Options trading

[Craig321]

Not sure if anyone will get anything from these posts but perhaps it might pay off for someone.

1. the problem with owning gold or silver is that it doesn’t produce an income. But it’s fun to own.
2. Shares are clearly a better investment because they appreciate in value and also pay an income - hopefully.
3. Many people in this website are conspiracy theorists who have strong views about the end of the financial system as we know it.
4. Exchange traded options are one of the very few places where you have more than a 50% chance of making money.
5. Most people who trade options lose money.
6. Only wealthy people with substantial share portfolios that consist of blue chip shares should consider trading options.
7. Anyone who has strong beliefs about the collapse of the US dollar or anything else could put their money where their mouth is and make a fortune. You don’t need to be 100% correct - you just need to be not too wrong.
8. There are ways to generate an income off holdings of physical gold and silver.

This is how I made $10,000 this week. (This sounds like a pitch but it’s not, I don’t use products or gurus or special brokers and I don’t have advice for anyone).

My trades relate to cba and anz. But you can do this with many other shares and use any broker. I’ll post again later to say how the position is going.

This morning CBA opened steady around $99 and rose during the day to a peak of $100.65 before closing at $100.04.

I sold 50 contracts of CBA2U7 $104 Nov 16 calls @ .87c = $4307 paid to me in cash into my bank tomorrow.


I also sold 50 contracts of Nov 16 CBA3J7 $106 calls @ .44c and an hour later another 50 @ .51c for about $4600 paid to me in cash into my bank tomorrow.


Earlier in the week, I sold 75 contracts of CBA3M7 $108 Nov 16 calls for .36c for a payment of about $2500 paid into my bank a few days ago.


Even though the cash will be paid into my bank it is not really mine until November 16, and these positions could go wrong.


I will get to keep all the money if the Commonwealth Bank shares stay below $104.


If the share price rises above $104 then I need to start thinking about rolling the position over to the next month, but that’s chapter 2.


But I make money if the bank shares fall, stay steady or rise a little bit.


The reason I’m posting this is to show how easy it is to make money when you have a reasonable belief that something is going to happen.


Your belief doesn’t need to happen for you to make money, it just needs to nearly happen.


I don’t think the Commonwealth Bank is going to go to $104 in the next six weeks and if it does go to $104, then I don’t think it will rise much more than that.


If you don’t already understand options you should probably not even try to learn. They are so risky.

But it would be great if there was other options traders here who were happy to bounce ideas around.

 

[Craig321]

The best place is probably you tube or the asx website. Definitely don’t need to pay anyone or do one of the courses that are advertised. But it requires money to do it.

People with self managed super funds can do it as well.

You can also do it the other way around and sell puts instead of calls. So for example, if bhp is now at $44 you might be happy to buy it at $40. Someone might give you $1000 if you promise to buy their shares for $40 each anytime in the next six weeks. If the shares are still selling for $40.01 or more at that time, then you will get to keep the $1000 for free. But you need to be prepared to buy the shares if they fall.

And to make it worth your while you need to be prepared to buy a lot of shares.

 

[Craig321]

These pics show the cba options. If you own cba shares already there is no risk. The share price is $100 now. You would decide what price you are happy to sell in 6 weeks - 102, 104, …. 120… obviously if you sell $102 calls there is a high risk that the shares will reach this price. But you might think that there is little chance that the shares will reach $118 by December so that option might be a better one. Or you just might be happy to sell if the shares reached $118.

 

[neonuke]

this all sounds great, but i'm a total noob and don't fully understand what your strategy is and how you identify these strategies etc.

is there some resource you'd recommend for a total newbie like me to get my head around all of these concepts?

 

[Craig321]

It’s just a step up from buying shares.


These options are all on the asx.


If you have commsec, click on a big company and then click DERIVATIVES. You will see all the strike prices there.


I’m simplifying it a bit, but you just need to decide how much money you want, and how much risk you’re prepared to take.


There is virtually no chance cba will reach $120 in 3 months. I don’t even think it has reached $110 at its peak. But someone might give you $1000 in an Options trade that bets it will reach $120 in three months.


But you can only do this without risk if you already have a big shareholding.


This is one of the ways the rich get richer. And it’s super safe now because the market is relatively high and pretty unlikely to rise a lot in the near future. It’s free money galore at the moment.

 

[Craig321]

this all sounds great, but i'm a total noob and don't fully understand what your strategy is and how you identify these strategies etc.

is there some resource you'd recommend for a total newbie like me to get my head around all of these concepts?

The asx website has heaps of stuff. I’ve never looked on you tube but it will have some. Maybe maquarie bank has something on it.
Just don’t spend money on any silly course. It’s pretty easy to understand once you start looking at it.

 

[Craig321]

https://www.asx.com.au/content/dam/...ent-options/options/understanding-options.pdf

 

[Craig321]

@Craig321, so you've got 10K sitting in an account, technically it's not yours until Nov 16, and there's the slim possibility that you will have to give it or a portion back if I read it correctly. What do you do with that 10K in the meantime?

You probably wouldn't slap it on Dapto R9 box 2 I would imagine.

You are correct. The money is not yet mine even though it is in my account. But the money from the previous month is now mine. Hopefully the pic attaches. It shows a profit of more than $15,000 but thats not real. It was closer to $10,000 the previous month because there was other positions that you cant see on this snip.

 

[Craig321]

Can you give us some more insight on the reasoning for this?

Yep. The first time i traded options a long time ago I lost $50,000. The second time I did it, I lost $50,000 more. The third time, I lost $100,000. They are so risky and you can lose money really fast.

There are levels of trading - each one supposedly more risky than the other. Some you can just lose all your money, but in level 4 you can lose 10x more than you put in - but that's unlikely.

The safest way is to sell covered calls. The riskiest way is to sell naked calls or puts.

So, if you have a shareholding of 10,000 CBA shares. You own them.... Now you can sell covered calls. '(covered means you own the share, naked means you are selling optiosn without owning the share) Someone might give you $8000 if you promise that they can buy your shares off you anytime between now and Nov 16 for $104. But the share price is now just $100 and probably won't get to $104. If it doesn't get to $104 you get to keep the $8000.

If the share price rises to $110 then you will have to sell those shares for 104 which means you will miss out on $6 (minus the 80c per share you got for selling the call options).

But if you didn't own cba shares and the shares rose to $110 you would have to buy them on the market for 110 and sell them to the options people for 104 = $60,000 loss (minus 8000).

But it gets better than this because if the shares rise you just need to roll your options over and you can hopefully increase your income even more. There are ways to stop the sale of your shares for that $104. Ill try to show you that later if you are still interested.

 

[Craig321]

And this has piqued my interest. Can you elaborate?

This is the one that I want to know more about to. I only recently started buying gold (coins) and while it's fun I know that it is not a good investment compared to other asset classes.

So, I was looking for a way to profit on this holding.

You can trade gold options in the USA and Japan - apparently.

This means if gold is, say, 96 per gram, someone might give us $1000 if we promise to sell them our gold at 100 per gram anytime in the next 2 months. Im making up the numbers to give an example of how it works.

We would not actually have to hand over the gold but you should be prepared to liquidate if it does rise.

But to do this we need a US or Japanese options broker. I was looking for someone who had done this to save myself having to do the research.

Options just give a way to supercharge investment returns but you can also lose a lot of money if things go wrong. If you can afford to buy the shares you are selling puts on or if you own the shares that you are selling calls on then it is difficult to lose money - only to miss out on potential profits.

 

[Craig321]

Just an update on this options position. After a week or so cba has risen about $1 but the overall position has made about $1600 of the $8000 or so that it’s aiming to make by Nov 16.

the closest postion ($104) is losing me about $150 but the $106 and $108 positions are making money. These positions could be closed tomorrow for a small profit or left to ride for the full term.

there is very little chance that banks will rise much now with what’s happening in the Middle East so it’s a safer position now than a week ago.

Even the JP Morgan share rally ran out of steam by the end of Friday in the US.

share prices will mostly drop in the next few weeks but covered call options positions lessen the hurt a little bit

 

[Craig321]

Increased chaos in the Middle East has made it a lot easier to make money in the options market. It’s one of those opportunities that come along only once or twice every few years - the last being the nonsensical banking crisis we had a few months ago.


CBA had fallen to $98.75 on Friday - well below the lowest strike price I’d sold - $104.


The high-priced strikes I sold ($108) decline in value the fastest because there is less chance the share price will reach that price within the next three weeks or so.


I’d sold 75 contracts of CBA3M7 $108 Nov 16 calls for .36c for a payment of about $2500. I could have kept holding this option until expiry on Nov 16. But it had declined in value to 9.5c which meant there was only about $700 of profit left to be made out of $2500. So I closed this position by buying back these options and selling the same number of $104 nov 16 calls (cba2u7) at .41c for a credit of about $3000 once I’d paid $700 to close the original position.


So the potential profit has now risen by $3000 for the month to about $13,000.


The brilliant things about options is that we can win no matter which way the market moves. We become writers of insurance and pocket the money.


It’s unlikely that there will be a trustworthy truce in the Middle East. There is a high risk that things will get worse. It’s really unlikely that the world will be a more investor-friendly place and that the stock market will be higher in 3 or 8 weeks than it was 2 weeks ago.


So I added two new positions by selling 75 cbabr7 $104 December 21 calls at $1.20 and 25 cbaw78 $106 dec 21 calls at .75c for an extra potential profit of $9000 plus $1800 = $11,800. I think this position is safe but it means I don’t want cba to go past $104 for 8 weeks which is a fair bit of time.


I’d probably think about closing this new December position if i could make $5000 of the $11,000 this week which would require cba to drop about $3. $5000 in a week vs $11,000 in 8 weeks.


The Middle East is a basket case and will always be as it is. The market will eventually realise that their fighting doesn’t stop life in Australia and the market will bounce. Of course, oil prices could throw a spanner in the works.


Closing positions before the bounce and taking them out again after the bounce could boost the profit even more but timing any market moves is difficult.

 

[Craig321]

CBA continued to tumble today - down 70c or so right now - which made it questionable as to whether it was worthwhile letting the November position continue. The November position could have made around $13,000/$14,000 for the month but i think its better to make $11,000 in 10 days instead of hanging on another 3 weeks just for another $2400. So i closed this position in full today. Im rounding a lot which is why the numbers dont quite add up.

In the meantime, the December position described above which aims to make $10,700 in 8 weeks has made about $4000 in one week. I think it's still worth keeping this position running because there is $6000 still to be taken.

But the real question is - what to do now. As I write CBA is $97.23. The new options position I am considering is
CBA0K7 100.00 CALL OPTION EXPIRING 16-NOV-2023. 0.740 0.845. This would mean I could get $7800 on the condition that i was willing to sell 10,000 CBA shares for $100 anytime between now and Nov 16.

There is talk of intervention by the western world to calm down the middle east dramas. Would this cause CBA shares to rise $2.76 - I don't think so but it could. Gold and silver have fallen slightly or steadied because things are not getting worse. Buying these metal now at spot is extremely high risk over the short term. Same goes for cba shares - i would not be confident of predicting if they are going to rise or fall a little bit in the next 3 weeks. But i am more than 70% certain that they won't rise $2.76 which makes the chance of making the extra $7800 quite good. But i still haven't done this trade because its a bit riskier than I prefer - I'd prefer cba rose $1 and then i resold the $104 nov calls. The alternative is the $102 nov call.

These trades are all covered calls which makes them virtually risk free. But, as I said before, this strategy can only be done safely if you already have a significant shareholding. It's free money and one of the ways the rich get richer without doing any work.


The trades:
B 100 contracts in 106.00 CALL OPTION EXPIRING 16-NOV-2023 568.9
B 125 contracts in 104.00 CALL OPTION EXPIRING 16-NOV-2023 1822.48
20/10/2023 S 75 CBA2U7 @ 0.410000 104.00 CALL OPTION EXP 16-NOV-2023 3009.67
20/10/2023 B 75 CBA3M7 @ 0.095000 108.00 CALL OPTION EXPIRING 16-NOV-2023 777.83
19/10/2023 S 25 CBAW78 @ 0.750000 106.00 CALL OPTION EXPIRING 21-DEC-2023 1816.82
19/10/2023 S 75 CBABR7 @ 1.200000 104.00 CALL OPTION EXPIRING 21-DEC-2023 8934.67
6/10/2023 S 50 CBA3J7 @ 0.510000 106.00 CALL OPTION EXPIRING 16-NOV-2023 2507.9
6/10/2023 S 50 CBA2U7 @ 0.870000 104.00 CALL OPTION EXPIRING 16-NOV-2023 4307.9
6/10/2023 S 50 CBA3J7 @ 0.440000 106.00 CALL OPTION EXPIRING 16-NOV-2023 2157.9
27/09/2023 S 75 CBA3M7 @ 0.360000 108.00 CALL OPTION EXPIRING 16-NOV-2023 2634.67

 

[Craig321]

Update

I said two days ago that the option worth considering was - "As I write CBA is $97.23. The new options position I am considering is
CBA0K7 100.00 CALL OPTION EXPIRING 16-NOV-2023. 0.740 0.845. This would mean I could get $7800 on the condition that i was willing to sell 10,000 CBA shares for $100 anytime between now and Nov 16."

Turns out that would have been a smart sell. The price of the option fell from 79c to 60c the next day which would have provided an overnight profit of $1700 or so after costs. Another case of thinking about doing a trade and regretting it later because you didn't do it.

Instead I sold 150 of the same strike price contracts yesterday at 60c. So I do not want CBA to rise above $100 in the next 3 weeks and if that happens the position makes around $9000.

16/11/2023 100.00 Call 33 0.600 26/10/2023
16/11/2023 100.00 Call 67 0.600 26/10/2023
16/11/2023 100.00 Call 50 0.610 26/10/2023

However cba has jumped $1.12 today to $98.14 as I write which means I am suffering a paper loss of around $5000 on this position. The delta has risen from about .27 to .36 on this option which is making it a lot more reactive to the share price. Time will kill the loss as long as the share stays below $100. If it rises above $100 then the position would be rolled over and up creating some extra profits but adding time to the holding.

The December position is decaying nicely but it would have been smart to have closed that position yesterday and reopened it today.

 

[Craig321]

Sorry for the rambling below. It's quite difficult to explain this stuff without spending a lot of time on it. I just write some thoughts and hope it makes sense.

What a difference a week makes. 4 days ago everything was fine. The position had made about 70% of the $20,000 and i could have closed it and taken $14,000 instead of waiting 2 or 7 weeks for the rest. But i thought the market would stay down and I didn't want to miss out on the remaining $6000. Over the next 3 days CBA rose more than $3 or so and a $14,000 profit turned into a $14,000 or so loss. I just round the numbers to what I think is the nearest $5000 to simplify things.

I wanted cba to stay below $100 until nov 16 and below $104 until Dec 20. It is now about $100.20.

So', while ordinarily this would mean the aim of the position had failed, with options it's difficult for things to wrong if you are selling covered calls.

The $100 call was sold for about 60c. On Friday it was worth $1.48 leaving a loss of $13,000 but today after a 30c drop in cba share the option price declined a bit cutting the loss slightly

This price sets up the next month for absolute maximum profit. Most of the current option price is premium - about 30c of the $1.48 is the intrinsic value.

Depending on how cba trades in the next few days, the next move will be to buy back and close the outstanding $100 option if cba is below $100 or more likely roll the position over and up to a $102 dec call leading to an additional profit of $5000 (if i had done it today) or hopefully $10,000 + next week if the cba price stays steady.

Maximum profit will be had if cba is at $99.99 on nov 16.

 

[Craig321]

Well, things didn't as planned. I wanted CBA to stay under $100 till nov 16 but it jumped to $102.30 or so last week. When a share price rises above the strike price all we have to do is roll the option over and up to the next month and strike price. If I had done this the day before CBA jumped to $100.30 I would have made an additional $6000 between Nov and dec 21. But i panicked and did it on the day and lost about $300 ($16,000 profit - $300 = $15,000 or so). The reason i did the trade on the day i did was because there is that American options can be exercised at any time and there was very little premium left in the option, so there was a small risk that I could be exercised. I'd rather miss out on a few thousand dollars than be exercised and then have CGT implications.



CBA fell on Friday (the day after i did the trade) which made my decision a bad one. If i had rolled over the option on friday i would have made $3000 for the next month. Now I have to site on the position until the $102 option decays a bit - or cba falls a bit - before i can roll it over again and, hopefully, this time, make some money. This is why options are such a /good way to make money. Even though the share price rose $2 past my price (15,000 x $2 = $30,000 in share price), there is no loss.



The $104 dec option has risen above the price i sold it at. But the expiry is so far away that there is nothing that can be done for now but to watch and wait.