Couple questions about options

[Jerry1]

I've been playing with options. This is essentially gambling and I'm risking very little. I'm just learning and wondering if someone can answer a few questions.

First - I have 21 trades (buys and sells, so actually 42 trades) for March. If I do this all year, there will a ton of transactions. Is the tax return a pain? Or, do you just download the information into Turbo Tax from the brokerage and you're all set?

Second - I'd like to do something that I can't figure out how to do. Say I buy an option at $1. I know how to put in a limit order for it to sell if it increases to say $1.25 and I know how to put in a stop order to sell if it decreases to say $.75. What I want to do is both. Is there a way put in an order to sell it if it drops to $.75 or increases to $1.25 so I don't have to pay attention to it after I buy it?

Thanks.

 

[brokrken]

You should be allowed to put in both and then if one gets triggered you'll need to go in and cancel the other?

 

[Fermion]

The first question is that some brokerage houses will allow you to download your trades right into your tax software and some won't.

Robinhood doesn't support H&R block so you must do those transactions manually if you use that software.

If you don't have wash sales though, you can now group transactions as one lot, for losses or gains. For example if you bought and sold Microsoft, Boeing, Apple, Peleton, Tesla, etc. and didn't have any wash sale issues, you could group them all as short term, Var-S for purchase and sell dates, and list the total basis and total gain or loss. This is a whole lot easier than listing you bought 5 shares of Microsoft on 3/2/2019, 30 shares on 3/5/2019, sold 35 shares on 4/1/2019, etc. and doing that for all of your trades. Options work the same as shares here.

 

[Jerry1]

You should be allowed to put in both and then if one gets triggered you'll need to go in and cancel the other?

That didn't seem to work. I had the option bought, put in the limit order on the upside and then when I put in the stop limit, it said I didn't have the stock to do this with. It made me think that the limit order for the up locked up the option. BTW, I'm using Fidelity through their Active Trader Pro program.

 

[Jerry1]

Options work the same as shares here.

I just deal with the SPY. Seems that there's enough volatility to play the game.

 

[Fermion]

Be very careful on option trades if you don't have a lot of cash in your account. There are some gotchas that you might not know about and some brokerage houses don't handle them the way one might think.

For example, say you had 100 call contracts on Microsoft for $140 strike that expire this Friday, and on Friday Microsoft was trading for $125 so you decided to just let them expire worthless. The problem is that sometimes the broker will exercise the options for you if they are in the money on expiration. If Microsoft popped up to $140.20, you might find that you are holding $1,400,000 of Microsoft stock over the weekend, possibly in an account that only had $30,000 of cash in it. The broker will sell your shares Monday morning to settle the account, but what happens if over the weekend news comes out and Microsoft opens at $120? Your account is now down $200,000 even though on Friday you had a tiny profit.

I like to nearly always close out my puts and calls earlier in the day myself for this reason, unless it is a covered call or I have plenty of cash and would not mind holding the stock through any news over the weekend.

 

[brokrken]

That didn't seem to work. I had the option bought, put in the limit order on the upside and then when I put in the stop limit, it said I didn't have the stock to do this with. It made me think that the limit order for the up locked up the option. BTW, I'm using Fidelity through their Active Trader Pro program.

OK, it seems that you don't have the authorization to sell uncovered calls and by putting in sell orders that total more than the shares you own, that is, in essence, what you'd be doing if they both executed.

 

[Jerry1]

OK, it seems that you don't have the authorization to sell uncovered calls and by putting in sell orders that total more than the shares you own, that is, in essence, what you'd be doing if they both executed.

Thanks. Do I just request that authorization from Fidelity?

Seems a bit silly since they obviously can't both execute. But, I'm probably missing something.

 

[Fermion]

Thanks. Do I just request that authorization from Fidelity?

Seems a bit silly since they obviously can't both execute. But, I'm probably missing something.

Why can't they both execute? On a volatile day, they might, if one is not cancelled when the other has executed.

 

[pb4uski]

I just deal with the SPY. Seems that there's enough volatility to play the game.

So if one wanted to buy an at-the-money call on the SPY expiring in Dec 2020 to get the upside of the SPY from here to December the same as investing ~$100k in the SPY.... how much would that cost?

 

[Fermion]

So if one wanted to buy an at-the-money call on the SPY expiring in Dec 2020 to get the upside of the SPY from here to December the same as investing ~$100k in the SPY.... how much would that cost?

A Dec 18, 2020 $260 SPY call is $27 right now. That is 100 shares.

So $100k of SPY at $260 is 384 shares, or about 4 contracts.

So 4 contracts would cost you $27 x 400 = $10,800

 

[Jerry1]

So if one wanted to buy an at-the-money call on the SPY expiring in Dec 2020 to get the upside of the SPY from here to December the same as investing ~$100k in the SPY.... how much would that cost?

Way out of my league. I grab a call about 30 days out and hold it for a while and then get rid of it. Rarely have I held anything overnight. This is, for me, more like playing video poker. My current goal is to see if I can "win" $100 per day. I did pretty good in March, but volatility is the key to that "game".

 

[ERD50]

Do it in an IRA, no tax reporting. That's what I did when I was active in options.

-ERD50

 

[Fermion]

Do it in an IRA, no tax reporting. That's what I did when I was active in options.

-ERD50

Sometimes it can be *smart* to do it in a taxable account.

One such example I might someday use is if I have gone over the ACA cliff by a few hundred dollars near the end of December. By purchasing a weekly out of the money option, I could guarantee a loss that would put me back under the cliff cutoff, saving me $8,000 in tax.

Options are a great way to safely lose money.

 

[pb4uski]

A Dec 18, 2020 $260 SPY call is $27 right now. That is 100 shares.

So $100k of SPY at $260 is 384 shares, or about 4 contracts.

So 4 contracts would cost you $27 x 400 = $10,800

Thanks. So the notional is $104,000 (400*260) and the option cost is 10.4%... so the SPY would need to increase by more than 10.4% between now and Dec 18, 2020 for me to make any money.... more than 10.4% and I make money... less than 10.4% and I lose money... right?

But OTOH, my loss is limited to $10,800 so if the index goes down 10% then I only lose $10,800.

 

[LOL!]

Years ago my brokers never reported any of my option trades on a 1099B, so they had to be entered by hand. You might wish to find out what your broker does.

IRAs cannot be loaned nor used for collateral, so not all option types can be traded in an IRA. Check with your broker. Perhaps ERD50 can describe the options they used in their IRA.

 

[pb4uski]

Sometimes it can be *smart* to do it in a taxable account.

One such example I might someday use is if I have gone over the ACA cliff by a few hundred dollars near the end of December. By purchasing a weekly out of the money option, I could guarantee a loss that would put me back under the cliff cutoff, saving me $8,000 in tax.

Options are a great way to safely lose money.

That is clever! Remember that when folks are on the cliff in December.

 

[Fermion]

Thanks. So the notional is $104,000 (400*260) and the option cost is 10.4%... so the SPY would need to increase by more than 10.4% between now and Dec 18, 2020 for me to make any money.... more than 10.4% and I make money... less than 10.4% and I lose money... right?

Sort of. There is time value in a option, so you might actually make money if SPY only increases by 3% or 5% or some number as long as it does it well before December. If you hold to the bitter end, then yes, you would need SPY to be $260 + $27 = $297 before you start making profit.

On the flip side, if SPY goes to $150, you only lose the $10,800, not the $44,000 that someone else would lose who was holding $100,000 of SPY purchased at $260.

 

[Fermion]

When it really gets fun is when you are some stupid person named Fermion and in mid Feb you buy $30,000 of puts on SPY at $325 strike and then sell them for some measly profit only to find out they are worth $1.1 million on expiration.

 

[pb4uski]

Sort of. There is time value in a option, so you might actually make money if SPY only increases by 3% or 5% or some number as long as it does it well before December. If you hold to the bitter end, then yes, you would need SPY to be $260 + $27 = $297 before you start making profit.

On the flip side, if SPY goes to $150, you only lose the $10,800, not the $44,000 that someone else would lose who was holding $100,000 of SPY purchased at $260.

Yes, I was assuming the option was held to expiry. I'm just trying to understand the economics of using index call options to invest in the stock market.

Newbie here.... but as I understand it since the VIX is so high that the cost of options is high as well... IOW, in "normal times" where the VIX is say 20 rather than 58.... what would that 9 month at-the-money call on the SPY cost?

Side note.... If the SPY were to close Dec 2020 at $150, then I would feel like a freaking genius!

 

[Closet_Gamer]

When it really gets fun is when you are some stupid person named Fermion and in mid Feb you buy $30,000 of puts on SPY at $325 strike and then sell them for some measly profit only to find out they are worth $1.1 million on expiration.

oh....that just sucks...

 

[pb4uski]

When it really gets fun is when you are some stupid person named Fermion and in mid Feb you buy $30,000 of puts on SPY at $325 strike and then sell them for some measly profit only to find out they are worth $1.1 million on expiration.

Yeah... but think what the tax bill on that big gain would have been!

 

[Fermion]

Yeah... but think what the tax bill on that big gain would have been!

It was in my Roth IRA.

 

[Closet_Gamer]

It was in my Roth IRA.

Every so often someone will start a thread asking people to post their worst investing decision of all time.

From here on out, I think you will officially be the winner of this game every time we play.

 

[tulak]

Newbie here.... but as I understand it since the VIX is so high that the cost of options is high as well... IOW, in "normal times" where the VIX is say 20 rather than 58.... what would that 9 month at-the-money call on the SPY cost?

From my understanding, I would have worded this in the opposite way: VIX is high because the cost of options are high.

Interesting white-paper on how VIX is calculated: https://www.cboe.com/micro/vix/vixwhite.pdf

I'm still holding 5/15 230/250 puts in my Roth. They've gone down quite a bit in value as the market has been going up. I've sold some of them though, so overall, I'm up. No complaints.

Personally, I'll never trade options again in a taxable account. I did the Robinhood thing for a bit with small amounts, which was fun (I really liked their UI), but cringed at having to pay short term gains in taxes. Plus, I don't want to deal with the tax filings.