First Options Trade

[jackson8]

hi guys
am looking at gettting into options trades and have a few questions if someone could help me out would be much appreciated
1 if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for

2 if i sell a call to open and same happens do i just pay the difference out

3 to write a covered call do i need to hold the stock first or can i sell call to open first then buy stock after at any given time frame

4 if i sold naked call and stock starts to rise to very near to stike price can i buy stock then to cover it before it goes over strike and putsme in red even more

regards gary

 

[wayneL]

hi guys
am looking at gettting into options trades and have a few questions if someone could help me out would be much appreciated
1 if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for

Even though "get exercised" is often used and everybody understands what you mean, being "assigned" is the correct terminology. When you are long, you exercise the option; when you are short you are assigned.</pedantic>

You must pay the strike price for the shares.

If you wrote a $20 NAB put contract that you received $1.50 for and are assigned. You must pay $20 per share, but you also keep the $1.50 per share. You end up with 1000 shares in your account with an effective cost base of $18.50 per share

2 if i sell a call to open and same happens do i just pay the difference out

No. You will be obligated to sell the shares to the buyer. That means either (a) you have to go into the market to buy the shares at market price in order to deliver the shares to the buyer, or (b) you will be short the shares. This will depend on your broker and trading permissions etc

3 to write a covered call do i need to hold the stock first or can i sell call to open first then buy stock after at any given time frame

If your account is authorized, you can write the call first if you want to.

4 if i sold naked call and stock starts to rise to very near to stike price can i buy stock then to cover it before it goes over strike and putsme in red even more

Yes.

 

[sails]

hi guys
am looking at gettting into options trades and have a few questions if someone could help me out would be much appreciated
1 if i sell a put to open and i get excercised do i then end up wirh stock that i have had to pay a premium price for

2 if i sell a call to open and same happens do i just pay the difference out

3 to write a covered call do i need to hold the stock first or can i sell call to open first then buy stock after at any given time frame

4 if i sold naked call and stock starts to rise to very near to stike price can i buy stock then to cover it before it goes over strike and putsme in red even more

regards gary

I would also suggest checking with your broker what their terms and conditions are in the event of being assigned. There are some very different ideas on exercise/assignment out there. Some charge horrendous fees for the stock transactions. Some charge "fail fees" because you are assigned the day before you know about it - which means you are not opening and closing the stock position on the same day which messes with the T+3.

You are technically right in the event of a sold call being assigned in that cash to the value of your short call is deposited into you account and, subsequently, you only need to find the difference to buy the share position to close it.

Aus brokers like OptionsXpress understand the workings of option trades and spreads and so are far more exercise/assignment friendly.

Be very careful with IB if you are planning to write Aus options as I understand they only give the first 10 minutes of the day to close the assigned/exercised position before they apparantly randomly start closing out your positions which may have nothing whatsoever to do with your options trade. This would be risky in our market as some of our shares like WBC, WOW etc don't even start trading until then. If you have a covering long position that you need to close simultaenously with the assigned/exercised position to retain the original risk exposure, it is almost impossible to get anywhere close to a fair price within the first 10 mins.

Also Pt 4 - as Wayne has said, but just to point out that you would simply transfer the upside risk to the downside should the share price move down significantly.

 

[jackson8]

thanks alot for your help guys

i have a couple of weeks off work so shall spend time reading and actually watching options market through my brokers platform which is comsec before i leap in.

need to understand what the risks are with different types of strategies, i dont necessarily want to try for riches just make a small amount on the side to supplement my income.

cheers
gary

 

[Seneca60BC]

Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend! What do you guys do to negate this temptation ?

 

[jackson8]

Hi Guys

Yes thanks for the encouragement. Yea I cannot beleive the illiquidity - i thought the Market Markers were suppose to at least put in a BID ASK everyday? Is this not true ?

Cheers.

Role of Market Makers
Market makers play an important role in the
options market. They provide liquidity, and
assist in the price discovery process, so that
traders and investors are more easily able to
price and value options. Market makers are not
required to provide quotes in all series, or at all
times, and as such there can be no guarantee
that all series will have prices displayed.
Under ASX Market Rules, each market maker
is assigned one or more securities in which
they must meet certain obligations for certain
percentages of time*. This involves quoting buy
and sell prices for a certain number of series,
and/or responding to requests from other
market participants for prices.
Market makers can choose to have the
following obligations:
a) make a market on a continuous basis only; or
b) make a market in response to quote
requests only; or
c) make a market both on a continuous basis
and in response to quote requests.
Continuous Markets
Market makers who choose to make a market
on a continuous basis are obligated to provide
orders continuously for certain percentages
of time* in eighteen series per underlying
security, encompassing three calls and three
puts in any three of the next six expiry months.
(3 series of calls and puts in 3 expiry months –
3 x 2 x 3 = 18 series). The criteria are based
on the previous trading day’s closing price of
the underlying security and are selected from:
1. Those series at-the-money
2. The next three in-the-money
3. The next three out-of-the-money.
Each order must be for at least the minimum
quantity, and at or within the maximum spread
requirements.
31
Quote requests
Market makers who choose to make a market
in response to quote requests must provide
orders on request for certain percentages
of the time* for all series out to nine months
maturity, for the minimum quantity and within
the maximum spread.
The maximum elapsed time before responding
to a quote request or replacing continuous
orders is 30 seconds.
The minimum duration of an order is 30
seconds. An order can be amended on
condition that the minimum quantity and the
maximum spread are maintained.

 

[sails]

Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend! What do you guys do to negate this temptation ?

If your crystal ball says it will keep going down, then you can hang on for now .

One other suggestion is that you could roll the long puts down to reduce your initial debit and would still keep you in the trade, but think you could lose a lot with slippage with so little liquidity in AWE options - in fact no open interest at all at the $2.50 call strike. Perhaps this is a paper trade - if so, it's certainly a good way to get started.

Out of curiosity, I requested a quote on both your put and call options and got no reply. I imagine there would be a fairly wide bid/ask spread making it pretty difficult to get a fair price. How are you getting your prices for this trade?

 

[Seneca60BC]

Hi Sails

I simply look at the ASX website to get the quotes. How do you mean you requested to get the prices?

 

[sails]

Hi Sails

I simply look at the ASX website to get the quotes. How do you mean you requested to get the prices?

If market makers are not quoting, you can always ask for a quote - whether or not you will get one is another thing when the options are so illiquid. Some trading software allows you to request quotes online or you simply phone the broker who will use their software to request the quote.

Using the ASX website for quotes is great when testing ideas, but it doesn't show how wide the spread can be between the bid and ask. When trading for real you will most likely pay higher than the ASX price if you are buying and get less when you sell.

 

[cutz]

Hi Sails,

Funny you should mention that,

some of the spreads on mqg where eye popping last week.

 

[cuttlefish]

Well I was actually sitting on a 22% profit and was so tempted to close the trade!! I think this is the hardest thing to do - to ride the trend! What do you guys do to negate this temptation ?

Seneca - I'm pretty new to options as well but in relation to profits one thing I've started to realise is there are as many choices for profit taking as their are for an initial position. e.g. you could take the volatility profit while leaving the delta open (by swapping for a low IV high delta - though you'd want to make sure you hedge any existing delta profit etc.) - I'm not savvy enough to offer specific examples but conceptually its important when taking profits to understand which greeks you're taking profits on. (and a similar concept applies for implementing stoplosses and trailing stops etc. ).

 

[Seneca60BC]

If market makers are not quoting, you can always ask for a quote - whether or not you will get one is another thing when the options are so illiquid. Some trading software allows you to request quotes online or you simply phone the broker who will use their software to request the quote.

Using the ASX website for quotes is great when testing ideas, but it doesn't show how wide the spread can be between the bid and ask. When trading for real you will most likely pay higher than the ASX price if you are buying and get less when you sell.

Hi Sails

I calculate my profits/loss based on the BIDs put forward so yes I have taken into account the spread.

 

[Seneca60BC]

Seneca - I'm pretty new to options as well but in relation to profits one thing I've started to realise is there are as many choices for profit taking as their are for an initial position. e.g. you could take the volatility profit while leaving the delta open (by swapping for a low IV high delta - though you'd want to make sure you hedge any existing delta profit etc.) - I'm not savvy enough to offer specific examples but conceptually its important when taking profits to understand which greeks you're taking profits on. (and a similar concept applies for implementing stoplosses and trailing stops etc. ).

Ok thanks for this - I will have to look into this is much more detail.

 

[Seneca60BC]

UPDATE:

position Exited - Profit 39% after brokerage.

Cheers!

 

[mazzatelli1000]

UPDATE:

position Exited - Profit 39% after brokerage.

Cheers!

Great work

Now just remember to maintain a healthy fear of the market....

 

[Seneca60BC]

Hey Maz

Thanks for the encouragement - yes I have been burnt badly before and I see that as a very good experience - actually im glad that it happened to me - it was a very good learning experience -

yes with AWE, I suspected oil would go down but was not 100% sure, hence the strangle.

Off course this trade could also be seen as a pure fluke as well, because this is simple just one trade.

The exerise of this was to demonstrate to others on this forum that Options, even though they are risky if not respected, should not be overlooked. Thats what i learnt anyway.

Cheers

 

[mazzatelli1000]

yes with AWE, I suspected oil would go down but was not 100% sure, hence the strangle.

Off course this trade could also be seen as a pure fluke as well, because this is simple just one trade.

The exerise of this was to demonstrate to others on this forum that Options, even though they are risky if not respected, should not be overlooked. Thats what i learnt anyway.

Cheers

Nothing in the markets should be overlooked Its just some are better at utilising particular products than others.

With regards to the "fluke", don't be too harsh on yourself.

But for trading purposes, the key now for you is to be able to generate money on a consistent basis. I have yet to meet anyone who has made money on a consistent basis from employing strangles/straddles alone.

But theres always a first

 

[Seneca60BC]

Hi Maz

I have paper traded some PUTS as well and have made quite some returns especially in this market - so will also be engaging this - I will also take a look at the more esoteric options at a later time, but dont want to chew more than necessary at this time.

 

[Grinder]

UPDATE:

position Exited - Profit 39% after brokerage.

Cheers!

Good effort Seneca, straddles have rarley paid off for me so glad to hear it worked out. Start of a curious journey I gather.

 

[cuttlefish]

Well done. A big part of options trading is in the taking of profit from the little bit of experience I've had - its very easy to let a profitable position go back to a loss - so well done on locking in the profit too.