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thanks for starting a good thread, I hope Doc and the other pro's post too, it's great learning for us "options newbies".
I bought some Jan32calls on the AGNC SPO and paid $2.95/contract when the PPS was $34.20. A couple of days later when the PPS went up north of $34.60 (as I recall) my Calls were still at or bellow what I paid. It was really weird to see the PPS go up but my calls were not moving. I understand that the delta was not 1, but I still wonder if it had something to do with the buying frenzy on the SPO day, maybe so many people were buying calls that day that I just didn't get a good deal because of the high demand. Any opinion?
I'm not complaining, just trying to understand the options correlation to the PPS and how to get the better deal.
The Leaps were trading a little steep on the SPO because of the excitement indeed. That excitement is known as volatility, and the higher the volatility, the higher they get priced. Couple that with the fact that you probably bought at the high of the day, as many did, not expecting the sell off at days end.
I look at when I will probably unload my Calls. In this case the Sept run towards EX. I then look at which months get me closest to par, which is the deepest ITM to get me the closest to par. IOW, the next strike will not get me closer. So Dec would do it and it so happened that the 31's were selling at 3.55 shortly after the open, so I purchased those. As the PPS moved up, I saw the Jan's priced at 3.60, so I bought those.
So look at the ITM Calls to see how far ITM you have to go to get as close to par as possible. This gives you your best chance of maximizing whole dollar return as the PPS moves higher. It gives you the least % return as PPS moves up, but the highest whole dollar return.
I also figured we would see 35 by August OPEX, so I sold the Aug35Puts for 1.00. The reason I like this trade is that you don't have to overcome Call premium to make money. That is, if I had purchased Aug35Calls for .75 or whatever they were at, I would have to see the PPS climb over 35.75, by Aug OPEX to see daylight. The PPS can stay at 35 at OPEX , with the Puts and I keep the entire 1.00 premium.
Just some thoughts for you....
..."So look at the ITM Calls to see how far ITM you have to go to get as close to par as possible. This gives you your best chance of maximizing whole dollar return as the PPS moves higher. It gives you the least % return as PPS moves up, but the highest whole dollar return...."
So deep ITM give me the best whole dollare return because the Delta is close to 1. I got that.
Does this mean far OTM gives me the best % return , and is that because my risk of expriring worthless is increasing with every $ OTM I go?
Is it the further OTM the better the % move or is there some sweet spot?
Doesn't open interest and volume play a part?
I have been buying slightly OTM recently with great success. I am looking to improve my game.
This is due to change in implied volatility and is an important concept. On SPO days, implied volatitlity goes through the roof. All options, but calls more so, become more expensive.
It would be helpful if you had a screenprint or matrix printed out of prices that day to look at.
My usual defense on SPO days is to also sell an option with more premium. I figure if I am stuck paying high premium, I better sell even higher premium.
In addition, implied volatility generally affects longer dated options more so than short dated options because the volitility is projected over a longer time frame.
In your example you provided I see you paid .75 of premium. That is high for an option that deep ITM on a low volatility stock like AGNC. Today an option that is similarily ITM would be the Jan 33 with a b/a of 2.53/2.65 and premium of (let's use mid range of 2.59) .21 cents.
So premium on SPO of .75 has shrunk to premium of .21 based on changes to IV. If you had sold an option in addition on SPO, this shrinkage would have occurred to the sold option as well. You could then by the short option back, with the profit decreasing your loss to the IV change.
These option descriptions get complicated in all text. Let me know if I can clarify anything.
Yet another defensive strategy, although entails different risks, is to buy a shorter dated option on the SPO and then roll it out when things settle down. I see that an August 32 could be rolled to jan for approx. .10 - .20 cents at present.
I purchased 33/34 Aug vertical spreads. I just rolled the long leg to Sept34 (although I'm liking Dec the more I look at it). Why? Because topside, my delta is the same. But if PPS drops, I don't lose as much on the Sept 34 as I would on the August 34.
So net effect is my topside potential is the same or similar, my bottom side is improved in my favor.
At he beginning of this year I began a tutorial on the spread in options. It has many redeeming qualities as you point out. Less expensive initial outlay, less distance needing to be traveled in PPS, to reach your max profit, are two standouts.
The disadvantage is the difficulty unwinding in the early or late going especially if the PPS goes against you, because of the reverse nature of the bid/ ask, vs the ask/ bid unwind. Secondly, if you unload the short leg you are buying back the leg and therefore placing more money on the table, even if you are buying back at less than what you shorted at.
I was long the AGNC 28/29 Call spread for .76 in March at the SPO, for 400 spreads. Both legs fluctuated in price and I could buy back the short leg at a gain or a loss, but it was still placing 400 x 2.25 or an additional 90,000 on the trade to ride the 28's possibly higher.
I wouldn't do it. Settled for 20 cent profit, or 8,000. Rim and others who bought the 28's outright did much better. Spreads have their place. With the environment with AGNC we find ourselves in I think the straight plays will be more profitable for the near future.
I do appreciate you bringing the topic up as it is an important aspect of option trading.