Board 8 > Stock Topic 25

(+) Yeah! (+)

Well I would actively discourage selling CCs on AMC because he was investing in it for a different reason than his usual fare.

If you expect a particular known catalyst to drive the price of a stock selling a CC is bad form in general because the math of option premiums doesn't account for that. It's the same reason buying calls in those instances can be lucrative.

I suppose if your point is "there must be a time where you wouldn't sell a CC to avoid lost profits" well point made but I myself just said I'm not currently selling CCs on FUBO so I mean there are a few different scenarios where you won't want to. In general I think using them generates more money than it risks though. Especially if you use some judgment in not selling them at key points.

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volatility in options is historically overpriced. So selling options on average will generate more profit than not doing so. But there are obviously a ton of exceptions to every rule

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My point is mainly that it shouldn't be thought of as "free money." Like, there's a reason Moonroof normally closes positions really quickly whether they move up or down. The stop losses allow him to put much higher amounts of money into a position than he would if he were holding for a longer period of time, because his effective amount of money at stake is smaller. If he puts in 25k but is only actually risking 2.5k because he will sell at -10% then he is only really risking as much as someone who invests 2.5k but is prepared to ride it to zero.*

If you take away his ability to stop losses quickly, from a risk management point of view those 25k-100k position sizes he likes are going to be too large. And sure, he can still stop losses by closing the call position as well, and it probably won't be very expensive to do so if the stock has already moved down - but the way I keep seeing these trades talked about, the posts appear to assume that he's going to hold for a long time.

And I agree he'd likely do better by holding for longer, but in that case I think it's quite important that the position sizes get smaller/more diversified as well. Like, 25k on Disney is fine but 100k on something like DNN or EVRI is really pushing the envelope if you are not going to stop your losses. It could be +EV, maybe very +EV, and maybe it'll make you a million quickly, but that would be too much risk for me at least to bear.

*As I've been saying for ages, there is some risk that the stock gaps down straight past your stop loss and you lose much more. But Moonroof doesn't seem to care, and it's relatively rare in any event.

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Option bid asks are going to slaughter moonroof

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I stand by that it is basically free money for him and that it introduces no particular extra risk for his style of investing. Your argument against it that there are certain edge cases where you make less money than you would normally could be used to argue that investing in SPY could have some element of risk. Like yes you can lose money investing in SPY but it's very difficult to do so. For Moonroof it would be similar if he follows the guidelines.

Like pretty much the only way he is unable to stop loss quickly that matters for CCs is if there is a massive AH gap down that he would have caught with a stop loss (which would only happen if he had an order in place beforehand). But I mean the funny thing is if you sell at the money CCs right when you buy it you actually get much higher premiums than you would when playing from behind too. He basically would get a free drop just by being aggressive with selling a CC. Like I'm looking at PTON right now and if he say, bought 900 shares NOW and immediately sold a block of 9 $109 CCs for next week he'd immediately receive $360x9 or about 3% of his initial investment back, which is as it turns out close to the loss he tends to incur before he gets out. It's really hard to imagine that he on average would lose money from moves like that if he just lets the contracts ride out and doesn't sell contracts for a price less than he's willing to sell out of the stock on.

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My platform forces me to use limits when selling covered calls. I always make my limit be the ask.

Also, I sold EVRI twice today. Once for $600, then again for $1300. Say what you will about how I invest, but this one has gotten me over $10k YTD.

Sunroof posted...

I always make my limit be the ask.

HES DEAD JIM

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What should I make it be?

I also think covered calls fits Moonroof's strategy very well. No disagreement there.

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Sunroof posted...

What should I make it be?

I personally do the midpoint between the ask and the spread + .05 or so. But i'm ok with adjusting it if needed.

For you i would probably just do slightly below the midpoint so it hits quickly. I would also recommend trying to find strikes that have a low bid-ask spread to begin with

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Sunroof posted...

What should I make it be?

Try not to let what people are asking for decide what you will do. If there's a bid of $1.25 and an ask of $1.75, if you are trying to buy dont just set it at $1.75 to buy it instantly or if you are selling set it to $1.25 to dump it. Set somewhere that seems reasonable to you. There might be recent sales data telling you it went for $1.55 or something that might help you make a choice (and the "price" you see for a stock on your broker or on the internet might be an average between the bid and ask or the most recent trades)

Choose the price you think is right, and don't always feel the need to chase the price up or down to make the trade happen. Just because the ask is $1.75 doesn't mean you should buy for $1.75. If a deal doesn't fulfill, maybe its best to just let this deal go. Once you decide "i want to buy/sell this stock" it can be easy to fixate on just making it happen at any price, but you should try and recognize that feeling and manage it.

BTW, you've probably picked this up now, but the market buy orders will just straight up go to whatever the bid or ask is, which is why they are so risky. The available bid/ask might not be a good deal. So don't feel like you you should set your limits there either.


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Thanks

CoolCly posted...

You've been using limit prices since we warned you to stop using market buys, right?

What is wrong with market buys

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Nanis23 posted...

What is wrong with market buys

You pay a worse price!

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red sox 777 posted...

You pay a worse price!

But who says that the stock will reach your limit price?
If you wanted to buy GME at 198 and set a limit order when it was 198.7 it wouldn't have happened at all because the lowest it got to was 198.25
So what would you do? put your sale limit at 198.5? but then the market buyer would have done it at 198.7? so at best you saved like...20 cents per share?
And risk the purchase order not happening at all?

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Nanis23 posted...

But who says that the stock will reach your limit price?
If you wanted to buy GME at 198 and set a limit order when it was 198.7 it wouldn't have happened at all because the lowest it got to was 198.25
So what would you do? put your sale limit at 198.5? but then the market buyer would have done it at 198.7? so at best you saved like...20 cents per share?
And risk the purchase order not happening at all?

Yes, you risk the purchase not happening at all. Better for a purchase not to happen than for it to happen at too high a price. If you really want the stock, set the limit for the highest number you are actually willing to pay. Like, if you are actually willing to pay $200 in your example, set your limit order at $200 and it will execute at $198.7.

Basically the only time you lose with a limit order is when the stock is moving at lightning speed and you haven't gotten in your order yet.

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in a high volume stock market orders are fine.

When a market buy will change the price of the stock is when you want to use a limit.

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ADA with that Coinbase listing!

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These covered calls also help me hold.

I have been out of the crypto game. I guess Im missing out...

GME earnings are on Tuesday by the way, for anyone feeling spicy.

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GME stock price has nothing at all to do with its earnings lol

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I would love to see GME stock skyrocket because it has good earnings. That would be the ultimate knee slapper.

I feel like it would be really really hard for GME to have earnings justifying the $200 price, but maybe they'll make a major announcement about the direction/strategy of their business.

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was GameStop ever worth $200 based on actual business stuff
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Growth could sustain a surge though.

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Btw if anyone wants more info on the lower risk strategy of wheeling here's my results with fubo so far.

At most I had 9 contracts sold at a time.

Last Friday I got assigned for the first time at $32 at a time (Honestly I just felt like owning 100 shares at 32 wouldn't be bad, I could have rolled)

I have 6 open outstanding contracts with an average strike price of 33.5. If I let myself get assigned on all 6 contracts and don't roll any my cost basis for 700 shares will 27.37. Currently my cost basis is negative for my 100 shares (I have made more in premium overall than I paid for these shares, they are basically free for me and I will start selling covered calls on them).

Some important things to note:
-I started wheeling when the stock was around ~45. I am profitable on this stock with a bullish strategy despite the stock having dropped to ~31ish.
-I did keep cash on the sidelines and introduced more contracts to my wheel when the stock dropped a lot. (I roughly doubled my number of contracts)
-I generally roll the day before or the day of expiration.
-I almost always roll if i can. Only exception will be if the stock price is within a dollar of the strike price and I want to get shares at that point. It has always been easy to roll for a profit.
-This is a high IV stock that I don't mind owning. You can't do this with every stock. You shouldn't do this with any stock with high IV unless you like the underlying.
-I have a margin account. Selling a CSP takes away from your buying power (normal or in some cases margin for me) but does not count as being on margin. I have never been on margin or gotten charged any interest but I have dipped into using margin buying power.

Edit: I forgot to post the spreadsheet lol. https://docs.google.com/spreadsheets/d/1TjQP4l8VqOUntFdryhO6idvnv2NWFadd9cZ-8DRpsQ4/edit?usp=sharing

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@masterplum

You wrote this, right?

https://m.fanfiction.net/s/13532680/1/Harry-Potter-and-the-Magic-of-Options-Trading

I gave it a revisit now that Im slightly more educated in options trading. So what Ive been doing is selling covered calls. What youre describing here though is selling puts. Correct? If so, the only money youre ever making is the premium, and thats only if the strike price doesnt hit. Correct? If so, that seems to be a pretty small amount of money to gain.

Additionally, in order for me to sell covered calls I have to already own the stock. Is such the case with selling puts?

Sunroof posted...

Additionally, in order for me to sell covered calls I have to already own the stock. Is such the case with selling puts?

You can have covered calls which requires owning the stock and naked calls which does not.

It's the same for puts. You can have cash-covered puts (you are covered by having the cash required to purchase the shares in case you get assigned) and naked puts.

Also note that generally you will get paid more for selling a put then a call for equivalent distance and from the share price

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Covered calls and puts are extremely similar. The basically do the same thing

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The Coinbase IPO/direct listing was pushed back a couple weeks to April. I thought a little bit about this and looked at the Palantir direct listing a few months ago. Unlike a traditional IPO, it did not have that first day surge, and actually closed below where it opened on day one and took a month to really get going on its upward movement. I think that makes sense because the stock is opening directly on the market, so there's no phase change between select bank clients being able to buy and the general public. So, I think it might be a good idea to wait a little bit to buy Coinbase.

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Well with covered calls I can make money through premium and if the stock goes up but doesnt hit the strike price. With puts, how do you make money aside from the premium? I am missing something.

Sunroof posted...

Well with covered calls I can make money through premium and if the stock goes up but doesnt hit the strike price. With puts, how do you make money aside from the premium? I am missing something.

You don't. But the premium can be juicy.

Colegreen_c12 posted...

Edit: I forgot to post the spreadsheet lol. https://docs.google.com/spreadsheets/d/1TjQP4l8VqOUntFdryhO6idvnv2NWFadd9cZ-8DRpsQ4/edit?usp=sharing

This is my actual trades for FUBO. There were cases where I made 10% of the share price in premium in a month. It has less potential upside than a covered call strategy by itself, but it accomplishes two things:
-Safer gains. My full gains aren't reliant on the stock going up just not going down
-Safer if the stock goes down. If the stock price drops I now have a lower cost basis than you would with covered calls and have the option to roll the put down.

They are both very good strategies imo (and are actually two sides of the same coin if you are wheeling) one just has more upside potential and one has more neutral to downside potential

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$


Heres an example. What does this mean if I submitted? My understanding is that I would be getting $2,645 premium automatically. Then, if SQ is over $220 by 3/26 then nothing happens. I dont make or lose anything else. If it is at $220 or lower, I buy 500 shares at $220 price regardless of how low it actually goes.

Seems kinda crazy to me to potentially put up $112k in a stock just to maybe get $2,645?

Yes exactly.

Say it ends at $216 you are actually still ahead. You bought at 220 yes but you got paid 5.3 in premium so your cost basis is $214.7.

You then have two main options:
-If you immediately sold You walk away with 1.30 a share profit
-You now sell a covered call on those shares you got assigned and keep doing that until that gets assigned in which case you switch back to selling puts. Repeat (This is wheeling)

You should do the same math where you buy 500 shares at the current price and sell a covered call and see where you end up if the stock finishes at 216. You will be in a better position with the put strategy almost guaranteed.

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Sunroof posted...

Seems kinda crazy to me to potentially put up $112k in a stock just to maybe get $2,645?

Yes, it's covered with your cash. If you want to hedge the position, you can buy another put. Or you can short the stock so that you make money on the short stock as it goes down (this one introduces unlimited liability if the stock moves up).

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Colegreen_c12 posted...

Yes exactly.

Say it ends at $216 you are actually still ahead. You bought at 220 yes but you got paid 5.3 in premium so your cost basis is $214.7.

You then have two main options:
-If you immediately sold You walk away with 1.30 a share profit

-
Can you lay out this math for me?

Sunroof posted...

Seems kinda crazy to me to potentially put up $112k in a stock just to maybe get $2,645?

This seems way less crazy than your normal plays tbh. Thats a what, 2.3% return in a week. You could easily double up in a year. You are used to way too high of risk tbh.

And you can't think of it as putting up 112k in a stock. You have to think about doing it on a stock you wouldn't mind owning so if you do get assigned it is at a major discount.

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That is true. And this is usually better than selling covered calls?

Whats usually better, putting an expiry date one month out -or- putting an expiry date one week out four times?

Additionally, lets see I did a sell put and like a day away from the expiry date I realize the stock is way lower than my strike price. Can I cheat code again and buy back the option to eliminate that loss?

Sunroof posted...

Can you lay out this math for me?

Ok to keep it simple i'ma just nice numbers.

Stock A is trading at $100.
I'm starting with 10,000

Selling Put Strategy
-I sell a $95 put two weeks out for $5 in premium.
-I get paid 500 dollars. I now have 10,500 dollars. (9,500 is being used to secure the put)

Scenario A: Stock goes nowhere
-Put expires worthless.
-I now have 10,500 dollars
-I can now sell another put

Scenario B: Stock goes up a bit to $103
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $98 strike this time)

Scenario C: Stock goes way up to $110
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $105 strike this time)

Scenario D: Stock goes down a bit to $97
-Put expires worthless
-I now have 10,500 dollars
-I can now sell another put (perhaps at the $92 strike this time)

Scenario E: Stock goes way down to $90
-Put expires and you get assigned
-You now have 100 shares worth $9,000 and $1,000
-You technically broke even here. You just lost time
-Alternate: You can roll your position here. I will go over this another time.

Selling Call Strategy
-I buy 100 shares for 10,000 dollars
-I sell a $105 call two weeks out for $3 in premium.
-I get paid 300 dollars. I now have 300 dollars and 100 shares worth $10,000

Scenario A: Stock goes nowhere
-call expires worthless.
-I now have 300 dollars and 100 shares worth $10,000
-I can now sell another call

Scenario B: Stock goes up a bit to $103
-call expires worthless
-I now have 300 dollars and 100 shares worth $10,300 (10,600 net worth)
-I can now sell another call (perhaps at the $103 strike this time)

Scenario C: Stock goes way up to $110
-call expires and you get assigned, forcing you to sell your shares for 10,500
-I now have 10,800 dollars
-Alternate: You can roll your position here. I will go over this another time.

Scenario D: Stock goes down a bit to $97
-call expires worthless
-I now have 300 dollars and 100 shares worth $9,700 (10,000 net worth)
-I can now sell another call(perhaps at the $103 strike this time)

Scenario E: Stock goes way down to $90
-call expires worthless
-You now have 100 shares worth $9,000 and $300
-You can now sell another call. (You won't get as much if you do a strike over 100 so you might want to just wait as well until it recovers)

Comparison
I will compare how the put, call, and owning raw shares evaluate in each scenario
Scenario A: put(10,500) > call(10,300) > owning shares(10,000)
Scenario B: call(10,600) > put(10,500) > owning shares(10,000)
Scenario C: owning shares(11,000) > call(10,800) > put(10,500)
Scenario D: put(10,500) > call(10,000) > owning shares(9,700)
Scenario E: put(10,000)>call(9,300)>owning shares(9,000)

As you can see the put strategy has by far the lowest downside but also caps the profit at $500.

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Colegreen, what are the rules for holding cash in the account to secure the put? In Moonroof's case, would he need to actually keep 112k in cash in the account or could he invest it in stocks? Or could he secure it with some percentage of the potential liability, like how margin works for shorting?

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Colegreen_c12 posted...

Ok to keep it simple i'ma just nice numbers.

Stock A is trading at $100.
I'm starting with 10,000

Selling Put Strategy
-I sell a $95 put two weeks out for $5 in premium.
-I get paid 500 dollars. I now have 10,500 dollars. (9,500 is being used to secure the put)

Scenario E: Stock goes way down to $90
-Put expires and you get assigned
-You now have 100 shares worth $9,000 and $1,000
-You technically broke even here. You just lost time
-Alternate: You can roll your position here. I will go over this another time.

So you own the stock at $90 even though your put was at $95? And why do you have $1,000 instead of $500?

Btw Cole that post was ingenious. Thank you.

Sunroof posted...

Whats usually better, putting an expiry date one month out -or- putting an expiry date one week out four times?

There is no sure-fire way to this. I believe weeklies has the most profit potential but also the most likely to get assigned. 45 days is the sweet spot i've heard but i generally go for 2-4 weeks personally.

Sunroof posted...

Additionally, lets see I did a sell put and like a day away from the expiry date I realize the stock is way lower than my strike price. Can I cheat code again and buy back the option to eliminate that loss?

Yes this is called rolling. Rolling down with puts is amazing and reduces your risk so much more than puts already does.

You aren't cheat coding though, you are just trading away time. Here is a continuation of the put scenario above i mentioned it:

Scenario E: Stock goes way down to $90
-Put expires and you get assigned
-You now have 100 shares worth $9,000 and $1,000
-You technically broke even here. You just lost time
-Alternate: You can roll your position here. I will go over this another time.

-You decide to instead roll your position
-You buy back your put which is worth $5.5 per share for $550. You now have $9,950
-You sell another put two weeks out at the $92 strike for $7 per share for $700. You now have $10,650

As you can see you bought yourself two more weeks and earned more premium doing it. Additionally if in two weeks the stock is still at $90 you could then roll it down again to $89 or something and earn more premium doing it. The only risk is if the stock drops way faster than you can roll it (which is a risk for any of these methods tbh) or if volitality dries up. But if you are ok owning the shares (which you should be) these aren't really a problem

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Sunroof posted...

So you own the stock at $90 even though your put was at $95?

You pay $95 for the stock when you get assigned. Now you own the stock, and it is worth $90 per the current market price.

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red sox 777 posted...

Colegreen, what are the rules for holding cash in the account to secure the put? In Moonroof's case, would he need to actually keep 112k in cash in the account or could he invest it in stocks? Or could he secure it with some percentage of the potential liability, like how margin works for shorting?

I honestly don't know for sure. I think it depends on your broker and I know it works differently for margin and non-margin accounts. I believe on a non-margin account a cash-secured put requires having the full cash amount however.

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Sunroof posted...

And why do you have $1,000 instead of $500?

started with 10,000.
Gained 500 from selling the put = 10,000 + 500 = 10,500
Forced to buy 100 shares at 95 per share for 9,500. 10,500 - 9,500 = 1,000

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Colegreen_c12 posted...

Scenario E: Stock goes way down to $90
-Put expires and you get assigned
-You now have 100 shares worth $9,000 and $1,000
-You technically broke even here. You just lost time
-Alternate: You can roll your position here. I will go over this another time.

-You sell another put two weeks out at the $92 strike for $7 per share for $700. You now have $10,650

Sell a put at $92 is higher than the $90. You can sell puts higher?

Sunroof posted...

Sell a put at $92 is higher than the $90. You can sell puts higher?

Sure, It's called an ITM put cause it is currently in the money (has intrinsic value. It's actually worth something if you execute immediately). Generally you only would do it when rolling a position if the different between your current put and the current share price is large.

Like you could probably instead sell a put for $89 5 weeks out instead and get a similar amount of money, it's really just how far out do you want to go and what your current feel for the stock is. Either move is probably fine but if the stock recovers to $95 next week that $92 put is no longer ITM and your money is tied up for a shorter amount of time

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