DS Goes Options Trading

[Abstract Actuary]

This was a bad couple weeks for me. My two bets ended poorly. One I had a chance to get out at a small profit and didn't take it only to see it erode over time. The other I was just plain wrong.

Originally Posted by Abstract Actuary

I felt ZNGA options were underpriced this morning so I bought some. The stock moved perfectly between purchases (went up after buying call). I'm not sure if the stock is going to continue to plummet or bounce back heavily from last night's drubbing, but I don't think it will stay here.

Buy AUG ZNGA Call @ $3.00 for $0.36 Sold for $0.08
Buy AUG ZNGA Put @ $3.00 for $0.20 Sold for $0.05

The stock basically stayed within $0.08 of $3.00 since this post. There were a couple of times that one or the other would spike in value, but I held on to both in the hopes that eventually it would get more than $0.50 away from $3.00 on one side or the other. I sold out of the position earlier this week for a nearly 100% loss on these trades.

Originally Posted by Abstract Actuary

Just doubled down on my BRK/B bet. I doubled my contracts for 1/3 of the price. These are my outstanding options now.

Buy AUG BRK/B Call @ $87.50 for $0.27 Expired worthless
Buy AUG BRK/B Call @ $87.50 for $0.09 Expired worthless

I was right when it was at the bottom. They eventually got up to $0.24 each which after bid/ask spread and transactions costs would have put me at a slight winner, but I was hoping for another push in the right direction. That never came and I ended up hoping for some/any bounce back in the last 10 days and it never came, so I'm going to let them expire worthless today since I can't even recover the transactions costs.

[Stan]

Originally Posted by Dismal Science

Exited this trade this morning for a loss:

SELL K=$18 PUTS on GME expiring 9/21 @ $0.95

It was only a short term bet. I really should have exited yesterday when I was up on it but I thought it might go lower by the end of the day.

Remember how you made money on the YELP trade, but could have made 10 times as much IF you had waited another day or two? This is what happens sometimes when you let it ride. My only point being, don't beat yourself up for getting out in the money. Sometimes, it is right to pull out shortly even if there is upside potential.

[Stan]

Originally Posted by Abstract Actuary

I was right when it was at the bottom. They eventually got up to $0.24 each which after bid/ask spread and transactions costs would have put me at a slight winner, but I was hoping for another push in the right direction. That never came and I ended up hoping for some/any bounce back in the last 10 days and it never came, so I'm going to let them expire worthless today since I can't even recover the transactions costs.

The thing to take away from this is that your speculation after the options rose to .24 was based on hope, and not belief that it would increase in value. Sure, a part of you still expected to make money at that point, but given that you weren't in the money after a while, it seems like maybe your best bet was to cut your 'losses' and get out (in this case break even). I say this because don't most of your big payoffs come right away? How often do you options decrease in value, eventually break even and then you let it ride to a big profit?

[smekta]

Originally Posted by Stan

The thing to take away from this is that your speculation after the options rose to .24 was based on hope, and not belief that it would increase in value. Sure, a part of you still expected to make money at that point, but given that you weren't in the money after a while, it seems like maybe your best bet was to cut your 'losses' and get out (in this case break even). I say this because don't most of your big payoffs come right away? How often do you options decrease in value, eventually break even and then you let it ride to a big profit?

I cant comment on "how often" with any any statistical significance, but at least half of my trades go into the red(some as much as 30-40%) before they turn green. My biggest win(at least for a trade with real cash behind it) of 100%+ came after the option value was more than 20% down over the course of 3 days.

This is very much the case for the times when I buy the option as it's in the process of losing value with the hopes of that trend reversing. I obviously cant predict where the bottom is, all I can do is put in a stop-loss of x%.

[smekta]

Originally Posted by Abstract Actuary

The stock basically stayed within $0.08 of $3.00 since this post. There were a couple of times that one or the other would spike in value, but I held on to both in the hopes that eventually it would get more than $0.50 away from $3.00 on one side or the other. I sold out of the position earlier this week for a nearly 100% loss on these trades.

I hope when you say "call" you really mean a single call, because thats just brutal. I thought I was being risky with a stop loss of 40%...

[Dismal Science]

Well today I learned about exchange fees associated with adding / removing liquidity for options.

I sold a large volume of far out of the money calls for about $0.02. But the commission ended up being about 1/3 of the total potential gain. While IB only charges $0.25 per contract there are also exchange fees. And a potential additional fee if you remove liquidity from the market (and a rebate if you add liquidity).

Normally I don't have to pay attention to things like this because the commission is a negligible amount compared to what is at risk. However, in situations where I am trading a large volume of contracts for a very small gain I guess I need to keep this in mind.

Here is the explanation:

Originally Posted by Interactive Brokers

The concept of adding or removing liquidity is applicable to both stocks and stock/index options. Whether or not an order removes or adds liquidity is dependent on that order being marketable or non-marketable.

Marketable orders REMOVE liquidity.
Marketable orders are either market orders, OR buy/sell limit orders whose limit is at or above/below the current market.

1. For a marketable buy limit order, the limit price is at or above the Ask.

2. For a marketable sell limit order, the limit price is at or below the Bid.

Example:
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 46.01. This order will be considered marketable because an immediate execution will take place. If there is an exchange charge for removing liquidity, the customer will be charged that fee.



Non-Marketable orders ADD liquidity.
Non-marketable orders are buy/sell limit orders in which the limit price is below/above the current market.

1. For a non-marketable buy limit order, the limit price is below the Ask.

2. For a non-marketable sell limit order, the limit price is above the Bid.

Example:
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 45.99. This order will be considered non-marketable, because it will be posted to the market as the best bid, and instead of being immediately executed.
If and when someone else sends a marketable sell order that causes your buy limit order to be executed, you should receive a rebate (credit), if an add liquidity credit is available.

PLEASE NOTE:
1. All accounts trading options will be subject to any options exchanges’ remove/add liquidity fees or credits.
2. Per IB’s website, only negative numbers under the Remove Add Liquidity schedules are rebates (credits).

[Dismal Science]

In summary - you want to be "adding liquidity" when trading really low priced contracts in volume by placing a limit order that won't be executed immediately.

[Abstract Actuary]

Originally Posted by smekta

I hope when you say "call" you really mean a single call, because thats just brutal. I thought I was being risky with a stop loss of 40%...

Meh, every time I make a bet I'm willing to lose it all. As Dismal Science alluded to above profitable trades frequently spend some time in the red. Options swing so much in value, so often, in both directions that I think stop loss backups is a mistake. When options move they move by 20+%. Then the next day they'll be up 80%.

[zeroEthix]

it may have already been mentioned, but options trades aren't reported to the IRS as they come in a separate MISC year-end statement

[Dismal Science]

I'll probably sell some covered calls against my USO position this week. And I'll be certain to make sure it adds liquidity so that the exchange fees aren't as outrageous as last time.