Thanks Misterkel, more ways to play with options.it seems like I have a lot to learn and ponder. And hopefully, not getting burned doing it. What do I need to know more to execute this? How much do I need to understand the Greeks (I only understand the definition and not versed in interpreting them)?
LEAPS option - Is this a good use?
- Thread starter macanoni
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Older book and a little expensive now, but I think there are some insights and concepts that may be helpful for an Investor.
LOL. IDK. Maybe because I am a newbie and everyone is being patient and wants to teach me a thing or two !-)
Thanks for the advice regarding the stock could become worthless. Yes, one would never know. Or sometimes one held on for sentimental reason. I has some former employer’s stock. It went up tremendously, did not cashed in. Then it went down, didn’t cash it. Reluctantly parted with it after it recovered somewhat and eked out a small gain. I need to develop a better tradesman mentality.
You are a value investor first and foremost and don't need the Greek alphabet to enhance your returns..
You have a good approach and intuitive understanding...Th3 biggest question for you is what month to sell,as well as what strike..That is simply a tradeoff of incremental return vs downside protection.Thats your call..
Are you a fair value,i.e discounted cash flow sort of fellow?? What valuation measures do you use to sell stocks on the upside??
You have a good approach and intuitive understanding...Th3 biggest question for you is what month to sell,as well as what strike..That is simply a tradeoff of incremental return vs downside protection.Thats your call..
Are you a fair value,i.e discounted cash flow sort of fellow?? What valuation measures do you use to sell stocks on the upside??
Once I own the stock, I basically let it run. I read reports, looking at Valuations (P/E, cash flow, profit margins etc..), just to make sure it is still what I want. But I mainly sell when I need to rebalance my portfolio to keep it not too skewed in one direction. I am bad at looking for technical indicators and such (so many times have not captured the gain at the highest); mainly because I don’t have too much time to track it diligently. I mostly own indexes, and only buy a few stocks that I really like. Just during the pandemic, I picked up a few more stocks that have been deeply discounted. They went up so fast, I had no chance to unwind before this downturn (still have a long-term mentality)
You need to understand Delta to an intuitive level so you don't need to check it. Delta is used as a proxy for likelihood of outcome, too. A .7 delta (almost certainly In the Money) has a 70% chance of expiring In The Money. A .2 Delta has a 20% chance. And so forth. A .5 delta is typically ATM, regardless of time to expiry.
You need to understand Implied Volatility and get an intuitive relation to it. IV has the greatest effect on option pricing (although it's IV IS the effect really). IV moves dramatically with events. Earnings coming up strongly increases IV. IV is dramatically higher for the first expiry after earnings. There are ways to play differential IV - calendars and diagonals. These are much more sophisticated plays and can be used in non-directional manners. Meaning - if the stock goes UP, you win, if it sideways, you win a bit less, if it goes down very slightly, you can still win. If it goes a moderate amount, you break even. If it tanks, you lose.
You need to understand Time Value (also called Premium).
You need to understand liquidity at different levels of the option chain. Bid-ask Spreads and Open interest are the best measures of liquidity. SPY is the most liquid option chain in the world, most likely. Though SPX has daily expiries, so - pretty liquid. Time value decays at different rates, depending on expiry. Long expiries have very small decay. Near term expiries have very rapid decay. So, you can do Calendars or diagonals to capture the near-term rapid decay, while hedging with the longer dated. BUT - time value disappears as the stock moves further from strike, and longer dated options lose more to this effect than near terms because near terms have much less time value.
You need to understand Theta, but the theta values given are often quite inaccurate.
AND, study option structures. Synthetics are very good for using less margin to hold a position. In other words, if you want to hold your stock (non-div stocks work better) for price appreciation, just buy call and sell a put. You can do it ATM or almost anywhere in the chain provided you buy and sell at the same strike. You can do it long-dated or short dated. Outcomes are the same as owning the underlying provided you have Put-Call parity (same time value for each option essentially).
This is the classical "textbook" explanation.
But as the rebel I am, I tend to disagree!
IMO one cannot take Delta as the probability for it being ITM at expiration.
I'm using my own formula, derived from the very BSM formula. It gives a different p value.
I haven't looked at it for a long time now, but I'm 100% sure Delta is not the correct probability value.
For example consider the Delta of this model option (assuming/using r=q=0):
S=100 K=100 t=1 IV=150 --> C=P=54.6745 C.Delta=0.7734 P.Delta=C.Delta - 1=-0.2266
Why has this model option a Delta of 0.7734 ?
I mean why assume that pITM equals this Delta value?
The expectancy is a change of 0, ie. S_at_expiry = S_initial = 100.
Then consequently for this option expiring ITM it should be p=0.5, not 0.7734
Q.E.D.
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You guys are out of your mind....Guys a Value investor who is looking to enhance his returns by selling leaps or possible sell OTM puts to get in at a lower price than current spot....
Of course he should have a basic understanding of the Greek alphabet,but beyond that he will know just enough to be dangerous...
Hes not a derivatives trader.nor should he be
Of course he should have a basic understanding of the Greek alphabet,but beyond that he will know just enough to be dangerous...
Hes not a derivatives trader.nor should he be
Yeah, I don't use it that way, either. It's definitely wrong for edge cases far OTM or ITM. It's not a bad rule of thumb for close to the money, but, hey, that's just saying that it's 50/50 whether a stock goes up or down since close to money is .5! I was just letting the OP know that it's one method out there.
Well, here's what he said in the OP:
interested in learning more about options.
It's not like I went that deep.
If he wants to do CC's effectively he definitely needs to understand the four things above: Delta, Premium, IV, and Theta. Basically, I stand by what I wrote.
LEAPS are bad for CC's, imo. Too long-dated. Six months out, max.
If you want to trade leaps, then verts, cals, or diags are far lower risk than CC's.