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The fancy equity derivatives vol arb thread... a.k.a. Options trading extravaganza


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I'll kick out some examples of what positions I opened recently or today, and why, and it helps with the notation as well.  And it's all for posterity so you can rib me when it goes bad.  I'll use units of single contracts (representing 100 shares).  + means bought aka Long.   - means sold/write aka Short.

  • +1 CRM May 21 230C for 15.35db.
    • I bought the call contract because the volatility was very low compared to its historical average.  and stock price had been flat for a while.  im bullish on the company so expect the stock to go up AND the volatility to increase, both of which will increase the intrinsic value and extrinsic value, and thus the contract value.  Spent $1535 per contract (15.35 * 100 shares), currently worth $2142 (21.42*100).
  • -1 GME Feb 5 35P for 1.92cr.
    • Sold a $35 strike put contract expiring this week. If GME drops to, say, $20, someone can force me to purchase 100 share at $35.  but thats very unlikely.  its more likely GME stays above that price, and the contract expires, and I keep all of the $192 premium.  typically contracts that expire this soon should have minimum extrinsic value (because of little Time) and be near worthless, but because the stock is so goddamn volatile, the contract is worth $192.
  • -1 FUBO Mar 19 30P for 3.25cr.
    • Sold a put on this with a strike that seems to be the price floor of the stock. it expires in 45 days, which is the typical duration of options i *sell*.  over time, as long as FUBO stock doesn't drop towards 30, the value of the contract will erode, and i can buy it back at 1.50 or something and eliminate my obligation.  so $325 collected in premium to open the short position, and targeting eventually to pay $150 to close the position, netting $175

Just a few examples.

This year I've closed 100+ positions - so about 5 per day.  Closed 500+ starting last summer.  600 trades fully roundtripped, with a win/loss ration of 90%.  This is my pace and how I like to do it.  People deploying this strategy (net sellers of options) are in this ballpark:  a few new positions per day,  typically close each position within 5-15 days, with a 75-90% win rate. 

Just to note on the W/L %, the beauty of options is you can very literally just pick your batting average.  If you sell options with strike price that is sooo far away from current stock price, it'll likely expire worthless, and you can be 100%.  you'll just collect very little premium for doing so.

 

This is just my style and there are a million others.  I'm sure other people here will add their opinions and experiences.  Its nighty night in my timezone, hoping to see this thing bloom in the morning.

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4 minutes ago, Incredulity said:

Anything referencing AAPL isn’t stonk.

Here endeth the lesson 

AAPL reporting for duty:

long  June 18 130C, 120C

short Feb 19 130P

done 19 trades on it, only 1 went bad!

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+2 DIS 21 Mar 2021 $2.94.  Picked these up when DIS got down to $160 during last week's carnage.  In a perfect world I dump these for a >100% return early Friday morning when the stock pops post-earnings because everyone cares about Disney+ subscriber numbers and hears the Charlie Brown teacher voice during the rest of the earnings call. 

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46 minutes ago, 52-80 said:

I'll kick out some examples of what positions I opened recently or today, and why, and it helps with the notation as well.  And it's all for posterity so you can rib me when it goes bad.  I'll use units of single contracts (representing 100 shares).  + means bought aka Long.   - means sold/write aka Short.

  • +1 CRM May 21 230C for 15.35db.
    • I bought the call contract because the volatility was very low compared to its historical average.  and stock price had been flat for a while.  im bullish on the company so expect the stock to go up AND the volatility to increase, both of which will increase the intrinsic value and extrinsic value, and thus the contract value.  Spent $1535 per contract (15.35 * 100 shares), currently worth $2142 (21.42*100).
  • -1 GME Feb 5 35P for 1.92cr.
    • Sold a $35 strike put contract expiring this week. If GME drops to, say, $20, someone can force me to purchase 100 share at $35.  but thats very unlikely.  its more likely GME stays above that price, and the contract expires, and I keep all of the $192 premium.  typically contracts that expire this soon should have minimum extrinsic value (because of little Time) and be near worthless, but because the stock is so goddamn volatile, the contract is worth $192.
  • -1 FUBO Mar 19 30P for 3.25cr.
    • Sold a put on this with a strike that seems to be the price floor of the stock. it expires in 45 days, which is the typical duration of options i *sell*.  over time, as long as FUBO stock doesn't drop towards 30, the value of the contract will erode, and i can buy it back at 1.50 or something and eliminate my obligation.  so $325 collected in premium to open the short position, and targeting eventually to pay $150 to close the position, netting $175

Just a few examples.

This year I've closed 100+ positions - so about 5 per day.  Closed 500+ starting last summer.  600 trades fully roundtripped, with a win/loss ration of 90%.  This is my pace and how I like to do it.  People deploying this strategy (net sellers of options) are in this ballpark:  a few new positions per day,  typically close each position within 5-15 days, with a 75-90% win rate. 

Just to note on the W/L %, the beauty of options is you can very literally just pick your batting average.  If you sell options with strike price that is sooo far away from current stock price, it'll likely expire worthless, and you can be 100%.  you'll just collect very little premium for doing so.

 

This is just my style and there are a million others.  I'm sure other people here will add their opinions and experiences.  Its nighty night in my timezone, hoping to see this thing bloom in the morning.

I have been doing more and more of this. My worry is with the current volatility in the market it’s “too easy” and I am getting fooled into thinking I am actually good at it. 

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My favorite for selling puts has been RKT and BIGC. I wouldn't mind holding those stocks if assigned and they have juicy premiums.

Selling March puts at current price get you more than 10%.

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I'm in the money on some $GME puts and have a big bet being a $64 $GME put for 2/5. I'll probably let that one go at a "minor" profit, as it's 326% up right now and don't want to risk the smooth brains pumping it again.

Also have a AAPL $141 call for 2/12 I think will miss. AAPL has been very bewildering to me the last few weeks.

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+2 DIS 21 Mar 2021 $2.94.  Picked these up when DIS got down to $160 during last week's carnage.  In a perfect world I dump these for a >100% return early Friday morning when the stock pops post-earnings because everyone cares about Disney+ subscriber numbers and hears the Charlie Brown teacher voice during the rest of the earnings call. 
What is the strike?


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6 hours ago, hornbri said:

I have been doing more and more of this. My worry is with the current volatility in the market it’s “too easy” and I am getting fooled into thinking I am actually good at it. 

Things that may sour this party:

FINRA/brokers require higher margin for selling options, reducing return on capital, as result of GME fiasco and regulators wanting to discourage options market.  probably unlikely.

Market actually going flat and we start selling more calls, which is a bit riskier.  I previously constructed my portfolio to be neutral (beta-weighted delta 0), and profiting purely from time decay, but going bullish has been way more fun.

Gotta keep getting while the getting's good.

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What's the easiest, most actionable way to get into options?

If you planned to buy 100 shares of a stock anyway, consider initiating a position by selling a put option.

Example:  FUTU is trading at ~115.  You wanted to get it, because it's a fucking monster, but at the same time it's been so hot maybe it might cool down a bit?  You're not sure if you want to commit buying at what might be the top.  Instead of paying $11,500 to buy 100 shares, you can sell 1 put contract Feb 19th expiration at 110 strike price

-1 FUTU Feb 19 110P

  • You receive $970 premium for selling this contract, and have an open short put position.
    • If stonk goes up fast (say $120 next Wed) the value of that contract becomes cheaper more quickly, and you buy back the option for $400 to close your position.  Obligation over. done.
    • If stonk stays flat, contract expires and all that premium is pure profit.
    • If stonk dips to $108 at expiration, broker will put 100 shares in your account at $11500 (115*100), but you netted $970 so total cost to you is (11500-970)=$10,530, representing a slight discount.

More deets:

  • If you use a cash only brokerage account, it will reduce your buying power by $11500 (collateral required in case contract holder puts the shares in your account)
  • If you use a margin account (most of you signed up for this), it reduces buying power by only $4500! 
    • capital efficiency!  and if you dip into margin for this, no interested is charged, because you havent really incurred the cost.  (unlike buying stock borrowing from margin)
  • This position is Delta = +25; Theta = +30         [these values change over time but for simplicity lets assume right now its linear]
    • Theta = time decay.  If stock stays flat, every day your open short position becomes more profitable by $30. 
    • Delta = change in premium vs change in stock.  Every dollar stock goes up, your position becomes more profitable by $25.
    • Put it together now, if FUTU is 119$ by Friday, your position should be (4*25)+(2+30)=+$160 profitable. 

 

There's a lot more moving parts to the above but I kept it to just the skeletons. 

Probably gonna buy a call credit spread on FUTU however just to mix it up.  Aug 20 120/130C pair at $245 per contract for Delta +3.20 Theta +0.5

 

 

 

 

 

edit:  Here's where you look at actual options prices.

Best to use your broker obviously.  But here's a quick glance using Yahoo Finance

https://finance.yahoo.com/quote/FUTU/options?p=FUTU

Set the expiration date on top left.  Decide if youre looking at Puts or Calls.  Scroll down to strike price.  See last price.

Dont be surprised during trading to see the % Change in astronomical numbers...cuz thats the game

Edited by 52-80
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15 minutes ago, Fudge Nuggets said:

And when volatility raises its ugly head again you lose all your money.

Sign me the fuck up.

we thrive on volatilities.  thats when it turns chickens into crispy golden nuggets.

feeling cute, might sell a friday GME 75P for 1.3K later

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1 hour ago, Fudge Nuggets said:

And when volatility raises its ugly head again you lose all your money.

Sign me the fuck up.

The volatility is the fun part. If you can emotionally handle the swings that is...

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So I’m very new to options. Regarding theta, I have a 2/12 GME $80 put that is doing OK currently, am I better off selling if it hangs around here or waiting until next week when I think it really tanks but also has more decay? Sure there’s a lot more to take in to account 

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closed 3 trades already today, prices per contract:

FTCH Mar 19 45P, sold yesterday for $131, bought back at $88

SPCE Mar 5 30P, sold monday for $144, bought back at $110

CRSR Mar 19 35P, sold monday for $660, bought back at $470

 

all these stonks went up this week, but you can calculate the return on capital % using the contract vs buying the stock. 

 

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2 minutes ago, Hank_Hill said:

So I’m very new to options. Regarding theta, I have a 2/12 GME $80 put that is doing OK currently, am I better off selling if it hangs around here or waiting until next week when I think it really tanks but also has more decay? Sure there’s a lot more to take in to account 

you are long the put? i.e you bought it?

depends when you think stock will tank and by how much (i think it might consolidate around here at 80-100, given residual retail support)

the bottom graph is 1 measure of volatility.  thats the component that goes into the extrinsic value of the option.  IF you bought the 80P on Jan 25, 27, when it was really high, and later it shrinks as the mania dies down, the value of the option will plummet.  even if the stock price goes in your direction. 

the kids refer to this as "IV crush".  and is why i prefer to sell options in general, rather than to buy them.

 

Screen Shot 2021-02-03 at 4.24.16 PM.png

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4 minutes ago, 52-80 said:

you are long the put? i.e you bought it?

depends when you think stock will tank and by how much (i think it might consolidate around here at 80-100, given residual retail support)

the bottom graph is 1 measure of volatility.  thats the component that goes into the extrinsic value of the option.  IF you bought the 80P on Jan 25, 27, when it was really high, and later it shrinks as the mania dies down, the value of the option will plummet.  even if the stock price goes in your direction. 

the kids refer to this as "IV crush".  and is why i prefer to sell options in general, rather than to buy them.

 

 

I know very little about options but a friend and I were talking about $GME and he sold puts on $GME when it was high and is still down... I want unsure how that could happen so I guess this explains it.

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3 minutes ago, Hank_Hill said:

Yea I bought 2/2 at open. So looks like the IV was pretty low?

yeah, could be alright.

just keep in mind theta starts to accelerate towards the final week, so if GME stock is still stable by friday, you might want consider getting rid of the option even at slight loss unless you're convinced the stock will plummet and the gain in intrinsic value will outpace the erosion of extrinsic value

 

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7 minutes ago, ZB'Tejas said:

I know very little about options but a friend and I were talking about $GME and he sold puts on $GME when it was high and is still down... I want unsure how that could happen so I guess this explains it.

that's exactly what happened.  and the change in vol for the gme/bb/amc is almost unprecedented. 

 

for normal stock the volatility floats around.  a very common pattern is it ramps up towards Earnings Report date (as there is increased uncertainty in the results), and them promptly plummets.  this is very good to exploit. 

 

attached is AAPL which had earnings on Jan 27th.  i was bullish on the stock, so i bought the calls in december when volatility was relatively low, and the stock price ran up through january, and the accompanying volatility juiced the returns. 

Screen Shot 2021-02-03 at 4.49.45 PM.png

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17 minutes ago, ZB'Tejas said:

I know very little about options but a friend and I were talking about $GME and he sold puts on $GME when it was high and is still down... I want unsure how that could happen so I guess this explains it.

puts get more expensive as the price of the underlying falls.  so if he sold 25 strike puts for $.50 when GME was 100 those puts are going to be trading like $4 when GME gets to 50. 

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53 minutes ago, 52-80 said:

yeah, could be alright.

just keep in mind theta starts to accelerate towards the final week, so if GME stock is still stable by friday, you might want consider getting rid of the option even at slight loss unless you're convinced the stock will plummet and the gain in intrinsic value will outpace the erosion of extrinsic value

 

In your personal opinion would you bail now +350 and attack it differently? Just saw the CTO announcement and yea feel like a new floor might be established for a bit.

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1 minute ago, Hank_Hill said:

In your personal opinion would you bail now +350 and attack it differently?

youre up?  take the the profit, sell some friday expiring puts for a more assured win.

 

i also hold a long 50P expiring march 5th.  position opened 9 days ago, and it was one of the lower vol expirations (so relatively cheaper to buy).  it gives me more time, but still isnt that great of a play.  delta -14 theta -36, so loses $36 per day.  ill probably close it flat. 

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24 minutes ago, 52-80 said:

youre up?  take the the profit, sell some friday expiring puts for a more assured win.

 

i also hold a long 50P expiring march 5th.  position opened 9 days ago, and it was one of the lower vol expirations (so relatively cheaper to buy).  it gives me more time, but still isnt that great of a play.  delta -14 theta -36, so loses $36 per day.  ill probably close it flat. 

Honestly don't understand selling puts you don't own so any run down of that would be awesome. How does it work if the price drops below your put price?

 

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12 hours ago, DonkeyCigars said:

I'm in the money on some $GME puts and have a big bet being a $64 $GME put for 2/5. I'll probably let that one go at a "minor" profit, as it's 326% up right now and don't want to risk the smooth brains pumping it again.

Also have a AAPL $141 call for 2/12 I think will miss. AAPL has been very bewildering to me the last few weeks.

Getting murdered on the $64 GME put, need it to fall back to low 80's.

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14 minutes ago, Hank_Hill said:

Honestly don't understand selling puts you don't own so any run down of that would be awesome. How does it work if the price drops below your put price?

 

If you have a cash-only account, your broker reserves 100% cash for the absolute worse case scenario; stock goes to zero and you get assigned at the strike price. 
 

So selling a 50P would require $5,000 of cash.  Not very efficient use of 5k 
 

If you have margin account, your cash + long positions serves as the equity, and the requirements are typically only 20%*
 

So selling a 50P would require only 1k in reserve. So you can have all your money in stock, AND sell some puts against it. 
 

*rough guideline. % change based on each broker, each underlying (stock vs etf), and the actual calculations are a bit tricky. as the underlying moves, brokers will stress test the position and may change the requirement. 20% is a good rule of thumb for most. 
 

 

***

 

if the price runs to 43 in a cash account, nothing happens because you’ve got 5000$ fully secured for it

 

id the same happens in your margin account, the requirements might balloon up a bit. if you haven’t completely exhausted your margined buying power, then nothing happens (that’s the whole point of having margin). bonus is you actually don’t get interest fee charged on the usage. 
 

worst case scenario your margin get breached and you get a margin call. then you take action. 
 

 

Edited by 52-80
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12 minutes ago, 52-80 said:

If you have a cash-only account, your broker reserves 100% cash for the absolute worse case scenario; stock goes to zero and you get assigned at the strike price. 
 

So selling a 50P would require $5,000 of cash.  Not very efficient use of 5k 
 

If you have margin account, your cash + long positions serves as the equity, and the requirements are typically only 20%*
 

So selling a 50P would require only 1k in reserve. So you can have all your money in stock, AND sell some puts against it. 
 

*rough guideline. % change based on each broker, each underlying (stock vs etf), and the actual calculations are a bit tricky. as the underlying moves, brokers will stress test the position and may change the requirement. 20% is a good rule of thumb for most. 
 

 

***

 

if the price runs to 43 in a cash account, nothing happens because you’ve got 5000$ fully secured for it

 

id the same happens in your margin account, the requirements might balloon up a bit. if you haven’t completely exhausted your margined buying power, then nothing happens (that’s the whole point of having margin). bonus is you actually don’t get interest fee charged on the usage. 
 

worst case scenario your margin get breached and you get a margin call. then you take action. 
 

 

Gracias. Still don't think I get it enough to try my hand at it on something like GME but I'll get there.

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15 minutes ago, Errestaurants said:

Are there any YouTube channels you highly intelligent guys/gals can recommend an idiot like me? I'll send nude pics of my wife as a thank you. 

Option Alpha does the best job of explaining it.

Tastytrade network has a super rich library of content, but you need to sift through it.  The guys behind that network literally developed the platform that TD Ameritrade clients use for options trading.

3 minutes ago, Hank_Hill said:

Gracias. Still don't think I get it enough to try my hand at it on something like GME but I'll get there.

Sign up for TDA's Thinkorswim paper trading account and fuck around for a bit.  After 10 or 20 trades it'll be like riding a bicycle.

https://platform.thinkorswim.com/platform/index.html#!/pmregister

 

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11 minutes ago, 52-80 said:

Option Alpha does the best job of explaining it.

Tastytrade network has a super rich library of content, but you need to sift through it.  The guys behind that network literally developed the platform that TD Ameritrade clients use for options trading.

Sign up for TDA's Thinkorswim paper trading account and fuck around for a bit.  After 10 or 20 trades it'll be like riding a bicycle.

https://platform.thinkorswim.com/platform/index.html#!/pmregister

 

Appreciate it brother. 

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29 minutes ago, 52-80 said:

Option Alpha does the best job of explaining it.

Tastytrade network has a super rich library of content, but you need to sift through it.  The guys behind that network literally developed the platform that TD Ameritrade clients use for options trading.

Sign up for TDA's Thinkorswim paper trading account and fuck around for a bit.  After 10 or 20 trades it'll be like riding a bicycle.

https://platform.thinkorswim.com/platform/index.html#!/pmregister

 

I second this. Think or Swim is the best platform I’ve seen for options trading. Really intuitive and great visuals for seeing how the trade will work over time. 

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So here is my question, which is more fundamental.  When do you decide on what options you are going to go into and how often are you entering positions?  

That is what I struggle with.  I almost sold a Farfetch put yesterday, like you did. Obviously, would have been a good trade.  But I did not as I wanted to wait and see opening this morning, and of course, it went gangbusters (I have the underlying stock as well).

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9 minutes ago, PenelopeWitherspoon said:

When do you decide on what options you are going to go into and how often are you entering positions? 

Because my primary strategy is selling puts, and i want to enter multiple trades a day, my routine is almost mechanical:

1.  Sort watchlist by biggest daily  loser +/-%; want to sell puts on a stock down day for maximum premium)

2.  Look at chart and measures of volatility (IVR, IV%, IVindex); want to sell options when they're most inflated*

3. Look at chart of stock price; use caveman voodoo to establish a stock pricefloor as the strike (though honestly, if we play #2 right, price almost doesnt matter)

4. Look at option chain around 20-50days expiration; this is optimal duration to collect theta and have time to react against bad moves (gamma)

  • Make sure there's no binary events like earnings (explained above)
  • Make sure the strike has good liquidity (high volume, option interest, and narrow bid-ask spread)
  • One expiration chain may have higher volatility than the other and better relative pricing

5. Pick the strike and expiration and check the capital efficiency:  for every $1,000 of buying power tied up, I'd like to collect $200 in premiums; some stocks require high capital requirement (because broker deem it risky or whatever) and not worth it

 

That's about it, and it really takes like 30 seconds to setup from start to finish. 

*If I see that the IV is really low, then it's advantageous to actually BUY the call option  (or buy the put option for stock im bearish on)

 

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All I know is the first thing I'd recommend new option traders do is sell options.

In all seriousness though, I appreciate this thread. Over the last couple years I have played more options to great success and great loss as well. Keeps it interesting for sure.

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I mostly sell puts on stocks I don't mind owning. I either get some nice interest on my collateral or buy stock at a price I am willing to pay for it. If I do get exercised I then sell a few calls until I make a profit and then put it back into collateral for puts. 

For long calls I prefer to buy the farthest out near the money leap and then sell some out of the money short term calls against them to lower cost.

It may not be glamorous but has been a consistent money maker for years now.

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13 minutes ago, Dbeasy said:

How do you all think about the unlimited downside risk of selling a call should the stock explode upward?

 

riskiest to least:

  • selling naked calls. also known as the widow-maker.  easy answer is dont do it.
  • selling naked calls. when you already have a short put position, you can sometimes open a naked call without broker requiring more Buying Power (essentially you leg into a short straddle/strangle).  its a greedy play, try not to do it.
  • selling calls covered by long calls. a.k.a.poor man's covered call , like @veritas aequitas mentioned above.  it just limits your upside.  if stock explodes upwards, your long calls gain in value.
  • selling calls covered by shares; safe.  also limits your upside.

when i sell calls, i do it at a strike quite far out the money (2 standard deviation or 50% away). 

these 2 conditions must be simultaneously met:  (1) the stock jumps and (2) volatility spikes. 

this allows you to capture the inflated premium.  if those conditions arent met, the premium is really just peanuts compared to the risk.

 

 

 

 

 

 

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I'm not a smart man (read that a Forrest Gump's voice)

But can someone explain to me why my long term SPY calls  (8 months and 11 month $400 strike) have gone down the last 2 days, while the SPY has gone up. I know market disconnect, but it just seems weird to me. I've held both of these calls for about 6 months, trying to leverage up my returns on a core SPY holding and to offset risk when I sell puts,, and they have done very well (both up over 100%) but is the options market telling me that it's time to sell (because why else would near money calls go down), or just write it off as a short-term glitch in the matrix?
I know it isn't a direct connection, but it just seems off to me - maybe I'll call Neo, or Mr. Anderson for an answer) 

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Need input/help on some Boeing options and selling calls as a hedge like mentioned above. Really just the trading mechanics of what happens in my acct.

Ba currently $210ish

I own Feb 12 $197.5 strike $7 premium, 3 contracts

If I sell 3 contracts for same day, $220 strike at say $3 premium I reduce my base by 900. If it doesn’t strike 220 then I pocket. If it does and I’m forced to fill, does that mean I have to hold and exercise my 197.5 strikes or will my platform just auto cancel them out? What do I need to do?

If it weren’t $200 shares I would just play around but don’t wanna fox with $60k

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2 minutes ago, Wally Fairway said:

Because theta is a cold hearted bitch that will eat your soul (and wallet)

I thought a two week option would be less susceptible to theta hence the higher premium?

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