Options trading question

[sgdividends]

Has it happened before where i sold a call option, price exceed the stirke price but the holder did not exercise it and let it laspse due to various reasons?

Is it ever possible?

 

[autumm]

if the option is in the money, most brokerage firm will automatically exercise the option

 

[Shiny Things]

Has it happened before where i sold a call option, price exceed the stirke price but the holder did not exercise it and let it laspse due to various reasons?

Is it ever possible?

Vanishingly unlikely. OCC (the Options Clearing Corporation, which handles this stuff in the USA) automatically exercises options that are one cent or more in the money at the close on the expiry date. Your counterparty's brokerage may have slightly different auto-exercise procedures, so it's not impossible; or the counterparty might deliberately lapse an option that's very close to the money if they're not delta-hedged and don't want to be long the stock.

Non-optimal early exercise is a whole different kettle of fish, and a few people got done for shenanigans around exploiting people forgetting to early-exercise. Let me know if you want me to explain what goes on there.

 

[yattokame]

is it an american or european style option?

 

[sgdividends]

Thanks all for replying!

Let's say it's interactive brokers and cboe ones, American style and I sold a naked call.
1) can the market price exceeds the strike price and it's not exercised and then later market price goes below strike price and expire worthless?

2) actually , how does the exercise procedure take place ? I guess there is a market maket as a counter party but how much in the money does he want to wait before he exercise ?

3) if I own some spy etfs, and I sold some covered spy calls . How does interactive brokers link these spy etfs to these spy calls ? I mean interactive brokers may think I sold naked spy etfs calls..Is there a button to click to link them?

Thanks Shiny, glad u replied..About the shenigans it's too high level for me..Maybe when I get the basics right I ask u again ...Serious knowledge u got there!

 

[Shiny Things]

Thanks all for replying!

Let's say it's interactive brokers and cboe ones, American style and I sold a naked call.
1) can the market price exceeds the strike price and it's not exercised and then later market price goes below strike price and expire worthless?

Sure. Just because the option's in-the-money now doesn't mean it'll be in-the-money at expiry.

2) actually , how does the exercise procedure take place ? I guess there is a market maket as a counter party but how much in the money does he want to wait before he exercise ?

Depends whether you're talking about the regular expiry date or early-exercise. I'm not an equity-options guru (FX options were my thing, and those typically trade European, so early-exercise nuances are a bit outside my wheelhouse), so if there are any equity options gurus out here, feel free to correct me. Buuuuttt, that said:

On the regular expiry date, the OCC defaults to automatically exercising all positions that are at least one cent in-the-money against the closing price of the stock on the expiry date, and automatically lapsing all positions that are at-the-money or out-of-the-money. You can notify your broker that you want to exercise an OTM position or lapse an ITM position, even if it would normally be auto-exercised or auto-lapsed; if anyone does this, the out-of-the-ordinary positions are assigned by the OCC (I think randomly, but I'm not sure) to its member firms, which then assign them to their end users.

On any exercise date, the OCC takes all of the early exercise requests and assigns them—I think randomly, but I'm not sure—against the short positions of member firms. Those member firms then assign the exercise notifications to their end users.

Basically: on the expiry date, it's all automatic, and all the exercise and lapse instructions pair off nicely; if someone exercises an option outside the normal auto-ex procedures, whether that's an early exercise or a day-of decision, it gets randomly allocated among all the offsetting positions.

There used to be some shenanigans around the early exercise rules, as well. This ISE whitepaper explains the "dividend trade" strategy that used to be very common in stocks that were about to pay a huge dividend. This strategy doesn't work any more, though, because the OCC changed the way they process early-exercise notifications in 2014 to eliminate this strategy... and BAML memorably f*cked it up in 2012 and lost nearly $20mio in one hit.

The important thing to remember here is that the only reason you'd ever early-exercise a stock option is if you're long a deep-in-the-money call on a stock that's about to pay a big dividend. If the dividend is bigger than the remaining time value of the option, you'd rather early-exercise the option and give up the time value in return for the phat dividend. Conversely, if you forget to exercise your call option, you're taking a loss, because you're giving up the value of the dividend that you would have earned.

3) if I own some spy etfs, and I sold some covered spy calls . How does interactive brokers link these spy etfs to these spy calls ? I mean interactive brokers may think I sold naked spy etfs calls..Is there a button to click to link them?

They don't.

For margin purposes, if you've got portfolio margin switched on, IBKR will automatically net the margin of the two positions with SPY as the underlying. But I don't think you can link two existing positions into a single combo position for position-management purposes; I'd love to be proven wrong here though!

 

[sgdividends]

Thanks Shiny..Been looking forward to your reply. .

Time to get my hands wet and dirty to learn the damn options

 

[scholar88]

I require help in trading options? Can some options experts clarify my queries? I have zero knowledge and experience about option trading and contemplating whether should I venture into option trading?

Is trading option more lucrative than trading stocks? Is trading options a safer option, if you know how to hedge your risk? Would you choose to be a nett buyer or nett seller in options? If one account is small, can we use option to trade, where options is a leverage to trade stocks or futures? As compared to stocks, where you need large capital? Buying stocks are extremely RISKY, do most of the investors lose money in stock market? Is there no way to hedge your risk for buying stocks except to set stop loss? Penny stocks are exteremly risky, will the company bust if you are not careful? Is it worth holding a stock when you have lost a lot of money, hoping it would bounce back? Hence, is trading options a safer option as risks are hedged?

Is trading futures like Crude Oil, S&P 500, Nasdaq, Coffee, Natural Gas profitable?

I frequently see these terms I read on the Options Book from Lawrence G. McMillan...but was quite unsure about it, hence making some wild, random guesses about it...Bear Call Spread, Bull Put Spread, Iron Condor, etc? Probability in the money (PITM)? Probability Out Of the Money (POTM)? Margin Requirements? Delta? Sell options? Repair strategies? Buying Power Effect (BPE)? Vertical Spread? VIX? Bollinger Band? Triple Top Breakout?

For instance, Crude Oil is bullish, we will go for Bull Put Spread? And for index like Dow Jones Index, do we go for Bull Put Spread only as this index is uptrending? Iron condor would not be suitable as this index is uptrending, and Bear Call Spread would not be suitable unless the trend reverses.. And is Iron Condor never suitable for Indexes like Nasdaq, Dow Jones as well as Crude Oil as they are uni-directional, meaning you either trade Bear Call Spread or Bull Put Spread?

Do we always sell options, and never go for naked options, must do "hedging" by buying an insurance to hedge our risk? For instance, when we sell a Put option of 36, we must also buy a Put options of 39, so as to hedge our risk, in the even the direction is wrong and not to our favour? We can minimise our losses and there is some sort of protection?

How much strike price difference for our vertical spread must we set? Is this very essential? For instance, for Crude Oil, must we set a strike price difference of $3 for our vertical spread? Will it affect our profits or losses?

And do we look out for the Probability In The Money (PITM) percentage? Let's say the PITM hits 30%, we start repairing early to prevent further losses, and so that the situation can be rectified rather than being too late? And what repair strategy would you use, roll to next calendar month, longer date to expiry?

And on the question on choosing which options chain to trade, is it the longer or shorter expiration date is better? Longer expiration date allows more time to react in case of repair? Shorter expiration dates trades may not allow sufficient time for us to repair in the event the stock price direction is not in our favour?

And it true that if the options in out of the money, and expire worthless, the options will not get exercised? And for instance, if an options is closed early, we have to pay for the commission fee, hence is it wise to let it expire worthless. And are we not allowed to close at 0.00, as nobody will be willing to buy at that mark price? So the lowest mark price we can close is 0.01, if let say we close early?

And at what profit would you close your trade? Would you allow your options to expire worthless or when you have amassed 75% of the profit, you close early?

And do you trade crude oil by Bear Call Spread, Bull Put Spread or Iron Condor? As Crude Oil price is largely one directional movement, would it be too risky to trade by Iron Condor? John Bollinger, a famous technical trader developed the Bollinger Band. For instance, let's say Crude Oil, if Crude oil touches the upper part of the Bollinger Band, do we bet that it will go back down, and will be bearish, and choose Bear Call Spread? And vice versa, if Crude Oil Price touches the Lower part of the Bollinger Band, do we bet that it will bounce back, and be bullish, and choose Bull Put Spread?

And when do we use Iron Condor? Is it suitable for stocks or futures that has no direction, directionless, very little movement up and down?

And do we use Triple Top Breakout to select stocks that are uptrending and enter Bull Put Spread and do we use Triple Bottom Breakout to select stocks that are downtrending and enter Bear Call Spread?

And do we trade all our capital into one option? As there is a buying power effect (BPE), which will vary as the stock prices moves up or down? Hence, the broker may charge you more margin and you may incur margin call, where you have to top up more money? So is it wise to leave some form of capital to prepare for repairs and to prevent margin call? And is it safe to trade too many lots into one particular stock or future? In the event, when a major event happens, a panic occurs, will you lose a lot of money? Hence, is it more wise to diversify your portfolio, and not trading many counters of the same industry. As if this particular industry has a problem, all the counters you are holding may be affected. Hence, is it wise to hold counters of different industries? For example Crude Oil, Ten Year Treasury Notes, Gold are the economy based futures. Soybeans, Corn are agricultural based futures. Hence, is it wise not to invest in the same industry based futures and diversify our porfolio. Just in case, when one industry is in trouble, we have the other to back up?

And for instance, a panic occurs, Nasdaq drops more than 10%. Do we close our sell put and just let the buy put run for us, so that we can minimise our loss and at the same time earn bigger profit? But how long does a panic event last, and let say it bounces back, do we have to repair again? And how much profit would we allow when a panic occurs, when do we realise our profit? We may not be able to sleep, thinking if tomorrow it bounces back, then my option will have a problem. And let say if I close now, it may drop even further, so what should we do?

And I realise that trading in commodities such as wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, soybeans are heavily dependent on weather and they are considered seasonal trades.. For example during rainy seasons, these crops may be heavily affected, hence do we avoid trading these commodities during these periods? Hence, when is the right time to trade these products? Is it by looking at the CBOE Volatility Index, when it is volatile, it it the best time to enter the trade?

And is it advisable to use only 30% of our capital on one product and use not more than 60% of our capital? Do we have to reserve 40% of out capital and leave it untouched to prepare for repairs,etc?

Is my above analysis correct or wrong? Any options expert to help? Do correct me if I am wrong in my statements above, I just read from an Options Book from Lawrence G. McMillan...

Have totally zero experience and no knowledge in options trading, and keen in it. Any experienced options trader can help me clarify my doubts that I have read from the book?

 

[scholar88]

Anyone can help me with my above questions?

 

[scholar88]

Seems like Interactive brokers will link it automatically. Hmm... Im feeling insecure like a chicken!! Bo Bo KE!

What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price.

Can you help me address my queries too? Thanks

 

[scholar88]

Seems like Interactive brokers will link it automatically. Hmm... Im feeling insecure like a chicken!! Bo Bo KE!

What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price.

http://ibkb.interactivebrokers.com/node/1718#What_happens_to_my_long_stock_position_if_a_short_option_which_is_part_of_a_covered_write_is_assigned_

 

[scholar88]

http://ibkb.interactivebrokers.com/node/1718#What_happens_to_my_long_stock_position_if_a_short_option_which_is_part_of_a_covered_write_is_assigned_

Do help me address my queries too. Really very puzzled and confused. Hope you can help me

 

[sgdividends]

Actually i think go to OCC the clearing house better.

Now all my doubts cleared.

https://www.theocc.com/clearing/clearing-services/specifications-equity-options.jsp

 

[scholar88]

Actually i think go to OCC the clearing house better.

Now all my doubts cleared.

https://www.theocc.com/clearing/clearing-services/specifications-equity-options.jsp

So can you clarify my doubts too? Because I'm quite confused and dumbfounded.

 

[868888]

Option strats are designed to hedge a particular cash flow and are often left to run until they expire or knock out.
A Long iron condor is a neutral non-directional strategy whilst the Short iron condor is a neutral and volatile strategy.
You need a spreadsheet at some time so you can input and calculate your different strikes and IV.

In the case of covered call, you are long the underlying and simultaneously short call option. Lower investment outlay and reduced delta, as compared to naked position in underlying. You give up profit potential if the stock skyrockets. Are you happy to liquidate e stock at the strike?

Delta ∆ = ∂V/∂S

Γ = ∂2V/ ∂S2
Gamma of a derivative, sensitivity of delta wrt to S. Gamma is greatest for options ATM.

Θ =∂V/ ∂t

ρ =∂V/ ∂r


Rho (ρ) - rate of change of the value of the derivative wrt nterest rate.

Λ = ∂V /∂σ
Vega (Λ) of derivative - rate of change of value of derivative wrt to volatility of the underlying asset.

If Gamma is large, your hedge ratio delta is sensitive to changes in the price of the underlying.
You can hedge a portfolio value immune to small changes in the underlying asset value.

 

[scholar88]

Option strats are designed to hedge a particular cash flow and are often left to run until they expire or knock out.
A Long iron condor is a neutral non-directional strategy whilst the Short iron condor is a neutral and volatile strategy.
You need a spreadsheet at some time so you can input and calculate your different strikes and IV.

In the case of covered call, you are long the underlying and simultaneously short call option. Lower investment outlay and reduced delta, as compared to naked position in underlying. You give up profit potential if the stock skyrockets. Are you happy to liquidate e stock at the strike?

Delta ∆ = ∂V/∂S

Γ = ∂2V/ ∂S2
Gamma of a derivative, sensitivity of delta wrt to S. Gamma is greatest for options ATM.

Θ =∂V/ ∂t

ρ =∂V/ ∂r


Rho (ρ) - rate of change of the value of the derivative wrt nterest rate.

Λ = ∂V /∂σ
Vega (Λ) of derivative - rate of change of value of derivative wrt to volatility of the underlying asset.

If Gamma is large, your hedge ratio delta is sensitive to changes in the price of the underlying.
You can hedge a portfolio value immune to small changes in the underlying asset value.

Is covered call the same as Bear Call spread?

 

[868888]

So why a covered call? Your index or equity already has a nice run up. You'll want to take profit, or you think its not gonna go up much further.

If it starts falling and a little, of cos you can keep the premium. If it drops and could fall even much further, close it. Don’t write covered calls as it won't be sufficient.

I might consider if a particular call payoff has a relative attractive edge relative vs cost at that point in time.

Your bear call is shorting 2 calls with the same expiration using two different strikes. Max gain net premium; max loss Strike1 - strike2 - net premium.

 

[scholar88]

So why a covered call? Your index or equity already has a nice run up. You'll want to take profit, or you think its not gonna go up much further.

If it starts falling and a little, of cos you can keep the premium. If it drops and could fall even much further, close it. Don’t write covered calls as it won't be sufficient.

I might consider if a particular call payoff has a relative attractive edge relative vs cost at that point in time.

Your bear call is shorting 2 calls with the same expiration using two different strikes. Max gain net premium; max loss Strike1 - strike2 - net premium.

Hi, I would like to know on average out of 10 trades, how many trades did you make profit? And I don't see any problem with my method.

 

[scholar88]

So why a covered call? Your index or equity already has a nice run up. You'll want to take profit, or you think its not gonna go up much further.

If it starts falling and a little, of cos you can keep the premium. If it drops and could fall even much further, close it. Don’t write covered calls as it won't be sufficient.

I might consider if a particular call payoff has a relative attractive edge relative vs cost at that point in time.

Your bear call is shorting 2 calls with the same expiration using two different strikes. Max gain net premium; max loss Strike1 - strike2 - net premium.

But in general, my repair strategy is as follows. See whether you understand..
For example, Apple share which has been bullish for months suddenly move down drastically from 140 USD to 120 USD.

Hence, my vertical spread (Bull Put Spread) which I have been betting that the stock will be bullish, is in trouble. So what I will do is, roll my sell put further away, For instance, my Vertical Spread- Bull Put Spread is as follows (Sell 100 Put, Buy 95 Put) of the same expiration date.

What I will do is close my exisiting sell put, and open another sell put- 90 Sell Put.

Hence, this is my method, see whether you can understand, that is why my trade will not lose all my capital, I will hedge my risk by repairing before my trades turn awry.

 

[868888]

Thought you'll use a ratio spread to repair or reduce the BE of a losing position.

The bull put spread has limits on upside profit potential and lmt downside risk.
Max loss(K short put - K long put) net premium + comm. Max loss capped by e long put. your gain is when Apple's above the higher strike and you pocket the credit. Profit starts to erode once S goes below the short put strike, till the long put K.

Given e defined limitations, can use 3 options to create a ladder in instances where IV is low and/or when IV is high.