Options, understandings and tacticsAlan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
Margaret, do you know if its possible to trade options on small bio stuff like beni. From UK its seems impossible.
I can’t speak for Margaret, but options are often unavailable on small stocks. Australia does have options trading, but the options are listed on the ASX and there is not generally a huge variety of strike prices or expiration dates, often I see only one option contract available on a given stock and they are really traded more like warrants are here. Benitec specifically does not appear to have any listed options (http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=BLT#options).
Non-listed shares never have options trading in the US, so the pink sheets or OTC stocks, whether or not they also have a “home” listing elsewhere like BNIKF for Benitec, do not have options trading in the US. Options are rarely available on microcap stocks or on stocks that are newly public, but sometimes you’ll find teensy stocks with options available in the US (whether there’s any volume on those options is another matter).
Thanks T. I found the same but Margaret seemed to have some v small cap stuff in her fantasy trade example. I was wondering if I was missed a trick.
Alan
People are missing you on the hepatitis blog
http://www.stockgumshoe.com/2014/05/microblog-hepatitis-with-a-c-right-now-someone-you-know-has-it-and-doesnt-know/#comment-1542826
Thanks Tom, its nice to be remembered. My apologies for absence, but I was getting sooo much mail I couldnt get any work done. Also, there’s important stuff going on in the background that you are not aware of yet, but which may eventually benefit all. Once that’s sorted, I will be back to crack a joke and lose money like a pro. Meanwhile, Margaret seems to be keeping all entertained and educated here. Best Micro thread on GS IMO.
Regards to all and c u soon.
Okay, this post is going to be heavy.:) I am targeting this at spread traders mainly, but anyone interested should chime in with advice or questions.
If I expect a stock to move significantly over the next six months, but I don’t have a prediction for direction, it has occurred to me that i might combine a short put butterfly, and a short call butterfly, with equal strikes to each other, and all long strikes at the money.
I think I would cover the risk in one of the flys, by the profit in the other, since it would be impossible for both of them to expire with maximum loss (not that I would hold to expiration).
Questions:
Is my logic sound on this?
Is six months an unreasonable expiration to use on these given potential IV increases?
(I think the last answer is yes, and that I would have to use them at two or three month intervals)
Example:
YHOO is trading at $34.75 on 5/26/2014.
Using October 2014 options.
Sell 1 $25 call for $10.00
Buy 2 $35 calls for $3.05.
Sell 1 $45 call for $0.60
Credit: $450.00
Max risk incl. credit: $550.00
Sell 1 $25 put for $0.21
Buy 2 $35 puts for $3.15
Sell 1 $45 put for $10.70
Credit: $461
Max Risk incl. credit: $539.00
Max possible loss for combined position: $89.00
Max possible gain for entire position: $911.00
Hi The Blind DayTrader; My experience is just buying calls and occasionally puts. Once again I am flunking Options 101. Can you tell me what is wrong with my math? I am assuming YHOO is $20.00 hours before expiration OCT 2014. ( I hope this copies and pastes OK). I numbered your trades and used that as reference below.
1.Sell 1 $25 call for $10.00
2.Buy 2 $35 calls for $3.05.
3.Sell 1 $45 call for $0.60
4.Sell 1 $25 put for $0.21
5.Buy 2 $35 puts for $3.15
6.Sell 1 $45 put for $10.70
Assuming no trades until expiration and excluding premiums and commissions;
20.00 stock price
1. +500
2. 0
3. +2500
4. -500
5. +3000
6. -2500
Total +3000 profit.
I was going to walk thru other price scenarios but want to get this one right first.
Tanglewood, your number for item 1 and item 3 are not correct.
1. +500 – should be 0, the option will be worthless, no one will exercise it
2. 0
3. +2500 – should be 0
4. -500
5. +3000
6. -2500
i don’t know why you would even consider that trade. I know you are not subtracting commissions, but in reality you have to pay them and you most likely are going to significantly impact your bottom line (negatively) if you consider commissions. When you trade one contract at a time commissions can really eat into your profit.
I believe he used 1 for easy illustration. One can always trade with proper position sizing once the strategy is understood.
I think your maximum possible loss is higher. Assume an ending price of 35 a share and what do you get? If you are correct on the significant move it does not matter. But if the stock price flat lines. Your even on the 25 dollar call
drop 610 on the 35 call
make 60 on the 45 call
make 21 on the 25 put
drop 630 on the 35 put
get assigned the 45 put stock as a wash
Total loss 1089 + assigned stock from 45 put.
I have an Optionsexpress account which I never use to trade. One of their very nice features is a ‘trade calculator’ which gives me a wealth of info. Whether it’s a simple call or put, right through the more exotic trades like a condor, I can determine profit, loss, gives me a break even (or two), as well as the probability. Not sure but I think the probability calculator only factors in the implied volatility, and doesn’t account for any triggers I may be anticipating. Still, more useful than trying to read tea leaves.
Margaret, Margaret, wherefore arst thou? Hope all is well on your end of the rope.
Yes, Margaret, we all miss you and are worried about you.
Something to consider: If you have not already done so (per Margaret’s earlier suggestion), today may be a good time to buy in-the-money (SP in 70-to-77.50 range) GILD calls expiring in November 2014 or January 2015. Timing is critical because: (1) Underlying stock price has been down almost 1% today – so option prices have dropped even more (4-5% in some cases); and (2) GILD has 4 separate FDA PDUFA dates during the 30-day period ending November 10, 2014. Check it out.
lawrence mckenna
Hi Pockets
I enjoyed hearing your shout-out!
Our option forum has been a lot of fun for me. So far as I’m aware, our forum became something unique in the investment world. And I did give thought to ways it might evolve while maintaining its fundamental nature. However, it did take a lot of time on my part. So I needed to step aside while I get my house ready to sell.
During our weeks together, I had some interesting self-discovery as I recognized that I am not much motivated to learn option techniques apart from those that might significantly increase my gains. Simple call options and put options offer precisely what I enjoy….their potential to give me astounding profit.
Today, I had the kind of thrill that I seek through buying options. So here is my story:
Friday afternoon June 6, I sold option contracts for AWRW (June 11.00) that gave me a gain X3. With my returns, I bought AWRW June 14.00 and AWRW July 14.00. I had $1,195.00 left over. So I looked through my pages of charts.
Solar still flickers (resulting in too much uncertainty). Tech stocks are looking good, though…and I almost chose CLFD for my option play. Then I looked at the biotech charts, and decided to update my chart for IDIX.
IDIX had a weak up-trend line, so no appeal. But it had a remarkable increase in volume (so something nice must be brewing, I figured). I then looked at option possibilities. High volume for the option contracts, too. With no further thought, I bought 15 contracts IDIX July 7.00 @ 0.77 for $1,180.75
Monday June 9, about 12 noon…Something was wrong with Scottrade. They showed my balance being $25,000.00 too high.
An hour later, I checked back to see if they had cleared up the problem. Nope. I then looked with care at each holding in my portfolio. I had nice gains, except for IDIX. The value on my IDIX shares had fallen to 25.38. Hey! Wait a minute!! This is not credible. So I looked more carefully.
The value of my IDIX option shares was not $25.38. It was $25,389.67.
Yes, a thrill!! It may be years before I again have a gain of more than 2,000% on one option play. But it is the POSSIBILITY that creates the addiction to options.
Fabulous trade, Margaret! You have to be good to be lucky.
I am so happy for you, Margaret!!! Maybe good karma came your way after you so generously shared your time and knowledge here with us. Good luck with your house!
Margaret,
Hoping you will return one day and your house sale went well. I’m new to Gumshoe, spent the entire afternoon reading and making notes from this thread. Congrats on the big win.
Although it is now mid Novenber, newbies are still learning from this post.
Cheers Lulu
Fantastic news, Margaret! Your meticulous approach to chart-tracking as a prelude to option-investing was rewarded in unparalleled fashion – and it could not have happened to a nicer person. Congrats!
Congratulations, Margaret! What an amazing trade!
Can I ask what screening tools you use to identify options candidates? Forgive me if this has already been mentioned, I haven’t been following this thread very closely because I currently do not trade options. However, I am interested in learning when I find the time.
Also, can you recommend any books or websites to learn the simple, most important options strategies? I think you have a good strategy of sticking to calls and puts.
Congrats again!
JP IMHO options are less risk and more rewarding than buying stocks, in a rising market. A down market can bite badly if you are over extended due to leverage working against you. Short sellers make money in down markets but it is very risky, I use charts to identify or rather get an indication of tops and bottoms. I like to buy when a stock has reached a double bottom and is rising. Main thing is pick stocks that have real chance of turning a profit as you know. Take it a bite at a time,,nibble,, see how things work,,,,,you develop your own method that works for you.
My opinion ,,,If book writers really knew what they advocate they would be doing that and not writing books. News letters more so.
Future questions might be best addressed here so you get exposure to more thinking on options,
Mei I will use the example of a GILD nov 14 call At this time.
An at the money 114 call is $3.65 meaning GILD would need to reach $117.65 to be even
an out money $117 call $2.54 ” ” ” “”””””””””””” $119.54 to be even
An in money $110 call $6.30 “”””” ” ” “”””””””””””””””””” $116.30 to be even
therefore The In money is more likely to pay off than the out of money $117 call.
Less risk higher price,,more risk of no pay off lower price. Is one example of how to choose.
Earlier on this thread htere are others.
Archi
I finally got it. Thanks a lot. You’re a good teacher!
Dr. KSS biotech threads currently feature an ongoing discussion regarding investment choices: proven performers such as GILD vs. rising (potential) stars such as ESPR, ACHN, ARWR, and CTIX. Linda recently made a great contribution on the current (or previous) Dr. KSS thread by sharing her positive experience with GILD options in her October 30th post: “I’ve been making good money by buying at-the-money call options about 3 months out when GILD sp dips and then selling when sp rises up some. The volatility in the SP makes it pretty easy to make money as long as you watch pretty closely. Also, if you buy options at least three months out, the time value is a little bit of a safety net. I usually buy 1 lot and if the price falls significantly I’ll buy another to lower my average cost. It’s been working for me for the last 4 months.” I have also used essentially that same strategy for the past 6 months – with excellent results, and I’m pretty sure that Frank and others have invested in GILD options as well. For those interested in trying out GILD options, a “balanced” strategy could include the following elements:
(1) Set aside a modest sum (up to $5,000) to buy GILD at or near the money call options (3-4 months out) when the share price has gravitated downward or a few weeks before a significant catalyst event. That $5,000 sum would buy you fewer than 50 shares of GILD at current SP – but should enable you to purchase at least 5 call options with staggered expiration dates/strike prices. While the leverage afforded by these options is generally quite remarkable, you need to be able to cope with the leveraged “down drafts” when the SP drops after your option purchase. That is why Linda’s advice to buy options at least 3 months out is very sound – it gives time for the SP to rebound after its inevitable dips.
2) Use the funds that you “saved” by not buying shares of GILD at full retail (over $10,500 for 100 shares) to start or add to positions in the “rising (potential) star” biotech stocks that look good to you prospectively (in the context of a due-diligence driven risk-reward evaluation).
Final thought on the GILD options: Why buy the whole cow when you can obtain great satisfaction by investing in a few selected Porterhouse steaks?
Long GILD (options only), ESPR, CTIX, ACHN, CLDN, ARWR, NBY, etc.
Here is a pearl of wisdom regarding selection of option expiration date that I discovered in the “Understanding Options” e-booklet published by http://www.SimplerOptions.com:
“It is always important (and always worth the investment) to pay more for time. Without time, the market will work the trader instead the trader working the market.”
[Note: I have no affiliation with http://www.SimplerOptions.com or its principal].
Lawrence good post and advice. I have done well with GILD options ,both long and short term. It looks like I will have a loss on Nov but there is still time to change.As to long and short term I wish it was as simple as having time work for you,,,it does cost money to wait. IIf you follow the idea that many buy on rumor sell on news,,the science is good,,, the techs show a down ,,,, as recently with Gild I waited for the down and entered a short term trade which made a triple in three days. Never say never ,,,,nothing is always sure.
Jean-Pierrre-Read this post (above 191)
Thank you for your analysis on ARWR.
This blog I am studying and is enlightening.
Best-Ben
Greetings fellow gummies,
I’m new to this discussion (and almost as new to trading options). I would very much appreciate some advice regarding how best to play out a current short-term holding I have: alternatives and strategies.
This morning I bought two Alibaba ($BABA) calls Nov 14@113 (ITM) for a total of $1,189.52, anticipating a significant bump in the underlying SP due to the massive revenue generated by Singles Day in China. My thesis appears to be working out, (though I should have bought the options last week when the contracts were less expensive)—$BABA is currently at $118.94 (up 3.74%, but somewhat off it’s high for the day). I want to take into account that I currently already own 100 shares of $BABA, and I am somewhat concerned that the company may be oversold at least short-term. My question is what is my best play from this point forward:
1) Sell the calls for a minimal gain
OR
2) Exercise to buy the 200 shares @ $113 for $22,600
OR
3) Wait to see if there is further improvement . . .
My current thinking is to exercise, and then sell half or all of the 200 shares generated by the call. What would you suggest? I am thinking this through correctly.
Thanks for your thoughts and suggestions,
Alan (the lesser)
Hi Stevi,
There is “almost never” an advantage to exercising a call option. Remember, that the effective price that you are paying for 100 shares is the Strike Price ($113) plus the premium that you paid for one option contract. If the per-share premium paid was $4.00, you will have effectively paid $117 per share upon exercise. It is “almost always” better to close out the position by selling the call(s). Remember to factor in the fees in calculating your expected profit/loss. Since you are close to the expiration date, there is no advantage to waiting much longer to do so (unless you expect further SP increase) – because time works against you this close to the expiration date. Hope this helps.
Upon closer reading of your post, it appears that you paid a call option premium of $5.95 per share – so your effective cost basis in exercising the options would be $118.95 plus commissions/fees. There may be enough extrinsic (time) value left in the options to enable you to at least break even on selling the call options to close out your position.
Earlier I wrote RE $BABA:
“I am somewhat concerned that the company [$BABA] may be oversold at least short-term.” Should have been OVERBOUGHT.
Lawerence: Thanks for your timely reply. I will close these calls out asap. And if I might ask a follow up question: How would you (or anyone else) have played this opportunity differently? Bought slightly OTM contracts? With a later exercise date? Or is attempting to play a short-term bump like this with a likely overbought stock not something to try to do with calls to begin with? All advice much appreciated—-I am learning bit by bit.
Alan (the Lesser)
steviMT : re $BABA calls. The website I like to use for optios is Dough.com. they give probability of profit based on volatility, etc. They have different scenarios you can test such as spreads etc, that will show you ahead of time what the probability is. You can also log into your TD Ameritrade account (I’m not sure about other brokers) and make the buy through dough.com
There is a learning options course you can take and be tested. All this is free.
Check them out. Tom Sosnoff is the creator and host of the site and is the original developer of Think or Swim.
Best of luck.
Tom
Hi Alan!
First of all, lawrence said everything I was going to say when I first read your message. By exercising your options, you waste all of the extrinsic value (time value, vol value, etc.). There is VERY! rarely a good reason to do that, unless you’re stuck in some kind of short covering situation and have to obtain the stock at a specific price for some reason., or because you are executing a dividend capture strategy of some sort.
You asked how someone might have played this situation. The simple answer is, I probably wouldn’t have.
These days I don’t usually buy such near term options, unless it’s part of a “portfolio repair” type strategy, and I have ofsetting short options. In other words, a complex spread.
If I’m just hoping to profit by buying and then later selling calls, I try to go for a 45 day expiration at a minimum; usually more like a 90 day. I never hold that long, it just makes it more likely that there will still be value in the options when I want to sell them (time value, that is).
I don’t tend to buy around specific short term events, unless I can buy well ahead of time, and sell right before the event when vol is highest. I rarely bother with that level of speculation though, except in Apple.
Here’s an example from a recent trade:
On 9/17/2014, NKE was at $81.48. I bought 9 NKE Jan 15 $80.0 calls, at $4.60. Simple trend following here.
By 9/26/2014, NKE was at $89.49, and I was getting concerned about having that much money on the table given the way the market was acting, so I sold the calls at $10.30. I’ll save you from doing the math: that’s a profit of $5,109.38 (commission adjusted), or ~223.1%. (And no, that’s not my usual trade outcome, by a LONG SHOT!:) It is less than I lost in October, sadly.)
Anyway, the point is that while Jan 2015 was probably overkill in September (it isn’t now), that was far enough out that even if the position had gone in the red, there was still likely to be enough money left in the options that I could have sold them for far less of a loss than I would have had with October options. I originally intended to roll the position in October, but the mess that was October changed my mind. Although given where NKE is today ($94.75), those calls would have been worth ~$15.05 (another $4,285.42), so maybe I should have. Although I’m never sad at taking stupidly good profits off the table.:)
This strategy is certainly not right for everyone, but for me at least, buying a few months out has treated me far better than living on the edge of expiration ever did.
I bought a very short term position on 11/7/2014, using options with a December expiration. That’s as close to the edge as I care to get right now.:) And I plan to sell that position this week.
It makes sense to exercise if you are in the money and want to own the stock.
I’ve been looking for an entry on KPTI and bought in-the-money May 20 calls for 12.50, basis with the call is 32.50. So if KPTI is over 32.50 I will exercise
Welcome to the discussion, steviMT .
Now that we have “Alan, (the lesser)” our CEO must be “Alan (the greater). No, he’s “Alan (the greatest), so there’s room for yet another Alan. 🙂
@BDT
Thanks for your helpful comments!
@pockets re Alan (the greatest) and room for yet another Alan.
Good point. But if we do get another Alan he may not want to be “Alan, the Least”, in which case I may well have to give up my claim to the “Lesser” title and demote myself. We’ll have to see.
BDT, welcome back! As you know, it has been hit or miss (mostly miss) on this thread since Margaret started her sabatical several months ago. I’m hoping that all is well on Margaret’s end of the rope; that she is active subscriber to this thread; and that we will be blessed by her return (even if limited to occasional spot appearances.) Congrats, BDT, on the big NKE win! Could you share with us the particulars of how/where you developed the thesis for investing in 9 NKE JAN 15 C90 on September 17th ?? Although you mentioned that the trigger was trend-driven, I am very curious to know more details – if you’re willing to share. You must have had a high confidence level to buy a basket of 9 NKE options on that date.
What do you guys think of call options in the 3D printing companies, DDD and SSYS? They took a big hit when HP said that they are planning to enter the market. They are volatile stocks and are always in the news. I currently have DDD Jan 2016 $60.00 calls (yes 2016, I like to buy a lot of time). Purchased 6/4/2014 at $7.00 and 10/22/2014 at $1.30. Currently at $1.22.
DDD-SA article just received http://seekingalpha.com/article/2667815-3d-systems-finally-some-decent-news?app=1&uprof=51&dr=1
Best-Ben
DDD no position
Lulu says: Options Question ( thanks Alan for sending the link) Trying to learn.
JP, AGIO / options any idea why the Dec 20 $85 call went down $3. Which wud u feel more comfortable with $80 85 90…..The SP of $83 is a bit rich, Like GILD CELG so looking at options……( which seem to take right off in front of my idle fingers)
Thank you Lulu
Jean-Pierre Ruiz says:
Re: AGIO/Options
Alas, Lulu I wish I knew the answer to your question. I know next to nothing about Options. In fact, I still get confused as to Calls and Puts!?!?! I’ve been busy learning Wyckoff/Weis’ Price-volume analysis (a synopsis is coming soon on the technical analysis thread). I know there are a few (many?) here who seem to be very familiar with Options. I hope they can provide an answer as I feel the same way you do.
Re: ACHN and CLDX
I stumbled into http://www.investorsobserver.comm , and they had this to say
About ACHN at http://www.investorsobserver.com/pr/111020140/ACHN
“Achillion Pharmaceuticals (NASDAQ: ACHN) has been identified by InvestorsObserver analysts as being well-positioned for a new covered call today. Buying the stock for $12.85 while selling the December $13.00 call will produce a new covered call with a break-even point around $9.75. At that price, this position has a target return of 33.3 %. This trade will have roughly 24.1 % downside protection, while still aiming for a 33.3 % return in 39 days. It will lock in that return as long as Achillion Pharmaceuticals is above $13.00 on 12/20/2014. For comparison purposes only, this ACHN covered call aims for an annualized return rate of 311.9 %.”
About CLDX (at same URL)
“Celldex Therapeutics (NASDAQ: CLDX) has been selected by InvestorsObserver analysts as a stock that is an ideal candidate for a new covered call today. Buying the stock for $14.81 while simultaneously selling the December $15.00 call will result in a new position with a target return of 9.8 %. Based on recent prices, this position will cost about $13.66, which is also the trade’s breakeven point. At that level, this covered call has 7.8 % downside protection, while still providing a 9.8 % return in 39 days as long as CLDX is above $15.00 on 12/20/2014. For comparison purposes only, this Celldex Therapeutics covered call aims for an annualized return rate of 91.7 %.”
They list a few non-biotech stalks, as well. I’m not recommending the site, but I think that people that understand options might be interested in it.
Long in ACHN, short on MONEY
With increasing anxiety around GILD’s current share price circulating widely and compounded by additional anxiety about a possible upcoming market-wide correction, I’m wondering if this might be a good opportunity for a short-term straddle play play on GILD—and/or a longer-term Call purchase. Any thoughts or suggestions??
Alan (the lesser)
I should have added that I am long GILD.
If you are worried about your position then why not sell covered calls on your position ?
If you are really worried, then sell in-the-money or at-the money
All: If anyone wants to send a jinglebells greeting to KSS…heres the place http://www.stockgumshoe.com/2014/12/microblog-happy-christmas-dr-kss-from-all-us-gummies/
Options are different kind of beasts as I have learnt. If you are buying you’ll loose 84% of the time so get your ratios right. If you are selling premiums then pick your spot carefully. Because their have leverage and are tied on time decay they need high volatility to perform in high volume. Creeks! You need volatility crash to be successful. Actually when you are selling premium your are betting volatility (higher than 65 % rank) to crash. Every binary occurrence, like quarterly earnings they all have abt. 1 SD price movements predicted and abt. 67% of the time price stays inside of 1 SD. No brainer to sell premium, iron condor or if you can place undefined risk trade and would be able to collect more premium.
First you do need a instrument which has high volume, indexes are good and some ETF’s and some high traded equities (not too many), abt. 50 or so)) . That’s can may make bid/ask narrower and advance your edge, easy to get in and easy to get out. Second you do need high IV%, (that is IV ranked against it’s historical (one year or so) volatility against it self.) Third you need to stay small. No hero stuff with options or any other leveraged instrument . Some platforms can give you advantage to pick your risk reward poinst and give you probabilities of touch, ROC, POP, etc. Some of them are better than the others and I believe new tech and better tech is coming all the time.
As I used to be buy and hold (silent, mutual fund) investor relaying on “professionals” (who didn’t know better & they lost 60%+ my money and they got paid to do so) now I am steering my own ship and will sink with it if so, so be it.
Lesson for me were that, I learnt to make money, never learnt to keep it, and gave away control of it to trusted “professionals” (“thief’s”). We have something broken here….
Merry Christmas and Happy NY
T
Re: Post #199
T, as one who is curious about options (although still busy learning to figure out how to read the tape to be financially successful with buying/selling stocks), I thank you for your post. It seems you have a lot of knowledge which I would kindly encourage to share on http://www.stockgumshoe.com/2014/10/microblog-technical-analysis/
Good post, T. If you are focused on option investments, I would strongly encourage you to continue posting on this dedicated options thread (vs. alternatives). Although I am not an options expert, my realized net profits on options investments (mostly in the biotech sector) this year have been about 5 times higher (in bottom line dollar amounts) than my profits on stock investments. If you are willing to share, I am curious about 2 things:
(1) What trading platform do you use for options play – and what are its pro’s and con’s?and (2) What non-platform resources (books, websites, etc.) have you found useful in learning about options?
Merry Christmas and Happy New Year!
T – You are a most welcome addition to the group. I second the requests by Jean-Pierre and Lawrence – please keep posting about your ideas, methods, and sources of information.
and Happy Holidaze!