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  • #16
    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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    • #17
      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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      • #18
        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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        • #19
          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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          • #20
            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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            • #21
              I get a “can’t lose” vibe in this thread.

              Comment


              • #22
                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?!?!

                Comment


                • #23
                  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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                  • #24
                    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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                    • #25
                      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.
                      To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

                      It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

                      This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.

                      Comment


                      • #26
                        Originally posted by Panscan View Post

                        To the bold, if these bets the people are making are so bad, why don't institutions/ giant hedge funds/traders with huge money snatch these up?

                        It seems like people usually don't turn down sweet deals and the more money/experience/knowledge you have the easier it would be to identify a sweet deal

                        This is something that I know nothing about and it's interesting to learn about so thanks to both of you guys for going over some basics.
                        you have to have a large long position that you don’t intend to sell.

                        the two negative sides of selling covered calls are 1) that you may have to sell your shares at a discount if the stock runs above the strike and 2) you cannot sell your long position if the stock tanks without also buying back the call you sold.

                        I personally don’t worry about 1 because you can always buy the the options back and sell more expensive options with better premium and possibly higher strike. In TSLA I’m long for 10 years so Zi font care if stock goes to $50. If it does I’m buying calls...

                        The two issues is also true of selling cash covered puts. 1) The cash you committed is locked up and 2) if the stock drops way below your strike you need to buy the shares or buy back the contract at a higher price.

                        I don’t think of this as cannot lose. Keep in mind that my initial investment was small portion of portfolio. I don’t think that “standard investing” is exactly without risk. Options just takes advantage of the fact that markets are not bell curves like idiotic financial theory assumes.

                        Hedging with put options is a pretty dumb strategy. You are paying someone to take your shares away at a discounted price... I cannot think of a worse financial contract to enter into...

                        Comment


                        • #27
                          So this is a part where I’m learning about still and appreciate anyone correcting me.

                          so most of these super improbable options are being bought and sold by huge funds/market makers (and potentially retail investors looking for lotto tickets).

                          they make money with the bid/ask spread but also use complex algorithms to figure out which ones they need to buy/sell and how much to buy/sell them at to remain delta neutral and still make a profit.

                          Essentially the funds that provide the liquidity for these options try to maintain as little risk as possible while still making money.

                          say the bank/fund sold these options to bcbiker for next to nothing. As the share price went up, they then sold puts or bought shares in their fund to counteract/cover the share price going up. So they might be losing money in the ones the sold to bcbiker but then making money on the other side to even out the risk and still make money for themselves.

                          edit: we answered completely different questions lol. Hopefully one was right

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                          • #28
                            Originally posted by Nysoz View Post
                            So this is a part where I’m learning about still and appreciate anyone correcting me.

                            so most of these super improbable options are being bought and sold by huge funds/market makers (and potentially retail investors looking for lotto tickets).

                            they make money with the bid/ask spread but also use complex algorithms to figure out which ones they need to buy/sell and how much to buy/sell them at to remain delta neutral and still make a profit.

                            Essentially the funds that provide the liquidity for these options try to maintain as little risk as possible while still making money.

                            say the bank/fund sold these options to bcbiker for next to nothing. As the share price went up, they then sold puts or bought shares in their fund to counteract/cover the share price going up. So they might be losing money in the ones the sold to bcbiker but then making money on the other side to even out the risk and still make money for themselves.

                            edit: we answered completely different questions lol. Hopefully one was right
                            The most common strategy that is well known is to buy convertible bonds and sell calls to remove the equity risk from the bond. But yes Renaissance and others have all kind of ways to trade around these things to exploit inefficiencies in how options are priced. And they have better access to the book so can also get bid ask arbitrage.

                            as an observer of these prices I can see some patterns that are a bit illogical that I’m sure someone is making a killing on. Unlike the underlying equity though the space to exploit is enormous because you have time and strike variables and the prices move exponentially in response to underlying stock and with a slight delay.

                            Comment


                            • #29
                              Originally posted by BCBiker View Post

                              The most common strategy that is well known is to buy convertible bonds and sell calls to remove the equity risk from the bond. But yes Renaissance and others have all kind of ways to trade around these things to exploit inefficiencies in how options are priced. And they have better access to the book so can also get bid ask arbitrage.

                              as an observer of these prices I can see some patterns that are a bit illogical that I’m sure someone is making a killing on. Unlike the underlying equity though the space to exploit is enormous because you have time and strike variables and the prices move exponentially in response to underlying stock and with a slight delay.
                              All this financial engineering...making my head spin. But it makes sense. Always interesting to see large institutions goj g for sure things vs small firms/individual investors taking more risk ?

                              Comment


                              • #30
                                Originally posted by formerly_cn View Post

                                All this financial engineering...making my head spin. But it makes sense. Always interesting to see large institutions goj g for sure things vs small firms/individual investors taking more risk ?
                                There are situations where they have very technical people working to “minimize” risk in large institutions who blow up. Long Term Capital Management was the biggest one.

                                Now they are not beholden to linear models and really bad assumptions. They also probably make sure no one person is using same strategy in same equity.

                                Many brokers have web services for trading so anyone with some fairly basic programming skills could start a quant trading system. If I was not otherwise occupied I would give it a try.

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