Option will bankrupt you if you don't know what you're doing
Adapted from a real storyMary made tons of money in 2021 buying and selling far out of the money LEAP Calls.These are cheap call options with strike that is way above the current share price & expires more than 1 year away. Option traders who play this game do not hold the contracts till expiration. Once the share price goes up, they will sell these LEAP Calls for good profit. Share price will always go upBecause Mary made a lot of money in 2021 playing these LEAP Calls, she figured come 2022, share price can only go up. So she doubled down on the number of contracts she bought. As market starts to trend down, she bought more calls to lower her costs thinking market will soon go up. Before she knows it, she had already spent a lot of money on these LEAP calls. Share price can also go downUnfortunately for Mary, the market continues to tank and now the LEAP calls are worth a tiny fraction of its original purchase price. Mary is staring at a few 100Ks of paper loss. Time decay is eating away at the value of these LEAP calls daily.Desperate moveMary decided to play the other side, afterall the share price can only go one way come maturity. So she bought a lot of far out of the money LEAP puts hoping that the share price will crash. She spent a lot of money on these LEAP puts as they are not cheap with IV at an elevated level.Its a bigger problem nowNow she is long on both LEAP Puts and Calls & time decay has increased as a result. Also delta is somewhat neutralised and any movement in share price does not impact the overall position much. In other words, the strangle (option strategy) which she has so 'cleverly' created has literally strangled her position & she has inadvertently locked in her losses. Not only she has to worry about the share price, she is also fighting against time. As most of us would have discovered by now, market does not go down or up in one straight line. Today is red, tomorrow can be green, 2 days red, 3 days green and so on, much like a tango dance. For her recovery strategy to work, the price has to move down or up a lot and move quickly. Unfortunately this is not the case now.Lesson LearntWhen entering a trade, always assume it will go wrong and hedge your bets. This will mitigate any losses in case the bet really goes wrong. Smaller losses means there is less of a desperate need to institute repair or recovery trades which if not done correctly can result in bigger losses as seen in Mary’s case. Finally if repair or recovery trades are to be undertaken, please make sure you know what you are doing otherwise you are simply digging a deeper hole which will be harder to get out. What should Mary have done?I cannot just end the article with the lessons learnt, else many would go away with the impression Options are risky. The fact of the matter is options are not risky if you know what you are doing. For Mary's case, as desperate as the situation may seem, there is repair trades she could have taken to salvage the situation. Keep a lookout for Part 2 to see what she could have done differently to salvage the bad trade.
What happens when you hold your options into expiration on Tiger Platform?
Ever wondered what happened when you hold option trades into expiration on Tiger Platform?
I executed the following multi-legs option trade sometime in August on IWM & held it to expiration on 16th September 2022:Long 1 x 175 Put Short 2 x 185 PutsLong 1 x 188 PutIWM closed at 178.99 at the end of last Friday’s (16th Sep) trading session.So what happened subsequently?On Sunday after 3pm, the option trades were settled in my Tiger account as follows: 1 x 175 Put - OTM & Expired worthless & closed. 2 x 185 Puts - ITM & I was assigned 200 shares at 185 each 1 x 188 Put - ITM & exercised on my behalf and resulted in short 100 shares at 188Now you know.A word of caution: It is almost always prudent to close option trades before expiration. However there are situations where it makes more sense to hold it into expiration and let the broker do the needful. $iShares Russell 2000 ETF(IWM)$@TigerStars #Options Hub
Is it really that good?Many of the option youtubers tout selling cash secured puts as being low risk, able to generate regular income and buying stocks at a discount. Let me provide some perspective to each of them.Low risk? Being cash secured only means you have the ability to pay for the mess if shit ever hits the fan. It simply means there will be no margin call from the broker. Its low risk to the broker, not the trader. The trader is still subject to the full risk the stock may crash lower, never recover at all or worse goes to 0.Generate regular income? When coupled with selling covered calls, it can be an effective income generator. However stocks may drop in price so much that it becomes impossible to sell covered calls for a decent premium at the assigned or even breakeven price.Buying stocks at a discount? Yes. premiums received could mean a lower entry price when assigned. But options comes in 100 packs and therefore one is bagholding 100 shares when assigned which could occupy a big chunk of one’s portfolio especially if the account size is small. Using simple dollar cost averaging when the stock is on its way down could in fact accomplish the same outcome, sometimes at an even lower average price.Hedge your Bets!Instead of selling just cash secured puts, include long puts &/or short call spreads in the mix. Use strategies such as spreads, ratio spreads, broken wing butterflies, iron condors instead to manage the overall delta. Yes some of the strategies may not be as lucrative as simply selling puts and admittedly hedges can be eyesores when the stock is mooning, but at least you get to sleep better at night knowing your risk is mitigated no matter how the market moves.@TigerStars
Options trade with Markets Falling Left, Right and Centre
The Sky is Falling!Even if you are an options trader and supposedly have a toolbox full of tools to deploy in any market situation, it can still be unnerving to be putting on trades when markets is falling left, right and center and everything seemed so bleak. My option trade for the first day of September:
Name of Strategy: Standard Put Broken Wing ButterflyUnderlying: QQQComponents:leg 1: Long 250 Putleg 2: Short 2 x 265 Putleg 3: Long 268 Put3 legged Standard Put Broken Wing Butterfly P/L Proflie at maturityCredit collected: $86 after Tiger fees.Collateral put up: $1,500I used my order blaster bot to submit the 3 legs concurrently to Tiger platform and all 3 legs were filled at the same time as QQQ options is highly liquid.All 3 legs were filled at the same timeNot trade recommendation. Just sharing my option trades.$Invesco QQQ Trust(QQQ)$ @TigerStars
Broken Wing Butterfly morphed into No Risk Full Butterfly
I entered into a broken wing butterfly on QQQ on National Day 9th Aug as follows:QQQ Broken Wing Butterfly TradeThere are basically 3 legs:Sell 2 x 295 Put expiring 2nd Sept.Buy the 280 Put same expirationBuy the 300 Put same expirationMulti-Leg Order Entry ProgramI used my Multi-Leg order entry program to enter the 3 legs as a 'single' order on Tiger platform and thats why the 3 legs were filled concurrently. My Multi-leg Order Entry ProgramRationale for TradeThe rationale for the trade was expecting QQQ to move slightly lower by expiration. However QQQ moved higher instead after the trade was put on. No fret really, the nice thing about BWB is I can still keep the premiums even if QQQ move higher. Morphing into a Free ButterflyAlso now I have the opportunity to morph the broken wing butterfly from this:Broken Wing on QQQinto this:No risk free full winged butterflyI just have to close the 280 Put and buy a new 290 Put. Of course this full winged butterfly would require QQQ to pull back to between 290 and 300 level to make good money. Else I can still keep the small credit regardless how QQQ move. In other words, its practically a free lottery ticket.
Executing a 3 legged long call butterfly trade on Tiger Platform
Option Setup: Long Call ButterflyUnderlying: IWM (Russell 2000 ETF)3 legs Setup:Buy $187 call expiring SeptBuy $195 call same expirationSell 2 x $191 call same expirationOne leg at a timeIt is entirely possible to enter the 3 legs individually on Tiger platform. However that is cumbersome and prices may move while each leg is being entered, potentially distorting the whole setup. To circumvent this problem, one can write an order entry program to enter the 3 legs simultaneously as if it is a single order:Order Entry ProgramMENUEnter the 187 long callEnter the 195 long callEnter the 2 short 191 callConfirm setupProgram fetches the mid price and factor in a price offset for higher chance of fillingSending all 3 legs to Tiger PlatformAll 3 legs appear simultaenously & typically fills in an instant for liquid optionsTiger recognizes the trades as a COMBO and requires only $400 as collateral for the trade. P/L profle for the tradeP/L at maturity@TigerStars#Options Hub
Trading CONDORS, BUTTERFLIES, STRANGLES, VERTICALS ON TIGER BROKER PLATFORM
NO FULL OPTIONS ACCESSIt is not easy to get full option access on established US brokers such as TOS especially if you are a newbie just starting out option trading. Without full access, it is not practical to trade verticals or spreads and other fancy option strategies that involves selling options as they either have to be full cash (short put) or equity secured (short call). TIGER IS GREAT BUT…..Fortunately, Tiger broker has no such limitations. It allows for selling options on margin and even have a COMBO function that provides collateral or margin relief on some of the option strategies. However the problem is in order to execute multi-legs option strategies on Tiger, one has to do it one leg at a time which can be cumbersome and prices may have moved while one is in the process of legging in and this could potentially distort the whole setup. USING BOT TO BLAST ORDERS SIMULTANEOUSLY:To overcome this limitation, one can program a BOT to send the multi legs orders (at the mid price) to Tiger Brokers platform simultaneously. This ensures the integrity of the option strategy as the mid price for each leg was fetched based on the same underlying price. I have a youtube video showing the BOT at work.VID:https://youtu.be/2jWnefygxlQIn the video demo, I created and sent the following 3 option strategies to Tiger Broker:IRON CONDOR (AAPL)VERTICAL (AAPL)SHORT STRANGLE (TSLA)Of course this is just an order blaster, it does not guarantee all the legs will be executed concurrently. Notwithstanding, I think we can all agree it is definitely much better than legging in one leg at a time & is a stop gap measure while waiting for Tiger to hopefully give us the ability to trade multi-leg option strategies (a.k.a. Options Magic) seamlessly. @TigerStars
Big bets before earningsMost option strategies during earnings involve taking directional bets on share price movement. If the shares crashed after earnings, those who bought PUTs would be laughing their way to the bank. If shares rallied after earnings, CALL buyers would be happy. There are of course the straddle option strategy which profits as long as the share price moves in a big way, up or down. What happens after earnings?If share price crashed in a big way after earnings, what follows is typically a period of tug and war between the bulls and bears. Bargain hunters will feel the market has over-reacted & thinks these ‘unloved’ companies are on sale. Fearful sellers & opportunistic shortist would continue to dump the shares thinking the company is practically hopeless. In other words, following a massive move, either up or down, the share price will typically try to find its bearings again & trades within a range. Welcome to the consolidation phase. This would probably be a good time for the IRON CONDOR to swoop in for the kill. @TigerStars
Standard Straddle (Pay to enter trade)If you dabble in options, you should be familiar with the Straddle.Buy ATM CallBuy ATM PutProfit from volatility during earnings. Example of a straddle setup for INTEL (INTC) which is reporting earnings in 2 weeks time.It would cost about $391 to buy the straddle (37P and 37C) which expires in 23 days. Bearish Straddle (get paid to enter)If you are not keen to pay so much money to get into a straddle trade & if you think earnings will not be good, then the bearish straddle may be more suitable. Buy 2 x 37PSell 1 x 44P (Assignment risk)The breakevens are about the same (33+ on the left and 40+ on the right)
Receive money ($333) instead of paying for the straddle. Collateral required.No unlimited profit if share price rallies to the upside vs standard straddle. In fact max profit if share price rallies is the premiums received.Negative delta trade. Rest of greeks similar in direction to the standard straddle.Lesser affected by IV crush due to lower Vega.
Beware of Heightened IV and IV CrushThe implied volatility of INTC (chart below) has risen over the last few weeks. IV crush is real with straddles especially those that are late to the party.Synthetic Straddles
Head over to substack (search for Jiamu OWL) to read on another ‘straddle’ setup that costs half the standard straddle and less affected by IV crush compared to both the standard straddle and the bearish straddle.
Disclaimer: not trade recommendations
I wrote an earlier article on capturing the share price with the Long Put Butterfly Trap. In this article I talk about the popular IRON CONDOR (IC).ICs are also ‘traps’ that seek to capture the share price by expiration. Unlike a long put butterfly where you pay to set the trap, for IC, you get paid to set the trap. ICs are simply made up of 2 credits spreads - one is bullish (bull put spread) while the other is bearish (bear call spread). The hope is the share price lands in the ‘trap’ by expiration and all contracts expire worthless. Obviously, the smaller or narrower the trap, the lesser the chance of capturing the share price. The bigger or wider the trap, the higher the chance of capturing the share price. The trade off is the larger the trap, the lesser the premiums one can collect. Let me illustrate with 2 IC for TSLA based on latest closing price:SMALL NARROW TRAPMore premiums collected: $1,610Chance of losing money: 79%Max Loss: $390 BIG WIDER TRAP
Lesser premiums collected: $533Chance of losing money: 29%Higher Max Loss: $1,467Not trade recommendations. Options are inherently risky if you do not know how to trade or manage it. You can potentially lose more than what you invested. @TigerStars