Cool! Very useful info, indeed! Thx! Your demonstrated extension of the above is very interesting too, but I need some time to grasp it fully... I still have only an analog brain...
Trade Idea / Research It's getting KOLD I think the Ukraine war will be resolved by end of this year. Then markets will normalize and prices will drop to normal levels, incl. NatGas. Ie. NatGas then will IMO drop. Then it makes sense to short KOLD now. KOLD is an inverse ETF: if NatGas falls then KOLD rises, and vice versa. The following cash-covered short put trades for KOLD could be profitable (field "PL=... max=..." below) if the above forecast holds: Code: KOLD DTE=119.42(2022-11-18-Fr) LT=0.03 S=14.9500 @BE=8.3307 (-44.28%) @S0(PL=44.05% max=44.05 % PLann=205.11% maxAnn=205.11%) K=12.00(-19.73% nKbef=11) fITM=0 B=3.60 A=3.74 balPr=3.66 ... KOLD DTE=119.42(2022-11-18-Fr) LT=4.14 S=14.9500 @BE=7.9804 (-46.62%) @S0(PL=37.84% max=37.84 % PLann=166.67% maxAnn=166.67%) K=11.00(-26.42% nKbef=10) fITM=0 B=2.90 A=3.14 balPr=3.01 ... KOLD DTE=210.42(2023-02-17-Fr) LT=0.15 S=14.9500 @BE=8.1538 (-45.46%) @S0(PL=83.35% max=83.96 % PLann=186.22% maxAnn=187.88%) K=15.00(0.33% nKbef=1) fITM=1 B=6.70 A=6.99 balPr=6.84 ... KOLD DTE=210.42(2023-02-17-Fr) LT=0.13 S=14.9500 @BE=8.4790 (-43.28%) @S0(PL=76.32% max=88.70 % PLann=167.44% maxAnn=200.86%) K=16.00(7.02% nKbef=2) fITM=1 B=7.40 A=7.64 balPr=7.52 ... Based on market data today about 1h before market close, cf. also here. CostBasis = Strike - Premium
Sunday quiz How best to manage a losing (winning) trade? Variant 1: losing trade: How to "rescue" a losing options trade? : CoveredPut trade (ie. a ShortPut with "CostBasis = Strike - Premium" as collateral or margin security): USpot=10.00 DTE=120 Strike=10.00 Premium=1.14 (IV=50) After 10 days: USpot=8.00 DTE=110 Premium=2.29 (IV stays same) This means the position is losing $1.15 (-12.98% of CostBasis). What best to do in such a situation? "Doubling-down"? Closing? Do Nothing? Other? Variant 2: winning trade: What would you do in the following situation (same position as above but now with different USpot and Premium after 10 days): CoveredPut trade (ie. a ShortPut with "CostBasis = Strike - Premium" as collateral or margin security): USpot=10.00 DTE=120 Strike=10.00 Premium=1.14 (IV=50) After 10 days: USpot=12.00 DTE=110 Premium=0.45 (IV stays same) This means the position is in the win zone (profit = $0.69 = 7.78% of CostBasis). What best to do in such a situation? Just close it, or short-sell even more of the same, ie. "doubling-up"? Do Nothing? Other? Btw, these are the cases 4 and 10 in "The Table".
Q & A Q: When does it make sense to "double-down" with a losing short Put position (CoveredPut in a CashAcct)? A: It makes sense only if CurrentUSpot is >= InitialUSpot AND the position is in loss at least >= 5%. This means IV has risen, which is of course not good for such a short position, but it's a good situation for short-selling some more of the stuff. This is the case #11 (and #8) in "The Table". Rationale for this: the rise of USpot does further enlarge the BreakEven USpot point from current USpot position (ie. this is a good thing), and rising IV means more big credit to earn when short-selling more. And: also important to know: at expiration IV does not play any role anymore for this expiring position, as then only USpot alone counts!...
Option Mysteries Solved Percent Change is not always Percent Gain When you yesterday open a LongCall trade, and today the Premium of that Call rises 60% then your profit is 60% if you close the position. But if you yesterday open a ShortCall trade, and today the Premium of that Call falls 60% then your profit is NOT 60% if you close the position! Proof: Code: Yesterday: USpot=9.90 DTE=30 Strike=10 Premium=1.00 (IV=92.47) Today: Premium=0.40, ie. a change of -60% For calculating the profit one needs to know that for a ShortCall the CostBasis = InitialUSpot - InitialPremium = 9.90 - 1.00 = 8.90, thus: PL = InitialPremium - CurrentPremium = 1.00 - 0.40 = 0.60 PLpct = PL / CostBasis * 100 = 0.60 / 8.90 * 100 = 6.74 % Ie. the profit is just a meager 6.74%, not 60% Btw. this applies also to LongPut and ShortPut (but here CostBasis = Strike - InitialPremium)
Here's a BSM data set to play with: Code: USpot=10.00 DTE=120 Strike=10.00 Premium=1.1398 (IV=50) After 10 days IV rises: USpot=10.00 DTE=110 Premium=2.1629 (IV=100) --> PL = 1.1398 - 2.1629 = -1.0231 calcs with a calculator: k=10; pr1=1.1398; pr2=2.1629; pl=pr1 - pr2; basis = k - pr1; plpct = pl / basis * 100; pr1; pr2; basis; pl; plpct pr1: 1.1398 pr2: 2.1629 basis: 8.8602 pl: -1.0231 plpct: -11.5471 % Ie. the credit from the 1st short-sale was 1.1398, short-selling now brings an additional 2.1629 credit... The avg credit is then: (pr1 + pr2) / 2 = 1.65135
Table of MaxProfit and MaxLoss Code: Table of MaxProfit and MaxLoss || MaxProfit | MaxLoss -----------||-------------------------|------------------------ LongStock || unlimited | InitialStockPrice ShortStock || InitialStockPrice | unlimited || | LongCall || unlimited | InitialPremium ShortCall || InitialPremium | unlimited || | LongPut || Strike - InitialPremium | InitialPremium ShortPut || InitialPremium | Strike - InitialPremium
Hey Overnight, I unfortunately don't get your argument. Can you please be precise and show which line you do mean?
Nevermind, I see what you meant now about the stocks bit. But the put options not having unlimited loss? I do not get that.
The result of my recent research posted above titled "Percent Change is not always Percent Gain" (which BTW should have been "Percent Gain is not always Account Gain") indicates that one better should trade long only as it has advantage over short trading as the numbers clearly show... I'm now concentrating my research & study on this particular case...