen for each contract (100 shares) or each options trade?

If someone doesn't mind, I'd be interested in seeing how trade fees worked out in a real life option scenario? (If anyone is interested in sharing..)


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## andrewf

Most options traders will close their positions prior to being exercised.


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## HaroldCrump

andrewf said:


> Most options traders will close their positions prior to being exercised.


But _somebody_ will get exercised, right.
Whoever sold the ITM call to our investor for closing his/her short position will be the target of the exercise.
All OI for each ITM call will get exercised.


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## andrewf

Yes. But OI falls quite a bit before expiry. Most people are not interested in taking delivery.


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## avrex

*Options Commission Costs - Another way of looking at it*



swoop_ds said:


> Just wondering what sort of amounts need to used in order to not be eaten alive by fees?


*Option Commission costs*
a) When I trade options in my non-registered account at *Interactive Brokers*, commissions are fairly cheap, so I don't worry too much about the costs.
b) However, when I trade options in my registered account with the *Big Canadian banks*, costs are a little more steep. So I like to check to see if my transaction costs are reasonable, for what I'm trying to accomplish.

One way I do this, is I try to compare the cost of this options transaction to how much this transaction would cost if I was just doing a regular stock purchase.

*Sample calculation*. 
I purchase 4 contacts. The underlying stock costs $60/share. The delta for this strike price is .63.

The big bank commission would be $9.95 + (4 * $1.25) = $14.95

At the time of this purchase, my option contract controls,
4 contracts x 100 shares x $60/share x .63 delta = $15,120
of the underlying stock.

If I equate this transaction to a similar stock purchase, where I actually own the underlying, 
I'm paying the equivalent of a 1% commission (14.99/15,120.00).


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## swoop_ds

What is OI?

also would there be an assignment fee for each contract (100 shares) or just one assignment fee?

Scenario:
(keep in mind, I've never done this so the lingo and process might be messed up)
I sell a covered call for a few months from now for a couple strike prices over the current price of the underlying stock. 
I sell TWO contracts (200 shares)
I pay $9.95 + $2
I collect the sale price, whatever that may be.
I wait till the option is almost expired.

By now three things are possible:
1. The stock is past the strike price and is called away. (Do I incur more fees at this point?)
2. I let the ooption expire because the stock hasn't went up to the strike price. (Do I incur $24.95 OR $49.90)
3. I try to avoid the assignment fee, how exactly do I do this? Does it cost a fee?

Sorry for the questions.


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## HaroldCrump

swoop_ds said:


> What is OI?


Open Interest.

http://www.investopedia.com/terms/o/openinterest.asp



> also would there be an assignment fee for each contract (100 shares) or just one assignment fee?


There will be 1 assignment commission ($24.95 in the example above).



> I pay $9.95 + $2


Correct



> 1. The stock is past the strike price and is called away. (Do I incur more fees at this point?)


Yes, you will be assigned in this case.
You will be charged $24.95, taken out of the proceeds of the sale of your stock.



> 2. I let the ooption expire because the stock hasn't went up to the strike price. (Do I incur $24.95 OR $49.90)


No



> 3. I try to avoid the assignment fee, how exactly do I do this?


You buy the 2 contracts back.
If you sold the contracts for say 50c. per share (for a total of $100), you will likely have to pay a lot more to close the position since the option is now ITM.

There can be different ways of wiggling out of this situation.
That can be a topic for another discussion, but just as one example, you can buy the 2 contracts back to close the current position, and then sell 2 contracts for a higher strike price further out in time (say another 6 months).

This will either be a debit spread or a credit spread depending on many factors.

But whatever manoeuver you choose, one of the steps will involve buying back those 2 contracts that are ITM.



> Does it cost a fee?


Yes, of course 
In addition to any debit spread you may have to incur, you will have to pay the same $9.95 + $2 to close the position.
Then you will have to pay the same $9.95 + $2 for any new positions you may open to offset your cost.


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## swoop_ds

So when pricing whether an option makes sense or not, I essentially should assume that I would need to pay:
9.95 + (1*#contracts)
24.95 + (1*#contracts)


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## metatheta

I like the covered call strategy but I find it very prohibitive executing it on an ongoing basis with a Canadian broker because of their higher commissions. Larger trade sizes may overcome that but I've always felt that size is a personal matter. (Oh no don't get me started on my double entendres.)

In my opinion, having the stock price blow past your short call strike and being assigned is the best that can happen to you because it achieves the max gain of the trade. Assignment fees are the downside of this scenario, however.

Because of high assignment fees ($43 at my Canadian broker), I make sure that the short call premium I collect is at least 80 cents per contract or $80. If I get assigned and I've done multiple contracts, I collected premium from one contract to more than cover the fees.

I'm actually looking to do a covered call trade in TD soon for next week's earnings. I like the near-the-money Dec 97 calls. Stock closed 96.71 and the call bid is 1.29 making the natural price 95.42. I look at the trade this way. I effectively buy TD at 95.42 and have a sell stop limit at 97 or a 1.6% gain should TD trade up post earnings. If TD trades down post earnings, oh well, I bought it cheaper and will try to sell Jan calls against it to further lower my cost basis.

I did a similar trade last TD earnings and got called away because of the strong run up after earnings. I don't regret it because I made max gain on that trade. I am now ready to do it again especially with the recent pullback.

Covered call strategies are usually done for longer durations to capture time decay and volatility premium. However with volatility so low and a one-way upward market, the only time you can sell decent premium on a stock like TD is on earnings.


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## swoop_ds

I have a scenario for you, and tell me if I'm missing something:

Currently, KO ($40.14ish as of this writing) has an option call spread of:
Jan 15 2016 , Bid $2.94 , Ask $3.05 

If someone wanted to hold KO for the longterm, would it make sense to:
1. sell this call
2. collect the premium
3. I assume it would go over $42.00 more than likely before that point (but if not, you're holding it for the longterm anyways)
4. When it goes over $42, you would be forced to sell to the buyer of the call? (or is this not automatic?)
5. You would have made an extra $3ish (ignoring commission) per stock
6. Rebuy the stock at whatever you can get it for, assuming it hasn't rocketed past $45, which is possible

Is there a flaw in this that I'm missing? If a call is selling for more than the amount the stock needs to increase to get to the strike price (for instance, the premium is $3 when the strike price is only $1.86 away), isn't this a 'deal'? Or am I missing something?


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## avrex

You are performing a Covered Call. 
You own KO stock. Then you sell the KO 2016-Jan $42 Call and pocket $3.



swoop_ds said:


> 4. When it goes over $42, you would be forced to sell to the buyer of the call? (or is this not automatic?)


Once the stock goes over $42, it 'could' be called away at anytime (but not necessarily immediately). However, come option expiry date, Jan-2016, it will definitely be called away.



swoop_ds said:


> Is there a flaw in this that I'm missing? If a call is selling for more than the amount the stock needs to increase to get to the strike price (for instance, the premium is $3 when the strike price is only $1.86 away), isn't this a 'deal'? Or am I missing something?


Yes, the $3 premium you collect is great.
But when you sell a call on a stock you own, you have now 'capped' the profit.









*Scenario*
*KO goes up to $52* by Jan-2016.
You already have the $3 option premium that you collected.
On Jan-2016, the option holder exercises his right to *buy the stock from you for $42.*

_Wh, ...What?? But, it's worth $52 now_. 
Too bad. The other guy holds the option.
You gained a $3 premium.... But, you could have gained a $10 profit, just by holding the stock itself without selling options.

*Lesson*
I just want you to be aware of both the upside and downside to selling options. Fun, isn't it.


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## swoop_ds

Just out of curiousity, what is the benefit to someone holding the option once it has passed it's strike price?

Is it common for someone to hold off on exercising the option? Do brokers notify the option buyers when their options have reached the strike price?


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## HaroldCrump

swoop_ds said:


> Just out of curiousity, what is the benefit to someone holding the option once it has passed it's strike price?


The most basic reason of all - more profit.
The deeper the option is ITM, the higher the intrinsic value.

If you are the holder of a call option for a stock with a strike price of $10, and stock is now trading at $14, still 4 months left on the expiry, and stock appears to be in a strong uptrend, you'd probably want to let it run.



> Is it common for someone to hold off on exercising the option?


Yup, very common.



> Do brokers notify the option buyers when their options have reached the strike price?


No.
I don't think they even notify when you are getting exercised against.
If your short call is getting exercised, you will simply see the shares disappear one fine morning, and the cash deposited (less the commissions).

As a short call seller, it is your responsibility to keep track of the status of your option.


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## swoop_ds

Very interesting. Thanks for the info guys.


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## swoop_ds

So I've been watching the 'Where do I start' series on tasty trades. Great show, if not a little slow moving. So far after a few hours of talking they have haven't made any trades, but it seems like they will be moving towards selling puts without holding the underlying stocks. 

Is this allowed in a registered account? Or do you have to own the underlying stock in a registered account? I'm trying to figure out questrades rules on what you can and can't do in terms of options in registered and non registered accounts and I'm getting a bit lost. 

If I needed to open a non registered account to do this, would I need to fund the account with $1000? $5000? Or $25000? 
(I noticed that it depends on how much is in the account as to what you're allowed to trade within it)


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## swoop_ds

Also, the fees incurred would be: $9.95+$1/contract to sell the put and then $9.95+$1/contract to buy it back (plus the cost of the put) if it went past your break even point and you wanted to 'get out of the contract'?

I assume that the second transaction wouldn't even occur if the stock stayed above the strike price?


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## humble_pie

swoop it's valuable that you have this knack/talent for analyzing the end result of an option strategy. This will serve you well as you gain experience & knowledge.

it's true that at the beginning there is a steep learning curve & everything looks mysterious to a new options player. But hang in there, things will sort themselves out.



> 1. Just out of curiousity, what is the benefit to someone holding the option once it has passed it's strike price?
> 
> 2. Is it common for someone to hold off on exercising the option? Do brokers notify the option buyers when their options have reached the strike price?


1. why does long holder continue to hold? because his long option is now appreciating much faster than the appreciation of the underlying stock itself. As long as some theoretical value remains in the option, the holder won't usually sell or exercise until one of these scenarios happens: 

a) price of underlying stock turns south (in a call strategy);
b) option is so deep ITM that there is no TV left in the premium, it is instead 100% intrinsic value, sometimes even less than intrinsic value (the spreads tend to widen here);
c) a dividend X date has just passed;
d) an earnings play increases IV & sometimes gives him an opportunity to sell or exercise his long option.

2. yes, fairly common, for the reasons just set forth. Keep in mind that, for a long holder of a call option to exercise, he must draw down capital & pay for the stock. So interest rates get factored into option equations.

brokers don't notify when option positions turn into-the-money as opposed to being out-of-the-money (for calls, essentially when stock has risen past the strike price). Option players are supposed to keep on top of that; if not willing, then don't play haha.

to be honest i was underwhelmed by your long-KO-short-2016-call pair. 2016 is mighty far out in time to be going for a measly $3 on a $40 stock imho.

it's true you could be out eventually at 42, for a capital gain of $5 on a cash cost of $37, which sounds good except that it has to be amortized over 2 1/4 years! that's 27 months, so there's too much risk that stock could collapse, world could be lost, etc.

on the other hand, as avrex points out, KO stock might be at $52 by 2016. Probabilities are difficult to work with when expiry date is so far out, but you can see that if stk = 52 by 2016, then selling the 42 calls will turn out to have been a thoroughly daft idea. I think it's more manageable to work in shorter time increments.

was there something wrong with the may 2014 42 calls in KO? you could have received $.80.

going out farther in time, to 2015, the 42.50 & the 45 calls look OK at around 1.62 & .95 respectively. Best not to go farther than 2015.

as for questrade, they have tried to make things simple, which is commendable, but imho they've gone too far. Some of their simple "strategies" on sale will likely lure novice players into being active - which will be very good for the broker - but they are not helping the novices to start laying down a solid knowledge foundation.

missing from questrade, for example, are discussions about the greeks, IV, open interest. These are key concepts.


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## humble_pie

swoop_ds said:


> ... selling puts without holding the underlying stocks.
> 
> Is this allowed in a registered account?


no, cannot sell puts in registered accounts (minister of finance regulations).

in non-registered, most brokers require a level 4 trader. I don't know what questrade requires.

the short put will be regarded as naked unless it is covered ... the only thing that can "cover" a naked put is a different long put (coverage may be partial) or else a short position in the stock.


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## swoop_ds

^is this different for united states folks? The reason I ask is the young lady in the show who is learning options has a $2500 account but seems to be able to sell naked puts no problem using think or swim / TD Ameritradr in what seems to be an unregistered account. (I believe the requirement for a 'level 4' option account is $25000 at questrade)


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## swoop_ds

So, to go along with my last post, is there anywhere that you can sell puts in Canada with a small account ($1000-$3000). I don't have the means to open a $25000 non-registered account but would like to maybe 'get my feet wet' with some of the stuff that I've been learning. It really seems like selling options is the better play(not always of course).


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## braintootired

What's the point of a synthetic long (long OTM call + short OTM put at zero cost) if your broker requires you to have the cash available to cover the short put? Why not just buy the underlying stock?


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## humble_pie

swoop_ds said:


> So, to go along with my last post, is there anywhere that you can sell puts in Canada with a small account ($1000-$3000). I don't have the means to open a $25000 non-registered account but would like to maybe 'get my feet wet' with some of the stuff that I've been learning. It really seems like selling options is the better play(not always of course).



swoop, not that my opinion matters, but i'm afraid the sad truth is that 1-3k is not yet enough to trade options. Certainly u will never be allowed to sell puts, i'm fairly sure of that.

there is a talented CA in cmf forum who calls himself Charlie. A while ago Charlie was advising another young person. I thought his words should be cast in stone, they are so flawlessly correct & appropriate.

this vancouver chartered accountant said that the *really* important thing for every young beginning investor is to save regularly. So much off the pay check, into savings, automatically, each & every month.

Charlie said that the choice of what-all this gets saved into is not particularly important, as long as it is not some outlandish investment vehicle like vintage comic books or maybe bitcoin. He said that just about any sensible investment vehicle will do. Canadian equity or balanced ETF, GICs, HISA, whatever.

with these middle-of-the-road instruments, a young investor is not risking to lose very much. Meanwhile, the incredibly long life of the investment savings period ahead - 50 or even 60 more years - will kick in & turn that modest $10k program into a million dollars, if only a young investor would just get started.

what Charlie's advice means to you, swoop, is that it'll be a little way off before you can put your new options knowledge to actual use. You'd best save up $10-15-25k first, before you can even buy a stock & sell its call.

but when you do get there, you'll probably do OK because it looks like you have the knack ...


----------



## swoop_ds

It's too bad that there are all these little 'levels' etc but I guess I understand the reason behind them.

For now, I will keep doing my index investing / dividend Dripping and meanwhile, slowly save up for a larger non-registered account.


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## humble_pie

swoop_ds said:


> It's too bad that there are all these little 'levels' etc but I guess I understand *the reason behind them*.
> 
> For now, I will keep doing my index investing / dividend Dripping and meanwhile, slowly save up for a larger non-registered account.



a primary reason is that it's the broker that is on the hook to all the different options exchanges for every option position undertaken by its clients.

the clients themselves are not, personally, on the hook. It's their broker, 100%.

this is the reason why brokers are obsessive about vetting & controlling what kinds of option plays their clients get to do. No broker is going to allow anything that might compromise its own integrity, if a client's strategy were to blow up.

an interesting by-product of this arrangement is that option positions are guaranteed by the exchanges themselves, who act as counter-parties at all times.

this is unlike futures, forward contracts & swap markets, where my understanding is that these are traded by bank treasury departments with individual counter-parties but no guarantor in the middle. The risk of failure is therefore higher. Failure of a counter-party means collapse of the entire deal for both parties.


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## swoop_ds

Well that makes sense that they'd want to cover their own behinds.

I wonder what would happen if I funded the account with $25000, asked to get level 4 options 'turned on', and then withdrew $22000....


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## humble_pie

swoop_ds said:


> Well that makes sense that they'd want to cover their own behinds.
> 
> I wonder what would happen if I funded the account with $25000, asked to get level 4 options 'turned on', and then withdrew $22000....



what do u think would happen?


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## swoop_ds

Well I would like to think that they wouldn't notice and then I could go on my merry way but I doubt it would be that easy


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## humble_pie

that's an insightful doubt ... 

the system would not let you withdraw, period.

see? it's like i mentioned, u are good at analyzing future probabilities ...


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## swoop_ds

I did some research by opening a papermoney account through TD Waterhouse / Think or Swim Canada / TD Direct Investing / whatever else they call themselves... then I opened up a chat with the support desk to get some answers:


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## swoop_ds

I also now wish I would have asked the guy if what he said essentially means that you need to fund the account with 'more' than $10000 since if you made your first trade and dipped to $9999, you'd have less than the $10000 requirement.


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## avrex

swoop_ds said:


> Think or Swim Canada


Please be aware that using the ThinkOrSwim Canada platform is ridiculously expensive.... 
...as in *'one would be forced to incur a minimum of $1,200 in annual commissions'* expensive.


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## swoop_ds

What happens if you don't make enough trades?


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## swoop_ds

I guess also to get this thread a bit back on course, what canadian companies do people on here trade options of?

What about us companies?


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## avrex

swoop_ds said:


> what canadian companies do people on here trade options of?


List of suitable Canadian TMX Options


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## swoop_ds

Thanks for the link!

ALso, I was trying to find information about what you said earlier about needing to make 30 trades a quarter with TD / think or swim canada. I didn't have a whole lot of luck, where did you get this information?


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## frosty

swoop_ds said:


> It's too bad that there are all these little 'levels' etc but I guess I understand the reason behind them.
> 
> For now, I will keep doing my index investing / dividend Dripping and meanwhile, slowly save up for a larger non-registered account.


@swoop_dsL: Try Interactive Brokers. They now have removed the pattern day trader rule for Canadians and you can trade options for under a buck a contract. Not that I recommend trading options on a small account but if you wanted to, IB has a great platform for options (confusing at first though)

Hope this helps!


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## humble_pie

swoop most canadian options are illiquid, their montreal markets are froze up, there's no use bothering to trade em

(no offence to avrex' list, i'm sure it's a good list) each:


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## avrex

no offense taken, humble_pie. 

In fact, I have yet to trade a Canadian option. 
My list was for those (people without USD) looking for some suitable possibilities (i.e. 500 contracts traded per day), in the Canadian market.

Similar to you, I try to find highly liquid options.
For me, so far, that's been the *US market.*


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## avrex

swoop_ds said:


> needing to make 30 trades a quarter with TD / think or swim canada.


My statement was based on research from a couple of years ago. Perhaps things have changed. From what I recall, if you didn't keep up the minimum 30 trades/quarter, they'd close your account.

I don't see this info on their website. 
@swoop_ds, perhaps you'll have to do the live chat with ThinkOrSwim to confirm this info.


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## humble_pie

avrex said:


> ... I try to find highly liquid options.
> For me, so far, that's been the *US market.*


yea markets are so much better stateside. I was rolling over my 3 aapl calls today, i started with the more difficult side which was selling the julys, i offered at outrageously high price, i was astonished somebody bought, then i went to buy back & close the aprils & now of course i felt some pressure to hurry up & close, still i bid an outrageously low price ... & somebody sold to me!

i'd never be able to trade so easily on montreal.


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## swoop_ds

One of the little things I have learned is that liquid "Efficient" markets are a good thing for options trading. I was playing around with a stock screener and noticed that a good part of the liquid stocks are interlinked, which was confirmed from the avrex link. Too bad that the canadian options aren't the best for trading. 

In reply to avrex above, I will maybe strike up a chat with a TOS guy again tomorrow about the trade minimums. I noticed that from reading avrex's site that IB is good for options traders. Anyone know if they have different options 'levels' requirements? Once again I am having a hard time finding this information as the site seems geared towards US clients. I will try the good old fashion phone call tomorrow if I continue to have no luck. 

On a side note, I would love to hear details of any recent trades gone wrong if anyone is willing to share?


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## HaroldCrump

swoop_ds, IMHO, you should not obsess over the _minimum_ deposit required in an account for option trading.
Because (again IMHO) $10K is too low.

You are speaking of selling uncovered calls, yeah?
Well, that is the _last_ level of option trading - Level 5.
Selling uncovered puts is Level 4.

With all due respect, it is not a good idea to sell uncovered puts or calls with an account size of $10K.
You will be able to play only with stocks of very small nominal value, such as stocks below $5.
Even then, you will be able to do a small number of contracts.

Secondly, as soon as you enter into 1 uncovered short position, you are "stuck".
The cash balance in your account is "locked" for that position.
You cannot (should not) buy any other long position, or sell any other uncovered positions.

It is really hard to do anything other than covered call writing (Level 1 of options trading at most brokerages) with an account size of $10K.

I would re-iterate the suggestions up-thread regarding an indexed couch-potato investing strategy or a small number of high quality blue chip stocks.
Then save like crazy and grow your account size.


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## swoop_ds

I think that the naked options obsession is slowly coming to an end for me!

Just to clarify though, I am in good share with a couch potato portfolio (RRSP and TFSA) as well as some 'Dripping' dividend stocks (non-registered). The options stuff would be an addition to my portfolio, not a replacement.

I sold my first covered call today in my questrade account just to see how the mechanics of it work. Exciting! (my wife doesn't see the excitement in this)

Just a question about covered/uncovered though:
Can 100 shares of a stock 'cover' both one put contract and one call contract? Or would that require 200 shares?
Some of the strategies and their names kind of elude me, but would this be called a straddle or a collar? Or some other animal?
Is this allowed in a registered account or would this animal need to live in a non registered cage?


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## HaroldCrump

swoop_ds said:


> Can 100 shares of a stock 'cover' both one put contract and one call contract? Or would that require 200 shares?


100 shares will cover one contract of a covered call.
There is no direct "cover" for a short put, other than keeping free cash in your account that is enough to "cover" i.e. buy the stock in case you are "put'ed".
Or, another long put with a higher strike price and same (or later) expiry.

In a margin account, the rest of your holdings will determine how covered or uncovered you are.
Different stocks have different margin eligibilities.
The brokerage will liquidate whatever is required to cover a short put (in case you haven't kept enough free cash around), or to cover a naked short call.



> Is this allowed in a registered account or would this animal need to live in a non registered cage?


You can do only two types of options in registered accounts (incl. TFSA and RESPs) - covered calls, and simple long calls.
You cannot do long puts, short puts (cash-covered or not), or any of the other multi-legged strategies.

To do options properly without tying your hands and feet, you need a margin account and some reasonable cash balance.


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## avrex

HaroldCrump said:


> You can do only two types of options in registered accounts (incl. TFSA and RESPs) - covered calls, and simple long calls.
> You cannot do long puts, short puts (cash-covered or not), or any of the other multi-legged strategies.


I believe Long Puts are allowed.

In fact, I currently hold Long Puts in my TFSA (which I don't plan to exercise.)


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## humble_pie

i believe policy on long puts in reg'd goes broker by broker.

avrex don't u remember lephturn complaining that roybank wouldn't let him buy puts in rrsp? he certainly couldn't sell puts, which is why he developed an aberrant Telemark ski twist in short puts that we named the Left Turn.

but lepht also said that roybank wouldn't allow him to buy puts in reg'd. That roybank is so ess aitch scared of options, there's no way any serious option trader could ever go to em or stay with em.

i suppose the risk worrying roybank about allowing long puts in registered accounts is that the client might up & sneakily exercise those puts behind their backs, when they're not watching, thus leaving a reg'd account with a not-allowed *illegal* short stock position. Oh, the horror, the horror.


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## andrewf

Questrade allows long puts in registered accounts.


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## swoop_ds

Is there any merit to picking a stock based solely on the income it can generate from it's covered calls? (I'm just asking this to generate discussion)

For example, FaceBook seems to have relatively high covered call premiums due to it's high volatility. Do you think it's likely that you could buy FB, sell covered calls, and have the following occur:
1. Stock stays ho-hum and you keep raking in dough so to speak minus commissions.
2. Stock keeps going up, you keep having to buy it back and/or move to a different volatile stock.
3. You ride the stock into the dumpster and just sell covered calls all the way down.
4. A mixture of all three, ending in #3.

Is this 'strategy' worth it? Or are you asking to get pummelled? If the stock kept going down and down and down over time (either due to a market crash, or a dying company), would the premiums melt along with it? Stay the same ish? Get higher?


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## andrewf

There's an interesting ETF called High Volatility Put Write (ticker HVPW) that write (sells) cash-covered out of the money (by 15% or so ) puts on high IV stocks.

To buy stocks with high IVs to write covered calls against is a bit risky. Usually stocks with high IVs have them for a reason, with some sort of binary event coming up (drug trial, etc.). The only way to mitigate this risk is to be diversified, which is difficult due to the capital required.


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## swoop_ds

It's funny that you mention drug trial!

I might open a 100 share covered call position for Dec 21 for GERN tomorrow morning.

It won't cost/make a ton of money but I want to go through a few of these 'soft' trades to see how this all works and get my feet wet.


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## andrewf

I'd recommend against writing covered calls against highly speculative high IV companies. You're just gambling at that point.


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## metatheta

You're on the right track with getting started in options. You have indentified a few points which I consider when trading options:
- liquidity (good volume and narrow bid/ask spreads)
- US options over CA options
- volatility
- selling premium

With regards to the last two points, you've picked a tough time to get started in selling premium because volatility is unusually low. If you believe that markets are cyclical, volatility should start to go higher again and that's a better time to sell premium.

I think that you should focus on a process on selecting underlyings to trade. Identify parameters for your trade. Look for sustained high liquidity as indicated by open interest, volume and bid/ask spreads. Look for high implied volatility and compare against past implied volatility. A stock may have high implied volatility today but it may be relatively low compared to past implied volatility. Stock scanners may help you here.

In general, high implied volatility allows you to do credit spread strategies and be less directional. If implied volatility is low, you may have to turn to debit spread strategies and be more directional.

Come up with a process and identify trade parameters which you can use over and over. Build a strategy playbook which you can tweak over time.

Hold off on that GERN covered call unless it has gone through your process and fits your trade parameters.

People will say that options trading is very risky. I believe that you can control your risk using options. Always know where your breakeven point is and whether you have defined or undefined risk. I can mathematically show you that a short put is less risky than long the stock.

Another topic in trading options not talked by many is rolling and repairing. You cannot win every trade. There are times when you can keep the dream alive by rolling or repairing. However, expensive commission structures make this prohibitive. You will need low commissions to execute these strategies.

If all this is overwhelming, then there is always the couch potato strategy. Nothing wrong with that.


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## braintootired

Wow, to trade options at IB, you have to take an _exam_. Not all of the questions were easy!


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## andrewf

That must be new! I don't recall having to do that.


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## HaroldCrump

Reg. long puts in RRSP accounts, I just checked iTrade again and it seems to be allowing me to do this !
I am positive it wasn't allowing this 2 -3 years ago when I first tried doing it.
I never re-tried.

Maybe the platform was still E-Trade's instead of Scotia iTrade.
Or maybe this is indeed a change in the brokerage policy.

I am not sure if the ability to buy long puts in an RRSP is too helpful, other than to hedge one's portfolio by buying long index puts on the XIU or the SPY.
It is too expensive to protect individual stocks (esp. long term holdings) by buying puts every few months or every year.
All I can think of is 1 year out SPY or XIU puts.


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## andrewf

I wouldn't bother buying puts to hedge an equity position. They're usually too expensive.


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## braintootired

andrewf said:


> That must be new! I don't recall having to do that.


Is it? Haha, well they really screen their customers now I guess. Imagine other brokers doing that!


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## swoop_ds

Question on 'option theory':

For a very short time period call that is currently the next strike out of the money and has about two weeks left before expiration, will the option and stock more or less move in tandem?

As I mentionned upthread, I was thinking of buying 100 shares of GERN, sell a Dec21 call, and see how that all works. (mostly to see the mechanics of such things, and try to learn something from it) I ended up buying at 5.51 and then sold the call for $0.75. At first I was a little annoyed that I couldn't get to work fast enough to buy it this morning as the stock opened around $5.35. Over the course of the day, the stock has went up and is hovering in the 5.60-5.75ish range. Meanwhile, the call has also went up. Therefore, I figured that it doesn't really matter too much the difference that I entered as the call would have been sold for less had I entered at $5.35, so that it would be nearly a wash. (close enough anyways)

Is this logic correct?

NB - This stock is a high IV stock


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## avrex

HaroldCrump said:


> I am not sure if the ability to buy long puts in an RRSP is too helpful, other than to hedge one's portfolio...


The reason that I use puts in my registered account (RRSP/TFSA), is so that I can utilize a *long-short strategy*.

For example, I'll do a technology sector long-short. 
I will buy in-the-money *calls* in a tech company that I think will *appreciate* in value. 
I will buy in-the-money *puts* in a tech company that I think will *depreciate* in value.


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## metatheta

swoop_ds said:


> Question on 'option theory':
> two weeks left before expiration, will the option and stock more or less move in tandem?


You can quantify the move correlation by checking the delta of the option. The GERN Dec 6 call has a 0.55 delta. That means that the option tracks 55% of the move of the stock. Be aware that the delta is a dynamic number.

Personally, GERN would not be in my list of underlyings to trade. The implied volatility is there but the liquidity really isn't there. The bid/ask spread is wide at 5-10 cents and this is huge considering it's a $5 stock. Although the Dec option interest and volume seems good, there is hardly any in Jan. For liquidity comparison, take a look at ZNGA ($4) and GRPN ($9) with 1-3 cents bid/ask spread with good volume across all expirations. It's usually very liquid if the underlying has weeklies.

ZNGA and GRPN have high current IV compared to other stocks but they are relatively low right now compared to their historical IV so selling premium isn't really good for them right now. I just wanted to illustrate a liquidity comparison.

GM and MSFT come up on my scan with high IV and excellent liquidity. If you have a bullish assumption on them, you can do a covered call or a short put. If you are bearish, you can do a short call vertical or short call. If you are neutral, you can do a strangle or an iron condor.


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## metatheta

I got my trade in for MSFT this morning because IV was unusually high. I was bearish so I did a short call vertical. But then again I was bullish so I did a short put. So I placed a Jan 39/40 short call vertical and a Jan 37 short put for 1.07CR. It is a neutral to mildy bullish trade. Max gain is between 37 and 39. Beyond 39, I make 7 cents. Below 37, I will own MSFT for 35.93.

I had my order in this morning then the bottom fell off on MSFT and IV exploded. There was some news about a car CEO. Anyways, I got filled but I wished I placed the order much later to get a better credit. Oh well, I'm now just waiting for IV to contract between now and Jan expiration.

I actually still have a MSFT Dec 37/38 1:2 call back ratio (long 1 Dec 37 and short 2 Dec 38) trade on right now. I put it on when IV started to creep up late last month on the day they released some kind of black box product. This trade was against me as MSFT price and IV went up but is now right at the 38 home run zone.

MSFT, please stay at 38 for Dec expiration and Jan expiration too.


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## swoop_ds

So far my GERN covered call is working. (bought 200 shares at $5.51, sold two covered calls at 0.75 for dec 21 @ $6 strike)

If I ever get a non-registered account up and running that allows vertical spreads, it seems like these would be more up my alley for stocks (like GERN) that are more or less being buoyed by thin air. I like the limited risk characteristic of them vs a covered call.


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## metatheta

I'm stepping in front of a little red Corvette today and hope that Prince doesn't run me over. GM is at a 3-year high and IV is higher than normal. I will go for a bearish reversal. I sold Jan 40/42 call vertical for 0.90CR. Max loss is 1.10. I'm hoping for one big down day in the markets so I can cover this.


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## avrex

metatheta said:


> I'm stepping in front of a little red Corvette today and hope that Prince doesn't run me over. GM is at a 3-year high and IV is higher than normal. I will go for a bearish reversal.


Two awesome things:
- selling high IV for credit.
- Prince references


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## swoop_ds

what do you guys think about doing iron condors for some of the tech stocks that have weekly options? Seems like decent returns for relatively manageable risk?


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## metatheta

Weeklies don't give you a lot of time to be right in case you are wrong. You may not be able to get far enough strikes. If you are playing for a binary event like earnings, weeklies may work well because they Pump Up The iVol.

Volatility sucks right now if you are a premium seller. Just look at the VIX. There's not much iron condor plays out there. For a duration iron condor, you need an underlying that is stuck in a range with higher than normal IV. Same goes for a short strangle which has greater reward but also greater risk.


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## avrex

Too many legs :cower: for this simple options guy. 
Since, I usually have a directional bias in the underlying that I'm targeting, I keep it to one or two legs.


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## humble_pie

metatheta said:


> For a duration iron condor, you need an underlying that is stuck in a range with higher than normal IV. Same goes for a short strangle which has greater reward but also greater risk.


true. I like CNQ US options as a naked short strangle. It's my only NSS. CNQ has been stuck in a band for more than a decade. Please do not think of joking back that it's spelled $SS.

watch. I'll post this & comes spring 2014 CNQ will probably phhhhhht s.o.a.r. just to spite the nose on my face.


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## swoop_ds

I don't have any prior context to go on, but you're saying that premium isn't carrying much premium these days? (Pardon the pun)


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## metatheta

To get context as to whether current implied volatility is high or low, you need to look at past implied volatility. Do not confuse this with historical volatility which is the actual underlying price volatility. IV is the volatility implied by option prices, hence the name.

Try to find past implied volatility on your platform charts.

VIX shows the IV for the S&P 500.

The CBOE also provides IV for five underlyings. You may be able to just type in the symbols on your platform charts.
VXAPL - AAPL (You can see this slowly creeping up. Selling premium in AAPL may be good again.)
VXAZN - AMZN
VXGS - GS
VXGOG - GOOG
VXIBM - IBM
http://www.cboe.com/micro/equityvix/introduction.aspx


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## HaroldCrump

-- nevermind --


----------



## humble_pie

thomas peterffy, a hungarian-born math genius who founded Interactive Brokers, begins to publish the Probability Labs. These appear to be his knowledge bequest to the world.

https://www.interactivebrokers.com/en/index.php?f=5910

probabilities for AAPL look a bit skewed as of 18 nov/13 though.


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## braintootired

I've been using that. I thought every broker had a tool like that. Pat myself on the back for going with IB.


----------



## avrex

I just started playing with the *Interactive Brokers Options Probability Lab.*

I'm looking at the AAPL March 2014 options. The initial graph shows the market implied probability.
I then adjust the probability distribution graph towards a graph that reflects my opinion of what I believe the probability is.

I click a button to request a two-legged strategy for my graph. 
It suggests the following short-strangle strategy:
- Sell 1 565 Put @33.40
- Sell 2 650 Calls @8.20










My maximum gain is 4980. I'll need 30,000 in margin to cover this transaction. My maximum loss in unlimited.

If my opinion/adjusted graph represented the actual probability:
- My Ev (Expected profit) is $371
- My probability of making any profit is 66%. I have a 37% chance of hitting the max profit.

Interesting stuff. I'll need to play some more.


----------



## braintootired

Options usually expire on a Friday. Does that include after-hours prices, or is the last price used at 4PM used to determine if you're assigned, or if you can exercise?


----------



## braintootired

Alright, did my first covered call trade. GO APPLE!


----------



## Spudd

You sold covered calls? Then, don't you want Apple NOT to go?


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## metatheta

When selling covered calls, the best scenario is for the underlying to blow past your short call strike because it puts you at max gain.


----------



## braintootired

Yup. Weekly, 1 strike out. Max gain 1k.

If I sold naked calls, I'd want Apple to... not go.



braintootired said:


> Options usually expire on a Friday. Does that include after-hours prices, or is the last price used at 4PM used to determine if you're assigned, or if you can exercise?


I'd like to ask this again. Which price is used to determine whether you're assigned or if you can exercise? The last price at 4PM of the expiry Friday?


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## humble_pie

metatheta said:


> When selling covered calls, the best scenario is for the underlying to blow past your short call strike because it puts you at max gain.


that's what killed the HEX fund

option trader is out with proceeds in hand but stock price has shot way north of proceeds. He can only put on fewer positions. Rinse & repeat.

of course, in reality trader can turn to a different stock. HEX was confined to its draconian core 30 so pretty soon it was hexabyebye capital.


----------



## humble_pie

braintootired said:


> I'd like to ask this again. Which price is used to determine whether you're assigned or if you can exercise? The last price at 4PM of the expiry Friday?


brain i think that it's closing price at 4 pm, i think i recall that only index options trade late, past 4 pm.

but what would i know. Especially since the pie would never be seen dead in such circumstances. For more definitive answer you might like to try the Options Council in chicago. 1-888-options.


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## humble_pie

it looks as if i could be wrong with that 4 pm idea.

here's a discussion of the after-hours trading risk for exercise on Elite Trader. This is an option discussion forum partly subsidized by Interactive Brokers.

please notice particularly the reference to 5:30 pm when "processing starts," although we don't know, definitively, for sure, that this is true.

however in such a scenario, there could be exposure from 4 pm, when option trading ceases, until 5:30 pm.

http://webcache.googleusercontent.c...php?threadid=275806+&cd=3&hl=en&ct=clnk&gl=ca

but please also notice the high levels of confusion. All the more reason to check with 1-888-options.

what would be worrisome would be the vulnerability of the short option player during the minutes or hours that trading in options is closed but exercise orders can - apparently - still be placed. Such orders could be triggered by after-hours stock trading patterns.


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## braintootired

I'm going to call them next week to clear up the confusion.

I've seen what they call "pin purchases" with Apple stocks. Like 50 million shares at 552.50 at 4:01PM on Fridays. I don't know why these purchases are made. If after hours prices are used, then it would make 555 cals and 550 puts expire, if market makers sold a bunch of them they would have an interest on keeping the price right in the middle.

But after hours are so illiquid that it wouldn't make sense to have a single share's purchase (or even a single lot) determine whether an option expires.


----------



## metatheta

I really don't know what price they use. Regardless whether they use the 4pm price at expiry I prefer not to deal with the uncertainty of being assigned or not assigned by closing the position if it is near the strike price. I've closed a position as late as 3:45pm on a Friday expiry because I just didn't know if it was going to be ITM or OTM.

I trade VIX options and that has an oddball expiry. Dec monthly options expire next Tuesday. I closed a VIX long call vertical spread yesterday with the recent spike in volatility. There was no point waiting until Tuesday expiry and give the gains back should volatility go back down.


----------



## humble_pie

here's an assignment scenario i sometimes wonder about. I've never found anyone with the depth of experience - including working inside the industry - who could answer me. Most parties will alas just hazard guesses.

what i'm wondering about is an early assignment instruction that is handed to a broker during the course of a trading day, at a moment when it makes sense. For a call option, this is often a DITM option during the days prior to a dividend X date.

however, immediately after such an assignment, suppose the stock moves dramatically in the opposite direction, soaring (or plunging as the case may be) completely out of the ITM range. At the close of trading at 4 pm, it would no longer be beneficial to assign/exercise this particular contract.

obviously the 2 parties to the exercise contract would be required to carry out their obligations.

but what of the party who is short an DITM call option just before an X date for a high dividend stock? such party, as i know from experience, is often already scurrying around in the markets looking for rescue opportunities.

this is why i say to myself - when monitoring option positions for early assignment risk - it's not helpful enough to just think about closing stock prices. The price that has to be kept in mind is the high of the day, for a call, or else the low of the day, for a put.


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## metatheta

My best practice is: If in doubt, close out.

I heard a story about someone who had a couple of hundred GOOG options that he allowed to expire. He got assigned. GOOG gapped against him the following Monday. Ouch!!


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## braintootired

Is it possible to settle an option in cash?

EDIT: I did some research and I think what I want is called a "contract for difference" CFD. But that's a type of futures contract, and I don't know anything about futures yet.

EDIT: OK, as far as I can see, CFDs are like buying a stock at 20X leverage, but you don't get voting rights or dividends. You have unlimited loss potential, but CFDs don't expire like options or futures.


----------



## metatheta

In general, if the underlying is not traded then the options are cash settled. If the underlying is traded then the options are physically settled.

For example, SPX is an index but not traded so its options are cash settled. SPY is an ETF and traded so its options are physically settled.

Other popular cash settled options are on RUT, NDX, OEX and VIX.

I think you can give special instructions to your broker on how to settle your options.

Here's another cash settlement scenario. I had an AAPL Dec 520/525 long call vertical. It was DITM and I could have let it expire this Friday. The 520 call was long and the 525 call was short. When it expires, the 520 would have been exercised while the 525 would have been assigned. They cancel each other out and my account would have been credited the difference.

I closed this vertical spread early last week when AAPL was at 570 for 4.85. I didn't want to risk my gains for another 15 cents with two weeks to wait.


----------



## braintootired

Why keep a vertical call position open after the price has risen past the second strike?


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## metatheta

The max value of the long call vertical spread is the difference between the strikes. If the underlying price is past the short strike and there is still a lot of time left to expiration, the spread value would still be far away from realizing the max value. The closer you get to expiry and the position remains ITM, it will get closer to max value. So even if both options are ITM, it is the trader's choice to stay in the trade to let more of the time value burn off to capture more value. However, he risks a reversal on the underlying which could wipe out the gain.


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## avrex

*Option assignment - with not enough money*

*How would this hypothetical scenario play out.*

I hold a deep-in-the-money Jan-2014 call option.
I go on vacation and completely forget about this position.

In Jan-2014, the ITM call option would be automatically exercised.
My account would take delivery of the underlying stock.

However, my Brokerage's TFSA account (i.e. not a margin account) does *not have enough money* to buy (take delivery of) the underlying stock.

*What does the Brokerage do next?*
a) On Monday, when the stock market opens, the brokerage would immediately sell the security, at the market price?
b) Or would the brokerage wait 3 days (stock purchase T+3) before it liquidated the position?


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## metatheta

avrex said:


> In *Jan-2014*, the ITM call option would be automatically exercised.
> 
> a) *On Monday, when the stock market opens*, ...


avrex, if your options are for a US stock, the US markets are closed on that Monday for MLK,jr day. The markets reopen Tuesday.:highly_amused:

Seriously though, I know it is a hypothetical situation if you forgot about your position but as a vacation checklist, you need to manage these positions before leaving. This falls under my "If in doubt, close out (or roll out)" best practices. 

Your broker should have the definite answer but sometimes they may not be clear of the process either. Why risk an uncertain outcome?


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## avrex

I agree. I would definitely recommend closing beforehand. 

I was just thinking aloud about worst-case scenario.


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## avrex

*Wow - Options Thread - Page 100*

Welcome to Page 100.

If you've actually read all 100 pages..... y̶o̶u̶ ̶a̶r̶e̶ ̶a̶ ̶g̶l̶u̶t̶t̶o̶n̶ ̶f̶o̶r̶ ̶p̶u̶n̶i̶s̶h̶m̶e̶n̶t̶ .... congratulations!

We've learned/shared a lot in the last two years.

With options, there are so many ways to 'play it'.

I'm looking forward to discussing more option strategies, in the future.


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## HaroldCrump

Page number depends on your settings.
I see *only* 25 pages


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## avrex

HaroldCrump said:


> Page number depends on your settings.
> I see *only* 25 pages


I did not know that. Thanks for the tip.
I'm going to change my settings. 25 pages doesn't seem so bad.


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## humble_pie

avrex said:


> *How would this hypothetical scenario play out.*
> 
> I hold a deep-in-the-money Jan-2014 call option.
> I go on vacation and completely forget about this position.
> 
> In Jan-2014, the ITM call option would be automatically exercised.
> My account would take delivery of the underlying stock.
> 
> However, my Brokerage's TFSA account (i.e. not a margin account) does *not have enough money* to buy (take delivery of) the underlying stock.
> 
> *What does the Brokerage do next?*
> a) On Monday, when the stock market opens, the brokerage would immediately sell the security, at the market price?
> b) Or would the brokerage wait 3 days (stock purchase T+3) before it liquidated the position?




avrex i can't back up or underline theta's suggestions in message 989 enough.

never, never, never leave option positions unattended as a) expiration date approaches, or b) dividend X dates approach when option is DITM & there is not sufficient premium to buffer an exercise.

me i am more conservative than theta & i am dancing all over my positions starting 2-3 months before the danger dates. At first i waltz slowly, gracefully; all is calm, all is bright; everything is logical & relaxed. This usually works. Generally speaking i'm able to get things fixed up with some kind of new credit rollover.

never by choice would i leave things to the last minute.

as for your tax-free, this i imagine must be at a bank broker, not at IB? anyhow u have no margin in a tax-free. I'd see no reason for the broker to allow 3 days until settlement. It's theoretically possible you might be able to make an arrangement with them whereby you would commit to contribute the necessary funds before settlement date if you were assigned. If you would still have the contribution room. If they would agree to accept such an order a long time in advance (i doubt they'd accept.)

but then, you told us you'd forgotten all about the position, so how could you remember to make the special arrangement, right?

imho it's much easier to sweep accounts regularly, looking in advance for option danger points.

in any event you want to check with the broker, as theta suggests. My guess is that they'd just sell the stock pronto in order to offset the assignment. This would not, in itself, be an undesirable event, i imagine? i mean, u must have taken an assignment calculation into consideration when you put the position on?


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## braintootired

Is it more profitable to sell weekly covered calls, or monthly/longer?

Also, did anybody notice Apple's strike prices just went from increments of 5 to 2.5? Is that a sign that volatility is decreasing?


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## KrissyFair

Wow, I miss a couple of weeks and there are 12 new pages to go through!!!

@Swoop - I'm also totally new to the options world and your posts look like the inside of my head, so thank you 

So I have a question since it's just occurred to me that the year is about to end, so I'm going to have to start going back through my trades to do taxes... Anyway, how do you guys track your trades? Specifically, if you use a spreadsheet I would love to know how you structure it.


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## braintootired

Instead of selling a covered call, what if you sold a covered single-stock futures contract? Differences between selling a call?


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## swoop_ds

To go along with a post above, what do you guys think of purchasing 200 shares of facebook and then selling weekly covered calls that are just ever so slightly otm for income? Do you think facebook stock dropping by a tonne over the next year would effect the amount of income that this would generate? (I see the stock dropping as the main drawback, in addition to losing out on the upside potential)

The premiums seem juicy (1.24 for a strike price that is 0.06 otm)


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## humble_pie

swoop_ds said:


> To go along with a post above, what do you guys think of purchasing 200 shares of facebook and then selling weekly covered calls that are just ever so slightly otm for income? Do you think facebook stock dropping by a tonne over the next year would effect the amount of income that this would generate? (I see the stock dropping as the main drawback, in addition to losing out on the upside potential)
> 
> The premiums seem juicy (1.24 for a strike price that is 0.06 otm)



swoop the prob i have with u is that u keep on bombarding this thread with totally novice & somewhat silly ideas. Meanwhile you fail to pay any attention to suggestions from us wise old pharts.

why don't you look at your GERN venture? it was politely suggested to you to refrain from the GERN buy-write. As predicted, this bargain-basement ultra-short-term cruise has turned out badly, once commish costs are factored in.

swoop this is going to sound brutal but imho you are a person who did not commence with sufficient funds to trade options. You have mentioned up top that your total investment monies are a few thousand dollars, that's it.

are you not the parent with a newborn child or a baby on the way? alas, you are doing what so many option novices do. They think they can game the system but they promptly end up losing all of their money. Repeat: within. a. few. weeks. or. months. they. lose. all. of. their. money. This is not any kind of appropriate conduct for a responsible young father imho, in fact it is quite alarming to hear about.

please come back when you have saved up at least 50-100k. In the meantime please read up about covered income calls, they are elementary-my-dear-watson.


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## humble_pie

braintootired said:


> Instead of selling a covered call, what if you sold a covered single-stock futures contract? Differences between selling a call?


brain one would have to check the deliverables. Minute differences in deliverables can destroy a cross-product strategy. Best left to pro traders.


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## swoop_ds

-humble- point taken. 

It is in my nature to be obsessively curious about things though so I apologize about the endless questions!

I am a new father and so I am trying to learn as much as possible. If i do go further into options, it will only be with a small portion of the overall pie. The above mentioned GERN covered call probably wasn't the best idea but I'm happy that I did it and learned some stuff about the mechanics of how this all works. Actually seeing how the premiums move in relation to time and the underlying stock was interesting. I likely wouldn't have watched this closely enough had I not put a little money into it.


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## metatheta

braintootired said:


> single-stock futures contract?


Where and how do you trade SSFs? Sounds complicated. I prefer simpler trades.


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## humble_pie

ok u can stay in the class for now but on a provisional basis & the baby takes absolute, total, 24-hour 365-day priority, now & forever, deal?

what are u going to do with your 200 GERN shares? i don't follow this company, don't have a pov about the quality of the underlying.

your dec calls expire today, if you sincerely believe that GERN is a quality long-term hold - albeit far too speculative for a small new investor - you might contemplate selling calls upon this stock into the future. You will soon notice that 200 shares means 2 calls means vicious commissions, though. You'd want to move farther out in time so as to capture bigger premium plus trade less, ie fewer commish.

the alternative would be to wind up the position & sell the stock. Here you will have a slight net loss, again largely because of the commissions.

you are right that a practical exercise is an excellent teaching modality. Here's a great sentence that you wrote:



swoop_ds said:


> Actually seeing how the premiums move in relation to time and the underlying stock was interesting. I likely wouldn't have watched this closely enough had I not put a little money into it.


this moving relationship between the premiums & the underlying stock is exactly what we all want the new option traders to focus on. Congratulations to you for having seen this.

what i hope not to see from you is this flipping around from one speculative stock to another. Please don't buy these stocks because you suddenly have an itch to play in their options. Please - as a young parent with awesome responsibilities - only consider buying a stock because you have profoundly researched, understand & believe in the stock.

it's ok to have an additional criterion that a chosen stock must have a liquid option market, but a player who is doing covered writes for income should not go at this procedure bass-ackwards; that is, he should never commence with the options.

you see, in a truly severe market collapse, the underlying stock is going to plummet & then you will not have any useful calls to sell. That's why the long-stock-short-call artist has to get really comfortable with his stock in the first place. IMHO both gern & facebook are too speculative for new option writers ...


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## metatheta

I think we're alone now.
- Tiffany (1987)

I feel alone in wanting the markets to pullback. All the bulls are partying and there are no bears in sight. The markets have been super bullish and I have already taken off a lot of my bullish positions. My bearish positions are still on and I'm hoping for them to come back.

As a tribute to one-trade wonder Tiffany, I sold a TIF Jan +82.5P/-85P/-95C/+97.5C iron condor for 0.90CR. Max loss is 1.60. Breakevens are at 84.10 and 95.90. Options are liquid and current IV is on the rise. It's a neutral trade and I just want TIF to hang around 90.


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## braintootired

Week one of my Apple covered-call: Long underlying at 555. Short 560 weekly call for 475. Closed call for 450 profit when stock fell to 545. Today stock closed at 550. So essentially I've "synthetically" entered a position at 550.50 because of the profits from last week's short call.

Didn't sell another call this week because the premiums have really fallen. Last week China Mobile deal rumor sent stock to 575. Deal failed to materialize this week, sending the stock down. I'm guessing that the rumor has accidentally forced the market to show its hand. AAPL + CHL deal = 575.

Assuming the deal is still coming, should I just hold the stock naked until the price stabilizes around 575, or should I sell 575 calls? The expiry would have to very far out to be worth it.



metatheta said:


> Where and how do you trade SSFs? Sounds complicated. I prefer simpler trades.


I can do it with Interactive Brokers. They do sound complicated. Going to hit the textbooks to learn more.


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## metatheta

braintootired said:


> Assuming the deal is still coming, should I just hold the stock naked until the price stabilizes around 575, or should I sell 575 calls? The expiry would have to very far out to be worth it.


I don't like talking about size because that is a personal matter but I find that there is a size risk in doing AAPL covered calls. One AAPL covered call position is more than $50K. They have minis but I think you had the regular ones. (I'm talking about mini options not the iPad mini.)

I like looking at trade risk and how much I can lose before looking at how much I can make. This AAPL covered call position has a high-dollar risk if it doesn't go your way.

Even if $50K is chump change to you, I think there is a better risk-reward trade when having a bullish assumption with a target price of 575. With AAPL at 550 and low vol right now, I prefer a debit spread like a Jan 545/555 call vertical. I will leave it to you to work out the math and all the details like breakeven, max loss, max gain and probabilities. Also make the risk-reward comparison against a long only stock position and a covered call position. Look back upthread as to how I breakdown my trades.

So that's my opinion. However, if AAPL rockets next week and you have naked stock, you will look like a genius and my suggested trade won't look as good.


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## braintootired

Well, as of this hour the Apple + China Mobile deal is official. Any other stock, I'd expect this to rocket Monday, but with Apple you'll never know.

Apple's a stock that I have no problem holding long-term. It underperformed in 2013 while the whole market soared. I'm hoping that it'll catch up in 2014. With such a concentrated position I'm expecting higher volatility. But given my stance on Apple, the only hard part will be the psychological barrier of seeing your portfolio swing by $5k a day, and having the guts to hold.


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## braintootired

Should have sold it at 571 pre-market, then bought back at open. Gah!

Sold a Dec 27 575 call for 2.25$. The market's only open for 3.5 days this week so plenty of decay already worked in. Here's to hoping that it stays below 575 and closes at 574.99 this Friday.


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## metatheta

braintootired said:


> Apple's a stock that I have no problem holding long-term.





braintootired said:


> Should have sold it at 571 pre-market, then bought back at open.


I think there are two users sharing the same username.


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## braintootired

metatheta said:


> I think there are two users sharing the same username.


"no problem holding" is not "want to hold"

My PT was 575. There were a lot of people who thought the same way. It was 572 pre-market, and I felt that there would have been a sell-off at open, so I wanted to sell it pre-market and pick it back up after open.

But I couldn't. I was sitting on the can. I didn't have my password card to log in.


----------



## avrex

I love trading options. 
But I don't care for the bookkeeping and timing decisions with respect to the Taxation of Equity Options. 

The trade that I placed back in August, the Bull Put Credit Spread of SNDK Jan 2014 Put 55/65, was successful, with SNDK racing to the $70 mark.

Now it's time to close this trade.

*Leg 1. *I bought back the SNDK Jan 2014 Put 65 that I sold in August. 
The closing of this leg nets me a nice $9.18 capital gain. This will apply to the 2013 Tax year.

*Leg 2. *I hold the SNDK Jan 2014 Put 55. 

*a)* If I let this expiry worthless in Jan 2014, this is treated as a capital Loss for the 2014 Tax year. 
The capital loss will be $3.80.
*Goal:* I want to apply this loss against my gain in leg 1 for the 2013 Tax year.

*b)* I tried selling this Put for 0.01 (one cent) today. There were no takers.
In fact, when I look at the depth-of-market, there are no market maker bids of any kind.

Would the CRA allow me to deem this option 'worthless' for the 2013 Tax year (even though it expires in 2014)? 
I doubt it. I think I must close this position now, for the CRA to allow me to take a 2013 Capital Loss.

*Dec 30* is the last day for 2013 to close this position.

I'm thinking of selling this option for *$0.00*. That's right, *I'm going to give it away for free.*
Has anyone else ever done this before?

I can't see any other way of closing this position....


----------



## humble_pie

avrex said:


> *Goal:* I want to apply this loss [$3.80] against my gain in leg 1 for the 2013 Tax year.
> 
> *b)* I tried selling this Put for 0.01 (one cent) today. There were no takers.
> In fact, when I look at the depth-of-market, there are no market maker bids of any kind.
> 
> Would the CRA allow me to deem this option 'worthless' for the 2013 Tax year (even though it expires in 2014)?
> I doubt it


no each:



> I think I must close this position now, for the CRA to allow me to take a 2013 Capital Loss


yes each:



> I'm thinking of selling this option for *$0.00*. That's right, *I'm going to give it away for free.*
> Has anyone else ever done this before?
> 
> I can't see any other way of closing this position....



there is a manoeuvre called a cabinet trade. Basically one gets to trade a worthless last-minute OTM option for a penny.

your broker undoubtedly has someone holed up on the trading control desk who knows how to stickhandle a cabinet trade. They (the brokers) will hate you forever after, though. It's a lot of manual labour & a total money-loser for em.

i did one or 2, once. Due to language issues in la belle province, the manoeuvre ended up being called a cupboard trade. Un placard, quoi.

ideally a network should exist for buying/selling to close worthless OTM options in order to crystallize the round turn as definitely a capital gain/loss situation. The fact that such a network doesn't exist tells me that the logistics are impossible.


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## metatheta

avrex, nice trade.

Taxes aside, I prefer to open a trade as a package and close it as a package. I just look at the net price of the trade. This order is easy to do in IB. Legging in and legging out changes the risk profile of the trade.

I've heard that market makers are more willing to fill you because they also have no leg risk as the counterparty or they can easily hedge it. I don't know if that's true or not.


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## braintootired

This is BS. I'm selling a call at 5$, the ask price. The ask size goes something like 300, 235, 300, 29, 1, 334, 21, 1, 304, 300, 1, 25, 29, 1. What, is my order the only one not getting filled?


----------



## avrex

metatheta said:


> avrex, nice trade.
> I prefer to open a trade as a package and close it as a package. I just look at the net price of the trade.


Thanks, metatheta.
Since I was mostly doing single leg trades, I didn't know you could do this.
Drilling down, in the Interactive Brokers "Trader Workstation" platform, I believe I found what you mentioned. (Although you call it a package.)

*File - More Advanced Tools - Option Trader.*
In this tool, there are further functions, such as *Option Spreads*, that let me enter multiple legs and (hopefully) submit it as one trade.
I'll play with this tool in the new year.

Thanks for your help.


----------



## avrex

*Cabinet trades at Interactive Brokers (IB)*



humble_pie said:


> there is a manoeuvre called a cabinet trade. Basically one gets to trade a worthless last-minute OTM option for a penny.
> your broker undoubtedly has someone holed up on the trading control desk who knows how to stickhandle a cabinet trade.


Thanks, humble. I hadn't even heard of this term, until you mentioned it.

I quickly looked up the term 'cabinet trade' at Interactive Brokers (IB), found a reference to it, and followed up with their support ticket system. Here's how the conversation went.



> Hi IB,
> I am closing my trade positions for the 2013 Tax Year.
> On Dec 24, I tried to close the following position:
> SNDK, 20140117, 55, PUT, Option
> 
> Unfortunately, there was no market maker bids.
> 
> The Interactive Brokers webpage indicates that
> "Commissions are not charged for US cabinet trades."
> 
> My request is that you please close this position, via a cabinet trade, as soon as possible.
> Thank you.





> Dear avrex,
> 
> IB does not support manual cabinet trades. Therefore, if you are unable to sell the options for a penny at the exchanges, then you will need to wait for the option to expire in the account.





> Hi IB,
> I was wondering if you can provide more clarification on your statement,
> "IB does not support manual cabinet trades".
> 
> If a 'manual' cabinet trade cannot be performed, is there any other way that I can initiate a cabinet trade? Is there some form that I need to fill out to perform this?





> Dear avrex,
> 
> Cabinet trades are executed at the option exchanges. A cabinet trade allows traders to liquidate deep out of the money options by trading the option. IB does not support manual cabinet trades, 'manual' meaning initiated by IB.


Well, I'm still confused. 
Reading between the lines, I'm wondering if perhaps they only allow institutional clients to initiate an 'automatic' cabinet transaction.
Perhaps only they have direct access to the options exchange to perform the trade.
Who knows. At this point, I gave up.

*End Result:*
On Dec 24 there where absolutely no market maker Bids in the depth-of-market chart. 
Today, on Dec 27, I got lucky. There were market maker bids of 0.01. I was finally able to sell and close my position.


----------



## avrex

*One more note on Closing worthless Options*

Here`s another note for those having a similar issue as I did.

I also tried to sell a worthless SPY put today.
Once again there were no market maker bids on the board.

*1.* I tried selling the position for free. *$0.00*. This was not allowed.
*2. * I tried to sell the position as a *Market order*. Once again, there were no takers.

*Bottom line:*
If you can`t close your option position for 0.01 at IB, you will have no choice 
and have to 'wait' for the option to expire worthless.


----------



## metatheta

avrex, I made up the term _package _to emphasize a complete trade. It is still called a _spread_.

IB calls it a _combo_. See ComboTrader.

Notice that I say vertical call spread or vertical put spread while others say just call spread or put spread. Just saying call spread or put spread is ambiguous because you could also have call calendar spread or put calendar spread or many other types of spread.


----------



## humble_pie

avrex said:


> [re cabinet trades] At this point, I gave up.
> 
> *End Result:*
> On Dec 24 there where absolutely no market maker Bids in the depth-of-market chart.
> Today, on Dec 27, I got lucky. There were market maker bids of 0.01. I was finally able to sell and close my position.



there u go. Another case of patiently waiting out the market, spotting a rare opportunity & jumping on it ...

as for cabinet trades, hereinafter referred to as "cupboards" due to language traditions in canada, the brokers horrendously lose money because these have to be done by hand. No wonder IB has a policy not to handle.

TD doesn't have such a policy, presumably because no client ever asked for a cupboard until i did. I managed to get away with 2 of them in one afternoon. I was trying a 3rd when my favourite team manager phoned me. Plus de placards je t'en prie, he said, anxiously. No more cupboards.

the one thing he was most concerned about was that i might write about cupboards somewhere in the internet, thus unleasing a tsunami of option traders all demanding these tight little spreads.

however, what i'd discovered was that cupboards are no bargain. They have to be entered manually by a licensed rep, who will charge the max commish which the broker supports. I believe i recall paying up to $80 for a fancy 3-sided cupboard, even though the options themselves were a penny apiece.

as for end-of-the-line option buy/sell solutions, we could set up an informal network/micromarket here in the forum. I could have offered to buy your unwanted position for a penny or 2, for example. The problem is, how would i or any other good samaritan be compensated for my costs, let alone my trouble? 

once we'd have that issue solved, we'd be in business. The used parts business.


----------



## metatheta

metatheta said:


> I'm stepping in front of a little red Corvette today and hope that Prince doesn't run me over. GM is at a 3-year high and IV is higher than normal. I will go for a bearish reversal. I sold Jan 40/42 call vertical for 0.90CR. Max loss is 1.10. I'm hoping for one big down day in the markets so I can cover this.


I don't know what happened to GM today but I got the down move I wanted. I bought back this Jan 40/42 call vertical for 0.50DR. It was underwater almost everyday since I opened the trade. I just took the 0.40 gain. 

IV still high on GM so I'm looking for a Feb trade.


----------



## braintootired

braintootired said:


> This is BS. I'm selling a call at 5$, the ask price. The ask size goes something like 300, 235, 300, 29, 1, 334, 21, 1, 304, 300, 1, 25, 29, 1. What, is my order the only one not getting filled?


When this happens, is it market makers that's flooding my strike with orders so mine doesn't get executed?


----------



## avrex

I don't understand your question.
Can you attach a screenshot and provide further details.


----------



## humble_pie

> I'm selling a call at 5$, the ask price. The ask size goes something like 300, 235, 300, 29, 1, 334, 21, 1, 304, 300, 1, 25, 29, 1. What, is my order the only one not getting filled?





braintootired said:


> When this happens, is it market makers that's flooding my strike with orders so mine doesn't get executed?




this doesn't look normal. If you are the lone "one" that keep reappearing in the sizing sequence, you should have been filled & out early (price of underlying must have been steady to slightly rising?)

i believe you'd have to take this up with your broker.


----------



## braintootired

humble_pie said:


> this doesn't look normal. If you are the lone "one" that keep reappearing in the sizing sequence, you should have been filled & out early (price of underlying must have been steady to slightly rising?)
> 
> i believe you'd have to take this up with your broker.





avrex said:


> I don't understand your question.
> Can you attach a screenshot and provide further details.


Can't really attach a screenshot... would have to record a video.

Not sure what to ask the broker. How would I even prove that this keeps happening?

Does it matter which ECN my order is routed to?


----------



## humble_pie

braintootired said:


> Not sure what to ask the broker. How would I even prove that this keeps happening?



a possible explanation is that your broker's jitney(s) were having a bad day.

there are 11 different exchanges in the US & an order for a single contract is normally routed to one exchange only. If the bids at that particular exchange don't rise to your ask, you will not get filled; even though the quote system will show you identical ask offers being filled at your price on other exchanges.

this is a known issue with US brokers. The rule books say that the broker is obligated to fill your order only *after* the price on other exchanges has risen past your own offered price.

now we are into another aspect of a complex issue, which is the widespread practice of US options exchanges to pay brokers to bring them business. Bref, if your broker's jitney had sent your order to an exchange where it's being reimbursed for the business, it might be difficult to persuade them to do things differently.

in my experience, a broker's trading control desk will run a tight ship, shopping an order to other exchanges, by hand if necessary, & generally keeping the jitney's toes to the flames. But occasionally i have seen even a venerable broker fall down momentarily. 

this would be where IB's famous 8 dark rooms probably serve well. IB is able to parade an order through (they say) no less than 8 private dark rooms of their own, in order to raise the counterparty that the client wants.

in your place, i would speak to the broker. I think your ask sizing data is sufficient for discussion, no need for proof. The purpose of your call would be to learn more about how such an order functions. So as to be able to regroup & plan more craftily next time.

for example, it might have been that the bid on the exchange where your order languished was $4.95. If you had known that, would you have dropped from $5 to $4.95? for one contract? me, i sure would have. So the key questions become What is the bid on the exchange where my order is sitting? how can i learn how to adjust my order?


----------



## braintootired

Thanks for the detailed explanation pie. Will be looking into this deeper when I have the chance.


----------



## swoop_ds

For the tax implications of option trading in a non registered account, does the brokerage send out some sort of nice little t slip? Or is it on me to figure it all out?


----------



## braintootired

Where can I get historical options data? I want to study the prices of some stocks since the introduction of weeklies.


----------



## metatheta

metatheta said:


> As a tribute to one-trade wonder Tiffany, I sold a TIF Jan +82.5P/-85P/-95C/+97.5C iron condor for 0.90CR. Max loss is 1.60. Breakevens are at 84.10 and 95.90. Options are liquid and current IV is on the rise. It's a neutral trade and I just want TIF to hang around 90.


I closed this TIF Jan iron condor in the morning for 0.45DR. I wish I had my buy limit order much lower cause they really crushed IV on TIF today.



metatheta said:


> With AAPL at 550 and low vol right now, I prefer a debit spread like a Jan 545/555 call vertical.


I suggested this conservative yet bullish trade earlier upthread when AAPL was at 550 as an alternative to long stock. This trade would be a loser today. However, a 1-lot of this long call vertical which controls 100 AAPL shares would be a lesser loser than long 100 AAPL shares.

In my opinion, verticals are a conservative way of trading AAPL. Adverse moves on AAPL like the past two weeks are less painful compared to being long the stock.

I really thought that AAPL would hold steady into earnings. I had no Jan AAPL trade cause I'm waiting for earnings. With the recent decline, I'm probably going to do a bullish earnings trade similar to my last earnings trade. It was a long call vertical financed by a short put vertical all for a small credit. I just have to figure out what the strikes will be.


----------



## braintootired

I'm long one lot of apple at 555. Stock's down 23 points, but I made $21 selling weekly calls. Not sure what to so into earnings. Probably buy a protective put.


----------



## metatheta

braintootired said:


> I'm long one lot of apple at 555. Stock's down 23 points, but I made $21 selling weekly calls. Not sure what to so into earnings. Probably buy a protective put.


The main objective of selling calls against a long stock position is to lower your cost basis and hence a lower breakeven point. You've successfully done that.

Buying a put, especially when option prices are pumped up for earnings, completely contradicts that strategy. It will raise your cost basis and your breakeven point.

Why would you want to pay higher prices for AAPL? Either find a better strategy to lower or keep same your cost basis or close out the position.


----------



## braintootired

Actually I think I'll either sell an ATM call for high premium or collar for safety. I haven't checked what the analysts' earnings estimates are, but CHL iPhone sales estimates are all over the place.


----------



## humble_pie

i agree w theta, don't buy protective put during earnings vol boomlet & probably don't sell ATM call either (what if you'd be wrong & stk goes to the moon?)

me i don't do quarterly earnings plays - i'd rather ride an endless wave - but theta here is an expert.

may i make a suggestion? study theta's iron condors & flies that he puts on just before earnings announcements. It's the quadruple reversal that helps him capture the volatility, slightly short the whole caboodle & often - although not always - make out like a bandit.


----------



## swoop_ds

Just wondering how people manage risk in their options portfolio? How many positions do most people have running at once? Is there a mixture of low and high risk positions?


----------



## braintootired

humble_pie said:


> i agree w theta, don't buy protective put during earnings vol boomlet & probably don't sell ATM call either (what if you'd be wrong & stk goes to the moon?)
> 
> me i don't do quarterly earnings plays - i'd rather ride an endless wave - but theta here is an expert.
> 
> may i make a suggestion? study theta's iron condors & flies that he puts on just before earnings announcements. It's the quadruple reversal that helps him capture the volatility, slightly short the whole caboodle & often - although not always - make out like a bandit.





metatheta said:


> Buying a put, especially when option prices are pumped up for earnings, completely contradicts that strategy. It will raise your cost basis and your breakeven point.
> 
> Why would you want to pay higher prices for AAPL?


Thanks for the inputs.

I had originally thought to close my shares and buy a straddle, but the stock would have to move 20-30$ for me to gain a profit, and in the past 5 quarters their earning surprises have been low.

I never traded an iron condor, so I only know theoretically what would happen if I hold it until expiration. It has 4 legs, and I'm not sure how to make adjustments as I go.

Side note: I asked earlier what would be the point of a covered futures. An answer I've found is that if you don't want to sell the stock now for tax reasons, but you want to lock in the gain, then you can short futures contracts, which theoretically puts you at 0 delta.


----------



## humble_pie

braintootired said:


> I had originally thought to close my shares and buy a straddle, but the stock would have to move 20-30$ for me to gain a profit, and in the past 5 quarters their earning surprises have been low.



i think it was mark wolfinger who said pros never buy straddles, the costs are too high compared to the low probability of a win, just as you have figured out.




> I never traded an iron condor, so I only know theoretically what would happen if I hold it until expiration. It has 4 legs, and I'm not sure how to make adjustments as I go.


i can't really speak for theta, but it appears that a number of his are ultra-short-term - only a few days - so no adjustments are done.




> I asked earlier what would be the point of a covered futures. An answer I've found is that if you don't want to sell the stock now for tax reasons, but you want to lock in the gain, then you can short futures contracts, which theoretically puts you at 0 delta.


this is akin to shorting the box, which was outlawed by the SEC & canadian exchanges generations ago. Yet long stock + short futures seem perfectly legal to me, at least i'm not aware of any reason why not.

for that matter - if one thinks about it - long stock + short call is also akin to shorting the box, is it not. Yet millions of these pairs are legitimately set up every day.

perhaps a criterion is that the CUSIP numbers for stock, futures & calls are different. If indeed futures have CUSIP numbers; possibly they're classed according to a different system.


----------



## metatheta

humble_pie said:


> i can't really speak for theta, but it appears that a number of his are ultra-short-term - only a few days - so no adjustments are done.


humble, you are absolutely correct on this. When I place an iron condor for earnings which is a binary event, there is no chance for adjustment or repair. The IC is defined risk. Place your bets and hope the probabilities work out. C'est tout.

The key is that if you get the non-move you wanted, close it early. Then it's time to find another trade. There's always another one during earnings season.

I encourage those interested in options and implied volatility to observe "_volatility crush_" during the earnings season. No, it is not a new drink by DPS (Dr. Pepper snAAPL).


----------



## KrissyFair

@meta, how far OTM do you go on those ICs?


----------



## humble_pie

metatheta said:


> Place your bets and hope the probabilities work out ... the key is that if you get the non-move you wanted, close it early. Then it's time to find another trade. There's always another one during earnings season.



there u go. Spoken by a master of the art.

me i'm not much into sudden death last minute plays. What i fancy are long-drawn-out waves of surf.

in AAPL i'm still working diagonal spreads that were begun in summer 2012. For a while they were looking truly pathetic. However they're now running ok & still have another year to go.

the long leg is 2015 jan 400 calls, the short leg at present is july 580s. I also sell puts with no cover, the present bunch are july 390s.

a diagonal spread is a calendar plus vertical hybrid. For the long leg, i always buy DITM LEAPs, because if the worst happens, then the low strike price of the long leg will still allow me to continue selling short legs. 

when i bought those 2015 jan 400 LEAPs, AAPL stock itself was in the $600 range. The 400 calls were therefore very expensive - which contributed to their pathetic appearance during the collapse. However, since stock never fell much below $400, these low-strike long LEAPs meant that i always had short calls that i could sell.

if i had purchased 600 calls initially, they would have been much cheaper. However as AAPL itself plunged into the low $400 & even the high $300 range, i would have had nothing to sell on the short side. Because selling 450 calls would have meant a whopping loss, while at the same there would have been no premium in the 600 call range, therefore nothing to sell there either.

diagonals with DITM long legs, such as mine, are heavier users of margin; perhaps that is the reason why they are seen less often.


----------



## HaroldCrump

It is too bad that brokerages won't allow diagonal spreads in registered accounts.
To me, it is essentially a covered call - the OTM short call is covered by the DITM long call, instead of the stock.
But they won't hear of it.

It would have been a nice way to play no or low dividend paying stocks inside a registered account.
APPL is a good example, esp. before it started paying 2% dividend.


----------



## humble_pie

brokerages "won't hear of it" but it's really the minister of finance that won't recognize the long call side as a security that can be used in an option spread.

actually i'm with the minister, i believe that retirement savings accounts should be ultra-prudent & conservative. If they started recognizing LEAPs options, where would they draw the line? soap flakes? goldfish? tea leaves? 

however, it is possible to set up this diagonal strategy partially in rrsp or tfsa. In the reg'd account, one would buy & hold the long-term LEAPs. In the margin account, one would keep on selling short-term calls at a higher strike price.

some drawbacks, risks & benefits:

1) what if assignment occurs in the margin account? no prob if the long side is in a TFSA ... just withdraw & exercise the DITM calls in order to cover the assignment.

however, if the long side is in a rrsp there can be a sticky wicket. The short call in the margin account is, in effect, naked. Investor does not really want to withdraw from rrsp. Therefore investor needs to have enough cash in margin - or quickly accessible somewhere - so that he can go buy the stock in order to deliver to the assignment.

of course his *total* portfolio worth does not alter. From a total dollars POV it doesn't matter whether the call assignment & subsequent delivery of stock occurred in reg'd or non-reg'd account. But the logistics of short side assignment in margin when long side is held in rrsp are messy imho (happened to me.)

2) on the plus side, this type of divided diagonal can deliver up a hugely leveraged gain in the registered account *if* the underlying stock soars (this would be the circumstance that would trigger assignment in the margin account.)

100% of the gain would accrue to the highly-leveraged long call position in the rrsp/tfsa account. This gain would not be diminished by the exercise of the short call in the margin account.

3) on the other hand, if the underlying stock plunges, the long call in rrsp/tfsa will suffer without any capital loss tax benefit.

but that, of course, is true of any security that plunges in a registered account. No capital loss tax benefit.


----------



## avrex

@humble_pie I have a question on how you typically handle these diagonals.


humble_pie said:


> the long leg is 2015 jan 400 calls, the short leg at present is july 580s.


When you eventually close the July short call, what do you do next?
Do you sell another short call 3-6 months out, hence continuing the Diagonal Bull Call Spread?


----------



## metatheta

KrissyFair said:


> @meta, how far OTM do you go on those ICs?


Check out my post #833 upthread about expected move. 


metatheta said:


> For highly liquid and efficiently priced stocks and options, a rough calculation of _expected move_ is if you take the weekly expiring at-the-money straddle mid-price and take 85% of it. That is the _expected move_ plus or minus the closing price before the earnings.


I've done iron condors for earnings just above the 85% ATM straddle price and I've posted some of them upthread. Some worked, some didn't.

My last AAPL earnings trade (post #878) was directionally bullish. It went my way, then it didn't, then it did, then it didn't but still made a tiny gain.

If AAPL doesn't rebound prior to earnings, I am interested in a directionally bullish trade. I don't really know. I'm just going for probabilities.


----------



## metatheta

humble, your diagonal, as HC alluded to, is also called a *poor man's covered call*. This is another strategic alternative compared to just going long the stock. Compared to a traditional covered call, it uses up less capital. That's definitely an advantage with a high priced stock like AAPL.



avrex said:


> When you eventually close the July short call, what do you do next?


avrex, although humble and I have different styles, we seem to be on the same page on the objectives of options strategies. So without speaking for humble, you need to continue selling calls to drive down the cost basis of that decaying long call. Alternatively, you can close it then re-establish the trade with different expiries and strikes.


----------



## braintootired

Hey a while back someone (I think metatheta) was talking about how an options trader accidentally got assigned 450000 shares of Google. Here's the actual story if anyone's interested:

http://youtu.be/g1mFlv8-r9s?t=16m54s

This also partially answers the question of which price is used to decide assignment/exercise, seems to be the last price before 4PM.


----------



## avrex

metatheta said:


> ...you need to continue selling calls to drive down the cost basis of that decaying long call. Alternatively, you can close it then re-establish the trade with different expiries and strikes.


Thank you for confirming.


----------



## humble_pie

avrex said:


> @humble_pie I have a question on how you typically handle these diagonals.
> 
> When you eventually close the July short call, what do you do next?
> Do you sell another short call 3-6 months out, hence continuing the Diagonal Bull Call Spread?



in the beginning (the aapl diags commenced in 2012) i would have sold OTM calls about 3 months out. Yes i could have gone to the weeklies but i have many other option positions to look after, weeklies would be _too much_.

the july 580 strike is a tad high but i put it on when aapl was recently romping through the 560s & my then-short was april 565. Hmmmmn, i thought to myself, i'll rescue em with a roll to july 580 & a 4.75 credit spread.

however the mood will change profoundly as we near july/14, because these diagonals will only have 6 months of life left. Sometimes it's useful to convert em to verticals towards the end of their lives. Sometimes it's useful (if underlying has soared) to close everything out completely. Sometimes it's useful to buy more long legs - these would be the aapl 2016s - & ramp up. Right now is far too early to say.


----------



## humble_pie

metatheta said:


> humble, your diagonal, as HC alluded to, is also called a *poor man's covered call*. This is another strategic alternative compared to just going long the stock. Compared to a traditional covered call, it uses up less capital. That's definitely an advantage with a high priced stock like AAPL.
> 
> 
> avrex, although humble and I have different styles, we seem to be on the same page on the objectives of options strategies. So without speaking for humble, you need to continue selling calls to drive down the cost basis of that decaying long call. Alternatively, you can close it then re-establish the trade with different expiries and strikes.



i've been doing these in US stocks since 2007. What i've found is that the median return is around 15-17%, ie slightly better than long-stock-short-call.

i've also found that, because there is a time limit & a definite exit point at the time of expiration of the long calls, these things are far more volatile than plain long-stock-short-call. Some are going to flame out & lose badly. On the other hand, i've had quite a few where the underlying has soared so quickly that i closed the position immediately, since max gain had already been achieved.

an irritant is that, when winding up, the bid price for the long DITM call will often be noticeably below intrinsic value. A solution to this is to exercise the long call & sell the stock at full price. Technically one shorts the stock first, then exercises the long call.

part of the reason i fell into these is to avoid US dividends & their punitive tax treatment in non-registered accounts. The higher return of the diagonals - on average - includes the transmogrified dividends, now more or less converted into tax-favoured capital gains.

and finally, as theta says, this is a poor man's strategy. It helps hold down the value of US securities in a portfolio, both for foreign tax reporting & for estate tax reporting.

there was a glorious effect in 2008-09 when markets collapsed. Since i held only diagonal spreads in lieu of US stocks, the collapse in my US accounts was only 1/3 of what it would have been, dollar-wise, if i had held the actual shares. The leverage, though, was more or less the same as holding full shares.


----------



## KrissyFair

@meta Thanks for that. I do remember your adventures in AAPL from a little while back  In my short options career I've learned I'm not that great at managing positions that aren't going my way, so I have to keep mine quite a bit further out than that to avoid doing foolish things


----------



## avrex

humble_pie said:


> Sometimes it's useful to convert em to verticals towards the end of their lives. Sometimes it's useful (if underlying has soared) to close everything out completely. Sometimes it's useful to buy more long legs - these would be the aapl 2016s - & ramp up. Right now is far too early to say.


Thanks for sharing your thinking. This makes sense.



humble_pie said:


> ...part of the reason i fell into these is to avoid US dividends & their punitive tax treatment in non-registered accounts. The higher return of the diagonals - on average - includes the transmogrified dividends, now more or less converted into tax-favoured capital gains.


Yes, I also employ options in my non-registered account for these tax advantaged reasons.


----------



## metatheta

metatheta said:


> With AAPL at 550 and low vol right now, I prefer a debit spread like a Jan 545/555 call vertical.


Wow. I declared this trade a loser back on 1/10. It looks like a winner today with three days to go. I would close it today if I had it.

On a similar note, I had a TSLA Jan 140/145 long call vertical I declared a dead loser too. It came back to life yesterday and I took it off yesterday for a winner. I wasn't going to wait for Friday expiration.

I have a few more Jan losers that need to come back from the dead.


----------



## braintootired

Looks like my AAPL lot will be called away this week. Should I let it be called away, or should I close the option on Friday and hold the stock over the weekend?


----------



## humble_pie

what's the assignment commish if i may ask?

even if it's free at IB there's still going to be a commish to put on another position w long stock.

also keep in mind that assignment means a taxable capital gain on the stock. It may be piffling small at the moment but please keep this reality in mind for _later when you're rich _each:


----------



## braintootired

humble_pie said:


> what's the assignment commish if i may ask?
> 
> even if it's free at IB there's still going to be a commish to put on another position w long stock.
> 
> also keep in mind that assignment means a taxable capital gain on the stock. It may be piffling small at the moment but please keep this reality in mind for _later when you're rich _each:


No assignment fee. It would cost 1$ commission to long a new lot.

If my assignment is lower than what I bought it for it would be a capital loss, right?

Getting assigned would really get the maximum theoretical value out of the short call, but the difference would be minor. Is there even anyone buying these deep ITM options at expiry?


----------



## humble_pie

brain what was the position again? please refresh ...


----------



## braintootired

This week it's 

Long apple @ 555
Short weekly 540 call @ 4.50

The call was sold earlier this week when the stock was $30 lower. I hadn't expected this sudden jump before earnings.


----------



## humble_pie

don't take that loss to town, son, don't take that loss to town.

there are plenty good rollover opportunities.

right now buying that jan 540 is 19.90-20.10.
meanwhile selling 22feb 545 is 27.25-27.50 (you could go to a higher strike; however among suitable candidates, this one has biggest open interest, meaning it'll be easier to roll again when the time comes)

you could get an easy $7.30 credit here while raising potential sell proceeds by $5, ie $500 per contract. Me i'd start by asking 7.40 (it's a tad outrageous) since it's only 1 pm on wednesday, then i'd stick on the case today & tomorrow. Don't let it go longer than next 26 hours though, ie be gone before 3 pm thursday afternoon.

of course, if u go to later months there are even better deals, can easily move to a higher strike. I'm mindful here that AAPL might trend down a bit after earnings come out. If so, you could then roll the 545 higher.


----------



## braintootired

Prices for Jan 31 and Feb 7 options for the same strike are almost the same. Must be because of earnings crushing volatility?

Bought back Jan 17 540 call for $21 and sold a Jan 31 545 call for $25.

Would it be too much to ask for Apple to go down to 544.99$ on Jan 31, and then open at 600 the following Monday? Maybe I can summon Steve Jobs' ghost to help me there.


----------



## humble_pie

braintootired said:


> Prices for Jan 31 and Feb 7 options for the same strike are almost the same. Must be because of earnings crushing volatility?


i don't find this. The 7 feb 540s for example are higher. Progression is normal.

31 jan 540: 26.85-27.20
7 feb 540: 27.85-28.25



> Bought back Jan 17 540 call for $21 and sold a Jan 31 545 call for $25.


good



> Would it be too much to ask for Apple to go down to 544.99$ on Jan 31, and then open at 600 the following Monday?


_way too much _


----------



## Canuck

newbie to option trading.

Is there any issues with waiting till the last trading day to sell a call option? besides the price going down

thnaks


----------



## avrex

@Canuck. The answer is..... "it depends".

There are two scenarios, that I can think of, where there are no players left to play, that I have described in other posts:

*1. Selling deep-in-the-money options.*
Deep in the money options with little Open Interest (OI)

*2. Selling 'to close' worthless options.*
Cabinet trades at Interactive Brokers (IB) 
One more note on Closing worthless Options 

So, the quick answer is, *yes*, I have traded on the last week or on the last trading day (expiration date) and was *able to close positions.*


----------



## Canuck

avrex said:


> @Canuck. The answer is..... "it depends".
> 
> There are two scenarios, where there are no players left to play, that I have described in other posts:
> 
> *1. Selling deep-in-the-money options.*
> Deep in the money options with little Open Interest (OI)
> 
> *2. Selling 'to close' worthless options.*
> Cabinet trades at Interactive Brokers (IB)
> One more note on Closing worthless Options
> 
> So, the quick answer is, *yes*, I have traded on the last week or on the last trading day (expiration date) and was *able to close positions.*


thanks avrex!

they're only slightly in the money and not really even worth trading today so I'm hoping for a bit of a pop tomorrow, or maybe later today....fingers crossed


----------



## avrex

ah, so in your case, there are 'lots of players' left. 

Yes, you should be able to close it tomorrow, with a reasonable price point.


----------



## braintootired

Is there a point of having a synthetic position? Long ATM call + short ATM put.


----------



## avrex

*Why would you do this? *It would be a low cost alternative to purchasing the stock outright.

1. Stock only: Buy 100 shares @ $550 of AAPL = $55,000

2. Or enter a synthetic position, via options.
Buy 1 APPL Jan 2015 550 CALL 55.85. Margin call (SMA debit) = $4,188.75
Sell 1 AAPL Jan 2015 550 PUT 64.00. Margin requirement: $17,400.00. Proceeds from sale of short put(s): $6,400.00. Margin call (SMA debit)= $11,000.00


----------



## braintootired

Ah ok, thanks.

Time decay on a synthetic position works against your long call, but for your short put. Is it theta neutral?


----------



## atrp2biz

braintootired said:


> Is there a point of having a synthetic position? Long ATM call + short ATM put.


Yes--with US stocks that pay dividends outside of an RRSP. Dividends would be taxed as income. Option premiums should reflect the dividend payment. ie. for ATM options, the put actually has a higher premium than the call (which is not the case for non-dividend paying underlyings).

Better to pay taxes on capital gains than on income.


----------



## humble_pie

atrp2biz said:


> Yes--with US stocks that pay dividends outside of an RRSP. Dividends would be taxed as income. Option premiums should reflect the dividend payment. ie. for ATM options, the put actually has a higher premium than the call (which is not the case for non-dividend paying underlyings).
> 
> Better to pay taxes on capital gains than on income.



doc we are the only ones to sound the heresy of avoiding US dividend-paying stocks. The entire rest of the forum is scrambling to buy US high dividend payors, either outright as individual stocks or else bundled into etfs. IMHO these are fine in rrsp but carry tax negatives elsewhere.

let us not risk excommunication as happened to poor Martin Luther soon after he launched the Protestant reformation by nailing his 95 revolutionary theses to the church door at Wittemburg.


----------



## Rusty O'Toole

Bought some Blackberry June $9 calls a week ago for a $1 buck. Sold the same number of June $11 calls today for $1.24 for a free trade.

Planning on buying back the $11 calls if BBRY dips below $9 and hanging onto the $9 calls.

Any comments or suggestions?


----------



## braintootired

Do the days when markets are closed count toward time decay?


----------



## metatheta

Yes. Money never sleeps.


----------



## braintootired

Nice. But why count a day that the stock is not traded on? No movement of stock possible should mean no decay.

If there is decay, who would buy an option on a Friday? Weekend premium loss with no underlying action.


----------



## humble_pie

might as well ask why banks charge interest over weekends?

_but always at my back i hear
time's wingéd chariot hurrying near_


----------



## underemployedactor

But had we but world enough, and time, we might have just waited until Monday.:moon:


----------



## humble_pie

tide nor time tarrieth no man


----------



## braintootired

Then I should always sell options on a Friday.


----------



## metatheta

braintootired said:


> Then I should always sell options on a Friday.


brain, try doing this helpful exercise to get a definitive answer.

Get the Friday quotes of a handful of liquid options (ie: AAPL, FB, GLD, SPY) then check back on them on Monday morning.


----------



## Rusty O'Toole

metatheta said:


> brain, try doing this helpful exercise to get a definitive answer.
> 
> Get the Friday quotes of a handful of liquid options (ie: AAPL, FB, GLD, SPY) then check back on them on Monday morning.


The closer to expiry the better. Options with a lot of time have very slow theta decay. If you could check options with a week or less to go, and if the price of theunderlying was the same on monday as it was on friday you could see if they lost value over the weekend or not.

I always assumed theta operated on weekends but never checked. I know others say it is price in. Would be interesting to know which it is.


----------



## braintootired

Actually according to the tastytrade, OTM options decay accelerates near 45-DTE, then slows down.

https://www.youtube.com/watch?v=dP79zA8FjMY

Anyway, Apple closed at 521 Friday, and Apple Feb28 535 Call closed at 4.45. Let's see what happens tomorrow morning.

EDIT: Where do you get historical options data? I don't want to subscribe to a $3000/year service just to get that.


----------



## humble_pie

the feb 28s seem to be a poor choice because the open interest therefore the volume is all in the feb 22s. Open int is 543 for the former vs 4724 for the latter.

if u look at the much less liquid feb 28 535, it was 4.30-4.55, this spread is so big that monday's data will be meaningless for comparison.

now take the far more liquid feb 22 535 at 2.58-2.64. Spread still tight at the close, sizing was 4 x 24, not really a significant imbalance considering closing figs are often wonky.

the one to watch monday am will be the feb 22.

btw stk closed at 519.68, our quotes seem to be way off?


----------



## braintootired

humble_pie said:


> btw stk closed at 519.68, our quotes seem to be way off?


Ya I looked at the wrong price. 521 was the last price in AH.


----------



## humble_pie

lol if AH are any indication the B/As will rise monday ...

_"time waits for no man"_


----------



## metatheta

braintootired said:


> Then I should always sell options on a Friday.





metatheta said:


> brain, try doing this helpful exercise to get a definitive answer.
> 
> Get the Friday quotes of a handful of liquid options (ie: AAPL, FB, GLD, SPY) then check back on them on Monday morning.


I think my suggested exercise isn't being followed the way I intended it to go because you are focusing on only one underlying (AAPL). You need a bigger sample of underlyings to support or refute the "always sell options on a Friday" strategy.


----------



## humble_pie

AAPL premarket is presently 520.78
theta i'm pricing that 22feb14 535 call something like 2.72-2.78
how do u find?


----------



## braintootired

AAPL traded at 9:31:27 at 520.77
Spread for Feb21'14 Call at 9:31:27 was at 2.65/2.73

What does it mean?


----------



## humble_pie

means the pie burnt the crust by like 6 pennies at the opening
i wasn't watching but the very next trade must have bumped up the delta though


----------



## braintootired

But are 6 pennies the result of one day or three day decay?

Theta for that call on my platform is -0.50. Shouldn't it have gone down by at least 50 cents?


----------



## Pluto

Soros doubles a bearish bet on the S&P 500 by buying puts on SPY.



http://blogs.marketwatch.com/thetel...bet-on-the-sp-500-to-the-tune-of-1-3-billion/

I'm not really up to speed on options but ferret around on this thread from time to time for educational purposes. On occasion I have considered, puts on an index when the market appears to be in a precarious position. Curious what you option guys think about what Soros is up to, and would you play it like he does? or some other way?


----------



## braintootired

If I want to go long on some long-term calls or puts, should I buy them ITM or OTM?

Also can somebody confirm that Apple's 555 July 2014 puts have a volume of 246 _million_? 560 calls have 1.39 _billion _contracts traded? What?


----------



## atrp2biz

braintootired said:


> If I want to go long on some long-term calls or puts, should I buy them ITM or OTM?
> 
> Also can somebody confirm that Apple's 555 July 2014 puts have a volume of 246 _million_? 560 calls have 1.39 _billion _contracts traded? What?


Depends on what you think the size of the move will be and how quick the move will be (gamma/theta tradeoff)

I see a volume of 6 contracts and an open interest of 670 contracts.


----------



## Rusty O'Toole

braintootired said:


> If I want to go long on some long-term calls or puts, should I buy them ITM or OTM?
> 
> Also can somebody confirm that Apple's 555 July 2014 puts have a volume of 246 _million_? 560 calls have 1.39 _billion _contracts traded? What?


Best value is to buy a put or call spread. Buy the in the money option, it has the lowest premium and the best chance of ending in the money. Sell an at the money or slightly out of the money option to defray your expense.

This is the cheapest way to put on a directional (bullish or bearish) bet.


----------



## braintootired

Option volume data is always a bit weird with IB after markets for some reason.



Rusty O'Toole said:


> Best value is to buy a put or call spread. Buy the in the money option, it has the lowest premium and the best chance of ending in the money. Sell an at the money or slightly out of the money option to defray your expense.
> 
> This is the cheapest way to put on a directional (bullish or bearish) bet.


Should they have the same expiry? Or should it be like selling weekly covered calls: buy far out ITM call, sell near OTM calls as often as possible?


----------



## metatheta

Rusty O'Toole said:


> Best value is to buy a put or call spread. Buy the in the money option, it has the lowest premium and the best chance of ending in the money. Sell an at the money or slightly out of the money option to defray your expense.





braintootired said:


> Should they have the same expiry? Or should it be like selling weekly covered calls: buy far out ITM call, sell near OTM calls as often as possible?


brain, I gave you an example of this type of trade back in December.
See post #1006.


----------



## metatheta

Actually, I tracked that trade on a couple of posts.

Post #1029: I declared it a loser. Almost worthless and best left to expire.
Post #1051: It miraculously became a winner.

The moral of the trade was that it was less painful than being long stock.


----------



## Rusty O'Toole

braintootired said:


> Option volume data is always a bit weird with IB after markets for some reason.
> 
> 
> 
> Should they have the same expiry? Or should it be like selling weekly covered calls: buy far out ITM call, sell near OTM calls as often as possible?


That is up to you. What are you trying to accomplish. You must be bullish. How long do you expect to hold the position. Time decay is not your friend, buying farther out (in time) minimizes theta but increases your cost. You should make more money by selling the front month and buying farther out.


----------



## braintootired

Any tips on managing/closing iron condors? Near expiration, should I close everything at once, or should I close the short positions only, for example, or close one side?


----------



## metatheta

There are few ways to manage an iron condor (as well as other trade strategies) depending on the situation.

What is your trade? What's the underlying, the strikes, the expiration and the net credit/debit when opened? Also, are you bullish, bearish or neutral beyond expiration?


----------



## humble_pie

don't u think that if u have to ask how to manage an iron condor, then u should not be doing condors, though?

(signed)
dumb crumb that does not do iron flies/condors


----------



## braintootired

I'm not trading them yet, but I'm studying so that I can. I've been asking about this since way back, but decided to start with covered calls (which, as of this month, is finally back in profit!)

Apple's been trading between 500 and 540 for a few months now. I'm thinking of buying the current price +/- 15$ weekly. So it at 525 it would have been 500/510/540/550. If I buy 10 of them (40 contracts total), it might make it worth while.


----------



## metatheta

ICs are duration trades. Since you want to do weeklies, there is really no room for managing them other than taking them off when it meets your profit objective. It is a defined-risk trade so you cannot lose more than you risk.

Since you use IB, you can practice paper trading it on the simulated trading platform.


----------



## metatheta

BTW, AAPL is really crappy for selling option premium right now cause IV is really low. In fact, if you like buying AAPL options, it's a great time to do it. You just need to figure out the direction.


----------



## humble_pie

theta i would not do a naked short strangle in AAPL, stock is normally too volatile even if lately a bit sleepy.

my solitary naked strangle is in CNQ, because for a decade this stock has traded predictably in a band, from USD 25-45, while always showing sufficient volatility to generate acceptable premiums.

wondering if i have this straight? an iron condor can be viewed as an elaboration of a naked strangle? it's the wings that lower the risks?

i can see how beguiling mastering this art can be for parties seeking earnings plays in the weeklies. Although when it comes to cooking i belong to the slow-foods school myself ...


----------



## Rusty O'Toole

braintootired said:


> Any tips on managing/closing iron condors? Near expiration, should I close everything at once, or should I close the short positions only, for example, or close one side?


From the standpoint of profit vs risk vs time, the best time to close out the trade is when you have 50% to 75% of the total potential profit in the bag. That is a good time to close the trade and go do something else. You have reached the point of diminishing returns where the potential profit does not outweigh the risk. This means, close the entire trade as one.

There is not much point in managing the trade if it goes sour. Your max loss is defined when you put on the trade, when that point is reached you have nothing more to lose. You might as well close the winning side and let the losing side sit there. There is always the chance the market will reverse and bail you out.

The only thing wrong with this idea is, you must maintain as much margin for one leg as for both. If this inhibits you from making a potentially profitable trade, it may be to your advantage to close the entire trade even if it means a loss.

This and similar questions are answered every day on a show called Tastytrade. I have been watching it for a few weeks and have learned a lot.

https://www.tastytrade.com/tt/


----------



## metatheta

humble_pie said:


> i would not do a naked short strangle in AAPL, stock is normally too volatile even if lately a bit sleepy.


Yeah. Premium is too low for this type of trade. Also it takes too much margin for an AAPL short strangle. Iron condors use up less margin.



humble_pie said:


> wondering if i have this straight? an iron condor can be viewed as an elaboration of a naked strangle? it's the wings that lower the risks?


Yes. A short iron condor is like a short strangle with a lower protective put and a higher protective call. Another way of looking at it is that it is a short put vertical and a short call vertical.


----------



## humble_pie

metatheta said:


> Yes. A short iron condor is like a short strangle with a lower protective put and a higher protective call. Another way of looking at it is that it is a short put vertical and a short call vertical.


i have no margin issues so i tend to ignore margin requirements. Even with assignment i would have margin.

another way of working with a plain short strangle is to keep the strike prices a tad farther out. This makes the addition of offsetting iron wings less strategic. With this provision, a short naked strangle is also much more profitable each:


----------



## braintootired

Alright thanks for the replies. I'll let it all stew in my brain for a while.


----------



## humble_pie

Rusty O'Toole said:


> This and similar questions are answered every day on a show called Tastytrade. I have been watching it for a few weeks and have learned a lot.
> 
> https://www.tastytrade.com/tt/



what a great link! hey, these are the folks from think or swim! i haven't figured out exactly how they're planning to make $$ from tastytrade dot com, but in the meantime it's a fine resource for option traders.

are they all wearing what look like cook's hats to underscore the "tasty" connection? whatever, any zany show linking options, food & jokes is my kind of crumble.


----------



## metatheta

Tom Sosnoff said he's coming to Toronto for a show sometime soon. I can't wait.


----------



## Rusty O'Toole

humble_pie said:


> what a great link! hey, these are the folks from think or swim! i haven't figured out exactly how they're planning to make $$ from tastytrade dot com, but in the meantime it's a fine resource for option traders.
> 
> are they all wearing what look like cook's hats to underscore the "tasty" connection? whatever, any zany show linking options, food & jokes is my kind of crumble.


They get a commission on anyone who opens an account at TD Ameritrade through them and they have a subscription tip service called Bob the Trader. And they are launching a new platform called Dough. Doesn't seem like a very big money making venture so far.


----------



## humble_pie

farewell my lonesome GOOG

you are about to become an irregular option
kicked upstairs to the attic & renamed GOOGL

it might not even be possible to trade you
since only closing transactions will be allowed

your place will be taken by a villainous rogue
he's going to assume your good name
he'll trade hereafter in your place & stead
fare thee well my golden boy


----------



## Squash500

Rusty O'Toole said:


> From the standpoint of profit vs risk vs time, the best time to close out the trade is when you have 50% to 75% of the total potential profit in the bag. That is a good time to close the trade and go do something else. You have reached the point of diminishing returns where the potential profit does not outweigh the risk. This means, close the entire trade as one.
> 
> There is not much point in managing the trade if it goes sour. Your max loss is defined when you put on the trade, when that point is reached you have nothing more to lose. You might as well close the winning side and let the losing side sit there. There is always the chance the market will reverse and bail you out.
> 
> The only thing wrong with this idea is, you must maintain as much margin for one leg as for both. If this inhibits you from making a potentially profitable trade, it may be to your advantage to close the entire trade even if it means a loss.
> 
> This and similar questions are answered every day on a show called Tastytrade. I have been watching it for a few weeks and have learned a lot.
> 
> https://www.tastytrade.com/tt/


Thanks for posting this link Rusty.


----------



## avrex

humble_pie said:


> farewell my lonesome GOOG


Normally when there's a two-to-one split, we just divide the strike price in half, and the life of the option continues onward towards it's expiry date. But, I guess we can't do that here.

In this type of split, we would have to divide the number of contracts in half. But, of course, we can't do that. Your 1 GOOG contract can't become a half GOOG contract.

Have I got that right?

*[Update:]* I just did some reading here under the section, 
What happens to my options.
My head hurts. :confused2:


----------



## humble_pie

avrex said:


> Normally when there's a two-to-one split, we just divide the strike price in half, and the life of the option continues onward towards it's expiry date. But, I guess we can't do that here.
> 
> In this type of split, we would have to divide the number of contracts in half. But, of course, we can't do that. Your 1 GOOG contract can't become a half GOOG contract.
> 
> Have I got that right?
> 
> *[Update:]* I just did some reading here under the section,
> What happens to my options.
> My head hurts. :confused2:




no, not quite right each:

existing GOOG options are going to become irregular series & classes. Unfortunately, trading in irregulars always becomes severely restricted & highly illiquid. Spreads always widen. Only closing transactions will be allowed.

option traders holding the older series of GOOG options - the present series - will find themselves in a trap, with no way out except to sell to, or buy back from, the option specialists, the market makers, who of course will widen their spreads until they are in dealers' heaven.

those existing GOOG options go all the way out to 2016 & many if not most option newbies haven't yet figured out how horrible the situation is going to be. One can almost hear the market makers slobbering & drooling as they get ready for the killing fields.

me i'm short 2 naked GOOG 850 puts in a nearby month. On 3 april/14, their symbol will change to GOLG1 & they will enter Irregular Hell.

because of the structure of the GOOG stock split, my takeaway is that i'll still only be short 2 contracts. However, their assignables (if i get assigned, which would only occur if new post-split GOOG stock drops roughly below $425) will be 100 shares of Google Class A shares plus 100 shares of Google Class C shares per contract.

which means that assignment in 2 contracts would mean a bundle of 400 shares altogether, for which i would pay $170,000.

moreover, there is no way, at this point in time, to predict what class A voting Google shares will be worth relative to class C non-voting shares, at any future date.

avrex u are making one other tiny little mistake, if i may. When a stock splits normally, in a normal stock split, the number of option contracts then doubles. It does *not* get halved, as you are suggesting in your post above.

a good example of this was the recent split in TD bank. The number of short calls i'd already sold doubled. Ditto the number of existing short puts.

but complicated re-orgs like the GOOG flip, along with the vast majority of mergers & spin-offs, result in new series of options being created, with all existing options in old series slipping into shadowy & scary irregular status.

that's what i meant by Farewell my handsome GOOG. For many years he was such a sweet & friendly comrade, before he developed all these difficult new attitudes.


----------



## humble_pie

lonesome has a new cousin. He's plain GOOG & he's expected to deliver 100 class C non-voting shares.

he looks kinda cute, although some option quote systems haven't yet been able to find him.

meanwhile his ageing cuz now goes by the handle of GOGL1 or even GOGL8. He's been put out to pasture & the spreads being demanded to play with him will break your heart. The truth is that GOGL can't play anymore & he'll never be ridden again in an open field.


----------



## Rusty O'Toole

In looking at option prices, GOOG and GOOGL right now seem to be at very high levels, the highest in a year practically. Have thought of selling an OTM spread. Has everything been settled re splitting or repricing the stock? I don't want to get into that kind of tangle but if that is all settled, and they are trading like any other option, it should be worth looking at.

What is the difference between the two when it comes to options? Or is one as good as the other?


----------



## humble_pie

Rusty O'Toole said:


> What is the difference between the two when it comes to options? Or is one as good as the other?



huge difference. Huge. Don't even think of going near em until you know.

deliverable for new GOOG is 100 class C non-voting shares.

deliverable for old GOGL1 is 100 class A voting shares plus 100 class C non-voting.

moreover old GOGL1 will not trade in a free market. No new orders can be placed. Only closing orders can be accepted. The spreads have already widened to a punishing degree because the dealers know that nobody is left with open interest except their future victims.

new GOOG might be ok to trade but me i'm waiting & observing at least a couple weeks.


----------



## humble_pie

will GOOG trend down, now that the founders have increased their voting power with new non-voting share issue?

http://www.washingtonpost.com/busin...d0ab6a-b9ca-11e3-80de-2ff8801f27af_story.html

here is a critical excerpt from the above-cited washington post article:

_If there is a big spread between the trading prices of the Class A and Class C shares during the first year of trading, Google Inc. will be required to pay an estimated $300 million to $7.5 billion in cash or additional stock to help make up the difference. Google agreed to those terms to settle a class-action settlement alleging the stock split was set up to benefit Page and Brin at the expense of other shareholders._

what, existing shareholders are expected to pay to bail out all shares if the market accurately prices the new non-voting shares lower than the voting shares?

vicious, i'd say. Poor trapped animal has to chew off its own forearm to get loose.


----------



## Rusty O'Toole

humble_pie said:


> huge difference. Huge. Don't even think of going near em until you know.
> 
> deliverable for new GOOG is 100 class C non-voting shares.
> 
> deliverable for old GOGL1 is 100 class A voting shares plus 100 class C non-voting.
> 
> moreover old GOGL1 will not trade in a free market. No new orders can be placed. Only closing orders can be accepted. The spreads have already widened to a punishing degree because the dealers know that nobody is left with open interest except their future victims.
> 
> new GOOG might be ok to trade but me i'm waiting & observing at least a couple weeks.


That is why I am asking. Thanks for the info.


----------



## londoncalling

I think I am ready to dive into the options world, finally. My plan is to start selling puts on some bank stocks. In the US WFC and BAC, In Canada I am considering BNS, TD, and CM as I already hold the others. My concern as a newbie is how to choose the right play. I am considering a strike of 10% or more below current price as an entry. Any pointers as to where to find more info on selling puts as a strategy in regards to duration (3mo, 6 mo, 1 yr or more?) Is there any flaws thinking? 

Cheers


----------



## swoop_ds

There is always the issue of liquidity for the canadian stocks. Also, put selling is great, as long as you're willing to buy the stock if you get exercised.


----------



## humble_pie

london there are almost never flaws in your thinking but nevertheless i'm not 100% ok with your proposal.

selling puts when stocks are at record highs is perhaps not the best thing to do. Ideally, one sells puts when stocks are in the garbage can, because put premiums are then at their highest.

of course, nobody gets it right, but still i'm hyper-cautious about any put selling these days.

my 2nd dismal thought is an elaboration of the foregoing. It's highly subjective psychology. Very touchy feely.

touchy feely tells me that i could buy a stock & sell its call & if the stock would then drop 20-25%, i would still be as calm as a cucumber.

let's say i buy TD at $50 & sell a call for $2.25. Stock then plunges 25% to 38.50. I'm cool with this. Net i paid $47.75 so now i'm down roughly $9, but all i'm going to do is stiffen my upper lip & try to feel grateful for the dividend.

now suppose i had instead sold a TD $50 put. I might have received $2.95 or even $3.10 for the blasted option, but if TD stock then plunges to 38.50 i know that i will become borderline mental. The prospect of being forced to pay $50 for a stock while mr. market is trading it at $38.50 would plunge me into the depths of darkest despair.

i know i know it is not logical or reasonable at all. It is how i feel, though.

how do you think you might feel?

theta might come along here & tell you how you can sell one put while buying another, thus limiting your risk. Theta would be right. You could sell a TD $50 put while buying a TD $46 put, thus limiting your risk to only $4, or $400 for one contract. Of course the returns will be much less.

moving on, consideration of a paired put strategy means considering whether your broker is up to it. How will you execute such a spread.

there are a few sectors that are cheapish right now. Gold, coal, many drillers, some energy producers, copper should be drooping also. Their puts might be OK to sell. On the other hand, if china tanks, the world is up for a huge resource & commodities depression, so these already-depressed prices could go into the garbage can, which would wreak havoc on your short puts.

ps i just looked up my short puts in TD. I sold them before the split, so their post-split strike price looks a little odd. They are the jan 39s of 2015. As you can see, they are 25%, not 10%, below the current market price. That's how touchy-feely i am about put risk.


----------



## Rusty O'Toole

londoncalling said:


> I think I am ready to dive into the options world, finally. My plan is to start selling puts on some bank stocks. In the US WFC and BAC, In Canada I am considering BNS, TD, and CM as I already hold the others. My concern as a newbie is how to choose the right play. I am considering a strike of 10% or more below current price as an entry. Any pointers as to where to find more info on selling puts as a strategy in regards to duration (3mo, 6 mo, 1 yr or more?) Is there any flaws thinking?
> 
> Cheers


As I said earlier I have been watching Tastytrade and learned a lot. You should get Think or swim, an excellent options trading platform and practice on it.

Some principles that Tastytrade has back tested. Sell out of the money options that are at least 1 standard deviation away from today's price. Make sure you collect more in premium than the risk you are taking. Sell options when implied volatility, and therefore prices, are high and wait for the market to correct. If things go your way, close out the position when you have 25% to 50% of the potential profit in the bag. Protect yourself by selling a farther out option (option spread).

All these are a matter of mathematical probabilities, or putting the odds in your favor. No one can out guess the market but if you put on trades where the odds are in your favor, and do small trades that risk no more than 1% or 2% of your account it is hard to go wrong.


----------



## Rusty O'Toole

Not that I would try to give advice to the great Pie but... there are a couple of "saves" to your Put selling fiasco.

One is to do put spreads that limit your possible loss. This is my favorite, selling naked puts would scare the hell out of me. Like, sell a 40 put and buy a 39 put when the stock is at 45. If the risk of max loss is 25% but you can collect 35 or 50 cents, this could be a good trade.

Another thing you might do is roll the position down. When it gets to less than a week to expiration buy back the loser put and sell one or 2 farther out of the money, farther out in time puts and cross your fingers.

Or, the Tastytrade boys favorite strategy, sell a bunch of calls to square yourself up if it keeps going down. A delta neutral strategy.


----------



## humble_pie

rusty i was just talking about my Feelings.

the dollar differential is close if not identical. Short Put = Long Stock less Short Call, says the conventional option wisdom.

but the Feelings are radically different, is all i was trying to say.

& i did write about put spreads! in that paragraph where i said theta might come along & explain how to sell one put in TD while buying another at a lower strike in order to control risk ...

i know i know nobody ever reads my stuff
so sorry, i will try to do better

as for spreads, surely we are not writing an options how-to tome here?
london will get to spreads when he gets to spreads. In addition, it's unlikely a broker will allow naked put selling as a maiden option trade.


----------



## Lephturn

Agreed Rusty - TastyTrade has lots of great content for free. Start with the WDIS (Where Do I Start) series.

I would advise against trading options in the Canadian market at all. It is just too illiquid. Basically no Canadian stocks have enough liquidity to allow me to manage a trade confidently in the way I would like.


----------



## londoncalling

Thanks for all the replies. I will definitely have to keep researching. I have been nibbling away at the idea for a year or more. I do not have an issue with being assigned. Perhaps my thinking was short sighted in both duration and spread. Perhaps leaps are a good place to start. When I get some time I will reread Options for dummies for the 3rd time, while study some deeper reading and running a practice account. At some point I will take off the water wing and dive into the shallow end of the options pool.

Cheers

Edit: a question about Canada. Is there not enough liquidity for large cap Canadian cos trading on the NYSE? TD, POT, BCE etc


----------



## humble_pie

just the first 13 pages of this nifty little booklet should be enough to start up.

it's from the montreal exchange. Scroll down this page to the PDF entitled Equity Options Reference Manual. Only 50 pages, yet everything is included.

http://www.m-x.ca/educ_guides_strat_en.php

somebody on here once said that Options for Dummies is daunting. I for one am against reading more than one book at the beginning. I believe in a hands-on startup that goes: Read a little, then a little option play (a real one), then watch how the numbers shimmy & shiver as time passes, then another little read, etc.

i believe the brokers are right when they limit first positions among option newcomers to covered calls. I believe they are right in restricting naked put sales to higher level traders only.

PS re US options on canadian stocks: there are many. Some canadian companies have their principal options market in the US. Potash is a good example of this.

although normally one goes to US options markets whenever one has the opportunity, nevertheless the situation must be judged on a case by case basis. Potash, teck & many others have greatest liquidity (look at open interest figures) in the US. Therefore avoid montreal exchange options for these.

other stocks - TD bank is an example - are somewhat divided, with still-heavy canadian trading (open interests) indicating that institutions still trade canadian bank options on montreal. I for one trade canadian bank options on montreal, not in the US, although the US options market for these is slowly building.

BCE has such flat low-premium options that i usually go where the opportunity beckons, either US or montreal.

keep in mind that selling a US option means that one is also playing on the currency exchange; somewhat at the time of sale but also - to a much greater extent - if assignment occurs.

a by-product of selling US options on canadian stocks is that one receives all those lovely US dollars with zero FX fee. This is another form of gambit trading.


----------



## Rusty O'Toole

londoncalling, for a retail trader it is better to close the position or roll out before getting assigned, in other words, 2 days to a week before expiration.

Unless you sold a put with a view to buying the stock, or a call in order to sell it.


----------



## HaroldCrump

Rusty O'Toole said:


> londoncalling, for a retail trader it is better to close the position or roll out before getting assigned, in other words, 2 days to a week before expiration.


IMHO, 1 week is far too late to hold on to an ITM short call position, let alone 2 days.
You should roll it out or close it a lot sooner.
How much sooner depends on how deep ITM the position is, how liquid the options market for that security is, and whether there are any upcoming events for the stock, such as a dividend X-date.

It is quite likely that a DITM call will get assigned early on the last X-date prior to option expiration.


----------



## avrex

Looks good @humble. 
Your diagonal became vertical. Still bullish. I like it.

The strike prices are going to look weird after the stock split. Does this mean that the strike price of your short AAPL call will be 87.14 after June 2nd?

Another side note. With the stock split, I don't think anyone will trade the Apple mini option (APPL7) anymore.


----------



## humble_pie

i would imagine they'd round each contract down to 87.14 plus a smidgen of cash for the fractional share.

but i don't yet know the details of the AAPL split, whether it's a normal split or whether it will be wonky like the GOOG split.

my AAPL diagonal has not done well because it had to straddle the deep valley in AAPL share prices. If all goes extremely well, i might have a humdrum sort of gain in jan/15 (cost is now down to $162 so if AAPL rises above 610 i'm out at maximum $48 profit.)

on the other hand i steadily made $$ by selling puts in aapl since 2012. Someone like theta would tell me i had a-short-strangle-plus-a-long-leaps, or maybe he'd say i had a-crippled-condor-missing-part-of-its-body; but me i think of the shebang as a diagonal plus a short put.

it might be worth noting that since the diagonal was put on in october/12, it has done noticeably better than the share price. AAPL shares at 593 today are far below the 700 they fetched in oct/12, while closing the diagonal today would fetch $160, only 2 dollars below its 162 cost.


----------



## braintootired

Apple's IV between Thursday and Friday was unusually high (25%+). Why was that?


----------



## avrex

incorrect. The current implied volatility of AAPL is actually at a 600 day low.


----------



## humble_pie

i'm an option mender. The verb usually used to roll an option position up or down or out is "adjust" but the way i see it, a darn by any other name is still the same.

tom van deijnen aka Tom of Holland teaches darning in great britain. Here's an old sweater he bought in a 2nd hand store & then partly covered with samples of darning stitches.

.










.

options, fair isle knitting, mending, chamber music. They have a lot in common. Contrapuntal. A stitch in time saves nine.

.












http://tomofholland.com/


----------



## avrex

rossco12 said:


> In my intent to further my knowledge of options strategies, I stumbled on this website which is a giant wealth of knowledge. Anyone here successfully executed any of the more intricate strategies beyond covered calls and protective puts?
> 
> http://www.optionseducation.org/strategies_advanced_concepts/strategies.html


I'll 'bump' this thread for you @rossco.


----------



## rossco12

avrex said:


> I'll 'bump' this thread for you @rossco.


thank you sir


----------



## avrex

no problem.

For myself, I only utilize simple strategies.
I mostly sell options for income. Usually one-leg, and sometimes two-leg spreads.

With volatility so low these days, I've been fairly quiet in the past year and have not done a lot of option trading.


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## dime

Options just baffle me sometimes, they seem so contrary to the idea of investing, when the option's value erodes with time. That's why I guess you only ever hear the term "options trader" rather than 'options investor'... there's no such thing!  
I've dabbled in covered calls but found they were quite a bit of regular work to figure out on top of the stock research and the tax implications never seemed very clear from the governement. I do own some of the 'covered call' ETF's because the yeilds are quite attractive. I've read though that over the long term the regular ETF might outperform over the long haul because you have greater upside potential without the covered calls. 

That might be an interesting topic for another thread... the virtues of investing in covered call ETFs?


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## avrex

dime said:


> That might be an interesting topic for another thread... the virtues of investing in covered call ETFs?


...which can be found here 
Covered Call ETFs - ZWB, HEX, etc.


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## humble_pie

dime said:


> Options just baffle me sometimes, they seem so contrary to the idea of investing, when the option's value erodes with time



options aren't really contrary to the idea of investing imho, they're more about plucking cash out of volatility. 

the volatility exists, it's just not visible. Perhaps something like electricity, you don't see it until you plug in a light bulb?

it's a good thing, not a bad thing, that an option's value decays with time.


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## humble_pie

option rumour at TDDI: coming soon, the next generation of their web platform will likely offer 100% online option spread trading at low commish.

if true, this would be a giant step forward & would help restore the big green's sagging reputation.

2 other well-known brokers plus one not-so-well-known presently offer online option spread trading. The 2 are interactive & questrade. The less-well-known is TD's think or swim, but it offers in USD only. Virtual broker *may* offer spread trades, but i'm not able to confirm if this is the case.

other brokers either cannot do or else charge clients full agent-handled commissions to enter 2 or more related option orders, tch.


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## lonewolf

humble_pie said:


> l
> .
> 
> selling puts when stocks are at record highs is perhaps not the best thing to do. Ideally, one sells puts when stocks are in the garbage can, because put premiums are then at their highest.
> 
> 
> .


 Humble_ Pie well said

The up trend has lasted a long time selling puts "WAS" the thing to do. Now that the trend has been in place for a long time & the masses have been programed to sell puts. I really really like the long put/leap trade on the stock indexes right now. Sure this market could keep heading higher for a while. Based on my work I do not think this rally will end well for the bulls. I will keep buying puts /leaps if & when they expire worthless I will buy a few more. Premiums are so low right now I think shorting the market with options is the best speculative play right now. With so much money on the long side playing the short side by buying puts is the best game in town @ the moment.


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## Argonaut

Hey folks, 

Canadian schools are competing in an options trading competition right now, from this week until November expiry. It's $100,000 of fake money and you can only trade the top 30 most active underlyings at Montreal.. I'm sure one can guess which these are. The trading platform isn't great, it looks like you have to buy to the ask and sell to the bid everytime, no simulated meeting somewhere in the middle. 

I'm leading the team from my school and looking to win. My first trade was buying 21.50 Nov 22 puts on XIU, based on a projected downswing for the market before a Santa Claus rally in December. Need big moves to win, and probably have to take the buy side.. not enough time or profit in selling premium. Any trade ideas from the forum? I haven't followed the market as much lately.


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## lonewolf

Argonaut

I do not play the Canadian market. I would say your on track with buying the puts, Dont know how far out of the money those ones are but I would go far out of the money. @ Peak momentum down during Oct crash cover puts then sell out of the money puts for premium for about 2 hours - 2 days into a strong rally coming off the lows then cover . Then go long very deep in the money calls that have little premium if possible ( premium will be sky high @ the money & above but most likely less then half of what it was) .

Or could do nothing & win because everyone else takes hits


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## humble_pie

argo what do you hear the montreal exchange has offered to the biz schools in return for flogging their best grad students into this masochistic torture.

alas masochism has a price. There are probably not even active option classes & series for as many as 30 underlyings at the sleepy old mx-ca.

also this business of paying to & selling at the natural is intolerable. What's with the hamasspeak? this is ISIL jihaditalk imho.

my price to help is eminently fair & reasonable, though. If perchance your team would win, i'd love to have 50 tickets to the cirque du soleil for an NGO in my neighbourhood that works with young single mothers. Best seats. On the parterre. 

for myself a magnificent large flowering plant delivered fresh to my door on the first day of every month for a year, plus a heavenly collection of drambuie, would thrill me silly.


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## avrex

haha @humble_pie. Yes, you could definitely teach this course.

@Argonaut, this looks like a great learning exercise for finance undergraduate students.

TMX Options Trading Contest for University students
*$10,000* first place prize. nice. However, with 1800 teams registered, it will be a lottery.
To win, one would need to buy many long call or long puts on the TMX 30 most active securities.

*If I was playing*, I would look for some *momentum and earnings plays*, during this short contest.
In general, I expect a market drop in Oct. Therefore, I would *buy puts* on the following stocks:
*YRI
ENB
AEM
BB
ABX
G*

To maximize your returns, I would try to get in and out of these individual stocks as they announce their earnings.

For example, *YRI* announces earnings just after the markets close on *Oct 29th*.
A few days before this date, place all of your money on YRI puts. Then YRI announces bad earnings. You make a ton of money.
When the markets open the next day, sell all the puts and move on to the next stock.



> Each team must execute a surprise strategy that will be unveiled by email on the 2nd trading week. The email will include a link to access the video explaining the strategy starting on October 9, 2014, at 4:00 p.m. (EDT)


You've got to send us a link to your video.

@Argonaut, have fun  and keep us posted on your moves and results.


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## humble_pie

avrex u are pulling my leg with the teaching biz, when i look at the parameters of argo's student project as laid down by the montreal exchange i am Beyond Aghast.

this is everything in options trading that i passionately oppose, starting with zero flexibility in pricing, moving on to ultra-short time frame (what! everything to wrap by 21 nov/14! what kind of nonsense is that), then moving on to the 4 classic strategies the MX is trying to teach, which happen to be the very strategies i not only don't like but never practice.

what it all means, i'm afraid, is that pure luck is going to win. Avrex is a good option trader & he will likely pick a 100% rational & convincing array of positions. He will have a beautiful bunch of logarithms.

but imho the winning team is going to be some freak lucky kid who happens to explode out of the boondocks with puts in a company that goes backrupt or 48-hour calls in a company that gets bought out of the blue by overseas investors at near double its market price, the way carfinco was recently.


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## humble_pie

on the other hand here is a gorgeous ray of light each:

the Canadian Derivatives Exchange Scholars Program. It's an alluring offer of graduate student scholarships from the montreal exchange. Argo, have u seen this?

the money is not chump change & the bonus is that the scholar can earn it without impairing any other kind of grant, scholarship or benefit he might be receiving.

https://www.m-x.ca/uni_bourses_derives_en.php

on offer are graduate & postgraduate scholarships of $15,000 & $20,000. All the student has to do is set up & run a research project in financial risk management or in any topic that is related to the business of the Montreal Exchange. Is that latter definition not extraordinarily broad, vague & all-embracing?

it's not just the $$, argo, it would look great on your resumè.


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## Argonaut

Thanks a bunch avrex and humble, I will look into these trades and that scholarship. I am so stretched for time lately that I cannot devote as much of my focus to the markets that I would like. Winning the $10k may be a longshot, but my objective with this investment group is to get people here excited about finance. At first it was me and some BCom undergrads but I brought a bunch of fellow MBAs in on it too. Options are a bit complex for beginners so I tend to talk about other things at the meetings.


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## Rusty O'Toole

humble_pie said:


> option rumour at TDDI: coming soon, the next generation of their web platform will likely offer 100% online option spread trading at low commish.
> 
> if true, this would be a giant step forward & would help restore the big green's sagging reputation.
> 
> 2 other well-known brokers plus one not-so-well-known presently offer online option spread trading. The 2 are interactive & questrade. The less-well-known is TD's think or swim, but it offers in USD only. Virtual broker *may* offer spread trades, but i'm not able to confirm if this is the case.
> 
> other brokers either cannot do or else charge clients full agent-handled commissions to enter 2 or more related option orders, tch.


What is your favorite platform? I am using Think or Swim at TD, do you know how it compares to others?


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## humble_pie

Rusty O'Toole said:


> What is your favorite platform? I am using Think or Swim at TD, do you know how it compares to others?



alas i can't go to think or swim because i have cross-currency positions, therefore need a system that offers both canadian & US stock & option exchanges.

i "hear" from respected sources that TOS is super-excellent.

there are so few choices for canadians trading options that i don't imagine anyone can have a "favourite" system. All the choices have limitations. For example (don't know this), does TOS offer a USD-only RRSP? my guess is it does not. Nor does interactive brokers offer RRSP accounts.

for automated spread trading in thinly-traded options markets, i believe it's likely that i'll continue to work these by hand. My reason is that the B/A spreads are so huge in thin options markets - even in the US - that the e-systems can't really crack them.

what i'm good at is observing a thinly-traded option series where i'm preparing to be active & detecting when there is a potential counterparty to my trade who can be coaxed into a better price. There isn't much that any software can do on the coaxing side of things each:


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## Lephturn

If only OX hadn't been bought and dumped Canada.... https://onlineint.optionsxpress.com/educate/xguides/walklimit.aspx

Their Walk-limit order is awesome. These days you can even customize the start price, end price, price increment, and time increment. It's as close to having an automated humbe_pie to work you order as I've seen, but only for Murica.


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## humble_pie

hey Lepht! good to see you!

but you always knew i'm secretly a Bot, right?

currently i'm planning to reform BMO on options. The reps themselves know that their firm is a bit behind & they are eager to do better, bless their hearts.

the obstacle is crusty upper management. I believe they still suffer from deep-seated Fear of ButterFlying.


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## Rusty O'Toole

Wouldn't it be simpler to exercise the DITM option then sell the stock?


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## Rusty O'Toole

I need some input from the more experienced option traders. I have been trading options for only a couple of months and think I have found a really safe, profitable trade. I would like to use it as a pattern for future trades because it is profitable, and I think, risk free. 

Let me describe the first trade of this type. On the 14th of this month I sold the Nov4 114.5 call @ $1.89 and bought the Dec 117 call @ $1.85 in GLD. The Nov4 had 14 days to expiry, the Dec had 35 days. I did a 10 lot which meant I took in $40 credit and paid out $25 in commissions, leaving me $15 to the good.

In other words a diagonal calendar spread.

My feeling was that I would benefit from time decay of the sold options, which would lose value faster than the others whether the underlying went up, down, or sideways and that is what happened.

As of the close yesterday, the 114.5 options were worth .82 and the 117s were 1.48. GLD closed at 115.16 so the 114.5s were slightly in the money, the 117s out of the money.

There was still $160 of time value in the sold options, tomorrow is expiry day, I intend to close out the position early in the day and expect to do a little better than $700 profit. This on an investment of nothing, and tying up $2500 for 2 weeks.

I thought worst case, the sold options would expire ITM with the others OTM which is what happened. I still made money, $700 plus the $15.

If the underlying goes down the sold options should lose value faster than the bought options

If the underlying shoots up and both are ITM they will go up dollar for dollar together.

So, if I start at even or with a small credit, and can't lose if the underlying goes up, goes down or stays the same, how can I lose?

Should also add this trade was very cheap on margin, only $250 per spread or $2500 for the 10 lot.

Would appreciate any feedback.


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## avrex

You made $700 in two weeks. Nice. 
I love the fact that you took advantage of the rapid time decay of the short.

I'll wait for @humble_pie to chime in, as she is the one person here with lots of *diagonal* experience.



Rusty O'Toole said:


> ....and think I have found a really safe, profitable trade. I would like to use it as a pattern for future trades because it is profitable, and I think, *risk free*.
> ....
> So, if I start at even or with a small credit, and can't lose if the underlying goes up, goes down or stays the same, *how can I lose?*


This trade can be profitable.....
However, there is no 'free lunch', and this trade *does involve risk.*

I know that this is unlikely, but let's look at a worst case scenario. 
Let's say that immediately after you entered into your paired position, GLD jumped up to 120.00 and stayed there until the end of the year. 
If you held your positions until expiry, here's how they'd settle.
1. Nov 114.5 Short Call. 1.89-5.50 * 10 contracts = - 3,610.00
2. Dec 117.0 Long Call. 3.00-1.85 * 10 contracts = + 1,150.00

Total =* - 2,460.00*


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## humble_pie

avrex the way i see it, the max loss in this example is 2.50, or $250 per contract, or in this case $2500 since he mentioned 10 contracts.

if exercised & if stock is north of 117, he'd have to sell at 114.50 but he'd have to cover by exercising the 117. 

if exercised when stock is north of 114.50 but less than 117, inevitably there will be a loss according to what he must pay to cover the short (obviously if stock is less than 117, he's not going to exercise his long.)


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## el oro

avrex is correct if held until Dec expiry but I don't think that was the intent.

I assume you had intended to close the whole spread at Nov expiry. In this scenario, small loss starts at ~117 GLD. The 114 call is worth ~2.5 (all intrinsic) and the 117 call ~2.39 (all extrinsic). After your original credit, that's a $70 loss. 

Since extrinsic value is highest at the strike price (as in the scenario above), the loss increases as the price goes up.

Nov expiry at 118: The 114 call is worth ~3.5, 117 call ~2.79 (1.79 extrinsic). You lose $670.
Nov expiry at 119: The 114 call is worth ~4.5, 117 call ~3.59 (1.59 extrinsic). You lose $870.
And so on... Your loss approaches the max of $2460 as extrinsic value approaches 0.


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## Rusty O'Toole

Sorry I did not make it clear, I mean to close the trade on the day the closer in time option expires, either by buying back the spread or by selling the long call if the short call is out of the money.

On the day the short call expires it will have no time value but the long call, which has several weeks to expiry, will have time value. I would expect this time value to offset any loss in the 114.5 - 117 area.

Furthermore, once both options are in the money they should gain dollar for dollar. I can't see how there could be a larger loss above 117.

Let me go over the option prices and report back.


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## el oro

My scenario is correct then. The reason you have a larger loss above 117 is because time value is not constant. It decreases the further you are from the strike.


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## Rusty O'Toole

Went over the option prices and I see what you mean. It is possible to show a loss. Will wait for closing prices today and see how they look.

In the meantime gold dropped below my short call and I closed the trade for a $990 profit.


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## humble_pie

Rusty O'Toole said:


> ... If the underlying shoots up and both are ITM they will go up dollar for dollar together


above is a key concept that Rusty has, so far, got wrong.

here it is again:



Rusty O'Toole said:


> ... Furthermore, once both options are in the money they should gain dollar for dollar



in fact, if GLD rises sharply, the pair of calendar options will always rise unevenly, as 1600 has shown above.

gamma/theta will push an ITM near-term call that is close to expiration to 100 delta or close to 100 delta.

but gamma/theta also means that the longer-term 117 call will rise more slowly, perhaps a delta of 85. At a certain point in this example, the cost to buy back 100-delta 114.50 will be greater than the proceeds that can be realized from disposition of the 117.

there are also the dealer spreads to consider. Few professional traders remain active on expiration day. The specialist widens his spreads accordingly. The party looking to buy back an ITM on or close to expiration day will usually find the dealer demanding a premium above intrinsic. The dealer is unlikely to budge.

in dollars & cents, the negative cost to close the example, in a scenario where GLD had gone up instead of down, could easily be greater than 2.50.


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## Rusty O'Toole

I see that now. Am working on a way to reduce risk on this type trade, I believe it has its place in the toolbox.

GLD closed at 112.11 today so they would have expired worthless but I did not want to take a chance so I bought them back for a nickel. If markets had been open yesterday I would not have waited for today but there was still $160 of juice left on Wednesday and I didn't want to waste it.


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## Argonaut

Best way to play oil getting back to $90-$100 in the next couple years? I would buy a LEAP on USO, but I'm concerned about its long term tracking ability. It went up to almost $120 in 2008, before settling into a range with a max of about $40 since then. Also, the liquidity of the contracts aren't great. The other option is the futures market, but i'm not experienced in that and it's not a major feature of most Canadian brokers.


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## humble_pie

Argonaut said:


> Best way to play oil getting back to $90-$100 in the next couple years? I would buy a LEAP on USO, but I'm concerned about its long term tracking ability




salut argo

here is a learned discussion about the folly of trying to own USO, DBO or OIL as long-term levers on oil prices.

since they themselves are leveraged futures products, the thought of buying to own a long-term option on a future does give me a twinge.

http://www.marketfolly.com/2009/01/how-to-play-crude-oil-using-etfs-etns.html


OIL in particular is an ETN, meaning its assets consist of promissory notes, not even futures contracts.

i'm wondering what would be wrong with holding a dull, sensible LEAPs product such as an XOM call of 2017 instead?

or, even more audacious if one is bullish, buy an OTM call & sell an OTM put (would this be an inverted collar?) (for folks who wear tees instead of ties)


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## Argonaut

I'm not as confident in the price of XOM, they aren't a direct correlation to the price of oil. I can logically ascertain that the probability of oil itself going to $90-100 in the midterm is high, though. I'll have a look at futures, but I don't know much about it -- whether or not I can go out to Jan 2016, or whether or not I can make a cheeky little $500 bet like I do with options.


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## humble_pie

speaking of cheeky bets, how did your team from the west coast make out in the montreal exchange graduate school option marathon?

as i recall, the terms that MX-CA imposed were 100% impossible. They meant slaughter for every legitimate competitor. The only team that could have won would have had to have been some sweet bunch of hayseed kids from Lower Swamp U? betting on puts in ACQ?


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## Argonaut

A high of $191k and an ending balance of $167k, so 67%. I didn't have time to really look at it, only made a few trades. Biggest hits were XIU puts at the end of September, and CCO calls at the end of October. I think a team from BC may have won -- Simon Fraser University.


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## janus10

Wow... want an example of what NOT to do with options? Last week I sold some naked puts on oil-related stocks (anywhere from 2 to 4 contracts each so that, if assigned, I wouldn't have to spend more than $5k on any position). Well, I couldn't have timed it worse - now the stocks are well off (10-30% down) in just over a week.

These puts expire Dec 19th - I don't see most of the stocks rebounding enough in the short time frame. As I see it, I have two choices - either get assigned or close out these deeply red positions. Any other choices for me or strategies that could be recommended? Those involving a time travel machine will be noted.


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## avrex

janus10 said:


> have two choices - either get assigned or close out these deeply red positions.


I guess it depends.
Do you see long term value in owning these stocks and can you take on the financial costs of buying these stocks at this time?

My goal in options is to never get assigned the stock. If I actually wanted to own the stock, I would just go out and buy it.

Whenever, I'm in a situation like yourself, I just *close the position*, take the loss, and move on to the next option trade.


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## Rusty O'Toole

janus10 said:


> Wow... want an example of what NOT to do with options? Last week I sold some naked puts on oil-related stocks (anywhere from 2 to 4 contracts each so that, if assigned, I wouldn't have to spend more than $5k on any position). Well, I couldn't have timed it worse - now the stocks are well off (10-30% down) in just over a week.
> 
> These puts expire Dec 19th - I don't see most of the stocks rebounding enough in the short time frame. As I see it, I have two choices - either get assigned or close out these deeply red positions. Any other choices for me or strategies that could be recommended? Those involving a time travel machine will be noted.


You could defend yourself by selling some OTM calls. When the time comes you could accept exercise and be long stock at high prices, and try to make some of your loss back by selling covered calls.

Or wait till a few days before expiry and if you are still in the hole you could roll out to the next month, gaining some premium, and hope they go back up.

I did this with a nasty position in EWZ puts that I put on before the Brazilian elections ( sold a bunch of calls to defend and rolled before expiry) and just finished trading out today, with a $721 profit, after being down $3000 at one point.

(PS the $721 profit was when I closed out the position today. Total profit $1758)


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## geoffh

To the poster who sold puts on oil E&P companies:that's tough. I personally believe that there is a ton of value at these levels. I would look to roll the puts out further in time and down for a small debit or credit. If you can give me the strike that you sold and what you collected, I'll throw some ideas at you.


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## humble_pie

Argonaut said:


> A high of $191k and an ending balance of $167k, so 67%. I didn't have time to really look at it, only made a few trades. Biggest hits were XIU puts at the end of September, and CCO calls at the end of October. I think a team from BC may have won -- Simon Fraser University.



sensational results for your team, félicitations!

yours were the XIU puts, as i recall? what's even more interesting is that IIRC you had put on the position yourself, some time before the oily swan song began in earnest, c'est terrible.

don't forget about the MX fellowship when u have time to look into it ...


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## janus10

To avrex - I was actually hoping to own these stocks at a discount. Obviously this strategy backfired because I will end up owning them at a discount from when I sold the puts, but at a high premium to their current trading prices. Each position would only represent less than 1% of my liquid assets, so it is more of a "lesson learned" rather than a true pain point.

To Rusty and Geoffh - here is what I have (all 20141219 expiries)

Sold two 56 Puts on VET - Currently trading around $45+
Sold four 12 Puts on TET - Currently trading around $8+
Sold ten 18 Puts on TCK.B - Currently trading around $16+
Sold three 26 Puts on CVE - Currently trading around $22+
Sold three 28 Puts on BTE - Currently trading around $17+ 

I am sitting on a fair bit of cash that I had earmarked should I see a correction. Other than about $15k in long stocks, these puts are my only exposure to energy in my portfolio - currently, I am around 35% equities and 65% cash and am looking to at least reverse that position with the right opportunities (I am light in financials for example).


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## Rusty O'Toole

Do you use Think or Swim? If you did, you could look up a chart of your positions in the analyse section and see exactly where you stand. You can download and use the Papertrading version at no cost.

I seldom sell naked options, they are too risky, I usually try to do some kind of spread trade, although I will take off the protective option if the trade goes far enough in my favor and has less than 2 weeks left to run.


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## humble_pie

usually when something like this happens i say to myself that whatever gain i received when i first sold the puts is the very last penny i'm ever going to get from these mothers, at least for the time being.

then i set myself to rolling, dancing, shaking & rocking my way forward out of the position while paying as little as possible, sometimes even picking up a credit.

i've looked at just one of your positions, perhaps the biggest dollarwise. TCK. Here you could buy back to close, the market is CAD 2.58-2.66, one could start by bidding 2.64 with reasonable expectations of being filled.

then you could sell 10 TCK on US market. I'd go to the jan 13s of 2016 because, as i say, the objective here is to Get Safe as cheaply as possible. The objective is to wriggle out of a tight squeeze, not to make new $$.

those US puts are USD 2.34-2.37. There's little room to play, so one would normally first offer to sell at 2.35. Exchanged (notionally only as i'm assuming you'd want to keep the greenbacks as is) at roughly 1.144, the bid becomes 2.68 in canadian dollars. Bingo, here comes all your money back, plus you have positioned your strike price far lower. It is now, in fact, below the money, the rescue has been accomplished & the investor/trader can now turn time & attention to other, better activities than housekeeping.

i didn't look at your other positions but these could perhaps be worked up as well. One big problem with the thinly-traded montreal options - stocks like vermilion - is that there's no liquidity, there are huge spreads, usually there are no LEAPs options, the montreal exchange is difficult to deal with, bref, i tend to stay away from low-liquidity canadian options.

in most liquid cases, as with TCK options, one should go to US markets. Please notice that open interest for the US jan 2016 13 puts is 2,027 contracts whereas open interest for their rough CAD equivalent - the jan 15 puts of 2016 in montreal is only 811 contracts.

most of our interlisted stocks have US options. In most cases - although not all cases - US markets are far more appealing.


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## geoffh

janus10 said:


> To avrex - I was actually hoping to own these stocks at a discount. Obviously this strategy backfired because I will end up owning them at a discount from when I sold the puts, but at a high premium to their current trading prices. Each position would only represent less than 1% of my liquid assets, so it is more of a "lesson learned" rather than a true pain point.
> 
> To Rusty and Geoffh - here is what I have (all 20141219 expiries)
> 
> Sold two 56 Puts on VET - Currently trading around $45+
> Sold four 12 Puts on TET - Currently trading around $8+
> Sold ten 18 Puts on TCK.B - Currently trading around $16+
> Sold three 26 Puts on CVE - Currently trading around $22+
> Sold three 28 Puts on BTE - Currently trading around $17+
> 
> I am sitting on a fair bit of cash that I had earmarked should I see a correction. Other than about $15k in long stocks, these puts are my only exposure to energy in my portfolio - currently, I am around 35% equities and 65% cash and am looking to at least reverse that position with the right opportunities (I am light in financials for example).


Rolling up my sleeves, here's my take:

56 puts on VET: You originally sold puts at that level because you saw value in the shares at that price. Don't let hourly or daily market moves shake you out of an investment thesis. This could be noise. I don't really see any option to roll (too deep in the money) or to sell calls against the position (too far away from breakeven level). I would look at the Jan options and work an order to sell 2 56 calls @ 1.00. You'll need a pretty good good move to get a fill, but it will essentially get you into a covered call position once the puts are assigned in December. From there, you still stand to make a buck on the calls in addition to the premium you sold the puts for. 

TCK 18 puts: Similar strategy to the above but looking at a farther date option (Febs) and working an order to sell ten 18 Feb calls @ 0.50. 

Seeing as how most of these are way in the money, there is very little to do. In hindsight, you have to act quicker. Roll out (to a farther month) and away (to a lower delta put/call) for a credit before things get out of hand. You can also average down into some of these since they are such small positions. This lowers your breakeven and lets you sell calls at strikes that allow you to bring in better premium.

My two cents. FWIW, I think a few of these names are great values. Like most good trades, you'll feel a good measure of pain first and you'll always be early.


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## humble_pie

.

with all due respect, TCK feb 18 calls were bidding something like .39 last night, early quotes this am are not suggesting that teck will open higher.

metallurgical coal & chinese steel mills are in the doldrums, IMHO it's best to avoid teck stock until base metals show signs of improvement.

what would be the purpose in tying up $18,000 in capital in teck stock at present? if one sincerely wants to be an early-bird uptaker in metallurgical coal exports, one would do a long-term bullish option spread in teck, not weight one's portf down with the cost of 1000 shares of non-performing stock.

in addition, the go-to market for TCK options is US, not canada. US teck options are far more liquid, there are numerous counterparties, option prices will nearly always be better for an individual option player.

predictably, the montreal TCK feb 18s are illiquid, only 92 contracts, ie long teck stock plus short montreal feb 18s is a bit of a graveyard.

lastly, there is also the investor/trader's management time to consider in making each option decision. Fiddling in montreal teck feb 18s for thirty-nine pennies is not profitable enough, imho. IIRC the OP is a young man with a thriving & challenging career in finance, he's not an amateur spending all day long mooning over a discount broker account somewhere.

myself, i make each option decision in a few minutes, perhaps up to an hour's research maximum for a very few. If i'm initiating 10 brand-new sell-to-open contracts in TCK, i would be looking for at least $1,000 for my time. Of course, cleanup transactons such as the buy-backs-to-close are much cheaper, but these are just the routine housekeeping chores that always accompany every option account, so they are hardly worth mentioning.


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## avrex

It looks like *volatility* has returned to some degree.
This could be a good time to sell options.

The amount of option trading that I did in the previous 18 months was almost nil. 
However, I thought it was about time to jump back in.

I've created a new portfolio of options for the start of 2015.
For anyone who is interested in following my progress, you can check it out here: 
2015 Avrex Options Income Challenge.


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## My Own Advisor

I read your post this morning Avrex. Interesting challenge. I think I would fail miserably!


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## Rusty O'Toole

Avrex that is some portfolio. Is it real or paper trading? If real how much margin or buying power?


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## avrex

@MyOwnAdvisor. Interesting and scary :cower:. Wish me luck. 

@Rusty. Yep, it's a real portfolio. 
I had some cash, plus I sold some stocks at the end of last year, to raise more cash. This portfolio is backed by that resulting 150k cash.

Besides the Options portfolio page, you can also check out my 2015 Option Income Goals post where I describe my strategy and thoughts on this portfolio.


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## humble_pie

avrex said:


> I've created a new portfolio of options for the start of 2015.
> For anyone who is interested in following my progress, you can check it out here:
> 
> 2015 Avrex Options Income Challenge.



wondering if those are uncovered calls? if so, scaree indeed. Super scaree.

i only have one naked call position myself. It's 12 CNQs, but they're USD 45s (sold a while ago when the strike price made more sense) so they are nothing to worry about right now. In fact i'm going to take them down to a lower strike soon.

a dozen far OTM short calls in a big oilco - one that has almost never left its trading band of 25-45 for a decade - is about all i can support. It's not a question of the margin, it's the fact that uncovered calls are the riskiest trade of all. Worse than uncovered puts. Even worse than shorting.


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## humble_pie

today in US options:

i bt 5 ARMH jan2018 25 calls to open at 27.38
& sld 5 ARMH jan2017 55 calls to open at 4.98
net debit was 22.40 thankx to deft stickhandling by the trade control desk;

i also bt 10 TCK jan2018 3 calls to open at 2.12
& sld 10 TCK jan2017 8 calls to open at .36
net debit 1.76 thankx to more stickhandling.


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## avrex

Hi @humble_pie,
I started using the website below to help me study and visualize trades (changing the output type to "Graph - profit/loss")
I was curious how your trades look. Here they are. Ya, they look good. 

ARMH Diagonal

TCK Diagonal


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## humble_pie

exhuming the granddaddy of all option threads. There's some fun stuff in here.

today i set out to find out what is the deliverable in BAM options, all of which issued prior to last month's reorg involving the Trisura spin-out having now become irregular options with irregular deliverables. For both canadian & US options.

for irregular canadian options, the deliverable per contract has been determined to be 100 shares of BAM.A plus cash-in-lieu consisting of CAD $12.54.

but in the US, the options clearing corporation has not yet been able to determine what the cash-in-lieu might be. It's a relatively simple exercise. All they have to do is determine what was the volume-adjusted average trading price of spun-out Trisura during its first five trading days last month on the TSX, then convert .58823529% of those figures to USD using the FX rates of the days involved.

it's easy. A high school student could do the math. A smart grade 6er could do the math. Even a poor dumb pie could do the math.

but it seems that the options clearing corporation in chicagoland cannot do the math.

ma'am they will get some sort of number eventually, said the OCC help desk representative.

how long might it take? i asked

probably months, ma'am, he said

good grief, months?

yes ma'am, there are hundreds of irregular options with deliverables that have not yet been determined, it takes months to figure all these out, he said.

but what do brokers do when these options get assigned during the months of waiting? i asked.

ma'am, your broker will likely deliver 100 BAM shares per contract & then attach an IOU to your account saying that you owe the cash once the OCC gets around to calculating it, yes, ma'am, he said

my goodness. That appears to be the best they can do nowadays, down south in the heart of donaldtrumpland. 

.


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## Ag Driver

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## humble_pie

Ag Driver said:


> I am trying to wrap my head around options and the risks associated with covered calls.
> 
> I own 350 shares of G.TO with an ACB of 23.90.
> I am willing to sell at 23.90 and have no issues with the call being assigned an exercise notice.
> 
> Say I want write an option to sell 100 shares.
> It appears that I can write a covered call (sell to open covered) for $24 limit that expires in 17 JAN 2020.
> 
> G C 17JAN20 24 (100)
> Last: $0.35999998	Change: $0.060000002 (20.00%)
> Bid / Ask	$0.17 / $0.35999998
> Lots	100 / 21
> Open Interest	68
> High / Low	$0.00 / $0.00
> Volume	0
> 
> The preview shows:
> Est. Total $239,865.01 CAD ( $240,000.00 Principal - $134.99 Commission )
> 
> Can someone please explain how the principal is calculated?
> From what I gather, if the covered call is not bought from now until expiration, I will lose the commission?
> How is the premium calculated if the option gets filled? I am assuming due to the fact that it is so far OTM that the premium would be very little.
> 
> Is there another strategy to look at, assuming I am willing to sell all shares and assuming the stock will rise long term given it's all time lows in around 16 years?
> 
> Pardon my ignorance



please don't be discouraged by the following discouraging remarks. There's a very steep learning curve to options right at the beginning & everybody has had to either stumble up it or else drop off the mountain. I do believe you'll make it though.

in the first place, when a stock has fallen as badly as has goldcorp - in tandem with other gold producers - the premiums on call options droop down into pathetic-land. Often they are not even worth selling, which is more or less the case with G at present. A very brave soul could sell puts - there will be high premiums in puts - but otherwise one tends to hold fallen stock as deadsville until the sector might revive some year in the future.

a few random notes: there's something wrong about that "principal ... commission" line. No way a commission for one short call contract (100 shares = 1 contract) could be more than $11.25 in canada. Could be less at several brokers here. If you are the proud owner of 100 shares, they are worth $1,259, so not sure where your astronomically high figs are coming from. 

you're partially right in thinking to choose a strike price that's close to the ACB of your shares, because if you'd selected a lower strike - closer to actual market price plus the lower strike call delivers a much higher premium - you would be setting yourself up to lose your shares at a significant capital loss in an exercise at that lower strike. Following which loss exercise, the shares would likely turn around & start to rise, of course ...

but look how your high strike is matched by unattractively feeble premiums. Ag surely you could not be contemplating the sale of one call contract for a pewling 21 pennies, could you? that will fetch you $21, less the above mentioned commish of 11.24, which will net you a grand profit of $9.76, which IMHO is not an operation worth bothering with.

at the very least, you should be dealing 3 contracts, representing 300 shares from your holding. That way, you might collect $63-66, with a commission of $13.75 or less; so the exercise might be worth doing for the experience alone.

butbutbut, you will say, Why would i sell my call for 21 pennies when the market is .17-.36? Why won't the dealer pay me at least half, say 28 or 29 pennies?

alas if it's G, this is the montreal exchange & i can guarantee you that the dealer will not pay you 28 pennies. Neither will anyone else. You'll be lucky if you can collect 21 or 22 centimes. Look at that open interest. Only 68 contracts. This means there are no players, there's no liquidity, the market consists of yourself plus the one-eyed market maker. Who btw is probably not even in north america (montreal exchange option dealers are mostly in london & amsterdam ... but that is a whole other story for another day)

look instead at US options in GG. The liquidity is probably a lot higher. Alas, the premiums won't be much higher, since the dealers in the 2 countries arb back & forth to each other. Still, US option markets are far more flexible than the rigidly sclerotic montreal exchange, so in nearly every case, options on interlisted canadian stocks should always be sold stateside.

PS you should be holding your goldcorp shares in USD account anyhow, since GG is one of the canadian companies that pays its dividend in USD. Granted, it's a pewling dividend of only 2 pennies, so if you've been holding the shares in CAD account the broker has not robbed you of very much in FX fees on dividends to date. Still, you might as well journal the shares over to USD account.


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## Ag Driver

Deleted


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## humble_pie

excellent questions. I'll try to answer some that i think are important; may return later to others.

rather as i was expecting, you are turning quickly in all the right directions. Perhaps it's a bit like flying a plane with rudimentary instrumentation in cloudy weather; a good pilot can rapidly & accurately process whatever bits of information he's able to obtain & thus he flies his route unerringly.





Ag Driver said:


> I'll start with learning a covered call ... when I started out with individual stock trades, skin in the game was my best investment ... I think doing this exercise for the experience alone is a good starting point.


it's a 10





> here is a corrected covered call with 3 contracts.
> 
> GOLDCORP INC
> G CA - CA
> Last: $12.835	Change: $0.255 (2.03%)
> G C 17JAN20 24 (100)
> Last: $0.35999998	Change: $0.060000002 (20.00%)
> *Bid / Ask	$0.19 / $0.42
> Lots	120 / 20*
> Open Interest	68
> High / Low	$0.00 / $0.00
> Volume	0
> 
> Action: Sell to Open Covered
> Quantity: 3
> Price: Limit
> *Limit price: $0.19*
> Good ‘til: Day
> 
> Est. Total $43.26 CAD ( $57.00 Principal - $13.74 Commission )
> 
> I'm still having difficulty understanding how/where the principal is calculated.
> *Also, could you please explain the Lots 120 / 20, outlined above?
> *
> Now -- In order to collect the principal, the option must be filled (broker/individual buys my call option) prior to expiration, is this correct?



i'd rather be working on a US example in GG calls - have you had a chance to observe the liquidity in US GG options? thousands of contracts, as shown in "open interest" figs. Blue skies ahead!

but still, so far we've only got a montreal exchange example so here goes. The principal is simply your gross proceeds if the order is filled. You've bid .19 in your example, so .19 x 300 (3 contracts) is $57. Your net will be gross less commish, as the broker is showing you.

far more important is what's called the "sizing," meaning the amounts bid/asked plus the number of contracts bid (120 in the above example) & number contracts offered (20 in above example)

sizing is of crucial importance in thinly-traded options (also thinly traded stocks, for that matter). It doesn't matter in high-volume US options such as apple, tesla, amazon - but in thin markets a trader cannot operate without sizing quotes. 

for example, in the above example, we are told that some bidder or bidders are willing to pay .19 for (they say) as many as 120 contracts. If i sound skeptical it's because i am skeptical. A lot of sizing data is ephemeral - here this second, gone the next. A lot of it consists of feints, parries, whispers from the dark room, impossible bids or asks that will flash here & then disappear there in a split second. Your eventual job will be to sort out who's real & who you can deal with, if anybody. OTTOMH i'd say it looks like there's reasonable interest in buying, but at a dirt cheap price.

now let's look at the ask sizing. Only 20 contracts offered at .42. 20 contracts means that's the market maker himself. Nobody else is selling. And look at his price, if you please. Sky-high, as the montreal MMs always are.

a selling party who would be insisting on trading on montreal - which i hope you won't be - could see that there's buying interest but no sellers. Accordingly he could start out with a high offer, maybe something like .28 or even .30, to test the water. Will some of those 120 contracts bid at .19 be willing to come up?

keep in mind that montreal typically negotiates for a nickel but seldom for much more. A party hoping to coax buyers up from .19 to say .28 has to work quite skilfully. It might take him more than one day to coax buyers up by a dime, however it can be done. At this point, though, i'll leave trading techniques aside for the time being.





> I should bee seeking high volume and high contracts?



yes, in goldcorp & many other interlisted canadian options, the US side is so much more liquid that there's no reason to attempt to scale the haughty ramparts of the montreal exchange





> I suppose this ties into market vs limit. Setting a limit is like setting my desired Principal? Where as market is what the market is willing to pay. In this case 19 pennies?



if there's one golden rule in options trading it goes: Always Send Limit Orders. Never Ever Send Market Orders Because They Will Rob You. Myself, even when i am agreeing to sell to the bid or else pay to the ask, i will still always send a limit order.

another rule goes Figure Out Your Own Option Price. The bid/asks are only indicators. In the above example, since you are not pressed/stressed & you have all the time in the world to sell your calls, there's no chance you are going to sacrifice those calls for only 19 measly pennies, right off the bat. Instead (trading techniques) you are going to see if you can tweak the bidders upward.


hoping you will move on to greener US pastures, would not $100-150 USD with no FX fees be useful in the account?

.


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