Challenge

[Drawdown Addict]

I consider myself a beginner in options trading. I played the markets a bit, with basic strategies, but I can't really tell where my knowledge is at.

Would you care to throw some questions at me?
As in practical situations that you might find whilst you are trading.

A good roast is welcome, all for the sake of learning.

 

[BlueWaterSailor]

Since you don't say what "basic strategies" you're using, the questions would necessarily have to be general ones.

How are you managing your risk? Where/how have you been caught out by unexpected problems, and how have you dealt with them?

 

[Drawdown Addict]

Since you don't say what "basic strategies" you're using, the questions would necessarily have to be general ones.

How are you managing your risk? Where/how have you been caught out by unexpected problems, and how have you dealt with them?

I only sell calls on the stocks I own, all covered then. I don't do anything naked.
When it goes my way I grow my size on the stock with the realized premium.
It is a slow and small income generator, so far.

 

[BlueWaterSailor]

I only sell calls on the stocks I own, all covered then. I don't do anything naked.
When it goes my way I grow my size on the stock with the realized premium.
It is a slow and small income generator, so far.

I figured it might be something like CCs. Since a covered call is synthetically equivalent to a short put, "I don't do anything naked" is not much more than an attempt to reassure yourself. Your exposure is still the entire value of your stock less the call premium, unless you have some sort of risk management in place. Which brings us back full circle.

How are you managing your risk?

 

[Drawdown Addict]

I figured it might be something like CCs. Since a covered call is synthetically equivalent to a short put, "I don't do anything naked" is not much more than an attempt to reassure yourself. Your exposure is still the entire value of your stock less the call premium, unless you have some sort of risk management in place. Which brings us back full circle.

How are you managing your risk?

I guess that at this point I have to ask you: "What do you mean by risk?"

A covered call over an owned stock has a limited risk, well defined by the size of the position on the stock as well as the size of the option contract. The risk is limited by the strike price of the contract.

 

[Drawdown Addict]

Since a covered call is synthetically equivalent to a short put

Looking into more detail about the equivalency between covered calls and short puts, it seems that covered calls give you more room to act on adverse moves.

https://www.optionsanimal.com/covered-calls-versus-short-puts-which-is-better/

I didn't know that, just learning it now. So they are not fully equivalent.

 

[BlueWaterSailor]

I guess that at this point I have to ask you: "What do you mean by risk?"

A covered call over an owned stock has a limited risk, well defined by the size of the position on the stock as well as the size of the option contract. The risk is limited by the strike price of the contract.

The size of your position is your risk. If you're not doing any risk management, which is what I asked about, that's fine; the market will teach you whatever lessons it has in stock sooner rather than later, and you'll be charged full price for them.

Truth to tell, I wasn't expecting much more. "Covered calls are safe!" is the story most commonly sold - perhaps along with "Iron Condors are safe!" - by the scam industry that's grown up around trading.

 

[BlueWaterSailor]

Looking into more detail about the equivalency between covered calls and short puts, it seems that covered calls give you more room to act on adverse moves.

https://www.optionsanimal.com/covered-calls-versus-short-puts-which-is-better/

I didn't know that, just learning it now. So they are not fully equivalent.

[SIGH]

Mathematically (look up "put-call parity"):

C = P + S ∴ C - S = P

Practically:
If you're short a call against stock that cost you $100/share for $3, your exposure is $9.7k.
If you short a put at the 100 strike for $3, your exposure is $9.7k.

 

[Drawdown Addict]

The size of your position is your risk. If you're not doing any risk management, which is what I asked about, that's fine; the market will teach you whatever lessons it has in stock sooner rather than later, and you'll be charged full price for them.

Truth to tell, I wasn't expecting much more. "Covered calls are safe!" is the story most commonly sold - perhaps along with "Iron Condors are safe!" - by the scam industry that's grown up around trading.

Ok, now the question is back at you.

How are you managing your risk?

 

[BlueWaterSailor]

Ok, now the question is back at you.

How are you managing your risk?

It depends on the strategy I use. Not to be insulting, but you wouldn't understand most of them - and explaining the context in which I make my decisions about it would take a thick book. But most times, it involves either buying a wing to limit risk, or getting out of the trade at predefined levels for both profit and loss.