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  • Nysoz
    replied
    I’m trying to present common options strategies with current pricing as objectively as possible. I have commented on the potential bad outcome of the trade with bag holding shares worth much less than I bought it for a few months. Which reinforces the need to only do this on companies/indexes you want to hold for the long term. I only use TSLA as an example because that’s what I use and follow. You can certainly use spy/qqq/aapl/amzn/goog/msft or most any other ticker you can imagine.

    Yep, I did this extra work and made around 200% less than I could’ve if I just did nothing. The reason why I chose to do this was to smooth out the volatility of TSLA and provide constant income/gains no matter what TSLA did. The reason why I capped at 400% is because the strikes I sold calls at is my FI number. If TSLA stayed flat or went down or went up slower, selling the calls would’ve continued to march me towards my goal. If TSLA blew past my strike like it did, I capped myself at my FI number. Capping profit like I did is the other “downside” of doing something like this.

    This isn’t the omg best strategy in the world to do, but it’s a tool that people can use for various purposes that may make sense at times to do. Sometimes it might not be the best thing to do. But if you don’t know about it, then you won’t have the ability to use the tool if it’s a possibly better way to accomplish your goal.

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  • Tim
    replied
    Originally posted by CordMcNally View Post
    I get a “can’t lose” vibe in this thread.
    Your comment brought to mind the WCI Facebook issue. There is a substantial difference between using options as a tool for enhancing returns as opposed to speculation. Most of this thread seems to lean towards the speculation side.

    Hedging (not recommended if it is purely an emotional response): Strike price below the current value and the premium. Minimize the loss.
    Yield enhancement : Strike price a little above the current value and the premium. Limits your gains but you collect the spread and the premium.
    In either case, you have the stock and are willing to sell it.

    Alternate retirement investment strategies like Dividend growth investments are relatively conservative.

    The use of options in this thread seem to lean to the speculative, not hedging a portfolio for risk management or yield enhancement.
    I personally think the RE fund and debt investments are to an extent motivated as a reach for yield, that would be similar to a dividend portfolio that enhances yield using covered calls. But no one advertises here. Just an observation that the call strategies seem to lean towards speculation.
    Similarly, puts can be use for hedging or buying a stock at a discount price.

    The WCI Facebook was shut down because the participants steered it towards speculation. Contrary to the WCI purpose. No problem with discussions on enhancement or risk management. Options are appropriate tools. The tone is not intended to be harsh, I apologize if this is received that way. It's almost as if the options speculative strategies should be labeled "do not try at home". Everyone wants to speculate if it works out. Little discussion of options for risk management or yield enhancement.


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  • JWeb
    replied
    Originally posted by Nysoz View Post
    The part that's burned me is that even though I had 400% returns in 2020, if I didn't sell all these covered calls I would be at like 600% or so if I just held everything I bought. My portfolio would've been much more volatile along the way as well though.
    So you're saying that you did all of this extra work and would have had a 200% higher return if you had just done nothing?!?!

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  • CordMcNally
    replied
    I get a “can’t lose” vibe in this thread.

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  • formerly_cn
    replied
    Originally posted by BCBiker View Post
    This is good thread to introduce concepts. I think the more you do this the more clever you become.

    The key is to never be on the wrong side of a trade that is convex (limited upside, and unlimited downside)

    Buying naked call options is being on the right side of convexity if you can buy the contract at a low price.

    this is why when people ask about trading options I think TSLA is not a great place to get your feet wet. Any contract that is not impossible to go in the money is going to cost you $15K.

    But for options that are reasonable in companies that are doing poorly/misunderstood you can get options that have reasonable shot for $300-400.

    Let’s say xyz is trading at $20 per share but they had a bad quarter and their next product is not expected to factor into bottom line. But you think the new product will double their revenue. You can buy a call option expiring in 2 years with a strike price of $30 and premium of $2 per share ($200 per contract on 100 shares). You can lose that $200 if the stock never moves so be prepared. But if the stock goes to $50 the contract becomes worth $20 per share (stock price of $50 minus strike price of $30). Thus you can 10x your money on a small amount of money.

    In contrast if you wanted the same exposure through buying stock you would need to buy 100 shares at $20==$2000. And if the stock went down to $10 you lose $1000. But with option you only lose $200.

    I like the mathematics of this. If you can make small bets that can 10x then you can lose frequently and still do way better than a normal return. If I make 10 bets of $10 and one is 10x then I could lose everything on the rest and still make money. In my case I made 2000x plus. In that case you just need one good bet and you are done.

    now I can sell covered calls for a ton of premium and could easily live off of these shares I got through options. When some is willing to pay me $10K for something is likely worthless I will take that. It is impossible to 100 x your return on most of the options people are buying now.
    All good. Am ready, just let us me know which next company is misunderstood....

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  • BCBiker
    replied
    This is good thread to introduce concepts. I think the more you do this the more clever you become.

    The key is to never be on the wrong side of a trade that is convex (limited upside, and unlimited downside)

    Buying naked call options is being on the right side of convexity if you can buy the contract at a low price.

    this is why when people ask about trading options I think TSLA is not a great place to get your feet wet. Any contract that is not impossible to go in the money is going to cost you $15K.

    But for options that are reasonable in companies that are doing poorly/misunderstood you can get options that have reasonable shot for $300-400.

    Let’s say xyz is trading at $20 per share but they had a bad quarter and their next product is not expected to factor into bottom line. But you think the new product will double their revenue. You can buy a call option expiring in 2 years with a strike price of $30 and premium of $2 per share ($200 per contract on 100 shares). You can lose that $200 if the stock never moves so be prepared. But if the stock goes to $50 the contract becomes worth $20 per share (stock price of $50 minus strike price of $30). Thus you can 10x your money on a small amount of money.

    In contrast if you wanted the same exposure through buying stock you would need to buy 100 shares at $20==$2000. And if the stock went down to $10 you lose $1000. But with option you only lose $200.

    I like the mathematics of this. If you can make small bets that can 10x then you can lose frequently and still do way better than a normal return. If I make 10 bets of $10 and one is 10x then I could lose everything on the rest and still make money. In my case I made 2000x plus. In that case you just need one good bet and you are done.

    now I can sell covered calls for a ton of premium and could easily live off of these shares I got through options. When some is willing to pay me $10K for something is likely worthless I will take that. It is impossible to 100 x your return on most of the options people are buying now.

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  • Nysoz
    replied
    Definitely try paper trading or smaller trades at first as there's a lot of nuance that can't be really described. It's important to keep emotions out of this and pick reasonable strikes/expirations.

    Or pick way far OTM strikes at first to see how the price changes as time goes by and as the underlying stock moves up and down.

    What I've described is just the really simple basics and there's a lot of unpacking to do to really get a feel for it. There's also a million different ways to manage the trade after you've opened it.

    (This next part makes me feel like a youtuber) Disclaimer is, once again, no one really needs to get into this and I don't encourage it to most as I don't know anyone's risk tolerance or situation. There's always 2 sides of a trade. Despite how well it's worked for me, others have gotten burned as well. The part that's burned me is that even though I had 400% returns in 2020, if I didn't sell all these covered calls I would be at like 600% or so if I just held everything I bought. My portfolio would've been much more volatile along the way as well though.

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  • formerly_cn
    replied
    Thanks for this Nysoz. That strategy is pretty great actually. Its essentially ROI on cash/shares you already have and believe in. Will try it and see how it goes (covered calls / cash secured puts that is).

    If someone is really bold OTM call option year out on company you believe in probably gets you great ROI. Or atleast thats my understanding so far. But yea akin to lottery...

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  • Nysoz
    replied
    Originally posted by xraygoggles View Post
    Great advice, and options are a great way to make income on stocks you are holding anyways for the long term.
    Yep, and a way to make extra income for people in retirement that own shares of a company/indexes that don't pay much in dividends. Also this way, possibly won't have to sell shares of something to draw down your portfolio in retirement.

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  • xraygoggles
    replied
    Great advice, and options are a great way to make income on stocks you are holding anyways for the long term. Buying options is akin to gambling and the lottery (and we have some people who won the lottery in 2020). Selling options is the smart way to go for retail investors.

    Pick a large cap stable company you want to own, sell a cash-secured put at the price you want to buy it. If it hits that price, you own 100 shares. Then sell a covered call on top of that, at a price you wouldn't mind selling for. This is called the wheel strategy, and is a very nice way to get discounts. I do this all the time for Apple and Microsoft.

    Just keep in mind however, that the main reason options exist in the first place, is for large traders to be able to hedge their bets. Simplest example would be some trader long the market, but buys a few hundred SPY put contracts to hedge their bet (hedge funds do this kind of stuff a lot, hence their name). There are more advanced strategies they use with futures and swaps, but the concept is the same.

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  • Nysoz
    replied
    Originally posted by burritos View Post
    When you started to get bullish on TSLA and went the options route, as an example, what and when where your first 5 option trades?
    2/10/2020 Sell TSLA 2/21/20 1080C $554
    2/11/2020 Buy TSLA 2/21/20 1080C -$181.00
    2/11/2020 Sell TSLA 2/28/20 1000C $730.00
    2/12/2020 Buy TSLA 2/28/20 1000C -$355.00
    2/12/2020 Sell TSLA 3/6/2020 1000C $660
    This is from the excel spreadsheet I keep of all my options trades. So I sold a covered call with a strike of $1080 for $554 then bought it back the next day for $181.

    Immediately sold another covered call longer out and lower strike for $730 and bought that back the next day for $355 and sold another one.

    TSLA was $771.3 pre-split on 2/10/2020 for reference.

    The thing that Random1 talked about happened to me during the covid crash. Sold a cash secured put with a $620 strike price as TSLA (and everything) fell and had to bag hold those shares as it went all the way down to $360 pre-split. After being assigned those shares, I sold $600 covered calls (so I didn't have to sell at a loss) to get some premium back while waited for the recovery. Those calls I sold were only $100 a week in premium or so, but over time as the share price recovered I got more for selling, and then adjusted my strike higher to not have those shares get called away.

    ​​​​​​​So it's important that you only do this on companies/tickers you don't mind holding because you might have to hold onto the shares for a while.

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  • Nysoz
    replied
    Yep, that's the risk involved. So you have to pick companies you want to buy/don't mind holding and pick reasonable strikes/prices you would be ok buying at. If you want to own TSLA at $500 then you can set your price at $500. You'd just get less in premium.

    So a 2/19/2021 $500 put is going for $425 currently. So you hold $50k cash as collateral, sell the cash secured put, and get $425 in premium. So that's 0.85% monthly return on cash held in return for the possibility of having to buy 100 shares of TSLA at $500 or a 41% drop in a month.

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  • burritos
    replied
    When you started to get bullish on TSLA and went the options route, as an example, what and when where your first 5 option trades?

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  • Random1
    replied
    If TSLA is below $700 then I'll be forced to buy 100 shares of TSLA at $700 (or that $70k I set aside previously). Meaning I made 4.75% returns on my cash in a month.

    So at the end of the contract if TSLA is selling at $500 , you have to pay $70,000 for $50,000 worth of stock ?

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  • Nysoz
    replied
    So with the basic terms of options explained, the core strategy I have going in my portfolio is selling options. The main 2 strategies are selling covered calls and cash secured puts.

    Selling a covered call means that I have 100 shares of something (covered) and selling a call option (contract to buy 100 shares at a certain price by a certain date) to someone. What this means is as of right now, TSLA is trading around $830 a share. I think that TSLA is richly valued right now and I don't expect it to go above $1000 in a month (20% increase from here and also psychological price). What I do is sell a call option with a strike of $1000 with expiration 2/17/2021. The buyer of the contract thinks that TSLA will be above $1000 by 2/17/2021 and pays a certain amount (premium) to me for it. Currently that amount is $3900. No matter what happens, that $3900 is mine. On 2/17/2021 if TSLA is below $1000 then the contract expires worthless and I keep my 100 shares and keep the premium. If TSLA is above $1000 then the contract more than likely gets exercised (the holder of the call option contract uses the option to buy 100 shares of TSLA @ $1000 per share), and then I'm forced to sell my 100 shares @ $1000 per share and still keep the premium. Meaning that I made an extra 4.7% return on my share value in a month.

    Selling a cash secured put means that I have the cash to buy 100 shares of something and think the price is too highly valued and want to get in at a certain price. If I wanted to buy TSLA but the current price of $830 is too expensive for me (I'd rather buy more at $700 or a 15% discount) then I sell a cash secured put option (holder of the put option reserves the right to sell 100 shares at a certain price at a certain date). So I keep $70k in cash in my account and sell a cash secured put with a $700 strike and same expiration of 2/17/2021 and get paid $3325 in premium. If TSLA is above $700 on that day, the contract expires worthless and I keep the premium. If TSLA is below $700 then I'll be forced to buy 100 shares of TSLA at $700 (or that $70k I set aside previously). Meaning I made 4.75% returns on my cash in a month.

    If you're able to pick your strikes correctly, you keep your shares of whatever/cash you have and just add to your account through the premium you collect. With the premium you collect, you can do whatever you want with it. Add more to your position or send it to your bank account to spend. However, if you are forced to sell the shares with the covered call and end up with a lot of cash in your account, then you can sell the cash secured put immediately after. If you bounce back and forth between these 2 strategies, it's called the wheel strategy.

    Now I pick TSLA because it's a company I like and follow. In the next 10 years I think it'll be worth the same or more so I don't mind owning TSLA. Undoubtedly it's volatile and no one can really predict what'll happen. The premiums now are slightly elevated because of the volatility and greeks (earnings are coming up soon) and would be slightly lower in normal times. Even in 'normal' times the premiums were decent like 2-3%. But in wildly crazy circumstances (S&P inclusion), the monthly premium has been as high as 10-12% in a month. If you use something that's less volatile like SPY, then the premiums are less but the idea remains true.

    Where people get into trouble is people look at premiums/volatility and find companies that are even more volatile than TSLA. Meme companies or things related to bitcoin currently. These premiums can return 25% in a week or 50% in a month because of how volatile the underlying is. These people often get into trouble because if the trade goes the wrong way, they're forced to hold shares in a company they don't want to be in bought at a much higher value than it is currently.

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