Trading in Luxury

Discussion in 'Journals' started by traderlux, Dec 5, 2009.

  1. both of these were good trades, never came anywhere near the short strikes, that clf is beast, can it keep going?

    #41     Oct 3, 2010
  2. have the following bps that i will close when i can get it back for .01$, or might just hold to opx,

    spy oct +106/-107p, sold it for a dime on wed sep 22
    #42     Oct 6, 2010
  3. article on expiration

    Ron Ianieri

    How to Bank Even Bigger Profits on a Winning Position
    Monday, February 8, 2010

    February might be the shortest month of the year, but for options traders, it's a long month ... this year, anyway.

    As you may know, options expire on the third Friday of every month, which is known as "expiration Friday."

    This February started off on a Monday, which gave you 15 full trading days until your February options were due to expire. Compare this to January, which not only kicked off on a Friday, but it was also a holiday, so traders only had 10 days during the month with their January options!

    Even though you still have another 10 trading days with your February options, it's not too early to think about managing those positions -- whether to bank your profits or cut your losses now (or very soon).

    But, when is the right time to change or exit an option position whose time is nearing its end?

    Next weekend, expiring options "come off the board." In anticipation of this, many investors and traders are closing the books on their February options and getting positioned for March and/or other further-out expiration months, depending on the strategies they are using and the results they want to achieve.

    What happens during expiration week to both winning and losing positions? Today we'll talk about how to manage your positions during this very active time in an options trader's world.

    Closing vs. Exercising

    As an option buyer, whether calls or puts, you have right but not obligation when it comes to how you want to exit your option position.

    This means that, at any time during the life of your option contract, you can choose to either:

    1) Close your position and bank the profits or curtail your losses, or

    2) You can "exercise," which means you tell your broker that you want to buy stock at the option strike (if it's a call) or sell shares at the strike (if it's a put).

    Many people buy options with one of two intentions. They can become long (buy) a stock (if they bought a call) or "put" (sell) their existing long shares (if they bought a put) to someone else at the strike price of their respective options.

    But do remember, if you don't want to wake up on the Monday morning after expiration with a stock position that you might or might not want (that you might or might not be able to afford), you must instruct your broker beforehand that you do not want to exercise your option if it finishes in-the-money.

    Better yet, you can close the option (i.e., "sell to close") directly. That way, as soon as your order is filled, the trade is completely shut down and you have nothing more to do with the option or the underlying stock.

    However, what if that position was a profitable one and you simply ran out of time with your trade?

    The Profits Don't Have to End with Expiration

    When you are in a winning position, and it looks like the position is going to continue in your favor but time is running out on the clock -- via expiration -- you don’t have to say goodbye to your winning streak.

    When you want to continue profiting from a position that's moving in your favor, you have the ability to lock in your profits while exposing yourself to additional upside with a technique we call "rolling."

    In fact, you don't have to wait until expiration week to "roll." If you're sitting on a nice profit in an option that expires six months from now, there's no reason why you should wait six months to close your position and risk losing out on all the gains you've made.

    When you roll, you bank your profits and use your original investment capital to buy another option in a further-out expiration month. If the stock keeps rising, you can "roll up" your calls to a higher strike price, or "roll down" to a lower strike if you're using puts. You can keep the momentum going for as long as your stock is running (or falling).

    In other words, you have an incredible opportunity to lock in your profits and limit your risk, while maintaining the same-size position.

    When my stock-trader friends tell me how much better stocks are than options, I remind them about rolling to protect profits in a winning position and get situated for more (which you can't do with any other security other than options). And I win that argument every time!

    Rolling works for long options. But what about when you are selling options against a long stock (or option) position to generate income?

    Buy it Back or Let it Go?

    When you sell options against your long stocks (or other long options) to collect premium while stocks are standing still or simply moving slowly, you do so to take advantage of time decay (i.e., the erosion of extrinsic value that happens most rapidly as expiration draws near).

    You will collect premium when you initiate the position (i.e., you "sell to open" the option). And, if the position works in your favor, the value of the option will decline.

    I'm always surprised to hear option sellers debating about whether to close the position before expiration (i.e., to "buy to close" the option) or to simply let it "expire worthless" if the position goes as expected and the option value declines.

    First of all, if you are in a covered call position, it is a repetitive strategy that you do month after month. So, it shouldn't be a problem to close out the expiring position before initiating the new one.

    However, if you aren't planning to continue the position (I might ask, why not?), the risk of it NOT expiring worthless is why you close the position. Instead of watching and waiting for the option to expire, it's best to buy it back. Chances are, you've gotten the lion's share of the value out of the option, so it's actually good to buy it back for a small loss.

    Volatility tends to pick up during expiration week, as traders and investors take their old positions "off the board" and get re-positioned in new expiration months and/or strikes. This could actually turn the price of your option in the wrong direction!

    If the stock is trading close to your option strike, you are taking a big risk in leaving your position to the fate of the expiration gods. The front-month, at-the-money strike prices, can change very quickly.

    In other words, the option might be worth 10 cents now, but could shoot up to $1 going into expiration. That is risk you could have -- and should have -- removed from the table. This makes the case for not waiting until 3:59 p.m. Eastern on Friday to call your broker to close out!

    There is one other "biggie" we need to talk about as we approach expiration, and that is assignment.

    Exercise vs. Assignment

    Earlier, we talked about "exercise," which is the buyer's right (but the buyer is not obligated to exercise).

    So, who IS obligated in the buyer/seller relationship? That's right, the individual who sold the option, who is obligated to fulfill the obligation that they got paid to take on.

    With American-style options (most equities), option buyers have the right to exercise their option at any time during the life of the contract; sellers get assigned when a buyer exercises.

    As we saw in our covered-call example, the option seller was selling calls against a long stock position. You don't ever want to be short options unless you have some type of hedge in case the position goes against you.

    The covered call strategy is best used on a stock that is in a slow-grinding uptrend. As the call writer, you can also profit if the stock stays still or even if it moves down a little bit.

    However, if the call moves in-the-money at expiration (i.e., instead of declining in value, it starts gaining intrinsic value, or the amount by which it is in-the-money), you run the risk of having someone who bought that same option want to exercise it, which means that you as the seller would have to sell shares to them at the strike price.

    The good news? You own the shares and can fulfill the obligation. The bad news? You're out of your position!

    Now, don't blame your broker for taking you out of your position. It's actually the Options Clearing Corp. (which guarantees both sides of a trade) that takes the people who are short that option and does a "random lottery" to determine who will fulfill the buyer's obligation.

    To avoid assignment, you can buy back your short option at any time. If you needed another reason to close out your expiring options, remember that if your short option is in-the-money and you haven't yet been assigned, you will be at expiration.

    Expiration: Time, Not Opportunity, Runs Out

    Options expiration sounds a lot scarier than it really is. Try to think of it in a more-positive and -realistic light: Expiration should serve as your reminder to "clean house" on your options account.

    You don't have to watch the markets from moment-to-moment for as long as they're open, but it pays to check in more frequently than you would with your longer-term holdings.

    As an options investor, you're spending less money to control the same-sized position in a stock. Plus, you can position yourself to capture gains much-more-quickly than the traditional stock investor might ever be able to see.

    You don't want to miss out on the opportunity to bank profits while you have them, to adjust losing positions while there's still something left to work with, and get re-positioned for even-better returns in the weeks and months to come.

    When you think "expiration," think "opportunities" to make more money!
    #43     Oct 7, 2010
  4. Bernie Schaeffer

    Some of the more popular names on which weekly options are available include Apple Inc. (AAPL), Google, Inc. (GOOG), the SPDR Gold Trust (GLD), the PowerShares QQQ Trust (QQQQ), and Goldman Sachs Group, Inc. (GS) (the list of available weekly options can change from week to week and is available at All weekly options begin trading on the Thursday prior to expiration week and expire on the following Friday.

    From the perspective of the option buyer, weekly options are attractive for the same reasons that attract traders during the traditional monthly expiration week. You achieve increased leverage due to the low dollar time premiums of near-expiration options, and short-term directional traders can better match the life of their option plays with the length of their forecast period. And for most underlying securities, options during expiration week are at their most liquid and slippage costs tend to be minimized.

    I'd suggest the following additional points for you to ponder when buying options during expiration week (or on the Thursday or Friday prior to expiration).

    You MUST be using an indicator set that drives trades based on a price forecast of seven trading days or less. It is simply foolish to trade weekly options based on a longer-term view on the underlying security, simply because premium levels are low. Longer-term views are keyed to playing the signal and ignoring the noise, while in weekly trading you are in fact trading the noise.
    If your indicator set does not encompass and address the issue of how stocks trade relative to option strike prices, and the potential for a preponderance of call or put open interest at various strikes to have a major influence on stock price behavior as expiration approaches, you are at a serious disadvantage.
    If you don't allow for the enhanced possibility in many cases of an underlying being "pinned" to a particular option strike on expiration day, you will experience far too many total losses.
    If trading weekly options is in fact about trading the noise, then you should seriously consider making pure volatility bets in the form of straddles (long a call and a put at the same strike). The single biggest rap against buying straddles is the old "you are paying double premium and this crimps profit potential" argument. But with the very modest dollar premiums as expiration approaches, straddle buyers can easily achieve triple-digit profits in many instances.
    It's not just about the low dollar premiums, which are a natural consequence of a small and rapidly decreasing amount of time until expiration. Implied volatilities on many of the weekly options are often lower than those of the next "regular" expiration – you see this phenomenon with great regularity, for example, in the AAPL and QQQQ weeklies.
    Consider trading the Weeklys on non-equity ETFs such as TLT and GLD, especially for volatility plays, as their implied volatilities are much lower than those for equities, and movement potential (particularly over the weekend) is surprisingly robust.
    Speaking of weekend plays, buying a weekly straddle on that first Friday afternoon and holding till the early part of expiration week is often a very attractive strategy for capturing excess volatility at a very modest cost.
    Recognize and accept the reality of buying option premium during expiration week and incorporate this into your trading approach. If you're playing direction, recognize that there is often not going to be time for you to recover from even a modest move against you. And accept the fact that some stocks are going to trade on expiration day in a shockingly narrow range above and below a strike at which they will be "pinned" by the close of trading. This is all part of the expiration week game, as is some huge profit potential and, as many traders are discovering with the growth of the weekly options, a lot of fun.
    #44     Oct 24, 2010
  5. #46     Nov 4, 2010
  6. #49     Nov 13, 2010
  7. #50     Nov 23, 2010