Intro to options

[Tim]

https://www.google.com/search?client=firefox-b-1-d&q=fidelity+options+classes

Many of the brokerage sites have training and materials. Options are contracts on a security that is publicly traded.

https://www.investopedia.com/terms/i/indexfutures.asp

Index futures are contracts on the indexes themselves. CBOE is the market for those. Typically the E-mini's are the vehicle. Different market and different prices.
Beware, you are playing with the big boys for big bucks.

https://www.cboe.com/tradable_products/

[Max Power]

...I generally sell covered calls 25-40% otm ...

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

[Nysoz]

Good thread Nysoz , few questions:

1. How do you decide on which covered calls to sell for TSLA regarding strike price and expiration date? Do you just pick some very OTM strike ( such as 950 if TSLA at 750) that you think will have very little chance of getting executed? Do you sell weeklies, monthlies?
2. Assuming you only sell covered calls for TSLA what percent of your stock equities do you sell calls on? For example if you owned 1000 TSLA shares, would you only sell 5 contracts so only half your position is at stake at getting called away?

I started selling covered calls on Palantir (PLTR) which I'm bullish on long term, but also has high implied volatility so am able to pull in good income from selling covered calls.

I sell covered calls on all my positions which in retrospect was silly. I generally sell covered calls 25-40% otm (out of the money meaning 25-40% more than current share price) monthly contracts thinking to myself I’d be happy with a 25-40% gain in a month.

this capped my TSLA gains in return for the premium I was given. Since the contracts I sold ended up in the itm (in the money meaning the share price is now more than the call option strike I set) I managed them by buying them back at a loss but immediately selling another contract that was even higher and a later expiration for a slight credit.

the strike I’m forced to sell all my TSLA at is above my fatfi number so I’m ok losing my shares at that price.

So my reasoning to do this is that I’m a fan of TSLA but know it’s volatile. Selling options on it provides steady premium in return for capping my gains which kinda smooths out the craziness.

[Nysoz]

Max Power yeah I mainly sell covered calls, cash secured puts. Sometimes do some spreads. (Explaining my thought and what happened for everyone else)

with cash secured puts sometimes it can be more than a trickle. For instance I like TSLA. When it was trading at $500 I’d be happy to buy it at $400.

so in my Roth IRA I set aside $40k and sold a $400 put a year out. The $40k stays as cash as a promise to buy the 100 shares if it got that low or lower in a year. In return, someone gave me $8k in premium up front. So that’s a 20% roi on something I didn’t believe would happen and if it did, I’d be happy to buy at. Then with the $8k I could do whatever I wanted with it (bought more TSLA stock lol).

now since TSLA has gone up, the value of the contract I sold is worth much less. So I sold it to someone for $8k but now can buy it back for like $3k if I wanted to. Or I can wait for the rest of the year and watch it lose value as the contract gets closer to expiration.

[Harmonica Man]

Good thread Nysoz , few questions:

1. How do you decide on which covered calls to sell for TSLA regarding strike price and expiration date? Do you just pick some very OTM strike ( such as 950 if TSLA at 750) that you think will have very little chance of getting executed? Do you sell weeklies, monthlies?
2. Assuming you only sell covered calls for TSLA what percent of your stock equities do you sell calls on? For example if you owned 1000 TSLA shares, would you only sell 5 contracts so only half your position is at stake at getting called away?

I started selling covered calls on Palantir (PLTR) which I'm bullish on long term, but also has high implied volatility so am able to pull in good income from selling covered calls.

[Nysoz]

I know about options, they always talk about them in movies but now that I think about it, I don't think that I have ever been on a website where one is for sale. Where do you go to get them? I wonder if there is an option on an index fund like the S+P 500 or total stock market. I would imagine that the fees you have pay combined with the risk associated with large losses makes them not a good option for the average investor.

Options can be purchased or sold if any regular brokerage. You have have to apply for the ability to buy and sell them. There’s different levels for each broker and depending on your experience you’ll get approved for the least dangerous options first.

you can buy and sell options on qqq/spy/voo/vti. Spy is much more popular than the other 3. More popular just means more liquidity

Using options can help reach/protect your investment goals. Say you have a lot in the s&p 500 but worried there might be a bubble or the next covid happening. You can buy puts as a hedge for your portfolio. If s&p keeps going up, then your entire portfolio is worth more but the put you bought is worthless (kinda like insurance in a way). If there is a bubble and the s&p corrects, then your portfolio is down (hopefully temporarily) but the protective put you bought is now worth a lot more. There’s all sorts of things you can do with options, most aren’t worth it to the average investor though but it’s nice to know about.

say during the covid crash, some people tried to time the market by selling and hoping to buy back in at a lower price. These people could’ve just done the above to keep their initial investment/portfolio but provide protection/some gains as the market went down.

or if you you saw mice fleeing the ship and knew after the first dip there was more pain to come, buy a lot of puts and make money as the market crashes

or if you had a feeling that once the printer went brrr the market would recover buy some calls to leverage on the way back up.

the fees of trading the option isn’t much $0.65 per contract for me, but the premium can get expensive depending on a lot of the variables.

[Max Power]

It is not a bad summary, and I hope it helped you reinforce what you know. There are tons of YT videos, books, and short ebooks that explain it... and it needs a lot of directional diagrams to make any sense to someone who doesn't understand it already. There are no fees anymore... 65c per contract, totally nominal unless you are doing something with a very low share price or trying to buy real cheap way OTM calls. The brokerages offer free online edu about it also.

To make it simple:
Buy calls = bullish and want to bet on it... likely lose, might win big (by either getting discount shares or selling the call)
Sell OTM calls = neutral to slightly bullish and want to take $ from the highly bullish ppl buying calls... trade some upside for some $ now
Sell ATM/ITM calls = bearish and want to get paid a bit... open to dumping your stock (was more popular before no trading fees)
Buy puts = insure a big position... prevent dramatic loss at the cost of losing some profit (stupid unless you are a hedge fund)
Sell puts = a way to make money on your cash (or end up with stock)... downside is it ties up your cash


The vast majority of ppl should be selling COVERED calls only. Selling naked calls (or puts) can land you with a lot of liability. The stocks that have high volatility and are fun to sell and buy options on (eg, TSLA) are also the most unstable in inappropriately valued ones. The place most traders go wrong is to start buying stocks because of their options potential and not their company quality (eg, TSLA).

Buying calls is usually a way to bleed yourself dry. It is like being the guy who always bets that there will be 100pts in a football game. Sure, it pays big when you hit, but it is rare. The contact hitter (call seller) will beat the home run swinger (call buyer) in the long haul. Even when calls hit well, the hedge funds keep them limted, esp if the call is time decayed and ending soon.. since they are the limited amount of buyers (mainly hedge funds) on those calls. They know the call buyers seldom have the cash to close on the 100 shares themselves. They rapidly become the call sellers since they know they are stuck selling asap or risking losing their "win."

Covered puts are also stupid for ordinary investors... why own something you don't believe in? There are always buys... good things that are undervalued and/or going up. If it is a global bear, then be in gold, inverse funds, cash, grab discount stocks that will survive and thrive again soon, etc. Why "insure" your funds since you don't trust them.
...Cash covered puts are a decent way to get trickle (esp in depressed markets) , but you can still usually find better stuff. I don't get them (for ordinary investors). There is a reason covered calls are 10x more popular.

[nephron]

I know about options, they always talk about them in movies but now that I think about it, I don't think that I have ever been on a website where one is for sale. Where do you go to get them? I wonder if there is an option on an index fund like the S+P 500 or total stock market. I would imagine that the fees you have pay combined with the risk associated with large losses makes them not a good option for the average investor.

[Nysoz]

I've been wanting to write this out to help explain what options are for people that may or may not want to learn about it. Personally I'm still learning as I go, so if anyone else wants to correct me, please feel free so I can learn too.

Disclaimer. By far the majority of people in the world don't need to dive into this, especially physicians or other high earners. For me, it's a way to help smooth out my investing strategy and a way to provide income outside of medicine. I still stand by my opinion that most everyone is better off in an index fund, but it's always nice/fun to learn about new things.

So an options contract is a contract between 2 people/entities over 100 shares of a company. Contracts will have a strike (price) and expiration (date when the contract is up). A call option is a contract to buy 100 shares of a company at a set price (strike) by a certain day (expiration). A put option is a contract to sell 100 shares of a company at a set price (strike) by a certain day (expiration).

Generally if you think the share price of a company is going to go up, you would be interested in a call option. Currently TSLA is at $750. If I think it's going up to $1000 by the end of the year, I can buy a call option to buy a block of 100 shares at a certain price say $800. If TSLA goes up to the $1000 that I think, that call contract allows me to purchase 100 shares at $800 even though the market value is $1000. If TSLA stays flat or down, then the contract expires worthless on the date of expiration because no one wants a contract to buy 100 shares of TSLA at $800 if the market value is $750.

If you think the share price of a company is going to go down, the put option is what you'd be interested in. If I think TSLA will be a lot lower than it is today, then the put option allows you to sell 100 shares of TSLA at a certain price by a certain day. Say I buy a put option with a strike of $600. If TSLA goes to $300, then I could sell 100 shares of TSLA to someone at $600 even though the market value is $300.

In order to have this ability to buy/sell 100 shares of a company, you pay something called premium. It's essentially the price of the admission to the roller coaster ride of options trading. The premium varies on the underlying company/index/ticker, volatility, how long the contract is for, and other variables.

Once the contract is created, the value of the contract goes up or down according to all these variables (greeks).

The trick with buying options is that you have to get the direction of the movement (up or down), the magnitude (picking the right strike price), and the timing (expiration date) to make money. If you don't, then the options contract is worth significantly less than what you paid for it, or worthless. That's why buying options can be similar to buying lotto tickets.

---

So that's the basics of what a call and put option is. There's still a ton of nuance to go through as well if anyone is interested. But what I mainly focus on is selling options. Currently looking at the options chain (a long list of all the available options listed for a company with associated prices) there's entities out there buying and selling these contracts no matter how ridiculous you think it might be. The TSLA $200 put option with expiration of 2/19/2021 is going for $55. If you're buying this contract, you think TSLA will go below $200 by 2/19/2021. Even if you're a TSLA bear, I doubt anyone thinks TSLA will go below $200 in 6 weeks. On the other end of the spectrum, the $1200 call option with the same expiration of 2/19/2021 is going for $530. Even if you're a TSLA bull, the likelihood of TSLA going that high in 6 weeks is negligible.

So what I do is find these improbable option contracts and sell them to these entities, either individuals or the 'market makers'. No matter what happens, I keep the premium associated with the contract (all STCG) and hope it expires worthless. I personally use TSLA because that's the company I follow the most, but people out there are using SPY or QQQ as well. Essentially most tickers will have options associated with it. There are a ton of different strategies out there with funny names but that's the basics of it!

If you made it this far, I urge anyone to read the disclaimer again as even doing things this way has potential drawbacks. But it's definitely a way to provide income/extra money in the market.