Intro to options

[Nysoz]

Yep high iv means larger potential price swings.

I mean a few weeks ago the iv on gme was 400. I sold June/July call options with a 800 strike for 50.00. So for every contract I sold I got $5000. Gme may or may not spike that high with an infinity squeeze scenario but to sustain it for that long is basically impossible.

[Panscan]

I guess my question is more so like I see high IV presented as a universally good thing for options sellers due to the higher associated premiums and extrinsic value but to me that seems neutral to me for both parties. Like isn't the amount of extrinsic value directly tied to the IV so ya you're getting more money for the sale but you're entering a riskier position by nature in exchange compared to a lower IV situation (which obviously would have a lower premium).

[Nysoz]

Higher iv is generally better for options sellers but also potentially more risk as well. If the price direction and velocity/magnitude moves against you, you can lose money quicker which typically doesn’t usually happen in a low iv environment. It’s much more risk for the options buyer though because even if the price moves in the right direction/magnitude you can still lose money if the extrinsic value/iv goes way down (iv crush).

Low iv is generally better for options buyers if certain things aren’t priced in correctly by the mm, like bcbiker did. It can be good or bad for options sellers as expected moves aren’t a large but since premiums are less you have to sell closer strikes to get any real premium which make it more likely to be itm and not expire worthless.

[Zaphod]

this is why in certain circumstances selling puts and selling covered calls makes sense. Obviously I have been very lucky in my strategy so far. I bought naked calls on Tesla for practically free in 2019 and then sold almost $1M worth of covered calls in Jan 2021. Now I’m selling puts on dip for crazy premiums and buying atm calls from proceeds of my covered calls. If you have a good understanding of a stock I don’t think there is a more profitable way to make money but it is very risky. Once you are working with money you made though it is Monopoly money that you can gamble without emotions.

What you're talking about is having a deep knowledge of a particular stock/fund, and "knowing" how it behaves, etc...it takes a bit of time to develop this. but once you have it, its an amazing skill. Its difficult to describe but the above is it.

I think its nearly impossible to do for too many things so I also prefer to focus on specific issues as opposed to broader, "whats moving today" ideas.

If you can do this with things that are more complex, that most people will simply refuse or not have the time/capacity to understand it can also be huge.

[Zaphod]

Higher iv is generally better for options sellers but also potentially more risk as well. If the price direction and velocity/magnitude moves against you, you can lose money quicker which typically doesn’t usually happen in a low iv environment. It’s much more risk for the options buyer though because even if the price moves in the right direction/magnitude you can still lose money if the extrinsic value/iv goes way down (iv crush).

Low iv is generally better for options buyers if certain things aren’t priced in correctly by the mm, like bcbiker did. It can be good or bad for options sellers as expected moves aren’t a large but since premiums are less you have to sell closer strikes to get any real premium which make it more likely to be itm and not expire worthless.

Yes, it seems good relatively, but the only thing that matters is if it ends up being underpriced relative to reality. Even when GME was like 800-1000% IV it turned out to be dirt cheap. In reality, its very hard to accurately price options at these weird edge cases and its likely that those kind of things that you're taught are "expensive" are actually cheap. They are expensive in a standard model that is discounting that those extreme moves happen. And of course its higher on more volatile stocks, and vol is agnostic, it will rip up and down. Sometimes you could be wrong overall and get bailed out by wild moves alone.

[Zaphod]

I remember a DM convo I was having with someone on twitter and they said, "probably we should just buy options, puts/calls, doesnt matter, theres no way the IV isnt jacked up for days ahead, anything you buy is a winner". Person was a former market maker and current commodities broker, and was dead right. Wish I had.

[Nysoz]

Same thing can happen with high iv stocks. Any option you sell is worth remarkably less after iv crush. I sold a put on gme and even though the price dropped like 50%, the put option was still worth less due to the huge decrease in iv

[Brains428]

Zaphod one of the finance podcasts I listened to pointed out that same point- even when the trade was going against you, the explosion of IV allowed you to make money if you got in early, or lose money if the trade went your direction when IV collapsed if you got in late.

[xraygoggles]

One of the easiest ways to juice your returns is to sell a call (or put) when the price of the underlying stock spikes (or drops) dramatically that day.

I was doing this with mainly MicroStrategy last few months as it was riding the momentum from Bitcoin, and to a lesser extent, with Tesla as well. Massive premiums, with huge drops in IV a day or week (IV crush) later makes for really juicy income.

[Jarpee]

Nysoz I recently started selling covered calls for fun on a few of my "plays" and long term holds. Is there a particular delta or strike % you target for each contract? What have you found is the nest bang for your buck? Currently I target contracts with less than 30d to exp and usually target a delta around 0.2.

Edit: Just saw your strategy on TSLA. The stocks/ETFs I'm playing with have far lower IV so can't go that far OTM.

[Jarpee]

You are selling long term calls on regular/high volatility stuff then. Hmmmm.

Assuming any stock with decent volatility (or index covered calls... my main jam nowadays), you will do a LOT better selling monthly (2-6wks out) and for whatever % is reasonable to you... typically ATM-to-15% OTM at most - or they won't have any value and nobody buys those (why your statement above says you are obviously selling long term).

As you can read in any options book or article, most of the time decay price drop on the option happens in the last 3-4wks. So, a 1 month call will typically get you nearly as much money - at least half as much - as a 3mo (assuming no major QE or divi in play), and you can do that 1mo sell three times in a row... so just do that. You make more, and you will have far less scrambles to buy your calls back or be upset on missed gains when your 3mo call is ITM after a few weeks.

It is tempting to sell longer term calls so you can set the price further OTM and think you'll be "safe," and it is scary to sell a covered call for $82 when the stock is $80 and you like it, but you can always pass on selling that month. With the long term sells, you're leaving money on the table when you sell that option versus a shorter one, and more time is actually more risk on your part (assuming you are out to make money, not just get a nickel per share for something that won't happen... "no way." Obviously, any positive announcement or market twitch can shoot a stock up, and you are giving too much time for that to happen. Long term call sellers on volatile stocks are barely ever appropriately compensated... the call buyers will fleece you on those (then sell them back if you will buy them). The short term are not only more profitable but also actually less of a risk to call seller.

...REITs and divi cows and fairly boring stuff are the only things you generally want to sell long term calls on. I have some roughly ATM long calls out on portions of my PSEC, NLY, T, etc for spring or even the year's end. They will probably get taken from me a day or two before an ex-divi date, and I don't care... I set the price where I'm happy either way. Those boring ones with almost no volatility are apples to oranges with TSLA or INTC or even something like SPY, though. Don't sell those long calls on growth stocks and regular stocks... do monthly or even weekly. Good luck man

Max Power Why REITs specifically for selling cc on further out exp? I sell cc on VNQ but don't want to sell an ATM option with 6 months from now just for premium and likely get assigned. Or am I missing something?

[Nysoz]

Nysoz I recently started selling covered calls for fun on a few of my "plays" and long term holds. Is there a particular delta or strike % you target for each contract? What have you found is the nest bang for your buck? Currently I target contracts with less than 30d to exp and usually target a delta around 0.2.

Edit: Just saw your strategy on TSLA. The stocks/ETFs I'm playing with have far lower IV so can't go that far OTM.

Yeah if you go by tastytrade, 0.2-0.3 delta with 30-45 dte is the way to go.

With TSLA I mainly use %otm and also current support/resistance. So like 15% weekly or 50% monthly otm. Also take into account any potential news/catalysts like earnings.

[Max Power]

Max Power Why REITs specifically for selling cc on further out exp? I sell cc on VNQ but don't want to sell an ATM option with 6 months from now just for premium and likely get assigned. Or am I missing something?

If they take the call, you get $ to buy something else. If they don't (and they often won't even when it is deep ITM), you get dividends all along.

You win either way. That's the point of covered calls. If the share price shoots up, oh well... that shouldn't be why you buy REITs. They more often stay fairly stagnant or oscillate around.

For example, I have dozens of CC contracts out on PSEC for $7 right now... bought them for around $5 last year and sold the CCs back when it was at around $6.50. It might stay up (nearly $8 right now), it might go back down. You would be surprised how many call buyers don't have the money to actually take the 100 shares even on a cheap stock and are holding them to see if it goes up further. Then, if it heads down in price, they panic since their call value shrinks very quick with time and share price drop. In reality, it doesn't matter to me whether they take them away or not... I'm making 10% on it in dividends... plus whatever I got in premiums when I sold the calls. I was never planning to make much/any on the share prices (or I would've bought something better for that purpose). It is actually pretty common on long term calls for the call to go fairly ITM and then back OTM by the end of the term... and it never gets taken when it could've.

You can do the same with F, WMT, KR, T, KHC or MMM or whatever that has fairly unexciting QEs, but it works even better on monthly dividend stuff like REITs or bond funds... those have a very tough time getting any momentum with monthly price dips to correct for divi, so you can just take the guaranteed win and force the call buyers to grab the contract to get the dividends... or let you have them.

[BCBiker]

I honestly don’t think anyone has a good understanding of TSLA.

As someone who has made 200,000% returns I may not understand it but I’ve made transactions decisions that suggest I know a little something about it. I’ve also said long term the revenue opportunities for Tesla will make it a $8-20T market cap company so with that in mind being mostly long is the general way to go. You and others have said many things in this forum about Tesla that suggest you know less than nothing about the company. Many people have blinders to how large the markets are that Tesla has clear paths to dominance. What makes Tesla a safer investment than most is that they have 3-4 trillion dollar markets in their crosshairs so if they miss entirely on 1-2 and partially miss on the rest they are still going to be largest company in the world. You cannot say that about Google, Apple, Amazon etc, who each have at most 2 comparably smaller markets.

[CordMcNally]

As someone who has made 200,000% returns I may not understand it but I’ve made transactions decisions that suggest I know a little something about it. I’ve also said long term the revenue opportunities for Tesla will make it a $8-20T market cap company so with that in mind being mostly long is the general way to go. You and others have said many things in this forum about Tesla that suggest you know less than nothing about the company. Many people have blinders to how large the markets are that Tesla has clear paths to dominance. What makes Tesla a safer investment than most is that they have 3-4 trillion dollar markets in their crosshairs so if they miss entirely on 1-2 and partially miss on the rest they are still going to be largest company in the world. You cannot say that about Google, Apple, Amazon etc, who each have at most 2 comparably smaller markets.

I'm glad Tesla has worked out for you. I think the truth is probably somewhere in the middle where many people here know more than you give them credit for (which is apparently less than nothing somehow) and you probably don't know as much as you think you do. Also, could you give any wider of a prediction range than $8-20T? A prediction from someone in the know, like yourself, should come with some dates along with those predictions. A perpetual bear will always think they're correct, too, even if the market has always gone up long term. Although I can't roll my eyes far enough back, I still wish you the best in your future investments (and I mean that).