Options trading in OZ - 'Reopening' discussions

[cutz]

Maybe I’m missing something.

That's cool, many complexities, it takes time to get it.

I think the bit you're missing is understanding equivalent positions, an option strategy modelling tool will help, sharkman raised a couple of valid points regarding your covered call position, legging into one introduces slippage / execution risk, a simple short put will set you up with the exact equivalent position in one trade.

 

[Gunnerguy]

That's cool, many complexities, it takes time to get it.

I think the bit you're missing is understanding equivalent positions, an option strategy modelling tool will help, sharkman raised a couple of valid points regarding your covered call position, legging into one introduces slippage / execution risk, a simple short put will set you up with the exact equivalent position in one trade.

 

[Sharkman]

I’m just a bit scared of selling puts without holding the underlying shares at the moment but my confidence will grow in time.

that's fair. i was a bit freaked out by the idea of "naked" positions vs "covered" positions when i was starting out too. but in this case you'd be selling cash covered puts, not naked puts, because if you've already bought the stock position outright, you would've had the cash to cover the assignment had you not bought the stock position ie. the puts would be fully collateralised, just like a covered call.

when selling puts, usually you DON'T want to be holding the underlying shares. short puts are delta positive, if you already have a stock position, you'd just end up making your position larger, so you wouldn't want to sell puts in addition to a long stock position (unless you intentionally want to take on more deltas in that stock). eg. if you have 1000 CBA and you sell 10 ATM puts, you will actually end up with ~1500 deltas in CBA, not 500.

naked calls however are a completely different story and i think it's completely legitimate to be scared of selling those. even after 13 odd years of options trading, i will still never sell naked calls, if i want to sell calls without owning the stock i will at least protect it by buying a higher strike call. unlike short puts, the potential losses are unlimited because a stock can theoretically go as high as it wants, whereas it can't go any lower than zero, so even if you sell puts that aren't fully collateralised, you know what your max loss is.

 

[cutz]

Hello,

In simple terms a covered call carries exactly the same risk profile as a naked put.

Why are you more comfortable buying stock and shorting calls over just shorting puts ?

Hi @Gunnerguy

This all becomes second nature, I don't have much time to explain these days.

This guy does it well with graphics, I only watched it to 6mins. https://s3.amazonaws.com/Vimeo/CCC.m4v

Pertinent point at 4mins 30 secs.

 

[Gunnerguy]

OK , time to update.
Watched over 40 hours of options education from ‘Options Alpha’. A tremendous free website with a huge, huge, huge amount of education and information.
Getting close to the first trade.
Start simple, know your risk, profit profile and .... patience.
GG

 

[Gunnerguy]

I've been quiet for a few days. Continuing to learn through videos and reading.
The IB account is all set up and have been playing with setting up the dashboard and did some paper trading.
So at the moment I have bought 100 CBA (at 95.4), 500 ANZ (at 27.9), and 250 BHP (at 47.9) in my 'options trading account'. I am currently 'long' in all these 3 and hold more shares in my 'Long Term investing account'.
My 'Options Trading Account' is purely to learn to trade options, make some income from premiums, and not care about the overall market directions.

The first trade I am looking at is selling June or July OTM Puts but above my original 95.4 purchase price, and below current price.
Possible outcomes, 1) Premium will be recieved, if CBA rises the contract will expire worthless and I have gained the premium, curremtly $38. 2) CBA falls below strike, my shares are assigned, sold out, and based on my buy price I make about 3.9% on my original CBA shares after costs.

A simple first trade. If CBA rises, I gain the premium, if CBA falls I lock in profits. Yes if CBA falls below then bounces up I loos possibe upside, but I hold CBA elsewhere that will gain the upside.

Probably a very basic first trade for those reading, but I have to start somewhere.

Any comments would be well recieved.

Regards
Gunnerguy

 

[Sharkman]

The first trade I am looking at is selling June or July OTM Puts but above my original 95.4 purchase price, and below current price.
Possible outcomes, 1) Premium will be recieved, if CBA rises the contract will expire worthless and I have gained the premium, curremtly $38. 2) CBA falls below strike, my shares are assigned, sold out, and based on my buy price I make about 3.9% on my original CBA shares after costs.

the bolded part is incorrect for short puts. if it falls below the strike, you will be obliged to buy more CBA at the strike ie. the stock will be "put" to you. what you've described for 2) is bought puts.

 

[Gunnerguy]

the bolded part is incorrect for short puts. if it falls below the strike, you will be obliged to buy more CBA at the strike ie. the stock will be "put" to you. what you've described for 2) is bought puts.

Sharkman,
Still learing and a bit confused.
If I sell the OTM put, the purchaser has the option but not obligation to sell CBA shares. If the price falls below the strike the owner/purchaser of my sold put option, would be able to sell shares. If I am holding shares surely my shares would be allocated to him, and he would sell them at that strike price and thus my shares would be 'sold' at the strike price.
What am I missing here ?
Thanks
Gunnerguy

 

[Sharkman]

the put buyer has the right but not the obligation to sell their shares to you. they're either buying protection for their own stock position, or they're punting that the stock price will fall. eg. if you sell the $100 puts and the stock price falls below that, they get to sell their units to you at $100. even if it falls to $90 or $80, you still have to buy the stock off the put buyer for $100 when they exercise it. that's why they're paying you the premium, to "insure" they get at least $100 for their stock.

 

[Gunnerguy]

the put buyer has the right but not the obligation to sell their shares to you. they're either buying protection for their own stock position, or they're punting that the stock price will fall. eg. if you sell the $100 puts and the stock price falls below that, they get to sell their units to you at $100. even if it falls to $90 or $80, you still have to buy the stock off the put buyer for $100 when they exercise it. that's why they're paying you the premium, to "insure" they get at least $100 for their stock.

Sharkman,
Thanks for explaining. Its a lot clearer now.
Gunnerguy

 

[Gunnerguy]

So my Options journey has now officially commenced.
My first ever trade ......

10 June. Sold 1 contract. $106 CBA covered call, 15 July expiration. Delta = 0.194, Price = 0.6. SP was at $100.94.
17 June SP got up to $106.33 but was not assigned.
21 June (today) SP at $98.06, Option Price = 0.219.

I could BTC and gain $36 (a nice bottle of wine for 11 days ownership of the option) after costs or let it ride.

I am currenty looking at selling more covered calls in BHP, ANZ, and maybe FMG tomorrow morning.
Happy so far and excited.
Slowly slowly ....

Gunnerguy.
(Wanting to suppliment my Dividend and Capital Gain Incomes with some Options trading Income).

 

[cutz]

So my Options journey has now officially commenced.
My first ever trade ......

10 June. Sold 1 contract. $106 CBA covered call, 15 July expiration. Delta = 0.194, Price = 0.6. SP was at $100.94.
17 June SP got up to $106.33 but was not assigned.
21 June (today) SP at $98.06, Option Price = 0.219.

I could BTC and gain $36 (a nice bottle of wine for 11 days ownership of the option) after costs or let it ride.

I am currenty looking at selling more covered calls in BHP, ANZ, and maybe FMG tomorrow morning.
Happy so far and excited.
Slowly slowly ....

Gunnerguy.
(Wanting to suppliment my Dividend and Capital Gain Incomes with some Options trading Income).

Congrats mate !

Early assignment highly unlikely when the underlying hit 106.33 on the july 106 calls, ex div is august I presume ?

How much are you paying on brokerage ?

 

[Gunnerguy]

Congrats mate !

Early assignment highly unlikely when the underlying hit 106.33 on the july 106 calls, ex div is august I presume ?

How much are you paying on brokerage ?

$1.17 per contract using IB as recommended by someone here on ASF, sorry can’t remember who, but will check
Gunnerguy

 

[Gunnerguy]

Congrats mate !

Early assignment highly unlikely when the underlying hit 106.33 on the july 106 calls, ex div is august I presume ?

How much are you paying on brokerage ?

Dividend declared in August

 

[wayneL]

Just a point on that sort of strategy, and more a point about management and assignment risk...

Maybe you don't need me to tell you this, but on a long term portfolio, beware of capital gains tax events.

ie learn the circumstances of when you risk being assigned, and when you don't.

FWIW

 

[Gunnerguy]

Thanks @wayneL for letting me know. Always happy to take advice and comments on my strategy/journey whether I know it or not. If I don't know I learn , if I do then it just reminds me of the fact which is good.

I am keeping a close eye on the potential to be assigned and the CGT consequences, especially now at EOFY. I have an 'invesment portfolio' separate from this 'Options portfolio'. I have a detailed spreadsheet showing my full tax status based on my dividends (& franking) and CGT events when I buy/sell my shares/ETF's through the year to ensure I 'churn' at a profit, and enough to live on, whilst also keep tax to a minimum. Assets are managed between my portfolio and Ms.Gunnerguy's portfolio.

I have already basically completed our tax assessments for this year, but looking at a little bit of 'bed and breakfasting' over the next 8 days.

Thanks for your comment @wayneL

Gunnerguy.
(The options learner)

 

[Gunnerguy]

Hi all,

With the impending, hopefully, good quarterly results in July for FMG, I am considering placing a Bull Put Credit Spread for FMG. The price has risen nicely in the last couple of days.

The details are.

15 July, 22.5/22.0 Bull Put, 10 contracts. Credit of $68. Max possible loss of -$432, if FMG price goes below $22.0 before 15 July.

I believe it’s unlikely FMG will go below $22.0 before 15 July. If it does I will buy FMG Long.

Not looking for Financial Advice (as no one can provide it here) but would appreciate any comments, suggestions.

Regards

Gunnerguy.

(Amateur options trading learner).

 

[cutz]

15 July, 22.5/22.0 Bull Put, 10 contracts. Credit of $68. Max possible loss of -$432, if FMG price goes below $22.0 before 15 July.

Hi , I'm getting a a $165 credit at the midpoint ! Max loss should equate to $335 plus commish, plus a little slippage.

 

[Gunnerguy]

Cutz,
Yep $170 now.

Gunnerguy

 

[Gunnerguy]

The spread across FMG prices currently.

Sell Put	Buy Put
High	Low	PM	Loss	Delta
$22.50	$22.00	$168.00	-$332.00	0.297
$22.00	$21.50	$108.00	-$392.00	0.084
$21.50	$21.00	$125.00	-$432.00	0.057
$21.00	$20.50	$43.00	-$457.00	0.044
$20.50	$20.00	$33.00	-$467.00	0.033

Interesting that as the premium goes up the highest losses goes down. Unusual isn't this ?
Deltas are also interesting.

Gunnerguy
(Amateur options trader)