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Can we get real about Options on ASF?

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Thinking about writing covered calls on some highly-traded ASX stocks I own. What sort of owned stock value for the covered call makes this even worth messing with? $10k? 20k? 50k? 100k? More? (I know it's done in multiples of 100 shares.)
 
StockyGuy said:
Thinking about writing covered calls on some highly-traded ASX stocks I own. What sort of owned stock value for the covered call makes this even worth messing with? $10k? 20k? 50k? 100k? More? (I know it's done in multiples of 100 shares.)
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As long as the return exceeds any commission costs. In the US the commission would be $1. I have no idea about the ASX.

A potential trade for Monday as the CCJ trade will also resolve on Friday 17 May.




With XLF



Trending with:



Any headwinds? Well there is a PP right smack in the way.

Most likely to resolve as the broad market resolves:



jog on
duc
 
StockyGuy said:
Thinking about writing covered calls on some highly-traded ASX stocks I own. What sort of owned stock value for the covered call makes this even worth messing with? $10k? 20k? 50k? 100k? More? (I know it's done in multiples of 100 shares.)
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@Stockguy at the end of the day, it really comes down to fees as a ratio to the premium you collect and the time you spend to execute. If you're trading Covered Calls at a big 4 broker at $35 a leg (in and out) to collect $100 of premium - it makes life really difficult, especially if you have to roll your option (Buy-to-close your current leg and sell-to-open another = 2 more legs of cost). The premium you receive is going to depend on how close to-the-money you are, Days Until Expiry and the Implied Volatility of the stock (amongst some other factors, but they're the main thoughts for most people).

There are some other alternatives, like IBKR that does per contract trading, but drawdown is the custodian model of ownership not held in your name (not CHESS Sponsored).

The Options Trading company I am fortunate enough to start working with, Volatility.com.au recently released a retail brokerage platform, CHESS Sponsorship, own Cash Management Account with MQG and $3.50 per contract Covered Calls and Cash secured Put trading, making covered selling options strategies more accessible. So, you don't need to have 1000's of shares to play. (If you stop on by, send me a DM and I can show you how it all works). The team have just rolled out half price equities brokerage vs advertised too 0.06% min $9.95.

Fees are the killer with this with small(er) accounts. Set yourself up to trade less often, collect as much premium as possible whilst considering your risk appetite. I would also cross reference assignment/exercise costs, where your sold option get in-the-money and you are exercised (on a Covered call forced to sell your stock, on a Sold put forced to buy the stock).

Cheers,
VB
 

Yeah, I'd really have to change to a low fee broker of some sort for it to be worth the hassle for me. I'm rather comfortable being able to see my shareholdings when I login to normal internet banking - but my mob are NOT cheap for options trading Those prices you mentioned are good, though Definitely worth thinking about.
 
Aristocrat Leisure Trade.

I sold a Bear Call Credit spread at 49/51 (July) about noon time after the results announcement. Price was $45. Price has risen a bit since but hoping volatility will go down over the next few days/weeks and the price will not rise anymore.

Gunnerguy.
 
With the ruse in price if CSL this trade is under pressure. Cost to buy back is about -120. Still a month to go so I will wait and see what happens.
 
I thought I might introduce an interesting strategy to accompany an existing stock portfolio, one for who is intending to add a position on a stock they like, but too expensive for their liking. Maybe a substitute for someone that puts a GTC buy order on a stock well away from the current share price.

I like to call this an Advanced Cash-Secured Put. Simply, for options traders we call this a Put-Ratio spread, or to break it down with intention, a sold put option & a put debit spread together.

Setup:
Selling 2x OTM put options at desired buy-price of the stock.
Buying 1x OTM put option at a higher strike price, but for less premium than the total premium received for the 2x sold legs (for a net credit trade).

For example, say I'm looking to take a position in BHP, but the current price is just too high for me ($45.72 today). I'm happy to buy in the $44.00 region. In this example I'm going to set expiration around 3 months.

Sell 2x BHP Puts at $44.00 15th Aug 24 at $1.06 each
Buy 1x BHP Put at $45.50 15th Aug 24 at $1.61
= 50c credit per share (rounded)



Look at the payoff diagram above. If BHP trades above $45.50 by expiry, these options will expire worthless. As the trader, we'd keep the 50c credit per share. Now, 50c per share doesn't sound like a lot, but let's run the numbers:

Maximum cash output for this trade is $44 per share ($4,400 for 1 options contract)
Options expire worthless - I keep 50c per share ($50 per contract) for 90 Days
$50/$4,400 = 1.1% for a 3-month trade = 4.4% annualised

But Blake, BHP's dividend is better than that - why don't I just buy the stock?

If you want the BHP Dividend, buy BHP. This strategy has no stock risk until $42. Nearly 10% away from the current price (look at "Breakeven" above). If you're bullish BHP there are better strategies than this. This is suited for the long-term accumulator of stocks to capture a little extra alpha in the marketplace.

If you're set up with a derivatives broker, instead of lodging cash as collateral for this trade, you can use your existing portfolio as margin, meaning you don't need to tie up any cash to have this trade on. This is called lodging stock as collateral :0 . Sit that cash you have waiting to buy BHP in a HISA and earn another 5% while you wait. Now the returns can add up.

And this isn't even the best result for this trade.

Why a Put ratio spread over a cash secured put?

If the stock falls towards your short put legs, this is where this strategy shines. The peak of the 'tent' of the payoff diagram is at the short put strike ($44 in this case) & we'll make $200. Why $200, the difference between the bought and sold leg strike $45.50 - $44.00 = $1.50, plus the 50c we got for entering the trade = $2.00 per share.

"We're getting paid $200 to take 100 BHP shares at $44 per share". Annualise this return and you're around 18% (note that its unrealistic that this trade will play out exactly at maximum profit always). Look at it this way, if BHP falls at or below $44, I'll buy 100 shares at $44 and get paid $200 for it. On the payoff diagram, anywhere left of the peak of the tent, look at that as your stock position. at $44, we're up $200, at $42 we're breakeven.

A cash secured put will pay you more to enter the trade (more premium up front), but you'll lose on that extra payday from the put debit spread part of the trade, if the stock moves down towards the sold strike, meaning a higher break-even on the downside. The risk is to the downside for both these strategies, I'd rather lose a bit of upside to have better protection on the breakeven. If I wanted upside I'd find a better strategy to capitalise.

This trade only works if you stick to the initial plan - that you're happy to buy the underlying at the set short put strike. It sounds great to buy BHP at $44 now, but how would you feel if tomorrows open was at $43. That's the joy of the market. Options trading only works if you stick to the plan. Trade with intent and trade smart.

Change the ratio, change the strikes, change the expiry days, change the underlying stock. Whatever works best for you.

Note this is pre-fees, so make sure you take brokerage rates into account and size your trades appropriately to make it worthwhile.

I'd like to start sharing some more of these, let me know if this post was of any help.

Happy Trading.

Cheers,
VB
 
Yes

The option world is a world of ideas and this is why I promote the idea of learning the Greeks.

It will do your f****** head in for the longest time, unless you are truly a rocket scientist intellect. But.... even those of us with average intellect can eventually analyse such positions.

It's the ol' unconsciously incompetent
Consciously incompetent
Consciously competent
... And eventually unconsciously competent

Many years ago I came to the conclusion that options are not more risky or less risky. But you can take away the linear risk of straight stocks and reshape risk and reward to something more acceptable to your risk profile.

That's what I personally like and the more ideas people put forth, the better our analysis risk and reward, on a nonlinear basis, might become.

Bring it on, the more ideas, whether they be good or bad, the better.
 






  • Rubin Miller, CFA

Call Me Maybe​








Options contracts are the right tool for the right investor. But many more investors use options contracts than should, and unfortunately the many that should consider it, simply don't know how to use them.



Most commonly, options are a tool to leverage bets. I don't suggest that.



Yet properly used (which they rarely are), for specific investors, options can actually improve your portfolio's profile.



Financial contracts are complex, but let's distill the basic principles of the major three:



  • "Cash" or "Spot" contracts — trade money immediately for something. We do this everyday when we shop for groceries, or use money to buy stocks or bonds.



  • "Futures" contracts — trade money immediately for something, but get it in the future. You buy something from me (e.g. 5,000 bushels of wheat), but I don't deliver it to you until the future (e.g. 3 months from now, after we harvest the crop). The roots of futures are indeed agricultural, and it is not a coincidence that the famous "Board of Trade" for commodities is in heartland Chicago, rather than New York.



  • "Options" contracts — trade money immediately for the right, but not the obligation, to make a defined transaction on a defined date in the future.

If we stay on the same wheat bushels, it might cost:



Cash/Spot: $100,000 to buy 5,000 bushels.

Futures: $110,000 to buy 5,000 bushels, but take delivery in 3 months (someone else has to store them until then!)

Options: $15 to buy the right, but not the obligation, to buy 5,000 bushels in 3 months for $140,000.



The payoff structure of options can feel like a casino. You might think — why on earth would anyone bet that the price of 5,000 bushels would reach $140,000 in just 3 months, if the current price is only $100,000?



To which I would respond — yes. That's why it might only cost $15 to enter that contract. It's cheap because it's unlikely.



But if there is a crazy, unexpected wheat shortage that causes the price to go up to $150,000 in 3 months, then that person becomes an outsized winner despite only spending $15. They execute the options contract to buy the bushels at $140,000, then sell them in a cash transaction at the time for $150,000.



Made $10,000 and it cost you $15 to do it. That's leverage.



  • And you can imagine that an options contract to buy the same 5,000 bushels of wheat in 3 months for $130,000, instead of $150,000 would be more expensive (e.g. $1,500), because it's more likely to payout.
  • And an options contract to buy 5,000 bushels of wheat in 3 months for $300,000 might be only $1.50, because its wildly unlikely.



What was once a horse-and-buggy, critical mechanism for 19th century farmers to hedge risk and run profitable agricultural businesses, derivatives (like futures and options) are now an industry that frequently reeks of Wall Street profit motives.



At the Chicago Board of Trade today, only about 1% of futures contracts get delivered! Instead, they are traded for hedging or speculation purposes, and then the trader exits the position before the contract expires.







Last week, when Roaring Kitty purred back into our lives and started tweeting again, the options activity on Gamestop (GME) stock went berserk. Consider this from an X account that monitors big trades:









Let's break it down:



  • Bought call options: paid $0.21 for options contracts that gave the investor the right (but not the obligation) to buy Gamestop stock at $25/share anytime before 5/17/2024.
  • As Gamestop stock ("the underlying security") soared, the price someone was willing to pay for that same options contract (or, opportunity) soared even more.
  • The investor was able to sell those same contracts they bought for $0.21, for $13.63. They bought $27,000 worth of the $0.21's, so the $13.63's would have been worth $2M.



What's the catch?



No one knows what an underlying stock will do in the future! And so this huge win is a very rare outcome.



Instead, a more likely outcome was just losing $27,000 as the options expired worthless, and GME never got close to $25/share.



If you know that a certain asset will go up or down, options contracts are a fantastic way to leverage your bet. You can earn demonstrably more than you would just buying or selling the cash/spot contract of that asset (e.g. the stock itself).



Problem is no one knows the future. I strongly encourage investors NOT to buy call options like this.



However, there is a sensible reason to get a scalpel, move beyond plain-vanilla investing, and introduce complexity via options into your portfolio.



The strategy is called covered call options, and can reduce portfolio risk for a unique set of investors.



Covered calls are when instead of gambling on the underlying stock by buying call options, you are the person selling those call options. You collect the premium (e.g. $15) — meaning you get that amount up front that gives someone else the right (but not the obligation) to make a specific transaction with you (by a specific date in the future).



If buying the call option works out well, then as the seller you are the one who gets hosed. You are on the line to deliver the goods, like wheat bushels or Gamestop shares, at a predetermined price. So why risk it?



Because if you are a specific type of investor who already owns a concentrated position in a stock ("cash" or "spot" position), and you know the price that you want to eventually sell them, then you can lower your portfolio's risk by selling covered calls (the covered refers to already owning the underlying stock).



Sell these calls at the exact strike price you want to get out of your stock position anyway.



Let's pretend you have a $2M portfolio, and $1M is in a diversified portfolio of stocks and bonds that you are comfortable with, and $1M is in Tesla stock that you earned while working there.





Today, Tesla stocks costs ~ $177/share. So you have $1M/$177 = 5,650 shares.



You don't really want to own them anymore because you work with a really thoughtful financial advisor who told you that having 50% of your investments in one stock is risky, but maybe (1) you are anchoring to the glory days when it was $400/share, and you can't stomach selling at this low price, or (2) when you received the shares as an employee, the price was only $50/share. The capital gain taxes owed by selling at $177 are too burdensome.



But let's also say that you do want to get out of your position when/if Tesla gets to $300/share. Then you are the perfect candidate to consider selling covered call options.



Below is an options ledger of all the Tesla Call Options for $300 [I am going to make some simplifications. The takeaway readers should have is that deep "out of the money options" — unlikely to work out well, are cheap. "Close to the money" or "in the money" options — much more likely to have a chance at working out, are more expensive].



The ones expiring on May 31, 2024 (next week) are trading for $0.02. Meaning because it's nearly impossible for Tesla to go from $177/share to $300/share in this short time, they are so "out of the money," that someone will sell you any upside above $300/share until expiration for just $0.02.



But consider at the very bottom of the $300 call options ledger, the June 18, 2026 contract...a little over two years from now. Someone willing to pay about $28 dollars could purchase the right, but not the obligation, to buy Tesla stock at $300 any time before that expiration date. Since we've seen Tesla hit $400/share before, and many traders hype over Tesla, you can imagine there is an appetite for this type of bet.



And this where YOU — the former Tesla employee who wants to de-risk your portfolio, and sell Tesla stock if/when it hits $300, can come in. You are the PERFECT seller to this person, because you can collect $28 to give someone else the right to force you to sell them Tesla stock at $300/share anytime before expiration.



Because you already want to sell at $300/share! What do you care?







What you give up is any future gains above $300/share, which is what the buyer would receive. But if you were intending to sell your Tesla stock at $300/share already, you wouldn't have participated in that upside anyway!



Covered call strategies are an appropriate scalpel when you own a concentrated stock position, and are waiting for the stock to hit a certain price target to sell.



Consider selling call options at that strike price.



I often use the Groupon analogy: if you go buy 20 Groupons for random things, you probably won't use any of them and it will end up costing you money. But if you know that you are going to a specific massage parlor or hair salon, why not see if they have a Groupon? It's free money.



If you own a stock already, and you know the price you want to get out, why not collect income along the way?



Financial engineering and derivatives got a really bad reputation after the 2008-09 financial crisis. It's not entirely undeserved.



But as investors continue to wise up toward simpler, lower-cost portfolios, and avoiding typical Wall Street shenanigans, they should also know that unique situations call for unique solutions.



Not all complex finance is inherently bad. Financial engineering isn't inherently bad. Derivatives aren't inherently bad. It's just misusing them that can be bad.

End.


Just an update to the CCJ trade:




Was sitting at max profit 1 day before expiry. On expiry, it blew out.

If this had been an actual trade, I would have probably closed it out on the 16 May rather than wait for expiry. Hindsight is a wonderful thing. LOL. The actual strategy requires you to hold to expiry. So a loser.





jog on
duc
 
Not too keen on WDS short term but maybe an opportunity for a contrarian play.
The SP looks very busy between $27 and $23.

Possible Bull Put credit spreads .....

XDateSTO PutBTO PutPMC'sTPMMLDTEARRDelta
19-Sep$22.0$18.0$0.10720$214-$8,000.001188.3%0.074
18-Aug$24.0$23.0$0.05340$212-$4,000.008622.4%0.083
18-Jul$24.0$22.5$0.04940$196-$6,000.005521.5%0.051

Risky yes, but returns better than Bank Interest.
Long term I wouldn't mind owning WDS at $24, $23, $22......

Gunnerguy
 
I think there is a major mistake in the public discussion of options, and that is in the assumption that analysis should be undertaking to option expiry.

Of course there are strategies where you might want that damn thing to expire and hopefully before it goes into the money. Fair enough.

In my trading, especially when long options I have absolutely no desire for that thing to get anywhere near expiry. Even when short there are circumstances were I might close out the position and move on to something else.

This is where payoff diagrams can lead a massive red herring across your path. That pay off diagram may not be representative at all of your potential for profit and loss. Especially if you are taking taxation considerations into your our analysis.

My takeaway is this, an option position does not have an ending, it should rather be viewed as a metamorphosis into another position, which may or may not reflect the previous position.

For a very technical explanation of that see if you can find Charles Cottle's Options, Perceptions and Deceptions
 
Thanks for the option book rec . I consider myself fairly strong in most aspects of trading apart from options . I have the knowledge required to pass the rudimentary option trader test but outside the basics my knowledge is limited . Looking for a short list of Options books to improve my skill level , I dont really need to read books for rookies but more looking for intermediate and then advanced type books . Appreciate any recommendations put forwards

I have done the basic options modules on the asx site quite a few years ago and might do a quick refresher first in there before reading any books . Maybe tonight while watching F1 Quali ...
 
If I am understanding your explanation on covered calls correctly. Is my below interpretation correct?

A pure hypothetical:

I hold 50 shares of BHP at $40/share

I initiate a covered call option to sell 50 shares of BHP @ $50/share expiring in say 2025

The cost of that option contract is just additional income you could potentially receive on your underlying assets assuming you were always wanting to exit BHP and were 100% sure you wouldnt have a change of heart.
 
You make a good point @wayneL , there is more to it than the expiry payoff diagram and it really depends on what your intention is whilst trading options. Are you speculating on the price of the option to buy low and sell high or are you using options alongside a stock portfolio to extract further premium?

Dare I say this again, but Options have Options!

There is so much flexibility in the way you can trade these contracts.

Instead of just relying on a payoff diagram, I'd recommend using something like a 'payoff grid', which can show the value of the position over time:



@Chipp I'd recommend an intermediate options trading book called 'The Options Course' by George Fontanills (If you have a look around the interwebs you might find a downloadable copy ) - talks all things strategies and what environments they work best in.

@BossMan. Yes, you're right. remember that buying a call option gives you the right to buy an underlying asset at an agreed upon price at (or before) a certain time. The seller of that call option will have the obligation to sell their shares with those pre-determined parameters. There is a cost for this contract, so someone buying this right from you will be paying a premium for this and your troubles.
Thats where the covered call strategy comes in. You own the stock, you sell a call contract against that stock and collect premium. Simply, if the stock price stays below the strike price at expiry the options contract expires 'worthless' and you keep the premium you collected (and you can sell another) or the stock rises above the strike price and you're selling your shares to the counterparty.

Just remember in most Options markets, ASX included, contracts are in lots of 100 shares; so 1 BHP call contract controls 100 BHP shares.

Cheers,
VB
 
General comments to et al.

I would even argue there are even more "options" with the humble covered call, depending on your goals with the underlying.

Assuming you have a long term holding, you really want to consider the taxation implications of:
1: Having the underlying assigned
2: BTC or expiry of the call at a profit
3: BTC at a loss, avoiding assignment.

Supposing I've held CBA for a very long time at a low cost base, I do not want to be assigned, no sirreee. There is no universe in which I want to hand over a massive chunk of my wealth over in CGT for the sake of a miserable 2% of premium income.

Include me out on that!

I would prefer to close out the call and take the tax loss (and possibly roll into another series). That leaves me in a better position because of the lesser tax liability.

Likewise, if an OTM call has virtually no extrinsic value with a fair bit of time till expiry, I might close it early in favour of another strike/expiry.

There are of course risks when viewed in terms of a particular expiry cycle, but I prefer to view CCs as an overall long term strategy.

We can also get the crystal ball out and get more exotic by converting the position to one or another spread.

As Blake points out, we have options with options. We start with a synthetic short put which can readily be converted to a number of other synthetic positions if you wanna be adventurous.... Verticals, diagonals, short straddles/strangles, even ratios.

Just never forget that the tax man is all to willing to scoop up your hard won profits and one can use various trades lower tax liability without sacrificing your overall position.


FWIW
 
OptionAlpha has a series of beginner, intermediate, and advanced videos. About 15 in each category up to an hour long in some places. Also has a handbook of about 40 different options trade strategies. I highly recommend this website. Everything is free.
Gunnerguy
 
That’s right, but contracts are usually in lots of 100. Some of BHO’s however are in lots of 112.
I do exactly as you describe above on my holdings of FMG BHP IGO COL WDS and STO. Usually 40-60 days ahead. A reasonable additional income is generated.
Gunnerguy
 
However remember that options on the ASX200 index (AP) are cash settled.
 
Volatility skew is a crucial concept in options trading, providing insights into market sentiment, expectations, and perceived risks. It refers to the variation in implied volatility across different strike prices and expiration dates of options contracts on the same underlying asset.

Traditionally, volatility skew is observed by comparing implied volatility levels for out-of-the-money (OTM), at-the-money (ATM), and in-the-money (ITM) options at a single point in time. A negative skew occurs when OTM put options have higher implied volatility than ATM or ITM options, indicating a preference for downside protection. Conversely, a positive skew arises when OTM call options have higher implied volatility, suggesting a bias towards upside potential.

Forward skew, also known as term structure skew or time skew, examines implied volatility changes over time, reflecting evolving market expectations and sentiment. This forward-looking perspective provides valuable insights into potential shifts in volatility and market dynamics.

Volatility skew plays a crucial role in options trading strategies by providing insights into market sentiment, expectations, and perceived risks. Options traders often analyze volatility skew to gauge the relative pricing of options across different strike prices and expiration dates, in order to identify potential mispricings and opportunities for profit.

Volatility skew is therefore one of the many elements to consider when designing potential options trades. By understanding and interpreting volatility skew, traders can enhance their decision-making process and navigate the options market with greater ease and confidence.





Just another Options based tool to guestimate market direction or conditions.




jog on
duc




https://www.tastylive.com/
 
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