Optionscards Flashcards
Protective Put:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: you own the stock, buy a put with strike below the existing SP or at OTM if you think alright of the stock
Strategy: handy when you think the market is going to go down but you’re bullish in the long run and don’t want to sell stock. buying stock and put of same ticker is called a married put and is used sometimes when you feel like you bought the price at a good deal but unsure of the market
BP: strike + premium
When to run: when you think market is shaky short term but you feel confident about stock performance in long term
Sweet spot: when stock goes down short term and up in long run
Max Profit: unlimited since you own the stock
Max Loss: just the premium paid for the options
Time Decay and IV: Time decay is your enemy since you’re long on options but IV is your friend as it increases the price of the option
Covered Call:
- Set up
- Strategy
- Buy/write
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: you own the stock, sell a call, generally stock price will be below strike price of call but can be ATM
Strategy: run if you think you’ve seen nice gains on the stock and are willing to let go of the stock if the option gets exercised - selling means obligated to sell if exercised by buyer. Often, sell OTM calls so if the stock goes up, you see further nice gains on the stock and then you sell off that stock if the buyer exercises option
Buy/write: if you buy stock and sell calls at same time like buying stock and buying puts (married put), this is called buy/write, you can lower the cost basis of the stock you’ve just purchased
BP: current stock price minus premium received for selling the call
When to run: when you’re neutral to bullish and you’re willing to sell stock if it reaches a specific price high above strike but you are aiming to have stock stay near or a little above strike so it doesn’t get assigned but you get the premium from selling
Sweet spot: if you are doing this to earn income, then you want the stock to remain as close to the strike as possible without getting too above so you don’t have to sell stock.. if you want to sell the stock and aren’t super bullish in the long run then you want the stock price to rise above the strike and stay there at expiration so it gets exercised and you part with stock.
Don’t do this if you think the stock is going to shoot wayy higher, in which case you’ll be obligated to part with it
Max Profit: when call is first sold, profit potential is limited to strike minus the current SP plus the premium received for selling the call
Max Loss: if the SP goes way above strike and call gets assigned so you lose out on missed gains.. also if stock loses its value then even if you make money from selling call, you still lose money on stock..
Time Decay and IV: time decay is your friend, you want the price of the option you sold to approach zero. you want IV to decrease as this decreases price of option. not the best in turbulent times?
Long Call Spread (limited risk/reward):
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: buy a call at a low strike price but also sell a call at a higher strike price.. the low strike long call can be ITM, ATM or OTM.. depends on how much risk you want to take. U want stock to be above long call strike and below short strike
Strategy: this strategy, although bullish limits your premium paid from the long call due to the premium received from selling the higher strike call - limits risk. Consider buying a shorter term spread like 30-45 days since the max value of the spread is usually achieved at expiration so you’ll want as little time value left
BP: strike A (long call) plus net debit paid by you
When to run: you’re bullish but you have an upside target for this stock
Sweet spot: U want SP to be above or at strike B (higher strike short call), but not so high u should have just bought long call only
Max Profit: limited to difference between strike A and strike B minus net debit paid - do some real world examples with ITM, OTM and ATM long calls
Max Loss: premium paid on long call
Time Decay and IV: time decay neutral bc of counter effects of long and short position. closer the SP is to or slightly above strike B, u want IV to decrease so it decreases value of OTM option u sold, faster than ITM option you bought
Long Put Spread (limited risk/reward):
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: sell a put at strike price A, buy a put at strike price B - u want SP to be at or below long put (bearish) and above short put (bullish)
Strategy: the opposite of long call spread - shorting put with strike A helps offset cost of long put at strike B - limits risk. Good to buy when IV is high so that you have some cover from a naked put, lower cost basis but you’re still bearish overall
Consider 30-45 day spread - U want as little time value left for the shorted put
BP: Strike B (shorted put) minus the net debit paid for the long put
When to run: you’re bearish with a downside target in the shorted put which covers you a bit.. best in high IV times like now but with bearish tones
Sweet spot: want the stock to be at or below long put strike A at expiration
Max Profit: limited to diff between strike A (long put) and strike B (short put), minus premium paid for long put - - do some real world examples with ITM, OTM and ATM puts
Max Loss: risk limited to premium paid for long put
Time Decay and IV: time decay somewhat neutral. IV: closer SP is to the strike A, u want IV to decrease so it decreases value of OTM option u sold than ITM option u bought long
Short Call Spread:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: sell a call at lower strike price, buy a call at higher strike price, generally want the stock price to be below the short call strike price
Strategy: only shorting a call has unlimited risk if stock moves higher - buying long call reduces risk since if the stock does go higher and higher the, the losses created from the short call is offset by the gains in the long call
BP: strike A plus the net debit paid
When to run: you’re overall bearish but but not too bearish - if you’re super bearish, you lose out on additional profit by only shorting the stock
Sweet spot: u want the stock price to be at or below short call strike so both options expire worthless in value but you keep the net credit received from shorting
Max Profit: limited profit, only the net credit received from selling the call - difference between strike prices
Max Loss: difference between two strikes reduced by premium received for selling call
Time Decay and IV: time decay is somewhat neutral since it erodes the value of long call but helps with short call
Short Put Spread:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: buy a put and sell a put at higher strike, you’re credited due to higher credit received from short less the smaller debit paid for long
Strategy: somewhat bullish but not too bullish where you should have just bought a call
BP: short strike price minus the net credit received when selling the spread
When to run: you’re bullish but also forecasting somewhat neutral activity
Sweet spot: U want SP to be at or above short strike at expiration so both options expire worthless - don’t want SP to go too high or u miss out on future gains
Max Profit: limited to net credit received when setting up strategy
Max Loss: Limited to difference between the two strikes, less net credit received
Time Decay and IV: time decay somewhat positive - erodes value of option you sold which is what you want but then also erodes value of option you bought
Long Straddle:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: Buy a call and buy a put
Strategy: buy the call and put at the same strikes - this increases the cost of your position, especially for a volatile stock since options are more expensive for volatile stocks. you will need pretty big price swing in order to break even. Use this strategy when you know that implied volatility is low and discounted but you think it’s going to go way up
BP: two: strike A plus the net debit paid and strike A minus the net debit paid
When to run: for volatile stocks or when you think a stock is going to go sky high or absolutely tank - very risky trade. do not do right now
Sweet spot: stock shoots to the moon or falls like a rock
Max Profit: unlimited if the SP goes up
Max Loss: limited to the net debit paid, which is larger than most other strategies since you’re buying two long positions
Time Decay and IV: time decay mortal enemy since it erodes option prices very quickly. Really want IV to increase rapidly so rapid IV rise overtakes the erosion of time and increases value of both options even if it moves in one direction or the other
Decreasse in IV is doubly painful
Long Strangle:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: buy a put at strike A and buy a call at strike B, you want the SP between the two strikes. Diff between Long straddle is different strike prices
Strategy: goal is to profit if SP moves in either direction but buying both a call and put increases premium. U need signif swing to BE.
BP: put strike minus net debit paid, call strike plus net debit paid
When to run: super volatile times or before news releases like earnings when you think stock will go crazy up or down - traditionally used with both OTM options so generally more volatile, less expensive than straddle
Sweet spot: SP go way up or way down
Max Profit: same as straddle, unlimited if way up
Max Loss: same as straddle, limited to net debit paid
Time Decay and IV: same as straddle
Back Spread w/ Calls:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: sell a call at strike A, buy two calls, generally the stock will be at or around SP A
Strategy: shorting one call then longing two or more calls at higher strike
BP:
When to run: extremely bullish on a highly volatile stock
Sweet spot:
Max Profit:
Max Loss:
Time Decay and IV:
Long Call Butterfly:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: long a call at strike A, short two calls at strike B, long a call at strike C - want the SP to be at B
Strategy: combination of a long call spread and a short call spread with the spreads converging in the middle at strike price B. U want calls B and C to expire worthless while capturing intrinsic value of ITM call with strike A. Low cost strategy since u sell two calls at strike B. short two calls in the middle with slightly OTM strikes
-may want to run with ETFs or index funds since indexes have not been historically as volatile as individual stocks
BP: strike A plus the net debit paid
When to run: when you are expecting minimal movement in the stock/no movement - stable stocks - KMI? high dividend paying stocks
Sweet spot: U want SP to be right at strike B
Max Profit: limited to strike B - strike A - net debit paid
Max Loss: limited to net debit paid
Time Decay and IV: time decay is your friend - u want all options except call with strike A to expire worthless with SP at strike B
Long Put Butterfly:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up: same as long call just flipped. long one put at strike A, short two ATM puts at strike B, long one put at strike C
Strategy: same as long call butterfly - wherever your B strike is in relation to SP, u are bearish or bullish - if slightly above then bullish, if below the bearish
BP:
When to run:
Sweet spot:
Max Profit:
Max Loss:
Time Decay and IV:
Long Call Iron Condor:
- Set up
- Strategy
- BP
- When to run it
- Sweet spot
- Max P/L
- Time Decay and IV
Set up:
Strategy: simultaneously running an ITM long call spread and OTM short call spread
- u want short call spread to expire worthless with long call spread having strikes A and B ITM
- typically want SP to be between strike B and C
- distance between A and B, C and D will be the same but the distance between B and C varies depending on how big u want the sweet spot
- wider the distance, the higher probability u land in sweet spot between B and C but lower the profit, vice versa
- use standard deviations.. B and C maybe 1 SD away from current SP for high probability
- use this against KMI or other stable stocks or index funds since they have less price movement
BP: strike A plus the net debit paid, strike D minus the net debit paid
When to run: limited to strike B minus strike A minus net debit paid
Sweet spot: SP anywhere between strike B and strike C at expiration
Max Profit: strike B minus strike A minus net debit paid
Max Loss: risk is limited to the net debit paid to establish the condor
Time Decay and IV: time decay is your friend - options with strike C and strike D to expire worthless and the options with strike A and B to retain their intrinsic values
Writing Puts - things to remember
- not worth it on long term scale - fucks up buying power. Possibly do it on a short term scale but then it’s actually better to buy short calls cus no assignment risk
- the buyer has the right to exercise at any time so you have to be aware of the purchase consequences
- if the buyer exercises, you have to purchase 100 shares x # of contracts at the strike, less the commission. U keep the commission but u have to buy the stock at the strike, so you’re in effect lowering the cost basis of your of stock purch.
- ex. if u write 1 put for $30 a contract with strike of $200 but current SP is $250 and receive premium of $3,000, if SP goes to $190 and buyer exercises, u purchase 100 shares at $200, so $20,000 total, but u kept the premium of $3,000 so your cost basis is really $17,000, or $170/share..
- if u don’t mind owning the stock, then u should hope for the SP to go below the strike of $200 but not lower than strike minus premium.. in this case $170, otherwise if the SP goes below the $170, you’re buying stock at a loss
- can be better than setting a limit order below the stock price since you can essentially lower your cost basis or just keep the premium when option expires worthless - just be comfortable buying 100 shares
- writing puts are priced like long calls - they’re bullish so u want to buy when market is down since market prices in higher likelihood that stock will go down further
- but the extrinsic value is valued the exact same on the opposite ends of the reward spectrum- LEAP long calls are more expensive since you have longer time period to see stock reach ITM, whereas with LEAP short puts you get higher premium because extrinsic value is not on your side since u want option to close as soon as possible
- lots of downside risk so if you’re going to write a leap put, probs want to focus on companies with solid upward trajectory whether it be small or large, companies that have a lot of cash on their balance sheet and that frequently conduct stock buybacks - banks, apple, MSFT - and companies whose stock price, if u have to buy 100 shares, is not astronomical
Things to play around with with options - find simulator
- weight: a lot of options play calls that require selling and buying of calls or puts at once state you should buy the same amount of longs as you do shorts or shorts as you do long… play around and see how different weighting affects based on your tolerance risk
- if you’re long on a stock, short puts for net credit to also finance the purchase of calls
How should you select strike prices for various options?
- U should look at not only strike % difference from SP, but also financial metrics
- if ur writing a put for AAPL it’s trading at a 23x PE and you think it’s a bit overvalued and you want to buy at 20x, calc the stock price and set your written call there if you’re comfortable - otherwise if it never reaches that level, you keep the premiums
