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I'm a 15 year stock market investor here who is very new to option trading (two weeks). I have a full understanding of how options work (complicated needless to say) and I have realized their potential.

I have read that is not a good idea to hold the options until expiration or to exercise them but it does make sense to me to hold them if I have enough money to buy them. I am using Robinhood so there are no commissions or fees.

Let's say that I plan to buy VUG in a couple of weeks when I get paid. I can buy a two week call now and if it is above the break even price in a week and half, why don't I just leave it as is and wait to purchase the shares? I already buy shares every other week and I already made a profit for buying the option earlier.

Every single comment I have read on the internet states that I should not exercise. To me, since I am a buy and hold investor, it makes sense to purchase stock that way. Am I missing something?

  • Just to make sure I understand your motive, you want to buy an ITM call and intend to exercise regardless of price at expiration? The reason you want to do this is so that you can benefit from any upward movement over the next two weeks instead of missing out on that growth waiting to buy shares in 2 weeks? – Hart CO Jun 17 '20 at 16:43
  • Wouldn't a future be more appropriate if you intend to buy no matter what? – Vality Jun 17 '20 at 20:07
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The reason that it is recommended not to hold long options until expiration is that option premium decay is non linear. It speeds up every day, faster and faster as expiration approaches.

The reason that it is not recommended to exercise ITM options is that if there is time premium remaining, you throw it away by exercising. So unless the time premium is pennies, it's usually a better idea to sell the option and execute the trade in the underlying. The exception to this is when you own a deep ITM option and the bid is less than intrinsic value, but that's another story.

Your approach is a special situation. You want to buy the underlying at later date but you want to lock in the price now by using a long call. That's a valid approach. The question is, should you be buying a two week call?

Since you didn't indicate the strike price and premium for the call that interests you, I'll just pick my own. Strike prices near the money have the greatest amount of time premium and ITM options have less. So for example, here are some July calls (VUG does not trade offer weekly options):

VUG $201.00

$175c 28.50 203.50 2.50

$180c 24.00 204.00 3.00

$185c19.70 204.70 3.70

$190c 14.90 204.90 3.90

$200c 7.40 207.40 6.40

The numbers above represent the strike price, the ask price of the call, the net cost of the stock and the time premium. As you can see, the lower the strike, the lower the time premium. You pay dearly for buying the less costly ATM strike.

VUG options are not actively traded and they have low Open Interest. Therefore, they have very wide bid/ask spreads. With some patience, you should be able to buy these for less. Start at the midpoint (the average of the bid and ask) and work your way up if you want the position and you are willing to pay more.

An alternative approach if you have the appropriate option level approval, a margin account and enough marginable securities to back the position would be to sell a short put. With this strategy, you would receive the premium and time decay would be in your favor. There's no guarantee that you would get the shares at a locked in price (buying the call) and then you would just earn income (the premium).

This may make your head hurt but if you combine both of the above, you would have a synthetic long position (sell the ATM put and use the proceeds to buy the ATM call). Let's say that it costs a dollar to do so. If VUG rises, you exercise your long call for $200 and your net cost is $201. If it drops and you are assigned on your short put, you pay $200 and your net cost is $201. That's a significant savings versus buying a long call.

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    That answer is more than what I waiting for. so obviously I have way much more to learn. I will digest your reply slowly as there is a lot of information I am not familiar with. Any recommended books or internet sites where I can learn these type of strategies? I am just realizing how I could have been doing much much better had I started trading options 15 years ago instead of buying stocks outright (I did pretty well nevertheless). The media has been keeping me away from options because they characterize them as gambling instead of investing but now I realize how it is the opposite. – lgalico Jun 17 '20 at 16:22
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    Sorry to overwhelm you but better more than less (g). The media is correct in regard to uninformed trading of options, aka gambling. However, there are conservative ways to utilize options, some less risky than outright ownership of the underlying. An example is buying high delta, low IV deep ITM LEAPs instead of the underlying. Almost the same potential profit and less risk. You can find a lot of good information on the internet but it tends to be superficial and sometimes, it's flat out incorrect. If you're learning, it's hard to discern the good from the bad. – Bob Baerker Jun 17 '20 at 17:16
  • AFAIC, the go to book for options is "Options as a Strategic Investment" by McMillan. 100 pages will give you a sound understanding of covered calls, synthetical equiv short puts and spreads. Should more complex strategies intrigue you, you can read more. You can get a used older edition for peanuts - no need to spend $75+ for the latest edition (1,000+ pages) since it involves more complex strategies which will likely not be of interest to you for years. After reading this book you'll be able to judge for yourself what other option books have to offer you (Hull, Taleb, Natenberg, etc.). – Bob Baerker Jun 17 '20 at 17:22
  • Thank you so much for your answer. I appreciate complicated answers; they give me things to think about. I just ordered the book you suggested. – lgalico Jun 18 '20 at 13:34
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If stocks have worked for you in the past, and if you don't have a very large amount of capital relative to the notional value of the options that you will trade, I think you should stick to stocks. The main issue with options is that each option contract is on 100 shares. If you would not buy or sell at once 100 shares of a stock, you should think several times before trading options on that stock because every time you are trading an option you are making a commitment to buy or sell 100 shares of the stock at one price. Another issue is liquidity. If liquidity is poor, you should stay away from that option unless you plan to hold it to maturity.

It is very hard to make profits consistently on options. Making money once or twice does not count. As for your example, if the stock price is above the strike price at option expiry you do get to buy the stock at a discount but note that you need to deduct the premium you paid for it from the discount. The discount has to be reasonably larger than the premium for you to make a decent profit. Also, you have to be able to cough up money for 100 shares at once. Much better would be to dollar cost average by buying fewer than 100 shares at any given time. Also, the time value of options tends to decay. That does not happen with stocks.

There is a good chance that you will lose your hard earned capital gains over the next few months if you are not discreet with the use of options. In my view, if you don't have large amounts of cash, it is best to stay away from them.

  • Your comments are appropriate for option traders but the OP's interest in options is for a specific circumstance. He's looking to lock in a price now via options for a later date when he has the cash to acquire the shares, He's not considering the trading of options. – Bob Baerker Jun 20 '20 at 14:27
  • The first paragraph is alarming. It is indicative of a rosy mindset with respect to options and that heralds danger. Next he asks why he should not hold a long call. I explain the cons in my answer through the "commitment to buy 100 shares" idea and how the discount is partly neutralized by the premium. And this is assuming that the option is in-the-money. Important is whether he can buy 100 shares at once. He just wrote he buys shares, but did not state how many at once. He is clearly excited about the "potential" of options and needs to be made aware of their potential for ruin too. – user2371765 Jun 20 '20 at 14:52
  • I agree buying will not hurt him much but he can still keep losing the premium either owing to time decay, or owing to expiry. More important is whether he has the willingness to buy 100 shares at one price if the option is in-the-money at expiry, and how much it is in-the-money. – user2371765 Jun 20 '20 at 14:55
  • Exchange traded options are for 100 shares so it's a given that if the OP doesn't have the money to support the exercise in two weeks, he's not getting the position. Also, he indicated in his opening sentence that he understands how options work so all of this discussion about 100 shares and 'discount neutralized by premium' is overkill. And as I mentioned in my answer, he can achieve the position in the underlying and avoid most/all of the time premium costs that trouble you by simply doing a synthetic long. – Bob Baerker Jun 20 '20 at 15:07
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    OK. If the stock price had fallen you would have lost the $100. Also, if the $53 strike call comes in-the-money you will lose your shares. What you are doing is different from what Bob Baerker suggested. He did not suggest to short a call. But I might be mistaken. I will let him reply. – user2371765 Jun 24 '20 at 14:41

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