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

Thanks very much Kim and Cuegis, for taking the time to reply, I really appreciate it. The original terminology from the 80's is easier to remember (what ever ou are doing with the wings you are doing to the fly). At least I know now there are two terminologies and using the above can understand it much better. The next thing I have to do is get a piece of pen and paper and get my little pee brain around how they fly is supposed to make you a profit (from a sellers perspective), My initial thought is from a sellers (writer) perspective, if you are selling the middle and buying the cheaper outers, (no matter if all calls or all puts) therein getting a credit. You want no movement (or very little indeed) in the spot price (underlaying), then you want Vega (volatility) to go down and down so the extrinsic value of the option drops and drops so you can buy back at a lower prise to make a profit (or let expire), is that right ? If my thinking about is correct, it would therefore seem logical to sell a butterfly when IV is high and premiums are over stated and buy a butterfly when IV is low and premium is cheap ? Thanks again all, I really do appreciate your time, I want to understand before I start to put up my hard earned cash in options Cheers CXMelga

Typo above, I meant to say underlaying does not 'move' much

Hello, I am trying to understand the different 'strategies' at the moment, some are easy to understand others are not, can you please tell me if I have the following correct Short v Long butter fly A Short butterfly (e.g. selling the ATM strikes and buying the other strikes, results in a credit to the writer) 2 ATM strikes + ITM strike + 1 OTM strike if price of underlaying does not more much on a Short butterfly the buyer will win and the writer will lose A Long butterfly (e.g. buying ATM strikes and selling the other strikes, result debit to the writer) 2 ATM strikes + 1 ITM strike + 1 OTM strike If the price of the underlaying does not move much on a long butterfly buyer loses and write wins I have seen the above explained (or at least I think that is what they were trying to explain I have also seen it explained where there are 'no' ITM strikes Therefore the first thing I wanted to understand is does a butterfly spread consist of any ITM strikes or not ? From the perspective of a options writer Should both a short and long butterfly be used when IV is high or only to long butterfly when IV is high and the short butterfly when IV is low ? Thanks very much in advance CXMelga

Can someone kindly clarify the following couple of questions for me please, thank you Looking at America style options first I understand they can be exercised at any time. So if sell a call option (write) for a strike price of $55 when the stock (spot) price is $45 with an expiry of 30 days (just to give some numbers) Question 1: If the stock never reaches its strike price during this 30 days the holder of the option (buyer) 'can not' exercise this option (as the contract terms have not been met). Therefore the contract cannot be assigned, is this correct ? Even thought the option holder (buyer) cannot exercise (until strike price is reached) they could sell their option contract (with less days left on it), at what ever market premium they can get for the option at that time. (which is not the same as an option being exercises/assigned) ? Question 2: When it comes to European style options which can only be exercised at at expiration (small time window) again using the numbers above (but on an Index) If the index goes goes well above is strike price 15 days from expatriation, but then goes back down below the strike price at expiration, I assume the option expires worthless. As the buyer of the option was 'unable to exercise it when it went past the strike price' is the above also correct ? However as above even though the holder of the option could be exercise this European style option exactly when they wanted, they could sell the option on (with the remaining time until expiry and same strike price), is that also correct ? Thanks very much in advance

thanks too Topcat what do you think if my last post, is my thinking regarding the importance of extrinsic value correct in the situation I describe above? CXMelga

Hello Kim, thanks once again for taking the time to reply, It is easier for me to understand how I can make a profit when I start of selling an option and then buying it back at a cheaper price later on (my brain gets that) When I start off by guying a call option (e.g. first trade in X stock) it is harder to understand but I think I go it now, what I am thinking is in order to make a profit in this situation (where time decay is against me) it is all about the 'extrinsic value' In other words if I start of by buying an OTM call option and assuming it stays OTM (obviously I could make a profit if it went from OTM to ITM) event though time decay is eroding the value of my option and the intrinsic value is 0 (as OTM) if the stock price moves very close to the strike price the extrinsic value could increase to a point whereby if I sold it this extra extrinsic value alone could be enough for me to see a profit in selling the call option (as I originally brought the call option when the extrinsic value was mush lower) Is that it in a nut shell when it comes to buying (first) and selling (second) an OTM option ? (apart from hoping it goes ITM) Thanks again, I just keep reading and watching videos and asking questions so I will understand it well enough at some point Cheers CXMelga

Hello, I am a beginner and would be grateful if someone could help me understand the following So, you either buy or sell options (or a combination there of). I can understand if I sold an option (sell to open) for a premium I could sell the option (buy to close) some where down the line (before expiration) to lock in a partial profit. I saw a video (cannot recall the link) where if I understood it correctly was suggesting I could sell a call option (that I had previously purchased) and take a partial profit similar to the above, however I am not sure I understand this concept So lets say I buy a call option for $200 premium ($2 per share) for XYZ stock at a strike price of $110 (XYZ trading at $100) for 30 days As time goes by my option contract is worth less every day, therefore I do not see how I could sell my option for a profit say $250, unless the market price of XYZ stock goes to say $108 and there is 15 days left on the contract, someone else in the market may think XYZ will pass $110 (as it is already close now trading at $108) and therefore be willing to buy my contract for a premium of $250 ($2.5 per share) even though time decay has eroded it some what. that how it works? in other words even though time decay has made my option less valuable the fact the stock price is much closer to the strike price makes my option more attractive and therefore more valuable (event after taking into account the time decay) Or am I going off in the wrong direction here ? Thanks very much in advance CXMelga

Got it Thanks again Kim, CXMelga

Hello Kim, Thanks once again for taking the time to answer my question for me One last question related to the above please, when you say "you will have to buy back that put" lets say the position is open in my trading screen (as the option still has time to live and it has not been exercised) so I can select that particular position, I presume I have to select something like 'buy to open' ? (still working in understanding the terminology). However will I actually be buying 'that particular put' as the owner (the actual person/entity who purchased the 'put' I sold in the first instance) may not want to sell their option. In other words , as options trading is a 'market' I assume what actually happens is I will be 'buying a new contract' (from a writer) for a 'put contract' at the same strike price as the one I sold and for the remaining time to live (e.g. 45 days) to actually counter balance exactly the one I sold ? or does it work some other way Thanks again (I have just read one basic book on options trading and another is on its way with more detail, so sorry if my questions seem a bit dumb at this stage) CXMelga

Hello, can someone answer the following for me please. If X is trading at $50 and I sell (write) a put at $40 with a 90 days expiry for a premium (per share) of $1 The above numbers are just for illustration After 45 days X is trading at $43 and I am worried it might hit the strick price before the option expires, can I sell the option (with 45 days left) on to get rid of my risk. I guess not as I would get getting paid twice to sell the same option? So I guess I could buy a put on X to hedge my position to a degree (depending on the strike pruce and duration). Or do a virtical spread (sell/buy) at the outset, to hedge but make less potential profit at the end Can someone please clear this up for me as I am learning before thinking about trading Thanks very much CXMelga