CXMelga

Hello I have a question about selling naked (puts or calls) on indices, such as SPX Now, unless I am wrong SPX is a European style, cash settlement ticker, meaning no earlier exercising and no dividend risk (for the options seller) Assuming the above is correct, let's say SPX is trading at 2485 and sell a naked put with a strike price of 2475 what would happen if SPX closed at 2465 at expiry (e.g. the option I sold is now two strikes ITM e.g. $10). I assume I would lose $10 x 100 = $1000 (minus premium collected) Is that correct please, or do I have to factor in anything else (apart from the fact the loss could be a lot higher if the option if further ITM). Thanks very much CXMelga

Thanks very much for the replies Yowster and SBatch As I have very recently started learning I get these crazy ideas pop into my head as I learn about the different strategies (at the end of the day all a combination of puts or call) I will have to be careful otherwise I will turn into a gun gunslinger with a ten gallon hat, and that is a shore fire way to lose money (unless you consistently an extremely luck person, and unfortunate I am not) Thanks all on my quest for knowledge CXMelga

sorry, did not complete the above if you did a RIC (perhaps with very tight strikes/short butterfly SBF) and an IC together on the same stock XYZ if XYZ does not move that much in either direction you win on the IC but loose on the RIC/SBF if XYZ goes outside the short strikes of the RIC (or SBF) but 'not' path the IC short strikes you make on all positions if XYZ goes beyond 'one leg' of the IC, you win on the RIC (or SBF) and lose on 'one' leg of the IC I am just thinking (providing the buyers are there for the relevant strikes) if you have a stock with medium volatility in price action (moves up and down in a reasonable range but not too wild you may be able to get your strikes right to win on both, on one trade. What do you thing ? Thanks CXMekga

After reading another of Kim's excellent posts (Kim, you have a good writing style, explain things nicely) The following came to my mind, and wanted to know what people think (don't worry I have been called an idiot before) If you did

Hello All Can someone help me cement my understanding of the Butterfly, (I think I got it from previous information, but just need clarification please) if I am in the business of selling options, than I believe I should be selling butterfly when IV is high meaning premiums are also likely to be high. If that is the case, then if I sell ATM (or very close to ATM) and buy the wings, I can move my long strikes out further and further based on the premium I get for the ATM strikes for example if the spot (stock) price is $100 and an ATM put and an ATM call each have an individual premium of 3.0 then I could buy the a put at 97 and a call at 103 (or as close as I can get to that). As I am thinking (rightly or wrongly), if I get a premium of 3.0 for each ATM option that means my 'break even' point is between $97 and $103 in other words if the spot price stays at or between $97 and $103 I am in a profit zone for me, correct? I believe what I want to happen as the seller is for the IV to go down (and therefore premiums to go down too) so I can buy back for less than the credit I sold it for, right ? I guess the thing that concerns me is, assignment because if someone paid for an option (e.g. one of my ATM strikes) and the option moves even slightly ITM, why would the buyer 'not' exercise their option, after all they paid a premium for it and it is now ITM, perhaps if it is not deep enough ITM for the buyer's purpose (e.g. just hedging) and therefore not worth exercising. Any comments on my understanding and thoughts above please ? Also, are they any statistics showing the percentage of ATM (or very close to ATM) options that are never exercised ? Thanks very much all CXMelga

Thanks very much for your excellent and comprehensive reply I appreciate it 😏

Hello, At the moment I am new to options and selling OTM credit spreads (above and below the market). I try to sell OTM spreads where the POP of being ITM is 30% or less I have quite a few positions open at the moment (%5 or less of account on each) across various sectors, but it is too early to say if this is going to work out for me Naturally as this is a defined risk strategy the net premium (and therefore my profit) is limited because of the long strike (hedge) So, I was thinking about the following, (if I have more time to keep my eye on the market) Sell naked puts or calls very OTM as above, so more potential profit as I do not dilute with a long strike, (but more risk), the idea being want the market to move away from my strike Then if the market moves closer to my strike (depending on the level of move), let say I sell a call and the market is moving up, I could sell a put below the current market to get some premium (naked again), and if the market continues to move up perhaps sell another put and another (to get more premium) Then if the market gets to close to my strike (e.g. sold call in this case) for my personal comfort buy a long strike to create a spread (hedge at that point). I know the long strike would be more expensive than if I have brought it in the first instance, but the credit from my short puts should help overcome this to some extent or completely. I figure, if I sell 100 contracts, and each is far OTM and say 20 of these 100 contracts do not work out, as long as I do the above overall I could make more profit. The big danger of course is an underlaying jumps or falls quickly through my short strike before I get a change to react. On that last point I suppose it would be possible (depending on the platform) to setup a BTO order but only if XYZ reaches (or falls) to a certain price (e.g. automatically buy my long strike if I am not in front of the computer). I am not asking anyone if I should or should not do the above (my risk) but want to know if anyone else uses this strategy (I assume so and how prevalent the method). Thanks very much CXMelga

I have a quick question please as I have not seen this it explained any where If xyz is trading at $100 a and so a 'credit spread' e.g. I sell a put at 95 and buy a put at 90 If xyz goes down to $80 (and I am not assigned at at $95, but instead assigned at $80), I lose $5 per share on the spread but would I make $10 per share on the long put? Or would I always be assigned at or very close to $95 ? Or will there never be a situation where I could make a profit from the situation described above Thanks very much

Thanks very much Zxcv64 and FrankTheTank I really appreciate you both taking the time to help me understand/learn Thanks for the explanation and charts Zxcv64 t:) So basically, if I want to trade options on Futures/commodities I just need to look for the correct 'ticker symbol' (where the underlying is a commodity rather than a stock) then buy/sell a contact based on the ticker ? I placed my very first options contract on Wednesday did a put credit spread (Vertical) on SPY with a POP of 78% (all going in my favour at the moment)

Hello Cuegis, Thanks very much for taking the time to reply to my question, Yes, commodities is something I have been thinking about as it occurs to me they 'may' be more predictable especially hard commodities like oil, metals etc. as opposed to soft (farmed) due to unexpected bad weather draught/flood So basically I am thinking (and still learning the whole area) where as stokes can be affected by the CEO saying the wrong thing or a thousand other possibilities, commodities are more based on supply/demand over the longer time frame (year plus) so a bit more predictable I understand features are contracts which 'obligate' the seller to sell X to the buyer at Y price on Z date, but the buyer can sell the contract before Z date Now with options the buyer has the 'right' but not the 'obligation' and can also exercise (whether ITM or not) the option, or sell the option (I believe that is also true) before expiry My question is then (if the above is correct), can I buy/sell 'options' on 'features' which I believe are both considered derivatives, if so is that in essence a derivative on a derivative ? Thanks very much for you time, helping me understand all this, as if I can sell (or buy for hedging) traditional options contracts on feature contracts that is something I would be very interested in Thanks CXMelga

Can you please help me with the following question regarding probability of profit and max-loss If you look at the following trade from an option witters perspective a call credit spread in Apple Inc. Jan 2019 expiry POP 82% EXT 55.00 P50 91% Max Profit 55.00 Max Loss -445.00 POP (probability of profit) and Max Profit verses the Max-Loss, it looks like the above is a bad deal from an option seller’s perspective (as far as I understand options at this time) as If I sell the exact same option 100 times 82 times out of one hundred I stand to make $55 (82 x 55 = 4,510) 18 times out of one hundred I stand to lose $445 (18 x 445 = 8,010) Therefore, all else being equal I stand to loose twice as much as I gain on this deal (as premium too low for the writer) If I look at the POP at 50% = 91% Therefore 50% of the max profit is 55 / 2 = $27.50 My question is as follows If I consider the trade at POP 50% (e.g. setup an automatic GTC at 50% profit), ‘can I also consider’ the max-loss is also reduced by 50% from 445 to 222.5? I guess not as the max-loss could occur at any time e.g. the next day the stoke smashes through the strike prices and I am assigned. However, if I could consider my max-loss are also half (if I always sell at 50% of max profit) then 91 times out of one hundred I stand to make 27.50 (91 x 27.50 = 2502.50) 9 times out of one hundred I stand to lose 222.50 (9 x 222.50 = 2002.50) Looking at the above, it now turns from a bad deal for the option writer to a good deal for the option writer, (providing my max loss reduced to 50% along side of 50%POP ) I would appreciate if someone could get back to my on my thoughts above please

I have a few basic question about vertical spreads please, just so I am sure I get my terminology and understanding correct I understand there is a 'credit' spread and a 'debit' spread As far as I know the above is nothing to do with weather the spread is above or below the market, but weather or not your get a 'credit' (take in a net premium) or you have to pay a 'debit' cost you money to take on the position, is that correct ? if the above is correct then assuming the underlying is trading at $100 if I sold a 'call' credit spread this would mean I sold an option that consisted of for example short call at strike $110 long call at strike $120 is the above a correct description of a call credit spread correct ? then if I short put at strike $90 long put at strike $85 the above would represent a put credit spread ? long call at strike $110 short call at strike $120 the above would represent a call debit spread ? long put at strike $90 short put at strike $85 the above would represent a put debit spread ? Thanks very much CXMelga

Thanks Kim

Hello Cuegis, Thank you for taking the time to write up such a comprehensive reply, this really helps me learn Yes, I am learning when selling options in particular is it all about the premium (and POP) because an options writer you could be correct 80% of the time and still loose money if the credit on the trade was too low as the loses on the 20% that went against you would wipe out all the profit (even if only ever doing defined risk strategies) From what I understand at the moment the higher the IV the more expensive the options (for obvious reasons), and this pricing tends to be overstated when IV is very high (as implied volatility is almost always higher then actual volatility) Thanks again CXMelga

Thanks very much Yowster, I am starting to get it ( a bit like learning to drive a car I am still in first gear at the moment and not left my driveway, but I will get there) Thanks very muchCXMelga