Facebook – Deep ITM Call Option Expiring June 18, 2021 – Day 5

It’s the first Friday expiration and it’s been excellent for selling premium – not so good for holding a deep ITM Call.

Long Stock

Had I held 100 shares of long stock, I would have lost $402 (Purchase Price: $323.10 – Closing Price: $319.08 = 4.02 x 100 shares = <$402>)

Loss on 85 Delta Call

I bought the 85 Delta Call for $35.50 and it is currently worth $31.87 or a loss of <$363.20>.

Gain Selling Premium

Here’s where I did pretty good. I originally sold a short call for $1.04. The stock dropped and closed that option for $0.11 then sold another option for $0.76. Then I closed that option and sold an option expiring May 14 for $1.21 that was worth $1.02 at close of business on Friday. This made my profit on the shorts $188.00

If you take the loss of $363.20 on the long option and add the gain of $188,00a that came from selling premium, I netted a loss of <-175.20>. Half of the loss I would have hand holding long stock.

Facebook – Deep ITM Call Option Expiring June 18, 2021 – Day 2

The market gives and the market taketh away. Today, it taketh away.

Janet Yellen started to warn that Monetary and Fiscal Policy cannot both be running flat out for the foreseeable future without overheating the economy. The U.S. didn’t even spend this percentage of GDP throughout World War II, when government expenditures reached the highest point in U.S. history. So the markets, especially the NASDAQ (Down 1.88%) reacted poorly and Facebook only had one way to go, which was down.

Since I’m being very cautious as the market figures out where it’s going next, I didn’t add any additional positions, but I do expect somewhat of a rebound later in the week since many stocks hit the lower edge of this week’s expected move and I expect they to adjust upward. However, it could be that the market could continue correcting for a couple more days, so caution seemed appropriate.

My Long Call Takes Pain to the tune of <$380.70>

Yesterday when I opened my long option position, Facebook was at $323.10 and today closed at $318.36 (Down about 1.46%), so my long CALL option took some pain and lost $380.70.

Closed my Short Call

To offset the loss, I closed my short $330 Call and made $73.00

And re-established it at a lower level

Then I sold a $222.50 CALL for $107. According to ThinkOrSwim, I’m currently down $479.00 in the trade since the $222.50 CALL increased in value since I purchased it.

I can breakeven for the week if the stock closes above $321.85

The good news is that I can break even in the trade if Facebook returns to $321.85 by the end of the week, that’s the nice thing about selling premium against my long position.

Facebook – Deep ITM Call Option Expiring June 18, 2021 – John Wheeler

Facebook – Deep ITM Call Option Expiring June 18, 2021

For my first demonstration trade for this blog, I decided to use a Facebook Call option that’s deep in the money and expiries in 46 days. I first learned this stock replacement strategy in one of Jim Cramer’s books, but Don Kaufman of TheoTrade also uses a similar trade and calls them Duration Trades.

I use it because an 85 Delta Call option tends to function like being long 85 shares of stock and if we’re lucky, and the underlying runs, my 85 Delta Call can be close to a 100 Delta Call and will act like 100 shares of stock before expiration.

Long 85 Delta Call

I purchased the June 18, 2021 290 CALL (85 Delta Call) for $35.50 on 5/3/21 at about 9:30 am EDT with the underlying at $323.10 and Facebook closed at $323.15.

Short 20 Delta Call expiring this week

Before the market closed today I sold the $330 Call (20 Delta) for $1.04. This should cover my daily theta burn on the trade and will supply some extra income.

NEt results

At the end of the day, with Facebook unchanged, I lost $22.00 on the trade. I also hold a net delta of 65 and theta of 36.34, so I’m happy.

Estimated Profit/Loss at Expiration

Right now the options market is anticipating a move of +/-$26.90 in Facebook Stock by June 18th, which is 8.3% up or down.

I anticipate selling the weekly option 7 times between now at June 18 for a theoretical gain of $700.

So if Facebook stock moves up to $349.70 at expiration, theoretically I could make as much as $3,120 on a $3,550 investment.

If Facebook moves down I could lose my entire investment but likely I would lose $2,279.

And if the stock doesn’t move, I would likely lose about $402.

Stay tuned for updates.

Related Posts

Facebook – Deep ITM Call Option Expiring June 18, 2021 – Day 2 – John Wheeler

Cruising Puget Sound

I’m considering selling my 26′ TBird and buying a powerboat. It’s actually part of my bucket list. I think that Puget Sound is one of the best cruising grounds in the world and there are dozens of cities, marinas, beaches, and restaurants that I want to explore by boat, and a 26′ sailboat is not fast enough for a 100 mile journey.

I believe the only way I’ll be able to visit all of the places I would like to go is to buy a powerboat. Right now, I’m thinking about a Four Winns boat in the 24′ to 30′ range.

I found this really awesome website that lists marinas and boat ramps on the Puget Sound and I want to bookmark it for myself and share it with everybody.

Save Money – Don’t Buy that Beginning Options Book

Blogging is tougher than people think. It’s hard to come up with content that people will actually read, and it’s even harder to get people to visit your blog.

My answer? In this blog, I’m using it a bit like a Pinterest account – a place to store ideas (especially investing ideas).

Here is the Option Strategies Quick Guide from the the Options Industry Council. To be frank, I’ve paid good money for beginning options books on Amazon that didn’t have this much information. Here are some of  the strategies that are covered in the book.

 

Long Call

Bull Call Spread

Bull Put Spread

Bear Put Spread

Bear Call Spread

Covered Call/Buy Write

Protective/Married Put

Cash-Secured Short Put

Long Put

 

 

 

 

Why I’ve Switched to Delta Neutral Strategies

 

Here’s a great video from Mike Butler of TastyTrade about Delta, so that I don’t have to try to explain Delta in this post.

The Evolution of my Trading

Buy and Hold Long Stock

Like everybody, I started my investing career by buying and holding long stock.  I’ve always been able to pick good stocks and managed to stay close to the growth of the S&P 500.  But I was looking for something better.

Weekly Covered Calls

Somewhere I saw one of those Traders (that is selling their program that will change your life and improve your retirement), who was selling the idea of buying weekly covered calls.  I liked the idea because it seemed like it was leveraged to the upside, so bring on Weekly Covered Calls.

It was actually a pretty cool way to invest.  Most months, I was able to beat the S&P (barely).

What I hated about this strategy was that at earnings, when volatility was high and the option premiums were high, it was a crap shoot. Sometimes the stock stayed at the same price or went up after earnings; but at other times the stock dropped like a Chinese Space Station and no amount of option premium covered the loss in the stock.

Using Long Options as a Proxy for Long Stock

I got this idea from the great Jim Cramer.  In one of his books he talks about how you can use options to replace stocks and thereby leverage your portfolio to the upside.

This strategy used to be awesome for me.

For between 10 to 15% of the price of the stock you can control 100 shares of stock.  During the raging Bull Market, this strategy was like printing money.

The problem with this very high-delta strategy was the downside.  Being highly levered to the upside meant that you were leveraged to the downside.  It was too expensive to completely hedge all those deltas or the wild beta.  During the market collapse of February, 2018, you couldn’t sell options quick enough to stop losing thousands of dollars because of the high deltas of the portfolio.  Yikes.

Weekly Covered Calls on LEAPS

In Excel, this seemed like a really great trading strategy.  Buy a LEAP option that was about 9 months in the future and sell weekly calls against it.  Some LEAP’s can be purchased for about $10.00 and have a very low Theta because of how far they are in the future.  I tried to hold the LEAP until expiration.

Some of the weekly options brought in about 10% premium on the LEAP.  It seemed like a really great strategy.

First I got the Trader’s version of the gambler’s fallacy.  I figured if I could get 10% return on weekly basis, then on an annual basis – 520%!  I started shopping for my island in the Caribbean.

Sadly, in downturns in the market, this is a really painful strategy as you watch the LEAP lose value.  Trust me on this.

Directional Put Spreads

I’m always bullish on the market over time.  So what could be better than buying an out of the money put spread?

In my mind, it was almost like printing money.  I put this strategy in play and started shopping for my island in the Caribbean again.

The problem with directional trades is that you have to be able to predict which way the underlying was going to move.  Sadly, the market humbled me and showed that I can’t predict direction.

A couple weeks ago, Facebook had dropped to about $168.  I was sure that there was no possible way that Facebook could possibly drop further, I sold a 150/160 put spread, knowing that it was impossible that Facebook to drop further.

Uh, ouch.  Facebook is trading around $155 today.  So much for my ability to predict direction.

Delta Neutral

Enter Delta Neutral.  With Delta Neutral Strategies, I don’t have to worry about normal moves in the underlying.

So now I’m trading volatility and time decay.

Stay tuned for how this strategy works for me.

 

 

 

Learning to Trade Options on Tastyworks

I recently opened a TastyWorks account in an attempt to learn to trade options the TastyTrade way.  I keep my IRA’s in Interactive Brokers, but think that TastyWorks is better place for trading options.

To start my trading adventures, I funded my trading account with about $3,500 that I wouldn’t miss if I lost it; because I’ve learned that sometimes you lose money while you’re learning to trade.

My History Trading Options

I started trading options in my IRA using covered calls and was able to very-slightly outperform the S&P 500.  Trading covered calls, especially weekly covered calls, helped me learn about things like Theta Decay and Implied Volatility long before I knew what the Greeks were and how they affected things.

I would sell the weekly call options of the stocks with the highest priced weekly’s and did pretty well unless the underlying took a big dip – which they often did at earnings.  But after a period of trading covered calls, I realized there was some profit potential in options and I was hooked.

Options as Proxies For Stocks

One of Jim Cramer’s books opened my eyes to using options as proxies for stocks.  It’s really a great method, especially in a raging bull market like we’ve been in for the past 5 or more years.

This method requires you to buy call options a couple months out that are deep in the money and have a Delta that is close to 1.00, so option acts very much like the long stock.  This means that for 10 to 15 percent of the cost of the underlying, you can control 100 shares.  Talk about leverage!  And I was off to the races.

I did great with this method until the mini-crash in February 2018, when I found out that being highly leveraged on the way up, also meant that I was highly leveraged on the way down.

Not good in this highly volatile market.

Calendar Spreads that act like Weekly Covered Calls

These are fun.  I bought a call option as far in the future as possible, for instance at an expiration 9 months in the future and allowed this to function like long stock.  Then I sell weekly ATM call options against the long call and it worked much like selling a weekly option against long stock.

I was highly leveraged and happy as a clam.  Happy until the market dropped and the price of my long calls began to erode.  Once again being leveraged to the upside left me vulnerable to downturns in the market, which there have been a lot recently.

Enter TastyTrade

TastyTrade seems to pride itself on being different.  I’ve listened to hours and hours of Youtube videos from TastyTrade.  My commute is 2 to 3 hours roundtrip and it’s easy to plug the IPad into the car stereo and listen to Tom, Bat and the group explain their methods.

Here are some things that I’ve heard:

  • Sell Premium
  • Trade Non-Directionally (when you can).  It’s impossible to guess which way the market will move.
  • Trade when volatility is high
  • Trade often
  • Trade small
  • Close Trades at 50% max profit (some trades close earlier than that, and some close later)
  • Manage your winners

So I’m off to learn the TastyTrade way to trade.  I thought I’d use this blog to help me chronicle my progress.

Peace and Happy Trading!

John