Interesting Option Trades

[backtothebeach]

I find options fascinating and a great way to distract myself so I don't trade or mess around with long term holdings too much.

 

I should note that in general I see the options market as quite efficient, where an options chain is usually a balanced matrix of risk and reward in relation to the underlying, and small inefficiencies are masked by the bid-ask spread. As such, novice questions like "what is the best options strategy to consistently make money" or "are iron condors superior to butterflies" are useless.

 

That said, every now and then I see something that looks like prices are a bit out of whack due to supply and demand. Combined with a lightly held opinion about the underlying, there can be promising setups.

 

For example: In January 2021 during the GME short squeeze, and also later with AMC, my lightly held opinion was that it would take a long time for these stocks to fall back to where the squeeze started (GME < $20). Hypes don't end that quickly. Yet the short term $20 puts traded at crazy IVs of 600-900% and could relatively safely be shorted for $0.50 - $1.

 

When combining options, I tend towards calendar or diagonal spreads. These can often be adjusted over time by rolling the short options up, down and out in time.

 

Here is a diagonal spread I did today which I think is promising, and has a lot of time to work out:

 

Long AI Jan17'25 strike 15 call @ 16.80, IV around 80%

Short AI Feb17'23 strike 30 call @ 2.65, IV around 210%

 

Net cost $14.15 before commissions.

 

Thesis: With almost 2 years of runway I should be able to sell short calls over and over again to whittle away at my cost basis. My lightly held opinion is that AI stock will continue to be volatile enough between $20 and $40 to make this profitable. The risk of this trade is to the downside, if the stock drops quickly and stagnates there without a lot of volatility, it will not work out. Important: No upside risk, if the stock goes to $1000 tomorrow, the spread is worth at least $15.
 

Edited February 6, 2023 by backtothebeach

[ValueArb]

I looked at BBBY briefly this morning with an idea of simply shorting it with year long puts, but they seemed obscenely expensive.

[backtothebeach]

On 2/6/2023 at 6:11 PM, backtothebeach said:

Here is a diagonal spread I did today which I think is promising, and has a lot of time to work out:

 

Long AI Jan17'25 strike 15 call @ 16.80, IV around 80%

Short AI Feb17'23 strike 30 call @ 2.65, IV around 210%

 

Net cost $14.15 before commissions.

 

Thesis: With almost 2 years of runway I should be able to sell short calls over and over again to whittle away at my cost basis.

 

Update on this trade, which by the way some people call "Poor man's covered call":

 

Despite not going optimally, because AI dropped quickly and did not move and stay close to $30 except for a very short moment (that I did not time well), I was able to sell $1.93 of additional premium in the last 7 weeks and the cost basis is now $12.22. Still more than 21 months to go and no upside risk.

[Castanza]

On 2/6/2023 at 10:19 PM, ValueArb said:

I looked at BBBY briefly this morning with an idea of simply shorting it with year long puts, but they seemed obscenely expensive.

 

Retailers always seem to hang on longer than expected. This sector is always so irrational or opaque I avoid it entirely. I think in the end you get killed with duration. I looked at shorting BBBY with long duration puts like 5 years ago thinking how tf is this company in business? Amazon, Walmart, Target, Costco, and Dollar General have to be eating their lunch daily. Yet somehow they persisted.  Retail is the zombie industry. They look dead half the time, probably are technically dead, but just keep on walking. 

 

Anecdotal but I stopped in Ollies this past Saturday looking for some cheap plant pots. 1 car in the parking lot, 2 employees working, aisles filled with unpacked boxes, store is basically dilapidated. Walked out with 2 pots for $3....How does that keep the lights on? No clue. 

[backtothebeach]

GM may be a good "poor man's covered call" candidate:
Long June 2025 20 calls, and selling the short term $35 calls over and over again. In 1-2 months one should be able to own the $15 spread at less than $15.

Edited April 23, 2023 by backtothebeach

[backtothebeach]

On 3/26/2023 at 9:31 PM, backtothebeach said:

 

Update on this trade, which by the way some people call "Poor man's covered call":

 

Despite not going optimally, because AI dropped quickly and did not move and stay close to $30 except for a very short moment (that I did not time well), I was able to sell $1.93 of additional premium in the last 7 weeks and the cost basis is now $12.22. Still more than 21 months to go and no upside risk.

 

C3.AI stock is up 30% to $43 today, looks like a short squeeze mixed in with the hype about all things AI these days.

 

The original trade was

Long AI Jan17'25 strike 15 call

Short AI Feb17'23 strike 30 call

 

A $15 diagonal spread. Despite bad timing my net cost is now below $10, after continuing to sell short term $30 calls against the long call. No upside risk here, if the stock goes to $1000 the spread will still be worth $15. Of course I hope it will fall back closer to $30 after earnings tomorrow, for further selling of juicy call premiums over the next 19 months.

 

 

 

Edited May 30, 2023 by backtothebeach

[Sweet]

1 hour ago, backtothebeach said:

 

CS3.AI stock is up 30% to $43 today, looks like a short squeeze mixed in with the hype about all things AI these days.

 

The original trade was

Long AI Jan17'25 strike 15 call

Short AI Feb17'23 strike 30 call

 

A $15 diagonal spread. Despite bad timing my net cost is now below $10, after continuing to sell short term $30 calls against the long call. No upside risk here, if the stock goes to $1000 the spread will still be worth $15. Of course I hope it will fall back closer to $30 after earnings tomorrow, for further selling of juicy call premiums over the next 19 months.

 

 

 

You obviously exited the original position, did you exit both legs though?

[backtothebeach]

23 minutes ago, Sweet said:

You obviously exited the original position, did you exit both legs though?

 

No I did not exit. Currently long the AI Jan17'25 15 call and short the Jun02'21 30 call. The latter still has more than $1 of time value that will disappear by Friday.

Moreover, rolling the short $30 call forward two weeks (even today, 1 day before earnings come out) netted another $1 of time value. I did this for a third of the position. After earnings I will roll the rest.

 

I think this hype is not going to die so quickly, and am planning to keep milking the insane implied volatility while the stock bounces around.

 

You are right that taking the $15 to the bank now would be the other, and maybe wiser option.
 

Edited May 30, 2023 by backtothebeach

[backtothebeach]

Decided to close this trade out for now. There could be a lot more juice in it over the next 18 months, but I don't trust AI as a company - if the hype/short squeeze ends, it could drop back down below $20 easily.

 

This was a diagonal spread:

Long AI Jan17'25 strike 15 call

Short AI strike 30 calls over the duration of the trade

 

Initial cost $14.15. Over the course of 5 months I sold and rolled short term calls, and last week my net cost was $8.68.

So let's say my average capital at risk was roughly the mid point between the two: $11.42.

 

Closing it out netted $15.82, a ~38.5% return on average capital at risk in less than 5 months, and $7.14 (times 100 shares) total profit per contract.

 

These "poor man's covered calls" using a DITM LEAP instead of stock, are a bit of work, but I find them suited for situations where my base case is that the underlying could go nowhere for quite a long time, and be volatile enough to have short term premiums (premia?) that are worth selling.

 

Ideally, unlike AI, the underlying value is there and protects your downside - like GM, possibly, as mentioned upthread.

 

[LC]

OXY is another one. The warrants are attractive, you can sell short term calls against.

[bizaro86]

45 minutes ago, LC said:

OXY is another one. The warrants are attractive, you can sell short term calls against.

 

Selling calls against warrants is much more margin intensive than selling them against stock or longer dated calls.

[lnofeisone]

12 hours ago, bizaro86 said:

 

Selling calls against warrants is much more margin intensive than selling them against stock or longer dated calls.

The margin comment is 100% spot on. The beauty of warrants/options is that warrants tend to be overpriced when they are OTM and underpriced when deep ITM when compared to options. There is also a tax play that can be employed if you are willing to anchor around warrants and sell options around it. 

[backtothebeach]

EBAY synthetic long:

 

-short Jan'26 45 put

+long Jan'26 42.50 call

for a credit of $0.20 per share.

 

A cash efficient way to go long. You miss out on the 2.5% dividend though.

[lnofeisone]

2 hours ago, backtothebeach said:

EBAY synthetic long:

 

-short Jan'26 45 put

+long Jan'26 42.50 call

for a credit of $0.20 per share.

 

A cash efficient way to go long. You miss out on the 2.5% dividend though.

If you are bullish, which this trade suggests you are, why not go with Jan '26 $50 put? You get more cash upfront and have a greater return if EBAY goes up to $50, and if EBAY drops sub $40, you are only losing marginally more. 

 

You can also look at Jan '25 $50 put. You get a bit less cash (still more than your original trade) than the above but you are cutting your put exposure time by 50%. You'll have more flexibility with this positioning come Jan '25, i.e., convert your call to vertical or sell another put. 

[backtothebeach]

14 hours ago, lnofeisone said:

If you are bullish, which this trade suggests you are, why not go with Jan '26 $50 put? You get more cash upfront and have a greater return if EBAY goes up to $50, and if EBAY drops sub $40, you are only losing marginally more. 

 

You can also look at Jan '25 $50 put. You get a bit less cash (still more than your original trade) than the above but you are cutting your put exposure time by 50%. You'll have more flexibility with this positioning come Jan '25, i.e., convert your call to vertical or sell another put. 

 

I think I was just looking for a synthetic long close to zero cost and with a low breakeven. I like your alternatives, especially the second one that introduces a calendar element and possibly a lot more flexibility in year two.

[backtothebeach]

@lnofeisone your assessment was spot on, comparing risk graphs for January 17, 2025, with no changes in implied volatility.

 

blue risk graph:

-short Jan'26 45 put

+long Jan'26 42.50 call

 

red risk graph:

-short Jan'25 50 put

+long Jan'26 42.50 call
 

 

Edited January 10 by backtothebeach

[bargainman]

Whereas in the past I found trading options a interesting distraction, I don't think I ever found them particularly profitable other than just simply buying leaps on occasion to make sure I didn't miss out on the upside in a market I didn't trust on the downside. And when I say 'particularly profitable' I mean after all of the time finding credit sales, managing positions, and then paying the short term taxes, never mind the bid ask spread/slippage.  I mean it's kind of a fun math exercise I just don't think it really consistently adds that much value.

 

 

[lnofeisone]

14 hours ago, bargainman said:

Whereas in the past I found trading options a interesting distraction, I don't think I ever found them particularly profitable other than just simply buying leaps on occasion to make sure I didn't miss out on the upside in a market I didn't trust on the downside. And when I say 'particularly profitable' I mean after all of the time finding credit sales, managing positions, and then paying the short term taxes, never mind the bid ask spread/slippage.  I mean it's kind of a fun math exercise I just don't think it really consistently adds that much value.

 

 

I'm in violent disagreement with your take—anything from hedging to the downside to minimizing capital needed to place a bet (i.e., lever up). Tax can be well managed with LEAPs. I would agree that being an options trader is definitely a hard day job, but the instrument is immensely valuable. 

[bargainman]

Well I try not to be violent in any circumstance.  I've been trading options for over a decade, everything from butterfly spreads to iron condors to broken wings, diagonals, collars, calendars, delta neutral, you name it.  The most I've made is from holding great compounding machines and living my life.  

[lnofeisone]

Nobody is being violent. It is an expression.

 

As far as your option trades, I think like anything you need tonfind your edge and execute it. Sounds like you learned a lot but your edge is in finding and holding compounders. That doesn't make options useless. 

[backtothebeach]

I think DWAC is going to be volatile for a while, and is unlikely to drop straight back down. Put on a little gamble today. Implied volatilities are through the roof.

[ValueArb]

14 hours ago, backtothebeach said:

I think DWAC is going to be volatile for a while, and is unlikely to drop straight back down. Put on a little gamble today. Implied volatilities are through the roof.

 

 

Ouch!

 

DWAC lost it's PIPE, does it have any chance of coming up with $850M to close its merger? If it doesn't close it's clearly only worth $10.20/share or whatever is left to be distributed from the trust account. If it closes the merger, it's then worth quite a bit less given Trump Media & Technology Group Corp. is a scam, not a real business.

 

This seems like playing a rigged craps game in front of a steadily approaching bull-dozer.

[backtothebeach]

2 hours ago, ValueArb said:

 

 

Ouch!

 

DWAC lost it's PIPE, does it have any chance of coming up with $850M to close its merger? If it doesn't close it's clearly only worth $10.20/share or whatever is left to be distributed from the trust account. If it closes the merger, it's then worth quite a bit less given Trump Media & Technology Group Corp. is a scam, not a real business.

 

This seems like playing a rigged craps game in front of a steadily approaching bull-dozer.

 

Lol, only 1 contract for fun. Just rolled down the short $50 call to the $40 strike for extra credit. Now only $5.50 net cost. Can I get $5.50 out of 3 more weeks of the $40 strike? Maybe. I probably should not clutter up the board with this stuff.

 

 

[Gmthebeau]

15 minutes ago, backtothebeach said:

 

Lol, only 1 contract for fun. Just rolled down the short $50 call to the $40 strike for extra credit. Now only $5.50 net cost. Can I get $5.50 out of 3 more weeks of the $40 strike? Maybe. I probably should not clutter up the board with this stuff.

 

 

 

I need to take a look at this piece of crap.  I have totally ignored it.  Looks like it went vertical and is essentially worth nothing.  

[backtothebeach]

On 1/24/2024 at 3:54 PM, backtothebeach said:

Can I get $5.50 out of 3 more weeks of the $40 strike? Maybe. I probably should not clutter up the board with this stuff.

 

Post mortem on this trade: Selling the $40 three more times I ended losing $0.25. It wasn't as much fun as I thought, in fact a nuisance having to watch this p.o.s. stock every Friday in order to roll the short options. Waste of energy - lesson learned.