How would you play this?
- Thread starter maae10
- Start date
How are you measuring return? profit/risk? profit/amount invested?
Instead of buying 100 shares of AAPL stock for a total of $9100, you could buy 80 calls, for something like $1200. AAPL pops to 100 and the options immediately expire. In the former case, you made 10%. In the latter, you made 80%. Is that really a fair comparison? If AAPL droppped 10%, you would have lost 80% on the options.
The verticals you mentioned will only have those payoff numbers at expiration. Let's say you're right, and AAPL immediately pops to 100. You'll barely be profitable (Maybe +$2 or +$3?). If it then sinks, you'll have been right on direction, but never had a chance to make money on it. In short, you'll be risking $7 to make $2. Seems hardly a long-term profitable venture.
In options, you must be right on three things:
1) Direction
2) Timing
3) Volatility
AAPL popping to 100 "somewhere in the next 45 days" is not sufficient. If it pops to 100 tomorrow and sinks, you will make nowhere near as much as if it hits that point at expiration, while risking the exact same dollar value. Instead of risking $7 to make $7.95, you'll be risking $7 to make $2.
Selling ITM put verticals is the same as buying ITM call verticals. The +80P-100P will have almost exactly the same payoff as a +80C-100C. You'll get someone's cash with the puts, but you'll make less money than if you did the call spread. In fact, you'll make exactly the risk free interest rate on the put premium less.
Again, I am not an options trader.
But, I understanding the basics.
First of all, if you are so confident that there are no downside risk then why even worry about creating spreads?
If everything is going to be up up and away then the way I see it is that there are only 2 options choices: Buy Calls or Sell Puts.
If you buy calls you will have to wait to receive your anticipated substantial profits.
If you sell puts you will realize a profit immediately via the premium(s) paid to you.
Personally, the 2nd choice sounds more inticing but why would you sell puts so far into the future?
To me it would make more sense to sell puts with the closest expiration date because the sooner the option expires the better your chances of keeping all of the premium(s).
Near term all things seem positive for AAPL but I would not even think of getting involved with AAPL until After the earnings come out on April 25.
Afterwards, there is a small window between the earnings date and the release of the IPhone.
There was a rumor that one of Apple's component suppliers for the IPHone needed to do a recall due to some problems (Don't have the details). Could this affect the stock price negatively if this problem is not resolved before the release date? I would think so.
So it seems to me that there could be a danger of assignment if you sell July Puts -- maybe or maybe not. But, I would choose the May Puts, personally.
If things ever go wrong when you are in a put writing scenario then it would seem to me that you have 3 choices in order to avoid assignment:
1) Buy the put(s) back before your break-even point or
2) Roll the put(s) foward or
3) Create a Spread (maybe a Bear Put Spread) to repair your trade -- Seems to me, this is the only time any spread should
ever be create anyway i.e. for repairing only (But, hey, what do I know)
Comments from the experts on this?
But, I understanding the basics.
First of all, if you are so confident that there are no downside risk then why even worry about creating spreads?
If everything is going to be up up and away then the way I see it is that there are only 2 options choices: Buy Calls or Sell Puts.
If you buy calls you will have to wait to receive your anticipated substantial profits.
If you sell puts you will realize a profit immediately via the premium(s) paid to you.
Personally, the 2nd choice sounds more inticing but why would you sell puts so far into the future?
To me it would make more sense to sell puts with the closest expiration date because the sooner the option expires the better your chances of keeping all of the premium(s).
Near term all things seem positive for AAPL but I would not even think of getting involved with AAPL until After the earnings come out on April 25.
Afterwards, there is a small window between the earnings date and the release of the IPhone.
There was a rumor that one of Apple's component suppliers for the IPHone needed to do a recall due to some problems (Don't have the details). Could this affect the stock price negatively if this problem is not resolved before the release date? I would think so.
So it seems to me that there could be a danger of assignment if you sell July Puts -- maybe or maybe not. But, I would choose the May Puts, personally.
If things ever go wrong when you are in a put writing scenario then it would seem to me that you have 3 choices in order to avoid assignment:
1) Buy the put(s) back before your break-even point or
2) Roll the put(s) foward or
3) Create a Spread (maybe a Bear Put Spread) to repair your trade -- Seems to me, this is the only time any spread should
ever be create anyway i.e. for repairing only (But, hey, what do I know)
Comments from the experts on this?
Return on my money and finding the best risk/reward ratio.
That's a good point, but are you sure all I would be left with is $2-$3? Figure my 85 puts I bought would only be worth about .50 and the 100 puts I sold would have a value of about $4.5. I'm left with $4.
Assuming my number ($4) is correct, and I'm very confident in terms of direction. Risking $7 to make $4 is not a bad proposition considering with my margin, I only have to put up $7 to make the trade. A very nice return for something that I have a lot of confidence in.
If one is confident in direction, doesn't that make the volatility less important?
hmmmm. Maybe I should just sell 95 puts straight up. Higher risk but at least I'm covered if the stock doesn't move at all.
I'm afraid not--you *must* have an opinion about volatility. You generally can't be right on 2 out of 3 and still make money. The exception is deep in the money calls or puts. With those, the time value is so low as to be almost meaningless.
Selling the 95 puts seems like the worst choice of all. Let's say it pops to 120, you don't benefit. If it collapses due to, I don't know, Steve Jobs resigns because he backdated his own options, you have unlimited risk. In this case, just buy the stock and you'll make more with the same risk. As you know, buying the stock and selling the 120 calls is the same as selling the 120 puts. Is that way-out-of-the-money covered call really what you want?
I'm still of the belief you should just buy the stock, or just buy Deep ITM calls. Anything else isn't consistent with your strategy. You believe with virtual certainty that a stock will go up, you don't have an upper bounds on that move, and you don't know when exactly it will move, just "over the next 45 days". That screams "buy deltas", "buy vega".
Selling puts means you have an opinion about volatility and an upper bounds of the move.
Buying verticals means you have an opinion about minimum or maximum movements. (A 90/95 call spread in May means you believe it will settle above 95 in 30-ish days).
First, you do not *realize* the profit when you sell puts, it's not even an unrealized profit. You took in some cash, but you have a debit in the form of a short put.
The premium on the puts is less than the synthetic equivalent because you're synthetically paying interest on the cash.
In other words, options are priced to include interest debit or credit at the risk free rate.
That was supposed to read "buy deltas", "buy gamma".
There's no realized or unrealized profit immediately when you sell the put. In actuality you'd probably start with an unrealized loss due to commissions and slippage.
There's no profit until the stock moves favorably in your direction, or stays flat long enough for vega to decrease, or theta chews away at the premium.
There's no profit until the stock moves favorably in your direction, or stays flat long enough for vega to decrease, or theta chews away at the premium.