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I am a newbie starting on Options, first starting with AAPL. I always write OTM puts and earn the premium. The decision to trade each option is quite arbitrary. Wonder can any of the more experienced member here advise on how to take on a more professional approach? Also besides the basic writing of calls and puts, is there any popular strategy with AAPL?
Can you help answer these questions from other members on NexusFi?
- Start by learning how options are priced. There is a fair amount of mathematics involved, but unless you understand how option pricing works you don't have a hope.
- Understand the risks. Do you understand the risks of writing naked (I presume) put options? You might end up owning a whole lot of AAPL shares you don't want, bought at a very high price.
- Tied in with top point, but you have to have an understanding of the greeks (delta, gamma, theta, rho, vega etc). Delta is essential to understand (its the change in option price for the change in underlying price) and is what drives option pricing. Gamma is the change in delta for the change in share price and is the second order derivative. Don't ever be short gamma (which is what you're doing when you sell options). A volatility explosion (eg if the share price collapses), will kill a small trading account.
- Read Education of a speculator by Victor Niederhoffer. He was an option trader who blew himself up doing exactly what you were doing (twice!).
- Read Nassim Taleb Black swans - he made the money Victor lost.
Finally (again) understand the risks. Options are highly leveraged and selling options can leave you with potentially unlimited losses. What if Apple goes bust? Work out how much you'd owe with a zero Apple share price. Don't think it can't happen (remember Enron, Lehman brothers etc).
I got a question for the options experts. Lets use AAPL as an example since it's somewhat on topic. Lets say I buy call options tomorrow (19/01/2015) with an expiry date of 4 months down to line like May 2015. Strike price will be near the money at $106. If around April or May, AAPL is trading at a price of $120+ a share, how likely am I to be able to sell my contracts? Will I have difficulty selling it and as such, I should've taken profits at a lower price or is there a good chance it'll sell?
I got a question for the options experts. Lets use AAPL as an example since it's somewhat on topic. Lets say I buy call options tomorrow (19/01/2015) with an expiry date of 4 months down to line like May 2015. Strike price will be near the money at $106. If around April or May, AAPL is trading at a price of $120+ a share, how likely am I to be able to sell my contracts? Will I have difficulty selling it and as such, I should've taken profits at a lower price or is there a good chance it'll sell?
Hello, you shouldn't have any difficulty in selling your contracts in this example. Market Makers will have a market for you to sell in with AAPL. It is possible in some cases you may pay a high Bid/Ask spread depending on the option.
Side note US Markets are closed for Holiday Martin Luther King Day on 1/19/15.
Additional Market Closings
2015 Holiday Status
January 01, 2015 New Year's Day (Observed) Closed
January 19, 2015 Martin Luther King, Jr. Day Closed
February 16, 2015 President's Day - U.S. Closed
April 3, 2015 Good Friday Closed
May 25, 2015 Memorial Day - U.S. Closed
July 03, 2015 Independence Day - U.S. (Observed) Closed
September 07, 2015 Labor Day - U.S. Closed
November 26, 2015 Thanksgiving Day - U.S. Closed
November 27, 2015 Early Close - U.S. 1:00 p.m.
December 24, 2015 Christmas Eve 1:00 p.m.
December 25, 2015 Christmas Day Closed
On the daily chart your looking at 103 as nearby support. You may want to consider a strike price below that level to give the trade a bit of breathing room. Either the 95 or the 100 July-15 Call looks workable for what you're proposing. The reason to look at July is if you are targeting May to exit the trade, you will want to give yourself at least 30 days of time distance from the expiration to avoid the exponential theta decay cost the call will experience as it approaches expiration. The theta of the July 95 for example is currently a manageable 0.02, whereas the theta for the near month is 0.06. The other potentially negative influence on this specific Call is it's implied volatility, currently 33% on the July 95 call, and 45% on the front month. The historical volatility is 23%. As the price of the stock goes up, the implied volatility likely will drop, and if the IV drops on your call, the call will lose value in response. Unfortunately longer duration call options, like this, are the most sensitive to changes in IV. So if the price of AAPL stock does indeed trade on up to $120 as you expect, the IV will very likely drop well below the current HV of 23%. Over the last year for AAPL options IV seems to bottom out around the 18% level. This is the classic case where someone buys a call, the price of the underlying security goes up as was anticipated, but the call option loses money for the trader. Given the current IV risk in AAPL options, a Bull Call spread may make more sense because it eliminates the IV risk from the trade. If you want to incorporate the IV story/expectation into the trade a Short Put strategy will profit from both the drop/collapse of IV as well as from the rise in the underlying stock price. If you want to get a little more creative with the current situation as it present's itself, you could employ the Short Put strategy on a front month to make maximum use of the theta decay and IV story, and the Bull Call spread on the later month(s) to benefit from the longer term price rise back toward the $120 level while being protected from the expected change in the IV.
I'm actually on the put side...I just wanted to know if I'd still be able to sell the contracts even if they experience big moves in price. It always felt like very few people would buy contracts with a strike price too far from current.
To answer your question: YES, you will be able to sell the contracts - maybe not at the price you prefer, but if you hit the bid with a small enough # of contracts (10 or less, I'd say), you'll have no problem.
