Stocks and Trading Thread - Channeling your inner Mono

[DGuller]

Oh, crap, my 401k.  It feels weird to win or lose a value of a brand new car, or two, over the ebbs and flows of the stock market.

[alfred russel]

Oh, crap, my 401k.  It feels weird to win or lose a value of a brand new car, or two, over the ebbs and flows of the stock market.

I know what you mean.*

Well not a brand new car, but a brand new tank of gas. Ultimate unleaded even.

[Ed Anger]

Since when is a 1%-2% drop considered a "free fall"?

Since Obama became president.

THANKS OBAMA.

[Admiral Yi]

Down again today.

Anyone know what set off the drop?  I haven't heard any bad US macro news, nor an announcement from the Fed.

My guess is unemployment dropping below 6% makes monetary tightening inevitable.

[Admiral Yi]

Mimsy: Etrade gave me 5 free option trades.  I feel like putting a bet down on a rebound, but I'm sort of overwhelmed by the information on the option screen.  Feel like walking me through it?

[MadImmortalMan]

Sure. What kind of trade do you want to do?

[Admiral Yi]

SPY call.  I figure I dump a grand in.

[Barrister]

Down again today.

Anyone know what set off the drop?  I haven't heard any bad US macro news, nor an announcement from the Fed.

My guess is unemployment dropping below 6% makes monetary tightening inevitable.

Monetary tightening plus deflation in europe.

[MadImmortalMan]

Okay cool. Pick an expiration and a strike price. SPY is at 186.60 as I write this. Say you decide you want a call with an expiration of December(usually third week) and you think it will be above 200 then. You could either pick an out of the money call with a 200 strike (it will be cheap) or be safer and pick one with a lower strike price. If you do the latter, the value will remain longer if the market goes the other way and you change your mind. Both are equally valid.

It will give you the option chain table to choose from. Each one has a bid and an ask price. The bid is what you'll pay. These are denominated in hundredths but the option actually controls 100 shares. So the bid price on Dec20 SPY 200 calls right now says 0.66. That will be $66 per contract. So you could get about fifteen of them with your grand. Currently in the money(186 strike price) calls are showing 6.22. So those would cost you $622 dollars per contract.

I'm guessing you aren't planning to sell them tomorrow or I would have chosen way different examples like short term weeklies or something.

While you are looking at the table look at one other thing. It should show you the volume and open interest for each option. Higher numbers for these means there are more people interested in them. Volume is way lower for options than stocks, so I try to make sure I don't put much money into very low volume options unless it's for a specific purpose. If you want to sell them later, you will want there to be buyers available. Otherwise, you'll find yourself waiting for days for your sell order to trigger. That's almost never a problem with highly-traded options like SPY, QQQ, etc.

Edit: I forgot to mention that the option volume on certain stocks can hint where that stock will trade around opex time. Like if the table for MSFT options shows the highest volume and interest just above and below $47, then it's very likely that will be the price of MSFT stock at the end of the week.

[Admiral Yi]

I was thinking more short-dated, in part because I think it will bounce back quickly or not at all, and because premiums go up so much for long dated options.

For example I'm looking at October 24 SPY 190 priced at $1.13.  (You meant I pay the ask, not the bid, right?)  So that would be $113 a contract.

Can I tell how much that option will be worth if I'm in the money by the expiration date?  Is it just the market value -190 X 10?

And what kind of volume should I be looking for, or should I not sweat it with SPY options?

[MadImmortalMan]

Nothing really to worry about the volume with SPY. It's maybe the most traded options there are. Yes, you pay the ask, my bad.

There are calculators out there that can estimate the possible price at expiration under your conditions. I'm sure you can find many just by googling it. They use the Black-Scholes method usually. Abbreviated BS method. Generally, the profit will be close to the same profit you would get by the appreciation of that many hundred shares of SPY over the same period. You just have to risk way less money to get it.

[Admiral Yi]

Oh what the hell.  Looks like at my option level I can't buy a simple call.

[MadImmortalMan]

Eh? I think I had to do an application a few years ago to enable all of the option types or something. I don't remember exactly.

[MadImmortalMan]

Oh you know the market had closed before you posted that. It might have meant you don't have it enabled for after-hours trading. I don't either.

[alfred russel]

Oh what the hell.  Looks like at my option level I can't buy a simple call.

It must be hard to realize that after a lifetime of voting republican, advanced financial opportunities are only open to the 1%. Sad that you had to learn it like this.