"So, wild guess: when you assign an option, the price may change between assignment and delivery." So close, but from there, you look like someone swinging at a Mariana Rivera cut-fastball. All the use your gains.. blah, blah, blah, forget. Meaningless. Try this - always best to work things out for yourself. You like your expry graphs. Enter a long deep in the money call spread 100 times, with 3 weeks to expry (that was the time the OP stated). Use a low vol and make certain that both strikes have no extrinsic value in the opposing put. Now run your graph. Now, all proud of yourself that somewhere you learned when to efficiently exercise your call to benefit yourself to the 3rd decimal, exercise it and enter the transaction, (removing the long call and replacing it with stock). Now look at your graph. You'll have your answer. Which you were quite close to, until you went off the rails. To beat the poor 'ol dead horse... Do it one more time. This time, the moment you exercise the call, buy in the corresponding put for cabinet. ...and before anyone corrects me on exercising calls for equity options, the example was for illustrative purposes, and I never liked equity options anyway. The equities options exchanges were for pussies.
[laugh] Gladly, and with a will. It'll be something to tell the grandkids some day. "There I was, swinging at a Rivera fastball... no, seriously, I have pictures!" Whiffing it still puts me in a rather exclusive club, but not stepping up to the plate would make me a 100x bigger fool than trying and missing. But the "so close" part is encouraging - I've never thought that piece through before, so getting any of it right is great. I'm lost. No extrinsic value in the opposing put? Unless you're talking about calculating VRP separately (or something else deep in the weeds and currently out of my range), extrinsic is the only value that OTM options have, AFAIK. Been staring at those graphs for a while now; no brilliant insights, I'm afraid. Married stock risk looks pretty similar to the one for a short put... and the numbers aren't jumping out at me. A "Tennessee Sun" style headline would be very helpful about now. "FATAL WRECK – Engineer Casey Jones, of This City, Killed Near Canton, Miss. – DENSE FOG THE DIRECT CAUSE – Of a Rear End Collision on the Illinois Central. – Fireman and Messenger Injured – Passenger Train Crashed Into a Local Freight Partly on the Siding – Several Cars Demolished." Cabinet or "Cab" Trade An option trade at a "cabinet price", which is equal to one dollar. Generally, cabinet trades only occur at very far out-of-the-money options. Cabinet trades are not available at TD Ameritrade. Nor at TradeStation. The farthest I can get on the option chain from a 100 spot is 75. I'll just be over here with all the girls, then.
Since I am severely sleep deprived I'll... Underlying =100 -75 call 100 times w/3 weeks =25 +70 call 100 times w/3 weeks =30; neither have extrinsic. You are up $5. Market goes to 150, you remain up $5. You had no upside gain potential. Market goes to 50, you give back $5. That was your max risk from where you are right now =$100 Now exercise your call. Your position is now: w/ Underlying = 100 -75 Call 100 times w/3 weeks =25 +100 Futures against it. Market goes to $150, the entire way up the -calls and + futures offset and no p+l change. Now, tell me what you look like at $50? Good job not buying in the put when you exercised the call. You just opened up a hole in your position the size of Jenna Jamesons vagina, to save yourself .0001 a day because some book told you to. BTW, you're fired. There was never the need for the short strike. I just believed it would illustrate the necessity better. Avoid the - it's not going there nonsense. I've seen it happen an absurd amount of times. ...and nothing wrong with trading equity options. I was referring to floor traders of equity options.
Fairly sleep-depraved myself, so - appreciate the extra effort. Please feel free to jump out of the convo at any point if reciting the ABCs gets to be too much. I guess you're talking value at expiry, so no extrinsic. Then I don't get how you're using "100 times w/3 weeks" for the calls, unless you just mean "calls on 100 shares". I actually graphed it for 100 call spreads - which showed me nothing useful since they dwarfed the underlying. Looked at a single spread against the underlying, too; nope, no clues. If you're just trying to magnify the max losses to show what an idiot someone would be to not buy protection at scale - well, that was implicit right from the start. I also believe that most people won't even when you advise them to. I want to understand so that I can take your advice when I am in that situation. NO clue about your perspective here. I'm selling a call at 75 and buying at 70, so it's a debit spread. How am I up $5? Sure. Capped risk, but also capped gain. Market goes to 50, you give back $5. That was your max risk from where you are right now =$100 [/QUOTE] ...parsing with some difficulty because of the previous "you're up $5", but - yeah, that would be the direction of the P&L shift. Another implicit assumption I missed; you're hedging, thus locking in the P&L. Since I have zero clue about the cost of +100 futures vs. a position like this, I'm going to assume it's negligible as well. An idiot who locked in a loss, I'd guess. I think we're back to the "exercised at X, delivered at Y" scenario, which must be the part I got right. Yeah. Crap, I catch myself doing that in trades even though I'm always reciting the mantra of "nobody can predict direction". I've got to stop that. Oh! Well, that's clearer. I've seen you write things like that before, and thought you meant options in general. Meanwhile, I'll keep hanging out with the girls. They're all soft and cuddly, y'know.
"Please feel free to jump out of the convo at any point if reciting the ABCs gets to be too much." Nope, we gunna hammer this out. I'm just in bad shape, the Misses came down with a fever and for 5 days I've been sleeping in the other room and have dog walking duties in the morning @ 5:30 am. Since I am nocturnal, I've been on about 3 hours a night for 5 straight nights. I'm walking like I just stepped off of a sailboat. "Then I don't get how you're using "100 times w/3 weeks"" You shouldn't, I'm retarded. It should have been written Current underlying price =$100 you are: -100 75c's settled@ $25 +100 70c's settled@ $30 So you are long the 70-75 call spread! Maybe you put it on 3 years ago when they were leaps and the underlying was trading $20. It's irrelevant. with 3 weeks to expry. An option can trade at intrinsic well before expry. That you know. The reason I used 100 contracts, and switched to futures is because I find it easier to use futures as everything is 1 to 1, whereas equities are 1 option to 100 shares. Problem then becomes using 1 future spread with a 50 delta would require you hedge half a future, so I have always used 100 to avoid that. Heck, I use 100 for everything. I think it maybe a default to every book I ever read as a kid, which for every example always started with "IBM is trading $100." It also makes the math easier for people to follow than to say, 'you sold 37 call spreads, with a 42 delta, and bought 15 futures against it.' As for the you are up. Again, I remember the point of contention with MTM. I was hoping to avoid it. I should say "currently 'worth/trading/valued' @ $5" btw, once again notice, I refuse to use the term debit or credit spread. Every time I see it I want to . Until someone says, 'sell a credit spread,' and then I want to , and in the because it's a double fucking negative. If you are taking in a credit it is because you sold the fucking spread. I don't know where this shit started. Never heard it once in my career. "Another implicit assumption I missed; you're hedging, thus locking in the P&L. Since I have zero clue about the cost of +100 futures vs. a position like this, I'm going to assume it's negligible as well." Assume cost of zero. One, they are futures so it's really not that far off. Secondly, you only need to be focusing on the p+l of their price change. I think clearing up the transaction might have been the problem. Since it was 'my bad' that confused you, it is difficult to know what threw you off. Now that I cleared it up - my apologies once again - if you are not following I will at least be able to understand why and clear it up the next time. "Another implicit assumption I missed; you're hedging, thus locking in the P&L." You are not hedging. You already were hedged. The 70c's and 75c's were both trading parity, therefore they each had a 100 delta and offset one another. You were delta neutral with the underlying trading @$100. Your exercising the 70c's takes away your +100 70c's and replaces them with +100 future contracts. Futures 1 for 1. Still delta neutral, with 3 weeks to expry. Don't confuse yourself with the fact they enter your account for $70. I know you want to. Ignore it. Once again MTM. They are currently $100. What you lost by exercising your options is the optionality. When you now run a p+l graph you should see a massive hole in your position to the downside that you didn't have before you exercised the call. That's why you need to buy the 70 put before you exercise the 70 call. "Meanwhile, I'll keep hanging out with the girls. They're all soft and cuddly, y'know." Yeah, they're my Achilles heel. Know all too well. Now to smoke opium and play League of Legends, so that I can support Tencent and the Peoples Republic of China!
As my old man might have said, a sheynem dank, tsu gezunt. I'm sorry you're having a rough time. Ah-HAH! [doing a little happy dance] Life makes sense again... Beautiful. ALL of this works once you plug these two pieces in. Sure. But now I also understand why you're looking at everything as MTM; it makes complete sense within this kind of structural view (and it's not just "market maker perspective", which was how I took it at first.) I don't know if I need to shift my or just learn to view things both ways for now. But I have a suspicion that yours is both simpler and more - hm. Immediate? Unforgiving (which is not to say 'wrong')? More food for thought. (This is also a good place to say that I now look at rolling in the way that you were talking about - accepting a loss followed by a (theoretically) better trade, which should be considered on its own merits. That also required shifting my perspective - to a much clearer one. Thank you.) Got it. I'll try to avoid using it around you in the future. Some of the folks in my immediate circles would curl up and die if I said "sell a call spread" vs. "buy a call spread" without providing a diagram, but maybe they just need to learn the concepts a bit better. No, you've totally parted the clouds now. That was it. You've read my mind; I did want to. But once the proper prybar has been applied - of course they are $100! The $70 was long ago and far away. ...and that was the problem with using the graph. I saw the hole when I used a single contract against 100 shares - but because the underlying was moving (side note: I considered this important enough that I was fiddling with it during trading hours), it kept popping on and off the screen. I thought it might have been an artifact of the somewhat crude analyzer in OptionStation Pro. Soooo major-league awesome. Thank you, thank you, thank you! I'm actually going to re-read this several times, carefully, to make sure I squeeze all the juice I can from it - but I already feel the pieces locking onto other stuff I've learned. Best wishes, and I hope all in your house get well soon.
Great to see such passion for trading options, looks like I came to the right place to learn. And Wheezooo, I'm almost too embarrassed to admit this, but when I first took an interest in individual securities in early '18 (I was into funds up until that point) I jumped in with both feet and loaded up on Tencent very near the 52 week high. I'm still holding those shares waiting to get back to even. Thought they'd get back up there this year but it looks like I'll have to wait until '21 The book I had originally mentioned is "Options as a Strategic Investment" by Lawrence McMillan, I like it, I had no idea there were so many option variations. In life, I feel, the best way to learn something is to actually do it, so I don't mind losing some money along the way, as long as I am able gain from my mistakes and hone my skills. I have another question but I don't want to derail my thread here
"I'm almost too embarrassed to admit this, but when I first took an interest in individual securities in early '18 (I was into funds up until that point) I jumped in with both feet and loaded up on Tencent very near the 52 week high." You're embarrassed? I'm the one playing video games with people 1/3rd my age.