Author Topic: Options heretics thread - by request  (Read 7346 times)

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #100 on: July 27, 2020, 09:39:52 PM »
I've only sold covered calls on the micro-cap stock I wanted to exit.  Shares will probably get called away at each option expiration date, since the stock has found a new trading range near my strike price.

More recently I've bought various Jan 2022 covered calls.  In my stock picks, where I wait months or years for Covid-19 recovery, I'd like to replace stock by call options where it's possible.  I found one odd case where the options prices are a bit nutty.

Casino "El Dorado Resorts" bought "Caesar's Entertainment" in a stock swap, after various regulators signed off on the deal.  So the combined company (using CZR stock ticker) might be too dramatic a change for the options market, which has wide bid-ask spreads.  The Jan 2022 options just don't make sense to me:

=== $29.74 stock (CZR), Jan 2022 call options:
$2.50 strike bid $25.20  ask $29.80   ImpVol 128%
$30.00 strike  bid $10.50  ask $13.25  ImpVol 86%
$40.00 strike  bid $8.05  ask $10.25  ImpVol 85%

There doesn't seem to be an efficient market for these options.  Stock is like an infinite duration call option with a strike price of $0.  So buying $29.74 of stock is much better than a $29.80 call option with a $2.50 strike price and expiration in 1.5 years.  The fact that's the lowest ask price is bizarre to me (it's not stale - the last purchase was noon EST, and I checked the daily price movements).

Seeing so many asking prices +25% above the bid surprises me, as well.  Maybe it's too soon after the merger, and the market isn't working efficiently yet.  Maybe most investors are waiting for the next quarterly earnings report before they offer call options for sale.

Financial.Velociraptor

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Re: Options heretics thread - by request
« Reply #101 on: July 28, 2020, 08:22:24 AM »
Two things here:

You noted low liquidity.  By definition, that is a less efficient market.  So you are probably seeing some true "wonkiness".

Deep in the money or deep out of the money options always look a little weird.  It's a feature not a bug.  A deep in the money call option has more "optionality" in that it is very likely to be money good.  You'd expect higher time value in that case.   Thing is the corresponding strike put has almost no chance of being money good and thus has very low time value.  TV has be about the same for corresponding strikes on calls and puts, else "put-call arbitrage" scenario exists where traders can earn a riskless profit by playing both ends against the middle.  There are big quant hedge funds that have powerful algorythms hunting for those arbs with great efficiency.  Thus, deep in the money options have behavior that appears a little counter-intuitive.

ChpBstrd

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Re: Options heretics thread - by request
« Reply #102 on: July 28, 2020, 09:24:44 AM »
This is probably something to do with the merger details. Will ticker symbol CZR exist a couple of months from now, or will all those long-duration options be closed out or converted to non-standard after completion of the merger? Rest assured that the market makers have figured out the correct price.

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #103 on: July 28, 2020, 11:28:34 AM »
ChpBstrd - El Dorado Stock (ERI) has been delisted.  The Caesar's brand and stock (CZR) will continue, although maybe the company will technically be named El Dorado.  How do you view the wide bid-ask spreads?  From my experience with ETFs, it looks like a failure to make an orderly market... but I'm not as familiar with options markets, so another perspective would be interesting.

Financial.Velociraptor - Low volume also means stale trades, so I sorted by most recent trade, and here's the most recent trades for Jan 2022 call options:
call $40 strike (today $8.95)  bid $8.50  ask $9.20    ImpVol 80%
call $50 strike (today $6.80)  bid $4.85  ask $8.00    ImpVol 76%
Still odd to see an ask price +65% higher than the bid price.  At least the $40 strike looks orderly.

----
I've settled into a pattern with buying long-dated call options.  I'll typically wait for a day when a stock is falling, and then buy just out of the money call options.  It could also be that Covid-19 is fueling pessimism in both stock and options markets, and people want to exit their positions and buy at a lower point.

ouroboros

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Re: Options heretics thread - by request
« Reply #104 on: July 28, 2020, 02:12:19 PM »
Hi all, I’m still a noob on options so this may be a ridiculous question. Ok I was looking at an Iron Condor for Capital One (COF) for 9/18, buying the 57.5 Put, selling the 62.5 Put, selling the 65 Call, and buying the 70 Call. The net is a credit of about $350 at current options prices, and the max loss is $150. So I got the $350 credit in cash, and now the max loss I could incur on expiration is $150 according to think or swim. So have I just earned $200 if I hold to expiry or am I missing something?

Financial.Velociraptor

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Re: Options heretics thread - by request
« Reply #105 on: July 28, 2020, 03:18:11 PM »
Hi all, I’m still a noob on options so this may be a ridiculous question. Ok I was looking at an Iron Condor for Capital One (COF) for 9/18, buying the 57.5 Put, selling the 62.5 Put, selling the 65 Call, and buying the 70 Call. The net is a credit of about $350 at current options prices, and the max loss is $150. So I got the $350 credit in cash, and now the max loss I could incur on expiration is $150 according to think or swim. So have I just earned $200 if I hold to expiry or am I missing something?

@ouroboros

Your ideal scenario is the underlying finishes on 18SEP2020 between 62.5 and 65.  You thus keep $350 in cash with no further obligation.  Should the price fall below 60 or rise above 65, you start incurring obligation.  You will have bought shares at 62.5 or sold at 65, respectively.  With the underlying above or below (respectively) those data points, you would have to incur a short term capital loss to close the shares.  That loss grows the further below 60 or above 65 the price goes.  The worst you can do is if the price falls to 57.5 or lower; OR; at 65 or higher.  That is your losses are hedged at 57.5 and 70.  You can thus lose 500 dollars at most (5 dollar distance between the strikes times 100 shares) on either wing of the condor but not both.  Your 500 in losses less your 350 credit received in cash is a net capital loss of $150.  Prices between the two puts or between the two calls have different results depending on how deep in the money the short (sold) put/call are.  For example a price of 60 or 67.5 puts your 2.5 dollars in the money (times 100 shares).  You would take 250 dollars in capital loss against 350 in capital gain for a net gain of 100 dollars.  Any outcome between minus 150 and positive 350 is possible. 

This is a hard way to make money in this market.  Times are very volatile and you made a play that depends on volatility being low.

[edit - Used 60 above when I meant 62.5, corrected]
« Last Edit: July 28, 2020, 03:22:37 PM by Financial.Velociraptor »

ouroboros

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Re: Options heretics thread - by request
« Reply #106 on: July 28, 2020, 04:40:24 PM »
Thank you so much for the detailed explanation, that makes sense and I knew it couldn’t be that easy.

ChpBstrd

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Re: Options heretics thread - by request
« Reply #107 on: July 28, 2020, 09:16:00 PM »
How do you view the wide bid-ask spreads?  From my experience with ETFs, it looks like a failure to make an orderly market...
Still odd to see an ask price +65% higher than the bid price.  At least the $40 strike looks orderly.

Wide bid-ask spreads are common among companies and funds with thin liquidity in their options markets. Instead of a bustling marketplace of competitive traders, imagine a single gas station on a dusty highway next to a sign that says "next gas 100 miles". You might place a limit order for the midpoint between the bid and ask, but it would probably be wiser to have a program calculate the expected value of the option and to offer that. Market makers will place a "stink bid" on options just to catch the occasional fish, and that can move the midpoint off the actual value of the option. Oftentimes if you place a fair offer on the market, your trade won't get executed because no one is interested in a fair offer. They only trade for profits.

Even worse, when it is time to exit, roll, or adjust your position, you run into the same problem.

My preferred approach is to not play in these kinds of markets. I pay a little extra for the expense ratio of SPY instead of VOO because the much more liquid options market will save me many more dollars than the ER when I am using a long-duration collar strategy.

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #108 on: July 29, 2020, 05:53:59 AM »
Hi all, I’m still a noob on options so this may be a ridiculous question. Ok I was looking at an Iron Condor for Capital One (COF) for 9/18, buying the 57.5 Put, selling the 62.5 Put, selling the 65 Call, and buying the 70 Call. The net is a credit of about $350 at current options prices, and the max loss is $150. So I got the $350 credit in cash, and now the max loss I could incur on expiration is $150 according to think or swim. So have I just earned $200 if I hold to expiry or am I missing something?
With enough volatility, could you lose money in both directions?  Against both the PUT and CALL?

Let's say the Fed provides negative news on interest rates, which impacts Capital One (COF).  Let's COF drops to $56.50, and the put you wrote gets exercised.  Your losses stop at $56.50 (the protective put you bought), so you've lost $500.

But now COF announces quarterly results, and they've done really well, and the Fed news doesn't seem relevant to them.  So COF recovers from the Fed situation, and then goes on to make gains... let's say they hit $70/share.  The call you sold would get exercised, costing you $500.

By that scenario, of a sharp drop followed by a very quick increase, I see $1,000 in losses are possible.

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #109 on: July 29, 2020, 06:03:40 AM »
How do you view the wide bid-ask spreads?  From my experience with ETFs, it looks like a failure to make an orderly market...
Still odd to see an ask price +65% higher than the bid price.  At least the $40 strike looks orderly.

Wide bid-ask spreads are common among companies and funds with thin liquidity in their options markets. Instead of a bustling marketplace of competitive traders, imagine a single gas station on a dusty highway next to a sign that says "next gas 100 miles". You might place a limit order for the midpoint between the bid and ask, but it would probably be wiser to have a program calculate the expected value of the option and to offer that. Market makers will place a "stink bid" on options just to catch the occasional fish, and that can move the midpoint off the actual value of the option. Oftentimes if you place a fair offer on the market, your trade won't get executed because no one is interested in a fair offer. They only trade for profits.

Even worse, when it is time to exit, roll, or adjust your position, you run into the same problem.

My preferred approach is to not play in these kinds of markets. I pay a little extra for the expense ratio of SPY instead of VOO because the much more liquid options market will save me many more dollars than the ER when I am using a long-duration collar strategy.
Good point about low volatility and rolling my position.  In your metaphor, I pay more at the remote gas station... and then on the drive back, I have to stop for gas again.  They make money both times, at much higher rates.  I think I'll avoid call options on CZR stock.

For now, I plan to only buy call options for "Covid recovery" type stocks, like Macy's (retail), DIN (restaurant) or Caesar's / El Dorado (casino).  Here I'm just replacing the stock with call options, to reduce my losses in a bankruptcy and maybe provide some leverage.  After Covid, all should recover... which I hope occurs sooner, but I'm keeping cash to roll out to a date 2.5 years from now.

Financial.Velociraptor

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Re: Options heretics thread - by request
« Reply #110 on: July 29, 2020, 07:45:19 AM »

With enough volatility, could you lose money in both directions?  Against both the PUT and CALL?

Let's say the Fed provides negative news on interest rates, which impacts Capital One (COF).  Let's COF drops to $56.50, and the put you wrote gets exercised.  Your losses stop at $56.50 (the protective put you bought), so you've lost $500.

But now COF announces quarterly results, and they've done really well, and the Fed news doesn't seem relevant to them.  So COF recovers from the Fed situation, and then goes on to make gains... let's say they hit $70/share.  The call you sold would get exercised, costing you $500.

By that scenario, of a sharp drop followed by a very quick increase, I see $1,000 in losses are possible.

This is true if and only if you close out your hedge before expiry.  If you keep the long put and long shares, and the price reverses, you bought at what turns out to be a great price.  If you exercise your hedge put upon assignment and then prices reverse past your call hedge, you lost 1000.

ChpBstrd

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Re: Options heretics thread - by request
« Reply #111 on: July 29, 2020, 08:12:43 PM »
I've been playing with options for years, and there is a certain casino aspect to them that is hard for me to shake. It is necessary to pick a direction stocks will go: up, down, or neutral. It is also necessary to pick a timeframe. The roulette table is a good metaphor: you can bet on black or red or you could do a long shot bet on a particular number or the "black swan" green, but any way you bet the house makes their profits on a margin, and all the rules and processes and glitter are there to obscure that margin. Just as there are no casinos without edges, there are also no free lunches in option world. The presence of books and internet gurus breathlessly promoting surefire riches if you can just let them teach you the rules of the game is yet another signal.

When you go to the horse track, you can generally tell which horse is going to win based on the odds. Even something as random as one horse running a tenth of a second faster than another horse is somehow sussed out by an efficient market of betters, yet the only people making consistent money are the track owners.

Yet, we FIRE investors face a conundrum that can only be solved by options. Options are the only practical way to truly hedge a long stock investment. Sure, you can diversify and still accept all systemic risk or you can dabble in futures and risk unlimited losses, but when you buy a put you know exactly where the floor is.

The market for long assets is almost completely decoupled from the depression-like economic reality facing workers and businesses, and it is known that assets are being inflated primarily by money printing and government purchases. And if anyone thinks 10 year treasuries yielding half a percent provides safety or diversification, I wonder where they think their retirement income will come from. At least cash under the mattress has no interest rate risk. So much of the traditional wisdom such as "stocks grow with the economy" and "bonds offer diversification and safer income" do not apply in our current post-capitalist era, where QE has replaced the economy and speculative investments have replaced bonds and the government is printing money to take increasing shares of ownership in formerly private industry. We investors have certainly lost something in this transition - the ability to diversify our income streams, the ability to measure and control risk, and the ability to predict the factors that in bygone years would determine stock performance. Now we can only guess at a narrative of what the Fed will do; will they inflate or deflate the bubble? 

This is where limited-loss-potential equity investments shine.

mjchamb

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Re: Options heretics thread - by request
« Reply #112 on: July 31, 2020, 12:29:09 PM »

There doesn't seem to be an efficient market for these options.  Stock is like an infinite duration call option with a strike price of $0.

That's an ingenious way to think of that! That never occurred to me, but I'm sure my brain danced around the idea. Can I ask if that is a MustacheAndaHalf original or did you read it somewhere?

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Re: Options heretics thread - by request
« Reply #113 on: July 31, 2020, 12:40:14 PM »
Some sobering words.  I want the novices here to understand that even experienced options traders have trades that result in losses.

^Totally agree. I've been doing this like a decade now and the best laid plans can still end up being a dumpster fire. The big lesson I learned was don't put all your eggs in one basket (have multiple bets going), never make an unlimited loss trade, be long volatility, and try to trade in a way where your wins can outweigh any losses.

I trade a lot of biotech (I'm an oncology pharmacist IRL), and that's a great arena to knock you down a few pegs if you start to feel to smart. Even with the best data drugs fail clinical trials or equity offerings eat up your gains, competitors leapfrog you, etc, etc.

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Re: Options heretics thread - by request
« Reply #114 on: July 31, 2020, 12:46:03 PM »
What I've heard is that you sell options into volatility.  I'm not sure about the put buying strategy unless you are hedging your long portfolio.

My strategy is largely "sell options".  I earn quite a lot more premium when vol is "high".  But I also hedge with long puts on companies I feel are overly indebted, especially if they have declining sales.  When TSHTF these tend to do very well often times coming in for a double or more.  Just a few thousand here and there makes for a nice hedge.  I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

I remember you used to use UVXY until leveraged was reduced. I still think this is one of the smartest trades I've ever seen, missed by the crowds, noticed by the velociraptor

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Re: Options heretics thread - by request
« Reply #115 on: July 31, 2020, 12:48:33 PM »
Last month I applied to make my Roth account enabled for margin loans, but didn't hear back, and it does not list "buying power".


Not allowed by law.  You can only margin taxable accounts.  The request for margin in Roth will either be ignored or denied.

You can get "Limited Margin" through some brokers on IRAs. My TD Ameritrade traditional IRA has limited margin and allows me to trade any limited-risk spread. I mostly trade diagonals in that account.

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Re: Options heretics thread - by request
« Reply #116 on: July 31, 2020, 12:54:29 PM »
Hi all, I’m still a noob on options so this may be a ridiculous question. Ok I was looking at an Iron Condor for Capital One (COF) for 9/18, buying the 57.5 Put, selling the 62.5 Put, selling the 65 Call, and buying the 70 Call. The net is a credit of about $350 at current options prices, and the max loss is $150. So I got the $350 credit in cash, and now the max loss I could incur on expiration is $150 according to think or swim. So have I just earned $200 if I hold to expiry or am I missing something?

If you want a detailed explanation of why iron condors sound great in theory but are much harder to trade in reality, this article has an in depth explanation of a brokerage that went bust trying to sell them for their clients: https://earlyretirementnow.com/2019/09/11/ubs-another-option-strategy-failure/

mjchamb

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Re: Options heretics thread - by request
« Reply #117 on: July 31, 2020, 12:58:00 PM »

And if anyone thinks 10 year treasuries yielding half a percent provides safety or diversification, I wonder where they think their retirement income will come from.


I feel the same way. No matter what's going on with the actual underlying equity price, I still feel like I can make a reasonable % selling covered calls or buying lotto tickets (long calls/puts).

I strongly agree with everything else you said but clipped the quote for efficiency's sake.

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #118 on: August 01, 2020, 01:06:56 AM »
There doesn't seem to be an efficient market for these options.  Stock is like an infinite duration call option with a strike price of $0.
That's an ingenious way to think of that! That never occurred to me, but I'm sure my brain danced around the idea. Can I ask if that is a MustacheAndaHalf original or did you read it somewhere?
I thought it up as a solution to a couple problems in spreadsheets I was creating.  I wanted to add options to a list of stocks, and thought about converting all the stocks to look like options (of unlimited length).  I also tried comparing expected profit of various options, and wanted to check and see that options acted similarly (or better) to stock.  So I thought it up, but I'm doubtful I'm the first to do so.


Last month I applied to make my Roth account enabled for margin loans, but didn't hear back, and it does not list "buying power".
Not allowed by law.  You can only margin taxable accounts.  The request for margin in Roth will either be ignored or denied.
You can get "Limited Margin" through some brokers on IRAs. My TD Ameritrade traditional IRA has limited margin and allows me to trade any limited-risk spread. I mostly trade diagonals in that account.
When I searched, I saw Fidelity and IBKR listed in the results, but not Vanguard.  Under a page showing how to avoid a "freeriding violation" (sell then buy before settlement), Vanguard suggests margin - but only for "nonretirement" accounts.
https://investor.vanguard.com/investing/online-trading/trading-penalties
"Consider margin investing for nonretirement accounts"

Since I favor the other benefits of my Vanguard IRA, I'm keeping it at Vanguard.  I can trade options there at a higher price ($1/contract, more than IBKR), but stocks at a lower price ($0/trade versus IBKR charging for stock trades).

Hm, but it might be interesting to have IRAs in both places... options at IBKR and stocks at Vanguard.

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Re: Options heretics thread - by request
« Reply #119 on: August 01, 2020, 08:42:29 AM »
What I've heard is that you sell options into volatility.  I'm not sure about the put buying strategy unless you are hedging your long portfolio.

My strategy is largely "sell options".  I earn quite a lot more premium when vol is "high".  But I also hedge with long puts on companies I feel are overly indebted, especially if they have declining sales.  When TSHTF these tend to do very well often times coming in for a double or more.  Just a few thousand here and there makes for a nice hedge.  I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

I remember you used to use UVXY until leveraged was reduced. I still think this is one of the smartest trades I've ever seen, missed by the crowds, noticed by the velociraptor

I think this is the trade people talk about when they say never to be "short volatility". @Financial.Velociraptor may have managed to work this one well, but I got my clock cleaned.

Financial.Velociraptor

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Re: Options heretics thread - by request
« Reply #120 on: August 01, 2020, 09:09:22 AM »
What I've heard is that you sell options into volatility.  I'm not sure about the put buying strategy unless you are hedging your long portfolio.

My strategy is largely "sell options".  I earn quite a lot more premium when vol is "high".  But I also hedge with long puts on companies I feel are overly indebted, especially if they have declining sales.  When TSHTF these tend to do very well often times coming in for a double or more.  Just a few thousand here and there makes for a nice hedge.  I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

I remember you used to use UVXY until leveraged was reduced. I still think this is one of the smartest trades I've ever seen, missed by the crowds, noticed by the velociraptor

I think this is the trade people talk about when they say never to be "short volatility". @Financial.Velociraptor may have managed to work this one well, but I got my clock cleaned.

@talltexan Position sizing is the key to betting against VXX or UVXY.  (If you are academically oriented, look up the black-jack/poker calculation for "risk of ruin").  There is always a non-zero chance the thing can go up hundreds of percent in a few days.  It is a sure bet over "long" periods of time it will decline.  But if you are 100% allocated when it blows past you, you risk being completely wiped out.  Keeping position size down to 5-10% allows you to sit on the underwater position for more than a year while you wait for it to recover via contango decay. 

For example, I have been playing VXX for years.  In January I bought the 13 strike with Jan 2022 expiry for 5.25 a share.  Coronavirus put that deeply underwater. I'm currently sitting on a 44% unrealized loss.  I expect it to eventually break even as normalcy for that ticker is a 60% annual decline (although it hurts to have 5% of my portfolio 'dead money' for more than a year).  I have a second 5% allocation on the 32 strike entered early June.  That is up nicely and I hope to roll it down next week if the market continues to cooperate.

My early retirement was at least 50% driven by gains against UVXY.  I got burned pretty good when they lowered the leverage, which killed my TV.  Thus, I now stick to the unleveraged VXX.

But indexing is fine.  Most of the people who ask me for investing advice I tell to index after reviewing their goals and risk tolerance.

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Re: Options heretics thread - by request
« Reply #121 on: August 01, 2020, 09:45:28 AM »
Indeed I might have given up too early on that trade. If I went back to it, I would try to have contracts staggered to different times so I wouldn't every get fully wiped out.

KBecks

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Re: Options heretics thread - by request
« Reply #122 on: August 01, 2020, 11:43:36 AM »
I had a very good week with weeklies.  Initially thought I might have done too many trades, but they worked out well, all positive except one small one I was experimenting with.

Now... have to work on next week.

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Re: Options heretics thread - by request
« Reply #123 on: August 02, 2020, 07:50:24 AM »
@Financial.Velociraptor (and others) - I currently have many call options that expire in 1.5 years, in Jan 2022.  Since some scenarios might involve a recovery that takes even longer, I'm preparing to roll out these options.  Just to revisit what you said earlier:

The new LEAPS  usually roll out in October and November.  There is a schedule somewhere on the CBOE website that details how they are initiated.  There are basically two cohorts.  I believe a stock is assigned a cohort at random.

In 2-3 months, I should get a chance to roll forward my call options.  As call options get more distant in the future, their time value costs less per month.  My guesstimate is 3% per month, so selling 1.2 year dated options (Jan 2022) and buying 2.2 year dated options (Jan 2023) might cost an extra +36% to roll forward.

When new LEAPS are first issued, is that a good time to buy them?
I assume those days will be higher volume, which means more efficient pricing of options.

Financial.Velociraptor

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Re: Options heretics thread - by request
« Reply #124 on: August 02, 2020, 09:42:39 AM »
When new LEAPS are first issued, is that a good time to buy them?
I assume those days will be higher volume, which means more efficient pricing of options.

I find the first week after issuance the liquidity is even lower than normal for a long dated LEAP.  Wide bid/ask spreads abound which require limit orders and lots of patience to get a fair fill.

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Re: Options heretics thread - by request
« Reply #125 on: August 04, 2020, 03:36:48 PM »
What I've heard is that you sell options into volatility.  I'm not sure about the put buying strategy unless you are hedging your long portfolio.

My strategy is largely "sell options".  I earn quite a lot more premium when vol is "high".  But I also hedge with long puts on companies I feel are overly indebted, especially if they have declining sales.  When TSHTF these tend to do very well often times coming in for a double or more.  Just a few thousand here and there makes for a nice hedge.  I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

I remember you used to use UVXY until leveraged was reduced. I still think this is one of the smartest trades I've ever seen, missed by the crowds, noticed by the velociraptor

I think this is the trade people talk about when they say never to be "short volatility". @Financial.Velociraptor may have managed to work this one well, but I got my clock cleaned.

If it makes you feel any better (misery loves company, they say) I jumped in on this trade just in time for the fund to be deleverages, but thankfully I got lucky and didn't have a very large position.

Full disclosure I am currently long VXX for some OTM calls, hoping that between the virus and the election we get some more choppy waters by the end of the year. But same situation, those long options are less than 1% my total trading account.

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Re: Options heretics thread - by request
« Reply #126 on: August 04, 2020, 03:42:32 PM »
Indeed I might have given up too early on that trade. If I went back to it, I would try to have contracts staggered to different times so I wouldn't every get fully wiped out.

I'm wrong more than I'm right so I always, always advocate "laddering" your options trades across different strikes and time frames.

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Re: Options heretics thread - by request
« Reply #127 on: August 04, 2020, 03:57:12 PM »
wrote two puts this week and hopefully will make my weekly income target. 

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Re: Options heretics thread - by request
« Reply #128 on: August 04, 2020, 06:24:57 PM »
wrote two puts this week and hopefully will make my weekly income target. 

@KBecks

What did you write puts on and what strike did you select?  On Monday, I wrote two ITB puts at 51.5 strike (with underlying at 52.22 for some downside protection) - 42.25% annualized return if unassigned.

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Re: Options heretics thread - by request
« Reply #129 on: August 05, 2020, 03:06:03 AM »
Looks like I'll be avoiding new LEAPS call options the week they come out.  Too bad, since it's probably going to be a very volatile time (2020 election news, vaccine trial results).

I picked stocks like Macy's that do badly under lock downs.  So those options are dropping in value, which I expected when Covid-19 threatens new lock downs (or even just reduced shopping).  I've got options that last 1.5 years, during which I hope a recovery occurs.  Since hope isn't a strategy, I've set aside cash to "roll forward" those options to 2.5 years.  If Covid lasts 3.5 years or more, my call options probably become more expensive than just holding stocks...  we'll see.

Earlier I tried to use put options to time the second wave of Covid-19 in the U.S., but people's thinking and reactions have changed.  It was a small investment that failed.  But it helped me realize I can't predict the up and down as clearly now as in March/April, and to simply stick to waiting for a recovery.  So for me, I'm limited to long-dated call options until the end of Covid-19.

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Re: Options heretics thread - by request
« Reply #130 on: August 05, 2020, 04:31:21 AM »
wrote two puts this week and hopefully will make my weekly income target. 

@KBecks

What did you write puts on and what strike did you select?  On Monday, I wrote two ITB puts at 51.5 strike (with underlying at 52.22 for some downside protection) - 42.25% annualized return if unassigned.

I wrote a $132 strike put on Livongo, LVGO and a $105 strike put on Fastly, FSLY.   Earnings come out today and tomorrow so shares could be volatile. 

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Re: Options heretics thread - by request
« Reply #131 on: August 12, 2020, 11:53:21 PM »
Seeing how much options can fluctuate, I've dropped the idea of keeping cash to roll forward options.  One example is my Macy's call options, which went up +18%.  That means the cost of rolling forward went up a similar amount, leaving my cash reserve behind.  So I don't think setting aside cash to roll forward makes sense.

Since stocks and cash are less volatile than options, maybe the answer is "more options".  Take that cash, and buy more options, which then rise or fall in value.  When it comes time to roll forward, some of the investment in options can be sold to roll forward the rest.

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Re: Options heretics thread - by request
« Reply #132 on: August 13, 2020, 12:33:14 PM »
Seeing how much options can fluctuate, I've dropped the idea of keeping cash to roll forward options.  One example is my Macy's call options, which went up +18%.  That means the cost of rolling forward went up a similar amount, leaving my cash reserve behind.  So I don't think setting aside cash to roll forward makes sense.

Since stocks and cash are less volatile than options, maybe the answer is "more options".  Take that cash, and buy more options, which then rise or fall in value.  When it comes time to roll forward, some of the investment in options can be sold to roll forward the rest.

You may be anchoring on the stock price. Yes, if the stock goes up it will cost more to roll the options at the same old $X strike, but if volatility, duration, and a few other factors are similar you will still be able to buy a similar option X% out of the money in the future. With options strategies, one is less tied to the “buy low sell high“ objectives of conventional stock investing. It is more of a time-bound probability game than a game of getting a good price on the stock, and the options pricing equations are agnostic about what constitutes a good deal on a stock.

That said, strategy gets complicated when one says “I want to own XYZ at $100/share, so I will write a put at the $100 strike and roll until assigned.” What happens next is the stock may run away and never return to $100. Meanwhile the premiums one can earn rolling $100 puts dwindle to nearly nothing. The way to get oneself in that bind is to try to play both games (buying stock and selling options) at once - the conflicting dominant strategies can leave one with few routes to success: If the stock rises, you should’ve bought the stock and if it falls you also lose.

For long call strategies, volatility contributes less to the call’s price when vol is low, and it is low when stocks are rising. So some of the call’s time value evaporates even as the price of the stock goes up. The overall appreciation of the call is thus inhibited. So if you buy a call for a good price, it is probably because stocks have been rising and vol is low, and if you want to leverage your upside during a correction, you’ll pay dearly because vol is so high.

So if you have your eye on an attractive stock, take it from someone who’s made the mistake before and just buy it. Similarly, if you think a stock is shite, buy a put during low vol times and wait for a correction when both vol and delta will appreciate your put simultaneously. Or take a neutral strategy and buy protection when vol is low.

MustacheAndaHalf

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Re: Options heretics thread - by request
« Reply #133 on: August 13, 2020, 08:12:55 PM »
It's not anchoring if my cash can't cover a cost.  It's just not enough cash.

I'm predicting "stocks recover", but let me give specific examples with Macy's stock.  I start with 100 shares of M, costing $700.  If I hold Macy's until recovery, I hope it reaches somewhere near $16.60.  ($16.60 / $7 = 2.37, or +137% in a recovery)

Or I can hold a mix of options and cash, with the cash set aside to roll forward.  I could buy "M Jan 2022 10.000 call" contracts at $1.50/contract (x 100 shares).  So I can spend $300 to buy those 2 contracts, and in a full recovery make more than holding stock.  ($16.60 - $10 / $1.50 = 4.4, or +340% in a recovery) ... (or, including the roll forward cash: $16.60 - $10 / $2.25 = +193%)

My estimate is 3%/month to roll forward 1.1 year options to 2.1 year options.  If I conservatively estimate 4%/month and round up to 1/2, I would set aside $150 to roll forward $300 worth of options.  So I have $300 worth of call options, $150 cash, and can use $250 to invest elsewhere.

Back on July 15th, Macy's soared +10% in one day (from Moderna's vaccine candidate entering stage III testing, if I recall correctly).  It's current price is about +20% above it's low for the past 30 days.  Per my thesis that "stocks recover", I believe a drug completing a stage III vaccine trial would cause Macy's stock to spike up significantly, maybe +30% or +50%.  And it's likely that happens before I get the chance to roll forward, which means option prices for Macy's will be significantly higher - and the option could be in the money, making it even more expensive to roll forward.

Now back to my pricing.  My $10 strike on a stock trading at $7 is +43% above the current price.  If Macy's stock goes up +50% to $10.50, I can't just add +43% to the new price: a $15 option is very close to Macy's recovery point ($16.60 - $15.00 = $1.60), while a $10 option has much more room ($16.60 - $10 = $6.60).  A fixed percentage doesn't work for my thesis that stocks recover, because I'm predicting a specific stock price rather than a percentage gain.

EDIT: Added profit calculation with "roll forward" cash included.
« Last Edit: August 14, 2020, 04:53:13 AM by MustacheAndaHalf »

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Re: Options heretics thread - by request
« Reply #134 on: August 14, 2020, 08:44:52 PM »
I've been using Covered calls extensively for a couple of years now with pretty decent success. I have written several long detailed comments on my mechanics on Seeking Alpha articles on related topic. Basically a 30 delta call 30 days out with at least 1 - 1.5% premium on index etfs. I purposefully converted my retirement investments from Vanguard funds to $SPY and $QQQ. In a rabid bull market like we are in now or were prior to Coronavirus, I have to roll up and out a Lot as I dont want to lose the shares. If rolling is for a credit, its still okay (even though you are not making much new money), but rolling for a large debit is a killer...Some of these details can only be learnt by actually doing it and not by reading or watching videos. So, if anyone wanting to start, I suggest start with 100 shares of $QQQ and write a 30 delta call 30 - 45 days out. Once you have done this for 3 - 6 months and importantly familiar with Rolling, start also selling a 16 delta put in addition to covered call (so called covered strangle).

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Re: Options heretics thread - by request
« Reply #135 on: August 15, 2020, 12:48:28 PM »
First, a big thanks to @Financial.Velociraptor , not just for the sharing he provides here but the sharing he provides in his blog. He has personally helped me become a better educated investor.

Second, I'd be in favor of a "Advanced Options Heretics Thread" if you ever have the desire to create it. There are a ton of other topics that it's always great to learn about.

Personally, I started my options journey probably 10 years ago when I learned you could use call options to create leveraged stock holdings. Sounded great. I had no idea what I was doing, but bought a few deep OTM call options on some stocks I thought were going to increase. Fast forward a few months, and the underlying would increase but my option would decrease. I left at the time thinking "options are hard and difficult to understand" when in reality I didn't have a full grasp on how options were valued. I knew the greeks existed, but I didn't know how they really worked. Now with a firm grasp of delta, time decay, and volatility as it relates to options pricing, options don't see so complicated.

I moved on to covered call writing, stuck with it heavy for a year or two, which helped me fully understand the change of delta and IV when figuring out my options. I now sell more naked puts than covered calls.

Speaking of, for your "advanced" series, I'd personally like to see more discussion on a few topics, namely:
1. Covered Calls vs. Short Puts (see https://www.youtube.com/watch?v=m7vT8iJJbLQ)
Most think covered calls are "smart" and "safe" while short puts are "dumb" and "risky", when in practice it isn't quite that simple. It requires a better understanding of the use of margin vs. cash secured positions though.

2. Short Put writing as an income stream
You hear so much talk about how writing naked puts are dangerous. But if you look at some of the studies (https://spintwig.com/spy-short-put-0-dte-leveraged-options-backtest/ where the use of a 0 DTE 16 or 30 Delta put on SPY can produce a consistent income stream, with relatively low risk) you can see there are a ton of possibilities. I paper traded a 0 DTE 30 Delta XSP strategy for two months, and it proved very successful. I moved real money into the strategy about 6 weeks ago, and it's produced about $30 per day on average, with ~$6,000 at "risk." Not every day is green of course.

3. Using VXX
Namely, I'd love to hear more about what you're doing:
I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

What time period are you targeting, what metrics (Delta, are you watching volatility leading up to and entering the trade, when do you roll, etc.) do you use?

I was just analyzing some of these strategies a while back when the VIX exploded. I figured it was too risky for me (or possibly no longer a viable trade), but have been watching money be printed since then.

Thanks again for all you do @Financial.Velociraptor !!!!!

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Re: Options heretics thread - by request
« Reply #136 on: August 16, 2020, 05:06:29 PM »
First, a big thanks to @Financial.Velociraptor , not just for the sharing he provides here but the sharing he provides in his blog. He has personally helped me become a better educated investor.

Second, I'd be in favor of a "Advanced Options Heretics Thread" if you ever have the desire to create it. There are a ton of other topics that it's always great to learn about.

Personally, I started my options journey probably 10 years ago when I learned you could use call options to create leveraged stock holdings. Sounded great. I had no idea what I was doing, but bought a few deep OTM call options on some stocks I thought were going to increase. Fast forward a few months, and the underlying would increase but my option would decrease. I left at the time thinking "options are hard and difficult to understand" when in reality I didn't have a full grasp on how options were valued. I knew the greeks existed, but I didn't know how they really worked. Now with a firm grasp of delta, time decay, and volatility as it relates to options pricing, options don't see so complicated.

I moved on to covered call writing, stuck with it heavy for a year or two, which helped me fully understand the change of delta and IV when figuring out my options. I now sell more naked puts than covered calls.

Speaking of, for your "advanced" series, I'd personally like to see more discussion on a few topics, namely:
1. Covered Calls vs. Short Puts (see https://www.youtube.com/watch?v=m7vT8iJJbLQ)
Most think covered calls are "smart" and "safe" while short puts are "dumb" and "risky", when in practice it isn't quite that simple. It requires a better understanding of the use of margin vs. cash secured positions though.

2. Short Put writing as an income stream
You hear so much talk about how writing naked puts are dangerous. But if you look at some of the studies (https://spintwig.com/spy-short-put-0-dte-leveraged-options-backtest/ where the use of a 0 DTE 16 or 30 Delta put on SPY can produce a consistent income stream, with relatively low risk) you can see there are a ton of possibilities. I paper traded a 0 DTE 30 Delta XSP strategy for two months, and it proved very successful. I moved real money into the strategy about 6 weeks ago, and it's produced about $30 per day on average, with ~$6,000 at "risk." Not every day is green of course.

3. Using VXX
Namely, I'd love to hear more about what you're doing:
I also like to buy long dated puts on VXX.  Contango in the futures markets tend to make that ticker decay over long periods of time.  Has been my best, most repeatable trade since about 2010.  I likely would not have been able to FIRE at 40 without that trade.

What time period are you targeting, what metrics (Delta, are you watching volatility leading up to and entering the trade, when do you roll, etc.) do you use?

I was just analyzing some of these strategies a while back when the VIX exploded. I figured it was too risky for me (or possibly no longer a viable trade), but have been watching money be printed since then.

Thanks again for all you do @Financial.Velociraptor !!!!!

@specialkayme

Thanks for the kind words!

Let's see if others want an advanced thread or to just fill out this thread with more discussion.  I don't want to become a burden on the moderators or attract Boglehead trolls.

I'm not what precisely sure you are asking about the difference between covered calls and short puts.  Maybe your are referring to "naked" e.g. "uncovered" puts.  Cash secured puts have the same theoretical profit/loss profit as the same strike covered call.  This makes a lot of sense as if there was a wide difference, you could arbitrage it away for a riskless profit.  (Of academic note, there is actually a very small (few pennies) persistent out of balance where puts are ever so slightly more valuable than calls.  It is called the "negative skew.") 

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Re: Options heretics thread - by request
« Reply #137 on: August 16, 2020, 05:17:17 PM »
financial.velociraptor, I rarely post but have been following this thread, as well as the "fun with VIX options" thread from a couple years back.   I remember that ran into problems when the ETF de-leveraged, and then I think there was additional trouble in the market wobbles of late 2018.  I remember reading intently about the decay in the underlying over long time spans (1-2 years) and the availability of LEAPS, but I don't fully understand or remember what the trouble was at the end.  I for one would be interested in hearing more about that, especially since you reference it again on this thread, and it sounds like you are still doing some version of it.

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Re: Options heretics thread - by request
« Reply #138 on: August 17, 2020, 06:04:47 AM »
I'm not what precisely sure you are asking about the difference between covered calls and short puts. 

I just think it's a topic area that should be discussed more, and something I wish was explained to me earlier on.

Covered Calls are often the "gateway drug" to the options world. Usually at this stage, investors believe Covered Calls are low risk with great reward. But you can accomplish the same thing by selling a put at the same strike price. Same profit potential, same loss potential. Only you can choose to have short puts cash secured (fully or partially) vs the use of margin.

Look at TGT as an example, a good aristocrat dividend stock. Trading this am (premarket) at $137.75.
1. Covered call option
I can buy 100 shares of TGT stock ($13,775) and sell one 9/18 option with a 145 strike for $230.
Cost: $13,545 (stock price less the option received)
Max Profit: Stock moves somewhere north of $145, I keep $230 from the option, plus $725 from the stock gains (if it gets called away for $145 less the $137.75 cost), total $955.
Max Loss: Assuming TGT goes to $0, I'll lose the $13,775 I put into the stock, but I keep the $230 from the option, total loss $13,545.

But it is VERY unlikely that TGT will go bankrupt between now and 9/18. And yet we have to tie up $13k in capital on the play, to hope for a 7% max gain.

Or

2. Naked Put option
I can sell a 145 TGT put with a 9/18 date for $11.60. I don't have to buy any stock. If I want it to be cash secured, I have to keep $14,500 in my account to be able to buy the shares (but since I get $1,160 from the option, I only have to start off with $13,340 in my account). Which means I need $205 less in my account than the covered call option.
Max Profit: If the stock moves somewhere north of $145, I keep the $1,160 from the option.
Max Loss: Assuming TGT goes to $0, I'll have to buy back the shares that are worth $0 for $145, for a loss of $14,500. But I keep the $1,160. Making for a loss of $13,340.
Cost: $13,340 (stock price at $145 to keep it cash secured, less what I will receive from the option).

So the naked put allows me to have a greater max profit ($1,160 vs $955), lower max loss ($13,340 vs $13,545), and lower out of pocket cost up front ($13,340 vs $13,545). And it's the same underlying movement of the stock. But since I have less out of pocket, and greater profit, my potential gains are 8.7% (rather than the 7% for the covered call).

Now consider the use of a margin account. To do the covered call on margin requires a $13k loan from your broker, which is very risky, expensive, and in my opinion dumb. So you need $13k in cash to tie up into the investment. But for the naked put, you don't need all $13k tied up in that trade, sitting in cash waiting for TGT to go bankrupt (which isn't likely to happen). All I need is ~$3,800 in cash in my account (roughly 20% of the stock price, plus the option premium) and I can sell the put. And the max profit is the same. But $1,160 gain on $3,800 of cash is a 30% gain (instead of an 8.7% gain).

So, if I had $14,000, I could tie up $4,000 to sit in cash on the naked put (in the event TGT dropped 30% in the next 30 days), and then I could put $10,000 in other investments (bonds, for example). If I gained anything on the other investments, it adds to my profit. And if I chose a diversified investment for my other option, I'm even further reducing my risk. If TGT drops more than 30% in 30 days, I can pull out of my other investments to cover the loss and buy back the stock.

Considering the naked put and the covered call is the same play on the same stock moving in the same direction, it surprises me that the naked put isn't talked about to beginners as often as the covered call. Especially when the profit is slightly higher, and the max loss is slightly less. Considering I wished I knew this earlier, I just figured it would be worthwhile to talk about it here.

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Re: Options heretics thread - by request
« Reply #139 on: August 20, 2020, 02:34:19 AM »
I initially bought options that would do well in a recovery, but recently added calculations for break even and a halfway recovery.  I'm willing to give up some "full recovery" profit to improve my results in other scenarios.

I wound up selling my Macy's $10 calls and buying Macy's $8 calls ("rolling down").  A full recovery might see Macy's stock go from $6.50 to $16.60, gaining +155%.  But if it only recovers halfway (maybe from Covid-19 uncertainty or Amazon taking market share)... the $10 calls are just above break even (+20% profit or so) while the $8 calls might double (ignoring time value).  For me, "rolling down" reduces the risks associated with a partial recovery.

My overall plan is to await vaccines / treatments and a recovery from Covid-19.  In the first week of June, Macy's stock rose +50%.  I'm guessing vaccine news could have a similar effect, perhaps larger.

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Re: Options heretics thread - by request
« Reply #140 on: August 31, 2020, 08:37:07 AM »
Thought this might be of interest.  I've closed some recent trades and opened a new one today.  Not all were winners.  I took a 37% hit on DHI.  I might make up to 101% on MSFT.  Not covered in the piece but September is on pace (all positions in the  money) for 1,986 in profits on 5,564 capital at risk on bull spreads and another 3,132 in profits on a covered call position in NLY.

[url]https://velociraptor.cc/blog/2020/08/31/bull-call-spread-with-yield-up-to-783/[url]

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Re: Options heretics thread - by request
« Reply #141 on: August 31, 2020, 11:42:38 AM »
emboldened by this thread, I've spent much of the month short a put-contract on $JPM. I netted $108 on the sale, and I'm only 4.25 trading days away from the contract expiring. Goal is to duplicate @Financial.Velociraptor 's stated Cash-on-Cash return of 1%/month.

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Re: Options heretics thread - by request
« Reply #142 on: August 31, 2020, 05:46:07 PM »
emboldened by this thread, I've spent much of the month short a put-contract on $JPM. I netted $108 on the sale, and I'm only 4.25 trading days away from the contract expiring. Goal is to duplicate @Financial.Velociraptor 's stated Cash-on-Cash return of 1%/month.

@talltexan

Are you playing JPM because you want to earn it long term or because you like its short term prospects?  How far did you go out of the money and why?    I think it will help others to follow the thinking of a new trader.

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Re: Options heretics thread - by request
« Reply #143 on: September 01, 2020, 08:35:05 AM »
I'm used to seeing it in the news and believe it's a better run bank than some others. I don't think my study here would withstand a ton of scrutiny from this crowd. It also matches my son's initials.

If something goes wrong with the experiment and the shares get assigned to me, I could live with it or sell and continue the strategy.