Author Topic: option trade  (Read 1565 times)

goodrookie

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option trade
« on: December 03, 2014, 01:58:38 AM »
If I am selling covered OTM options what works better (for a same strike) - selling a long term option (which have higher premium) or selling shorter term (less premium but more time decay)? What is your experience? Are both same? 

Khan

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Re: option trade
« Reply #1 on: December 03, 2014, 02:22:06 AM »
I don't like options because I don't want my stocks to be called away and lose out on potential upside, and so from what I've seen of people preaching option selling to add in yield to range bound stocks, I'd think I'd tend towards shorter duration options if I were to go that route.

jjcamembert

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Re: option trade
« Reply #2 on: December 03, 2014, 02:21:06 PM »
I'm no expert, but the advice I've been following for a while is to look at the options in terms of risk. Generally, options are priced based on time, volatility, and risk, so if any of those go up so will the price. I've been selling options that have about a 0.35 delta (35% chance of moving ITM) with less than 60 days until expiration. I prefer shorter to longer term because I'll surely earn some money due to decay (theta). A real quick-and-easy calculation I do to compare is annualize the return I'd make; usually the nearer-term options will give you a higher annual %.

Annualized = reward / risk / days until expiration * 365

For example, looking at options for AAPL today with similar risk:
DEC14 119 Call: Delta 0.32, $1.16 (16 days to expiration)
FEB15 125 Call: Delta 0.29, $2.55 (78 days to expiration)
Current price of AAPL is 116.
So you get:
DEC: 1.16 / 116 / 16 * 365 = 23% return
FEB: 2.55 / 116 / 78 * 365 = 10% return

This assumes of course that you will continue to sell options every 16 days.

It also assumes that implied volatility doesn't change. If IV goes up, your option value will go up, and down, down.

The downsides to shorter-term are that it's more work and more trades, and of course at expiration you have a chance that you're ITM. If a big upward move happens, then you have to either sell cheap (miss out on that profit) or roll your calls out to a further date + higher strike in an attempt to regain that profit. You do lose money on big moves compared to if you just hold the stock.

Obviously there's a lot to all this, and I'm still learning, so I think the best thing to do is to learn all you can about options trading if it's something you want to pursue. tastytrade.com has free videos, and most brokerages (TD Ameritrade, optionsXpress) offer free online seminars. Or, like most Mustachians, buy an index ;) I've made some money with options, but I haven't beaten the market, and I've paid with personal time.

God or Mammon?

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Re: option trade
« Reply #3 on: December 03, 2014, 04:30:55 PM »
If I am selling covered OTM options what works better (for a same strike) - selling a long term option (which have higher premium) or selling shorter term (less premium but more time decay)? What is your experience? Are both same?

you should sell rolling short term otm calls assuming transactions costs (brokerage) are not too high

the forward price on long dated options is below the current price for most dividend paying stocks due to the fact that the risk-free rate is almost 0%

you also have a lower probability of the stock being called away due to the option being deep in the money, although in reality you could always roll the calls up (in strike) and out (in maturity) if the stock price rises significantly above the strike