Yeah, this is a long post, but there was no way to provide the pertinent details without writing at length. 
About nine months (or so) ago, I became interested in learning about options. Along the way, a number of you have taken the time to offer insights into the mechanics of trading options, for which I am extremely grateful for your time and your assistance.
One of many things I've recently learned is that assignment is really nothing to fear, and, if you want, can be virtually eliminated as long as you understand when assignments happen, and monitor your trade. Thank goodness for that! lol
I *think* (hope) I finally have enough understanding to make my first paper trade and attempt to apply what I've learned so far. I don't have an options account just yet, and have no way to screen stocks, so I just manually dug around and came up with NFLX. Chart looks good, no dividend to worry about, and next earnings report isn't until October. So NFLX is what I used for my paper trade, which I made earlier this past week, on 8/9, EOD.
Based on the chart, NFLX has had a pretty bad year. However, it looks like it bottomed out in May, June, and July, and price is working its way back up. The overall market is bullish, and I'm thinking a put credit spread would be an appropriate trade. This trade probably should have been made back in June/July, but I wasn't ready at that time.
On 8/9, NFLX closed very near $230. The overall IV was 50% and the HV was 68%, so not really a great candidate for selling puts. However, the IV30 rank was 60%, which seemed marginally acceptable, even though 70% would have been better (and probably would have been a month earlier). Not sure whether IV30 rank trumps overall IV/HV, but I made that assumption.
I decided on the 9/16 expiry, only because I've read that 45-60 days out is best (I need to dig into this a bit more). Keeping in mind the market, over the long haul, tends to maintain normal distribution and 1SD would equal +/- 34% from the NFLX closing price, I looked for a delta in the vicinity of 34% for my short strike.
Note: I will be using the midpoint between bid/ask for all prices. And I'm still not certain how to determine whether a bid/ask spread is acceptable. The spreads in the following were 15, 20, and 25 cents. That seems like a lot to me, but I'm used to trading MES futures contracts.
The first strike that was <= to a 34d was the 215, at 30d, so I used that strike (going for 7.53) as my anchor, which put me a little outside 1SD, with slightly better probabilities. In determining the spread width, I looked at the 210 and 205 strikes, but the 205 entailed more risk than I really wanted to take on.
The 210 strike was going for 6.15, which would generate a premium of 1.38. The 205 strike was going for 4.98, which would generate a premium of 2.55, significantly more. However, even though the 205 strike represented an 85% increase in premium over the 210 strike, the increase in risk (factoring in premium) was 106%. That didn't seem worth it to me. Plus, the volume on the 210 strikes was pretty good (288), but on the 205, it was minimal (53).
This is where it got tough. The risk:reward on the 215/210 was 2.62:1, and on the 215/205, it was 2.92:1. To further complicate matters, it seems you are supposed to look for a premium that is >= 1/3 the spread width, which would eliminate the 215/210. So what to do? I really wasn't certain, but being new, and had this been a real trade with real money, I'd probably have played it safe and gone with the 215/210, so that's what I did.
On 8/9 EOD, I sold a NFLX Sept 16 215/210 put credit spread as a paper trade (did I write that out correctly?).
And in the past few days, I *think * I also understand margin requirements, so let me give that a shot while I'm at this.
Margin account requires a minimum of $2k (or whatever your broker requires). Based on TradeStation's website (because it was easy to locate and easy to understand), the initial margin for this trade would be $500 + premium, so $638 + C&F (buying power would be reduced by that same amount). Maintenance margin would be $500. So the absolute minimum account balance to make this trade would be $2,638 + C&F, but a few thousand more on top of that is highly recommended.
At present, that trade is doing well. More than likely beginner's luck and/or because it's only a paper trade.
Of course, all that is the easy part. How to deal with the trade if/when the short strike is threatened, whether to hold to expiry or take profits somewhere along the way, maybe around 50%, and what to do when/if the risk of assignment becomes greater than my tolerance, etc., etc. All that is still TBD. As of Friday's close, it looks like I could have bought the spread back for $62, which would have left me $76, so already past the 50% mark. Still a lot of reading and studying to do on this.
I'm hoping my logic for this trade makes at least some sense, and my calculations check out. If not, back to the drawing board. And at this point in my learning curve, I don't mind telling you -- my brain hurts. lol
Still in grade school but trying to work my way up to middle school. Any feedback would be appreciated -- good or bad. Thanks for taking the time to read.
About nine months (or so) ago, I became interested in learning about options. Along the way, a number of you have taken the time to offer insights into the mechanics of trading options, for which I am extremely grateful for your time and your assistance.
One of many things I've recently learned is that assignment is really nothing to fear, and, if you want, can be virtually eliminated as long as you understand when assignments happen, and monitor your trade. Thank goodness for that! lol
I *think* (hope) I finally have enough understanding to make my first paper trade and attempt to apply what I've learned so far. I don't have an options account just yet, and have no way to screen stocks, so I just manually dug around and came up with NFLX. Chart looks good, no dividend to worry about, and next earnings report isn't until October. So NFLX is what I used for my paper trade, which I made earlier this past week, on 8/9, EOD.
Based on the chart, NFLX has had a pretty bad year. However, it looks like it bottomed out in May, June, and July, and price is working its way back up. The overall market is bullish, and I'm thinking a put credit spread would be an appropriate trade. This trade probably should have been made back in June/July, but I wasn't ready at that time.
On 8/9, NFLX closed very near $230. The overall IV was 50% and the HV was 68%, so not really a great candidate for selling puts. However, the IV30 rank was 60%, which seemed marginally acceptable, even though 70% would have been better (and probably would have been a month earlier). Not sure whether IV30 rank trumps overall IV/HV, but I made that assumption.
I decided on the 9/16 expiry, only because I've read that 45-60 days out is best (I need to dig into this a bit more). Keeping in mind the market, over the long haul, tends to maintain normal distribution and 1SD would equal +/- 34% from the NFLX closing price, I looked for a delta in the vicinity of 34% for my short strike.
Note: I will be using the midpoint between bid/ask for all prices. And I'm still not certain how to determine whether a bid/ask spread is acceptable. The spreads in the following were 15, 20, and 25 cents. That seems like a lot to me, but I'm used to trading MES futures contracts.
The first strike that was <= to a 34d was the 215, at 30d, so I used that strike (going for 7.53) as my anchor, which put me a little outside 1SD, with slightly better probabilities. In determining the spread width, I looked at the 210 and 205 strikes, but the 205 entailed more risk than I really wanted to take on.
The 210 strike was going for 6.15, which would generate a premium of 1.38. The 205 strike was going for 4.98, which would generate a premium of 2.55, significantly more. However, even though the 205 strike represented an 85% increase in premium over the 210 strike, the increase in risk (factoring in premium) was 106%. That didn't seem worth it to me. Plus, the volume on the 210 strikes was pretty good (288), but on the 205, it was minimal (53).
This is where it got tough. The risk:reward on the 215/210 was 2.62:1, and on the 215/205, it was 2.92:1. To further complicate matters, it seems you are supposed to look for a premium that is >= 1/3 the spread width, which would eliminate the 215/210. So what to do? I really wasn't certain, but being new, and had this been a real trade with real money, I'd probably have played it safe and gone with the 215/210, so that's what I did.
On 8/9 EOD, I sold a NFLX Sept 16 215/210 put credit spread as a paper trade (did I write that out correctly?).
And in the past few days, I *think * I also understand margin requirements, so let me give that a shot while I'm at this.
Margin account requires a minimum of $2k (or whatever your broker requires). Based on TradeStation's website (because it was easy to locate and easy to understand), the initial margin for this trade would be $500 + premium, so $638 + C&F (buying power would be reduced by that same amount). Maintenance margin would be $500. So the absolute minimum account balance to make this trade would be $2,638 + C&F, but a few thousand more on top of that is highly recommended.
At present, that trade is doing well. More than likely beginner's luck and/or because it's only a paper trade.
Of course, all that is the easy part. How to deal with the trade if/when the short strike is threatened, whether to hold to expiry or take profits somewhere along the way, maybe around 50%, and what to do when/if the risk of assignment becomes greater than my tolerance, etc., etc. All that is still TBD. As of Friday's close, it looks like I could have bought the spread back for $62, which would have left me $76, so already past the 50% mark. Still a lot of reading and studying to do on this.
I'm hoping my logic for this trade makes at least some sense, and my calculations check out. If not, back to the drawing board. And at this point in my learning curve, I don't mind telling you -- my brain hurts. lol
Still in grade school but trying to work my way up to middle school. Any feedback would be appreciated -- good or bad. Thanks for taking the time to read.
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, need at least 3 years.