lloydbee
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I'm with you 100%, as I always say, it makes no sense to trade anything else....
Options are :clap: just too good.
I'm with you 100%, as I always say, it makes no sense to trade anything else....
Options are :clap: just too good.
Yikes. 200 contracts? I thought 10 was a lot. I'm doing 2 wide spreads. At most 2 contracts/trade. I wait until the RSI(5) is over 80 or under 20 to put on a Bear Call or Bull Put respectively. Otherwise, I may do an Iron Condor. Also, I only sell the strike that is above 80% probability of being OTM. Is that prudent?
lloydbee
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keeping it simple and playing probability like you are doing is a great way of trading verticals for income.
CostaKapo
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I've had three emails in the past month on people being assigned on positions and receiving margin calls, and generally not knowing what happened. I advise everyone to completely research and become familiar with the exercise/assignment aspect of option trading. If you don't you can find your entire account blown out over a weekend.
Assignments occur in two basic varieties. First, on expiration Friday (or Thursday or Wednsday depending on the instrument your trading, but most commonly on Friday). If you have a position that is .01 in the money, or more, you WILL be assigned. For instance, if you have a 100 Call on stock XYZ that expires today, and XYZ closes (AFTER HOURS) at 100.01, you will find that you own, sometime Saturday, 100 shares of XYZ that you paid $100/share for.
Now this option might have only cost you $100 or so. But all of a sudden, due to the inherent multiplier in options, you are now out of pocket $10,000.00. What if you're account only had $5,000.00 in it? Well, you are going to get both (a) a Regulation T Notice and (B) margin call from your broker. First thing Monday morning, your broker will automatically liquidate the position. What if there is adverse news over the weekend and the opening price is only $80? Well you just lost $2,000.0 -- in a $5,000.00 account. In other words, that $100 option just cost you 40% of your entire account. This happens.
What if you had "hedged" the position though, and had a vertical call spread? For instance, you might have bought the $100/$105 spread on XYZ. Well if XYZ closes anywhere above $105 you are ok because BOTH positions will be auto-exercised. This SOMETIMES results in a margin call as well -- but don't worry. Option clear throughout the day on Saturday and your account will frequenltly show one position and the other not exercised yet. By Sunday morning it will be fixed. By way of example, I had a very large position (for me) (20 contracts) in the LNKD 92.5/95 vertical call before earnings. Well earnings did what they were supposed to and LNKD jumped to 104. Well Saturday morning, all of a sudden, I was SHORT 2000 shares of LNKD and had received roughly $190K in cash into my account. This sends off all kinds of margin alerts. I got an email, a call, and another call. Ignore them, they're idiots. The 92.5 side simply hadn't cleared yet. Three hours later the other option cleared, buying the shorts back at 92.5. Then Sunday morning, your account statment will reflect that all trades happened at the same time.
HOWEVER, what if, on that 100/105 spread, XYZ closes at 103 on Friday? Well, guess what, you'll be assigned on the 100 position, the 105 will expire worthless, and now your back in margin call.
MORAL OF THE STORY:
DONT EVER LET YOURSELF BE ASSIGNED ON A SPREAD THATS NOT FAR IN THE MONEY ON BOTH LEGS.
What if, on Friday, the price of XYZ was at $106 at close? You better have closed the spread, because of after hours trading. The price of XYZ can move after hours -- but you can't get out of the options. So if the market closes at 106, and you say good, both legs will clear and I won't pay commissions (or pay less commissions) and get a huge tax break, you could be wrong, as in afterhours the market might go back to $104.98. Then you're screwed, only the 100 option gets exercised and you go into margin call. I'm convinced when your near a strike the market makers manipulate the after hours markets to have this happen.
Of course if you have enough cash in your account, you won't get margin called -- you're risk profile will just be largely out of whack.
And this isn't to say you can't have a big benefit from this. My single most profitable trade EVER occured on a spread that was $.50 above the line, I didn't close it, and then in after hours the price dropped. So I got assigned long on the lower strike. Well, that weekend there was big news involving the company and the price jumped 15% the next morning. In that case, here's what happens -- I own the 100 (long) /105 (short) vertical. After hours, the price is $104.92. Well that spread was worth $4.85 at close on 20 contracts, or $9,700. Well, Satruday I'm now the proud owner of 2,000 shares bought at $100.00 each, for a net cost of $200,000 -- oops. Margin call, broker call, broker email, ect. Well they inform me the trade will immediately close at open on Monday. Well the price jumped, and the position was closed, at $240,000.00. My original investment of $8,500.00, that I didn't want to close at $9,700.00, netted me $40,000.00, or roughly a 470% return. BUT, what if the price had gone down 20%? Well I would be owing my broker money and have completely blown out my account.
If you have ANY questions on this, please let me know.
Now SITUATION TWO -- and you will, sooner or later, enounter this. Let's say we have that same 100(long)/105 (short) spread on XYZ. Only we own the September spread and today (Friday) XYZ closes at 103. No bigger. UNLESS someone exercises their 100 spread. American style options can be exercised at anytime. Why would this happen with time value? Who knows, most likely someone needed to unwind a position, hedge something, take profits, any number of things realy.
Well if you had a 10 contract position, on Saturday your account is now down $100,000.00 in cash and you won 1,000 shares of XYZ. You will again go into margin call. However, whie this is a headache and you will have to deal with your broker, you don't need to panic because the position is still hedged. You can certainly still lose money -- but only up to the 105 line.
What happens? Well your broker will force you to exit the position Monday morning at the open. If you BEG and wheedle, the broker might let you close the position yourself, so you can close at the mid point instead of just a market order. They should let you do this because the position is still hedged, but you are technically in a Reg T violation, so they won't let you hold it for long. Monday you'll have to sell your shares and buy back the short calls. This should be, at worst, a break even situation because of the time value left in the short calls. However, markets fluctutae and you might have to sell your stock at something like 104 and by the time you exit the short calls its up to 105 (or you get a bad fill price) so you give back some.
When this happens, take your lumps and move on. I have this happen about once a quarter and my worse loss was 4%. There's nothing you can do to protect against this. You are hedged, and you won't blow your account out, but it does suck.
Assignments occur in two basic varieties. First, on expiration Friday (or Thursday or Wednsday depending on the instrument your trading, but most commonly on Friday). If you have a position that is .01 in the money, or more, you WILL be assigned. For instance, if you have a 100 Call on stock XYZ that expires today, and XYZ closes (AFTER HOURS) at 100.01, you will find that you own, sometime Saturday, 100 shares of XYZ that you paid $100/share for.
Now this option might have only cost you $100 or so. But all of a sudden, due to the inherent multiplier in options, you are now out of pocket $10,000.00. What if you're account only had $5,000.00 in it? Well, you are going to get both (a) a Regulation T Notice and (B) margin call from your broker. First thing Monday morning, your broker will automatically liquidate the position. What if there is adverse news over the weekend and the opening price is only $80? Well you just lost $2,000.0 -- in a $5,000.00 account. In other words, that $100 option just cost you 40% of your entire account. This happens.
What if you had "hedged" the position though, and had a vertical call spread? For instance, you might have bought the $100/$105 spread on XYZ. Well if XYZ closes anywhere above $105 you are ok because BOTH positions will be auto-exercised. This SOMETIMES results in a margin call as well -- but don't worry. Option clear throughout the day on Saturday and your account will frequenltly show one position and the other not exercised yet. By Sunday morning it will be fixed. By way of example, I had a very large position (for me) (20 contracts) in the LNKD 92.5/95 vertical call before earnings. Well earnings did what they were supposed to and LNKD jumped to 104. Well Saturday morning, all of a sudden, I was SHORT 2000 shares of LNKD and had received roughly $190K in cash into my account. This sends off all kinds of margin alerts. I got an email, a call, and another call. Ignore them, they're idiots. The 92.5 side simply hadn't cleared yet. Three hours later the other option cleared, buying the shorts back at 92.5. Then Sunday morning, your account statment will reflect that all trades happened at the same time.
HOWEVER, what if, on that 100/105 spread, XYZ closes at 103 on Friday? Well, guess what, you'll be assigned on the 100 position, the 105 will expire worthless, and now your back in margin call.
MORAL OF THE STORY:
DONT EVER LET YOURSELF BE ASSIGNED ON A SPREAD THATS NOT FAR IN THE MONEY ON BOTH LEGS.
What if, on Friday, the price of XYZ was at $106 at close? You better have closed the spread, because of after hours trading. The price of XYZ can move after hours -- but you can't get out of the options. So if the market closes at 106, and you say good, both legs will clear and I won't pay commissions (or pay less commissions) and get a huge tax break, you could be wrong, as in afterhours the market might go back to $104.98. Then you're screwed, only the 100 option gets exercised and you go into margin call. I'm convinced when your near a strike the market makers manipulate the after hours markets to have this happen.
Of course if you have enough cash in your account, you won't get margin called -- you're risk profile will just be largely out of whack.
And this isn't to say you can't have a big benefit from this. My single most profitable trade EVER occured on a spread that was $.50 above the line, I didn't close it, and then in after hours the price dropped. So I got assigned long on the lower strike. Well, that weekend there was big news involving the company and the price jumped 15% the next morning. In that case, here's what happens -- I own the 100 (long) /105 (short) vertical. After hours, the price is $104.92. Well that spread was worth $4.85 at close on 20 contracts, or $9,700. Well, Satruday I'm now the proud owner of 2,000 shares bought at $100.00 each, for a net cost of $200,000 -- oops. Margin call, broker call, broker email, ect. Well they inform me the trade will immediately close at open on Monday. Well the price jumped, and the position was closed, at $240,000.00. My original investment of $8,500.00, that I didn't want to close at $9,700.00, netted me $40,000.00, or roughly a 470% return. BUT, what if the price had gone down 20%? Well I would be owing my broker money and have completely blown out my account.
If you have ANY questions on this, please let me know.
Now SITUATION TWO -- and you will, sooner or later, enounter this. Let's say we have that same 100(long)/105 (short) spread on XYZ. Only we own the September spread and today (Friday) XYZ closes at 103. No bigger. UNLESS someone exercises their 100 spread. American style options can be exercised at anytime. Why would this happen with time value? Who knows, most likely someone needed to unwind a position, hedge something, take profits, any number of things realy.
Well if you had a 10 contract position, on Saturday your account is now down $100,000.00 in cash and you won 1,000 shares of XYZ. You will again go into margin call. However, whie this is a headache and you will have to deal with your broker, you don't need to panic because the position is still hedged. You can certainly still lose money -- but only up to the 105 line.
What happens? Well your broker will force you to exit the position Monday morning at the open. If you BEG and wheedle, the broker might let you close the position yourself, so you can close at the mid point instead of just a market order. They should let you do this because the position is still hedged, but you are technically in a Reg T violation, so they won't let you hold it for long. Monday you'll have to sell your shares and buy back the short calls. This should be, at worst, a break even situation because of the time value left in the short calls. However, markets fluctutae and you might have to sell your stock at something like 104 and by the time you exit the short calls its up to 105 (or you get a bad fill price) so you give back some.
When this happens, take your lumps and move on. I have this happen about once a quarter and my worse loss was 4%. There's nothing you can do to protect against this. You are hedged, and you won't blow your account out, but it does suck.
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This is a perfect explanation in plain English. Being a new trader, I haven't become well versed in "trade language".
Thanx.
CostaKapo
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Bull puts when the premium is available, is a great way to get your feet wet with selling puts.
First post, excellent info here. Hopefully I can add something of value.
One thing I don't think hasn't been mentioned is opportunity to manage the trade prior to expiration.
Being that it was a weekly option there is less opportunity for that but anyway.... I'm guessing you collected about .30 if it was 1.00 wide, give or take, if you got in when it had an 70-80% probability. Being that your call spread was profitable the play for me would be to close it the puts as you could have bought it back that morning around .30 and your call spread is the one that made you the money....but if you had a bullish sentiment at this point it could you have rolled to AUG14 expiration for about even giving you more duration to make the remaining .30.
Personally I only play the weeklies around binary events (earnings calls, etc) with high Implied Volatility where I'm playing for a contraction of volatility. The problem with waiting until the last day to manage the trade is that in the last week the Gamma risk (rate of delta change) goes through the roof as the deltas (option price change in relation to a 1$ move in the underlying) get closer to a 1 for 1 relationship. This also means there is very little theta (time value) to collect on the short strikes. Leaving your position with more risk potential than return potential. Means if you collected .30 on each leg of a 1$ spread at open you were risking 1.40 to make .60 with a 70-80% probability of profit. Toward the end of the trade you were risking .70 to make .30 with near 1-1 delta risk and near 50% probability of profit. So had it continued to move against you in the end you could have been down .10 overall....assuming your call spread made .30. So closing the trade for 50% max profit locked in would have been better than taking a near 50/50 shot at losing .10 overall.
So what I mean by managing prior to expiration for me is to take profits anytime I can close the whole position for 30-50% of max profit (whichever makes sense for your position) as the Gamma risk goes up and Theta value is down especially in the last 7-10 days prior to expiration. Obviously that makes more sense when trading 30-45 days to expiration but applies much the same in weeklies just much faster.
Just noticed that you may be trading wider strikes....that's fine the percentages are the same. And your probably collecting 25-30% the width of the strikes so you can just plug in number where they apply.
One thing I don't think hasn't been mentioned is opportunity to manage the trade prior to expiration.
Being that it was a weekly option there is less opportunity for that but anyway.... I'm guessing you collected about .30 if it was 1.00 wide, give or take, if you got in when it had an 70-80% probability. Being that your call spread was profitable the play for me would be to close it the puts as you could have bought it back that morning around .30 and your call spread is the one that made you the money....but if you had a bullish sentiment at this point it could you have rolled to AUG14 expiration for about even giving you more duration to make the remaining .30.
Personally I only play the weeklies around binary events (earnings calls, etc) with high Implied Volatility where I'm playing for a contraction of volatility. The problem with waiting until the last day to manage the trade is that in the last week the Gamma risk (rate of delta change) goes through the roof as the deltas (option price change in relation to a 1$ move in the underlying) get closer to a 1 for 1 relationship. This also means there is very little theta (time value) to collect on the short strikes. Leaving your position with more risk potential than return potential. Means if you collected .30 on each leg of a 1$ spread at open you were risking 1.40 to make .60 with a 70-80% probability of profit. Toward the end of the trade you were risking .70 to make .30 with near 1-1 delta risk and near 50% probability of profit. So had it continued to move against you in the end you could have been down .10 overall....assuming your call spread made .30. So closing the trade for 50% max profit locked in would have been better than taking a near 50/50 shot at losing .10 overall.
So what I mean by managing prior to expiration for me is to take profits anytime I can close the whole position for 30-50% of max profit (whichever makes sense for your position) as the Gamma risk goes up and Theta value is down especially in the last 7-10 days prior to expiration. Obviously that makes more sense when trading 30-45 days to expiration but applies much the same in weeklies just much faster.
Just noticed that you may be trading wider strikes....that's fine the percentages are the same. And your probably collecting 25-30% the width of the strikes so you can just plug in number where they apply.
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Thanx. I've got a ton to learn still. So far, two months, I've made $75 on $2200. Slow and steady......
CostaKapo
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Are you risking 2200 to make 75? Or your account is 2200? Is this a risk you deem acceptable? How do you determine your positions?
What securities are you writing your spreads on?
My account is 2200. I'm trading SPY, APPL, IWM, QQQ, DIA, EEM. I use the RSI 2,5,14 to find something overbought or oversold then, set up a bull put or bear call spread accordingly. I choose my strikes based on Percent OTM. If I can get 15-20% with a 80% or better percent OTM then, I'll probably sell the spread.
I'm still trying to figure out what parts of the trade I should keep track of. I'm not sure how to determine when to close out the trade either. I would like to close it after I get 75% but, what's the calculation? If the delta of my short strikes gets to 30-35, I'm getting out of the trade.
Does this make sense? I just sold an OCT14 SPY Iron Condor. 207/205, 189/187 for .35. I sold 3 contracts.
lloydbee
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a nice safe trade, it should be uneventful throughout it's life.
I hope you have an adjustment plan if it's in doubt or tested.
Thanx for you input. Adjustment is roll up and out if the delta on the short strike gets to 30-35.
Is that outcome the same if your delta gets hit with 4 weeks remaining or if it was hit in the last week of expiration?
Good point. The last thing I want is to be assigned with such a small account. I'd probably bail at 35.
Any thoughts?
lloydbee
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Getting assigned is the least or last thing to worry about with Verticals and only requires a simple close of the short to cancel that from happening.
My point was more in question about the time factor with someone that has the mentality of rolling their way out of incoming trouble as there is a big difference between a 30 day remainder and a 5 day position. It is something worth thinking about, something worth trying perhaps in a virtual account.
Rolling is something I personally pretty much would never do, in fact with the many years of trading verticals and many 10's of thousands of contracts I can say I have never rolled one yet. But then I have never been a mainstream trader, I'm the 'outside the box' thinker/trader.
So, you buy to close the short position and let the long one expire?
Sounds like your doing great.
Previously I outlined my opinion about managing winners. With losers I see it much differently.
They way I look at it....with vertical spreads (whether they be iron condors or otherwise) I generally let losers run as my risk was defined at trade entry. If I keep the size small I don't lose any sleep on it. However as it approaches the 5-10 days before expiration I keep an eye on it. Reason...there is very little time value (theta) left to collect on the short strikes and the Gamma risk is usually getting dangerous.
When you put on the trade consider that the risk is already defined with a vertical spread....and the probability of it being tested is fairly high. So if you go managing a loser every time the delta approaches 30-35 and you still have 15-40 days until expiration your going to be leaping all about. And if you have to pay to do it you are just adding to your risk.
However if you wait until the week of or just before expiration There may be an opportunity to roll to the next month for more duration as long as you can do it for near even. I would never roll a vertical that cost me more than a couple of cents to roll. But I'm happy to do it for a credit or for free.
I prefer duration over direction. With defined risk trades like verticals my risk is managed at order entry, and by keeping it small.
I never let winning verticals expire or verticals that are trading near the short strike. As I am usually managing winners at 30-50%+ max profit. And if it's trading in between the strikes or just outside the short strike of a vertical I'll definitely be out at least by Fri expiration before close as I don't want to pay the exercise fees for them to settle the trade as my positions are generally pretty small and it's much cheaper just to close for a loss if I can't roll for even.
I don't consider managing deltas midway through a defined risk trade with plenty of time until expiration an option. Simply because I managed deltas at order entry and with verticals the risk is already defined. And the price could just as easily turn around on you.
Good advice. Thanx.
