Option Education

[bkluck]

Newly2b, how does this increase my profits? Selling the ITM put netted me $155, while selling the OTM call would net me only $20, while capping my upside. Wouldn't I do better by just selling another ITM put? I'll admit to being new to options, so can you provide some detail?

[Newly2b]

To increase your profits, you might consider selling OTM covered calls against your existing position. Just a thought. . .

Newly

[bkluck]

Question from an options newbie:

I've been an owner of NRP (coal) for many years. It is a high-yielder, and with by reinvesting, my return (even thru the recent drop in share price) is quite good, and I have decided to add to my position.

So I could just go buy the stock (currently trading at 16.51, down significantly over the past few days), since overall I feel it is still a great investment. However, the more I research options, it seems like I could do a bit better.

So what I did this morning was to sell the Feb 17.50 put, for 1.55. This put $155 in my pocket, and guarantees I get put the stock. Yes, I get put at 17.50, but with the premium, I'm really in the stock at 15.95, a 4% discount from the current level.

Since I was going to buy the stock anyway (likely at 16.51), is there a hole in my strategy?

[leemalone2k3]

Thanks,Newly!

[Newly2b]

Lee doesn't seem to be around today, so let me take a stab at clarifying this issue for you.

ATM, ITM and OTM refers to the relationship between the strike price of the option and the actual price of the underlying's shares. So, if the underlying is trading at 80, and you buy an 80 call, that call is ATM. An ITM call would be any call with a strike below 80 and an OTM call would be any call with a strike above 80. An ITM Put would be any put with a strike above 80 and an OTM put would be any put with a strike below 80.

Perhaps this is what confuses you: a call option may be ATM when you buy it and a few minutes later if the price of the underlying shares rises, the call may be now be ITM, if it falls, the call may be OTM. The strike price of the option has not changed, but the price of the underlying shares has, which changes the relationship. The strike of the option you hold never changes, but the price of the option will depending on changes in the price of the underlying shares, and that changes whether the option is ATM, ITM or OTM.

If you are buying calls your profit lies in having the price of the option rise when the price of the underlying rises and if you are buying puts your profit lies in having the price of the option rise when the price of the underlying drops.

Hope this helps.

Newly

[clevertechie]

Questions about - In the Money, Out of the Money, At the Money

Hi everybody,

I'm new to options trading, I just started learning about it a week ago.

Could someone please explain in what scenario the ITM, OTM, ATM actually takes effect?

What I mean is....

If SPY is currently trading at 179 and I buy 1 contract CALL at 185 strike for $1.79 - this option would be out of the money, yet from what I understand the options profit is made when the price of the actual contract goes up.

So, say SPY went to 182 (+3) and the price of the contract went up to $4.79 (+3) (assuming delta is 1) and I close the option - $4.79 - $1.79 = $3.79 * 100 = $370 profit.

Is this correct? So even though the option is still considered out of the money at 182 compared to where I bought it for 185.

If this is correct then the term out of the money is confusing to me...Does this only apply when the option is exercised or am I completely misunderstanding it?

Please help.

Thank you!

[nwsun]

thanks

[leemalone2k3]

The Think or Swim platform shows the IV for the stock during each expiration preiod as well asw the IV for each option strike. It is located on the trade page. If you click the drop down menu on the layput button you can chose IV and that is for each strike. You can see the IV for the stocks on the right hand corner of the page for each expiration period.

[nwsun]

Question? This product defaults to the previous days implied volatility when seeking specific stock option information. Where can a person find the current days IV? There is an IV calculator on the page but I filled in an amount it returned N/A? Thanks in advance

http://www.cboe.com/framed/IVolframed.aspx?content=http%3a%2f%2fcboe.ivolatility.com%2fcalc%2findex.j%3fcontract%3d49B83A6F-B67C-43A8-9CC8-0EEBB2771E2A§ionName=SEC_TRADING_TOOLS&title=CBOE%20-%20IVolatility%20Services

[leemalone2k3]

Im not really sure what that would be called. It's simillar to a collar without owning the stock.

[dominik2]

Hwy lee what do u call a play when u buy long term deep in the money puts and just sell weekly itm calls against it?or vice versa..thanks for the response

[Newly2b]

Thanks, Lee. That's what I suspected but wasn't sure.

Newly

[leemalone2k3]

Hi Newly, I got your message from last week but was away on vacation. Usually when an option has .05 steps in price and you see penny increments- someone is probably getting a spread and filling in between.
Hope this helps.

[leemalone2k3]

There's several routes you can take. You can read about spreads and naked options here, or on the cboe web site. I also hold webinars which will help you to understand much quicker. I wouldn't recommend selling naked options at this time.

[aetvb]

Hi Lee, I am interested in selling options in the near future once I'm educated enough. Was wondering if you could steer me in the wright direction?

[Newly2b]

Everything you say is true, Lee, and makes perfect sense. But somehow doing spreads always feels to me like I am betting against myself, since hedging one's bet on direction generally limits one's gains when and if the trade moves in one's favor. Still, it does mitigate one's loss if the trade goes south on you. I guess this attitude is just one of those nasty 'trading demons' I will have to overcome if I'm going to trade spreads.

The big attraction, to my mind, is that any spread trade requires less maintenance than a naked option trade would, so one can go higher volume or longer hold as opposed to frenetic daytrading to keep reusing capital and avoid reaching one's limit. Of course, presumably, under the scenario where one uses all one's available capital plus margin, one would always have to exit the short side of the spread first to avoid having a naked position requiring more capital/margin than is left in one's account (exiting the long side is less problematic since the owner of the op has the right to exercise or not).

Thanks, Lee.

Newly

[leemalone2k3]

I like to refer to those as "can't lose" trades-hehe. Keep in mind that you would still need to close these spreads manually (just like you would in any debit spread)prior to expiration if the max gain occurs and also if either strike is near the money ATM or ITM or you will be exercised.

I like these can't lose positions. Frees up capitol, and requires no margin requirement. Short puts are a great way to sell premium, but requires that you need to have larger accounts to do so. You can do these cant lose trades with much smaller accounts. That way everybody can play like the big boys!

[Newly2b]

Thanks, Lee. I've done those spreads you prefer, going long a farther out expiry (monthly or leap) and short the near-term expiry (weekly). What surprised me about the play you posted was that both options were weeklies and it was a Credit Spread, rather than a Debit Spread as it would have been had you done it as one trade instead of two separate trades.

I rarely buy options, my favorite play being to short Puts, but it never occurred to me to turn an option play into a spread when price was moving in my favor in preference to simply closing out the trade and taking profits. Learn something new every day, LOL. Thanks for the explanation, Lee.

Newly

[leemalone2k3]

That's exactly what I did. Sometimes I will sell some of the original longs, then short other strikes against the remaining contracts.

Basically, the plan was to have a position that ended up with a small gain or a large gain, but no loss of original capitol funds. If it closes above the sold strike in this case, there was a max gain, and if it closed below the long option, I would get a small gain ( or break even).

Another advantage is that there are times you can buy back the short side for a gain, thereby lowering the cost of your longs. Then wait for a move and short against them again. You could possibly short the options and buy them back cheaper many times before expiration, and it doesn't take any extra money, like buying options. I really like selling weekly options against longer term bought options.

Hope this helps.

PS thank you for your thoughts and the info earlier. There are many foods which I can not eat because they trigger the attacks.

[Newly2b]

Hi, lee. Yes, I'll repeat my question here and hope to get an expanded reply when you have time:

. . .since the price of the higher strike Call would generally be less than the price of the lower strike Call, I assume you simply waited until the price of the short Call strike was higher than what you had paid for the long Call (i.e., turned a straight long op play into a spread as price rose)? If so, was this your original intent, or did you do this because you thought price might reverse, but were really unsure, so you preferred to turn the long play into a spread in preference to selling and taking your gain?

TIA. Newly

[leemalone2k3]

Glad to have helped.

[KIRBY]

Hi Lee, you have taught me so much and started me in the right direction. I thank you.

Krby

[leemalone2k3]

Hi Kirby. Sorry I missed your question. I haven't got into any LEAPS yet this year because stocks are up near all time highs.

I haven't traded much this year andMost of my trades have been shorter term, the last 6 weeks. On earnings plays, I have been buying ATM calls and selling OTM front month/week calls (or puts), because the volatility has been jacked up.

Some of these trades went against me and at least I was covered up to a point. I hope to get more active in a few weeks.

[KIRBY]

Thank you do appreciate it .
kirby

[hap0206]

kirby, here is the thing --

do not lose

1 - look for a major -- cash (in the billions), no debt, book value/share above mp

2 - under $30

3 -- this is a stock you would like to own

4 - sell the puts, close expiration with premium to burn as time runs

5 - if not OTM at ex date, roll to the next week
========
cash covered naked puts on financial solid companies in "disfavor" -

intc, msft, come to mind

[KIRBY]

Hi Lee , I am wiring in some money tomorrow morning so I can be ready to do a buy long term / sell short term calendar spread next week . Want to start very slow and cautious , maybe one or two contracts at a time. On one of your posts you had stated you trade mostly calendar spreads on stocks I think $20 to $60 dollar range. I remember you use to trade YHOO ,HAL, MCP , STEC and BBY but they have declined in price. Yahoo seems to be in range and slowly climbing , could you recommend a stock trading sideways or slightly downward so I can buy a long term CALL leap first ( as you recommended ) and sell one slightly higher to collect on the time decay and not be naked .
thanks
kirby

[leemalone2k3]

Yea I hate cluttering up a chart. Well done!

[KIRBY]

Have been trading using the bare basics / seat of the pants flying as suggested , does help with "INDICATOR OVERLOAD ANXIETY " .lol

[leemalone2k3]

Good morning. Glad to help.

[KIRBY]

good morning and thank you Lee.

[leemalone2k3]

Historical volatility needs to be calculated. Here is some info on how to do it.

http://optionstradingbeginner.blogspot.com/2010/10/historical-volatility-part-1-definition.html

If you want to look at HV it is a lower indicator on TOS charts.

[KIRBY]

Hi Lee , you talk about comparing Historical volatility to Implied volatility to show if its overvalued , undervalued and fair . Question where do I find the historical volatility ?
thanks
kirby

[KIRBY]

Thanks .

[leemalone2k3]

I use price volume support and resistance. I also look at mean prices as well as price patterns.

[KIRBY]

Hi Lee, you have mentioned before you keep your trading indicators down to a minimum for a true feel of the movement. Could you please tell me what you use most of the time ?
thanks
kirby

[KIRBY]

I could imagine ! thanks for the Put to call ratio link and will also look in my TOS .
take care
kirby

[leemalone2k3]

Thanks for reading it! Took a long time to type all of that.

[leemalone2k3]

Think or swim has a tool called the sizzle index. I am sure there are other sites out there. Here is one: http://www.market-harmonics.com/free-charts/sentiment/putcall.htm

[KIRBY]

Hi Lee , just re-read every post on this board from the beginning . Amazing wealth of knowledge. thanks for sharing.
kirby

[KIRBY]

Lee where is a good place to check the Put to Call Ratios ?
thanks
kirby

[BottomBounce]

what do i need to know to get started trading options?

[KIRBY]

Thanks Lee.

[leemalone2k3]

Weeklies are definately are overvalued. I think its best to daytrade them

[KIRBY]

Question please? Weeklys start on Thursdays and expire following Friday. do they have artificiality inflated Theta/ time value ? Would it be better generally speaking to wait til Monday or Tuesday to let them settle down ?
thanks
Kirby

[Mac G]

Just starting I think I will buy near the money.....like one step away from at the money lol

[leemalone2k3]

It's riskier to buy OTM. Some buy OTM,because, if it does move the amount they predict the rewards are huge. Most of the time they expire worthless.

[Mac G]

Buying near the money best for beginners? I see some traders buying pretty far out of the money on weekly's but can't understand the strategy.

[CAPTIVA97]

Thanks bro!!!

Will start getting myself up to speed and will definately papertrade for a few months....

Can't wait to contribute to the board!!!

Fast learner, avid reader and researcher!!! Thanks again!!

Printed options millionaires board... as a newb in Options, best to stay quite and learn from the PROS.

[leemalone2k3]

There are some very good traders at the option Millionaires board, including UPB, jimmybob, RetiredMM, and others. The best thing to do is to set up a paper trading practice acct. once you learn the basics and practice for a while.

[CAPTIVA97]

Like your style and agree with everything you said...Too many promoters, scammers, pumpers etc in pennyland, seems like a one day pump job.

Learning to play options and buying several books, but experience from seasoned traders is also good.

Who are the good traders to start learning from? TIA

member marked and board marked..Thanks!!