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level 2 options IRA account

2,223 Views | 28 Replies | Last: 2 yr ago by OasisMan
rednecked
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AG
so in my Vanguard IRA account I have been approved for level 2 options trading meaning I am approved for the following:
buy calls and puts
write cash secured puts
write covered calls
write covered puts

now I know all of these are used constantly by the guys on the stock market thread and I have been following and trying to understand the what and how of it all. And I am not about to try any of these until I have a much greater understanding.

all that said, can someone point me to some parts of that thread, youtube vids, etc that can help me further my knowledge in a practicals sense? I've been trying to read a book on this but it's a dull slog to get through.

Thanks in advance
GMM
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I like The Plain Bagel when it comes to learning about new (to me) financial concepts. Obviously options trading is a lot more nuanced and there are countless resources out there, but Richard gives good, simplistic overviews that are easy to follow.

azul_rain
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Options trading in an IRA account doesn't seem very wise no ?
you may all go to hell and i will go to Texas
Red Rover
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Why? Gains are tax free. Seems better than in a taxable account since almost every single trade ends up short term.
Red Rover
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I think buying calls and puts and selling covered calls is the easiest to focus on. I like searching through https://www.investopedia.com/ and going down rabbit holes. I would advise learning about ITM, ATM, and OTM call first and starting small. As you get a little real world experience then begin looking at price targets and how those relate to strikes you would like to buy or sell. Then you can learn a bit about simple "Greeks", such as Delta.
rednecked
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Red Rover said:

I think buying calls and puts and selling covered calls is the easiest to focus on. I like searching through https://www.investopedia.com/ and going down rabbit holes. I would advise learning about ITM, ATM, and OTM call first and starting small. As you get a little real world experience then begin looking at price targets and how those relate to strikes you would like to buy or sell. Then you can learn a bit about simple "Greeks", such as Delta.
thanks for this. I have a slight bit of an understanding of what you are saying and will concentrate here. take some small bites and learn as I go. Right now the whole of the thing is pretty intimidating.
rednecked
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GMM said:

I like The Plain Bagel when it comes to learning about new (to me) financial concepts. Obviously options trading is a lot more nuanced and there are countless resources out there, but Richard gives good, simplistic overviews that are easy to follow.


good video. I need to watch it a few more times as I think it raised more questions in my mind. Subscribed to the channel too.
JSKolache
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Red Rover said:

I think buying calls and puts and selling covered calls is the easiest to focus on. I like searching through https://www.investopedia.com/ and going down rabbit holes. I would advise learning about ITM, ATM, and OTM call first and starting small. As you get a little real world experience then begin looking at price targets and how those relate to strikes you would like to buy or sell. Then you can learn a bit about simple "Greeks", such as Delta.
Investopedia also has a simulation game you can use for pactice
rednecked
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JSKolache said:

Red Rover said:

I think buying calls and puts and selling covered calls is the easiest to focus on. I like searching through https://www.investopedia.com/ and going down rabbit holes. I would advise learning about ITM, ATM, and OTM call first and starting small. As you get a little real world experience then begin looking at price targets and how those relate to strikes you would like to buy or sell. Then you can learn a bit about simple "Greeks", such as Delta.
Investopedia also has a simulation game you can use for pactice
excellent! thanks. just form reading a few things and watching videos today I am thoroughly confused right now!
Charismatic Megafauna
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AG
Just think of each vehicle as a contract (which it is) and what your right or obligation is when you are on each side of that contract
Buy calls : you have the right to purchase stock at the strike price up to expiration
Sell calls : you are selling someone the same, which gives you an obligation to provide the stock at that price if they exercise. (If stock price goes above the strike price, i.e. the call goes in the money, you better be in possession of the shares you promised to sell. Selling calls on shares you have is called selling covered calls, selling calls on shares you don't have is called selling naked calls and that's how you lose your house)
Buy puts: you are purchasing the right to sell someone a stock at a given share price. If the stock goes below the strike price before expiration you can exercise the put option by buying shares at the current price and selling them to the put writer (seller) at the strike price, and you pocket the difference
Sell puts: you are the put writer and have an obligation to buy those shares at the strike price if the put gets exercised. Better have enough cash in your account to do this or you'll get a call from Mr. Margin.

Luckily your ira account probably won't give you the ability to put yourself in this situation. When you sell a put your broker will put a hold on enough cash to buy the shares at strike price if it gets exercised. Same with covered calls, you usually can't sell calls on your shares then sell the shares leaving yourself in a naked call position. Buy you should still be aware of it.

These are the building blocks of 95% of the strategies you hear people talk about
Go through various stock price scenarios before you do a trade and make sure you're comfortable with every outcome (this becomes more important if you start selling bull put spreads)
rednecked
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OK, so i've been doing some reading, watching the tube and I think I have a tiny bit of understanding about some of this stuff. can you tell me if I am completely wrong or if this makes sense:

I own 1300 shares of WWR

price right now is $3.40

I sell 10 covered calls with 11/19 expiration at $0.90 each for a principal of $900 (less $10 commision)

strike price is $2.50

this makes my breakeven price $3.40.

with this transaction. if the price is above $3.40 on 11/19 i've pocketed $890.00 and still have my stock.

but if the stock drops to $2.50 I lose my 1000 shares.

what if it is between $2.50 and $3.40 at expiration?

Is that right????


deadbq03
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Red Rover said:

Why? Gains are tax free. Seems better than in a taxable account since almost every single trade ends up short term.
The only real risk is the fact that you're bound by cash settlement rules… so you might end up having to make hard choices (i.e. having to hold onto a crappy trade because you can't get another Good Faith Violation, whereas in a marginable taxable account you can jump in and out as you please).

All that said, after doing my 2020 taxes this year, I decided I needed to do a lot more buy-and-hold in my taxable account and therefore I'm doing options a lot more in my IRA.
Charismatic Megafauna
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3.4 only matters for your accounting purposes. If the stock price is 2.51 or above at expiration (lord help us) your shares will be called away and you will get 2.5 a share for them (add in the premium you received and you have netted 3.4 on the transaction). You generally sell otm (out of the money) contracts if you want to harvest premium and keep your shares
rednecked
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deadbq03 said:

Red Rover said:

Why? Gains are tax free. Seems better than in a taxable account since almost every single trade ends up short term.
The only real risk is the fact that you're bound by cash settlement rules… so you might end up having to make hard choices (i.e. having to hold onto a crappy trade because you can't get another Good Faith Violation, whereas in a marginable taxable account you can jump in and out as you please).

All that said, after doing my 2020 taxes this year, I decided I needed to do a lot more buy-and-hold in my taxable account and therefore I'm doing options a lot more in my IRA.
yeah, I got a nastygram from Vanguard a couple of weeks ago for a good faith violation.
deadbq03
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Back on topic to the OP's question... at the risk of posting a TL/DR, here's something I wrote on a different thread a long time ago when someone posed the question: "what's the point of options? what makes it better than just buying or selling the shares with limit orders?" My response to him then:

The distinction you need to recognize is that the options contract itself is tradeable. It doesn't just sit there waiting for the month to run out and prove you wrong or right. This is the concept that most online explanations fail to discuss well... they discuss the mechanics of what the option will do at expiration, but not what happens in the meantime. Buying a call option shouldn't be thought of in terms of wanting the stock to reach a particular price at a particular date... it should be thought of in terms of wanting to see movement early in the contract and taking a profit on that early movement.

[I referenced a previous example in the original thread here]... if Bob buys 1 share of XYZ stock for $100. Jim buys a $1 call option for the same stock for next month at a strike price of $105... and spends the same $100 to do this. From a standpoint of option mechanics, that means that Jim needs the stock to rise above $106 in order to make a profit at expiration. He's paying $1 per share now for the option to buy 100 shares at $105 dollars a share next month. When you think of this strictly in terms of those mechanics, yes - it kinda seems like a limit order.

But in terms of trading the option itself things are very different. Jim doesn't need to wait for the option to reach $106... he can make a very large profit the very next day (or same day).

If the very next day, XYZ had a good news release and the stock price jumped to $110, Bob would've made $10 on his stock. But Jim would see massive gains. The premium on that same option might be $8 at this point, so Jim could sell the contract back for a $700 profit.

But even if the gains were more modest... a $1 jump in the price of XYZ the next day would result in probably a 0.75 or so jump in the option price... so again, Bob would make $1 profit in a day, but Jim would make $75.
rednecked
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so to put your example to a real world stock.

ASTR
current price $9.26
11/19 strike price $12.50
price is $0.45 or $45/contract

so I buy 5 contracts at that price for $225.00. if, at expiration the stock is say $13.00 I profit $250-$225= $25?

If the stock is below $12.50 I lose the $225.00.

But if ASTRA next rocket launch is successful and the stock takes off to $15 in early November. I sell the contracts early and my profit is $1250.00


that about right?
Charismatic Megafauna
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Do you want to trade options (i.e. make bigger profits on smaller price swings, with higher risk) or do you want to use options as a tool to generate more cash flow from your long (share) holdings and/or improve entries in your long holdings? If the latter, i wouldn't worry about any of that stuff. Sell covered calls on shares you own, sell cash secured puts on stocks you want to own, buy them back if they decay if you want, or just let them expire. Oh and play some hero or zeros on lotto friday
rednecked
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NRD09 said:

Do you want to trade options (i.e. make bigger profits on smaller price swings, with higher risk) or do you want to use options as a tool to generate more cash flow from your long (share) holdings and/or improve entries in your long holdings? If the latter, i wouldn't worry about any of that stuff. Sell covered calls on shares you own, sell cash secured puts on stocks you want to own, buy them back if they decay if you want, or just let them expire. Oh and play some hero or zeros on lotto friday
I haven't determined my desired strategy yet. I am trying to make sure I understand how they work fundamentally using the examples above. Maybe I'm off base on what I think I know or don't know? do my examples make any sense at all?

I'm intrigued by this lotto business you guys talk about on Fridays but I need to understand the basics of what happens first.
Charismatic Megafauna
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rednecked said:

so to put your example to a real world stock.

ASTR
current price $9.26
11/19 strike price $12.50
price is $0.45 or $45/contract

so I buy 5 contracts at that price for $225.00. if, at expiration the stock is say $13.00 I profit $250-$225= $25?

If the stock is below $12.50 I lose the $225.00.

But if ASTRA next rocket launch is successful and the stock takes off to $15 in early November. I sell the contracts early and my profit is $1250.00


that about right?

Ok your example is close, but misses the concept of premium/implied volatility and the idea of having intermediate options as mentioned above
To pick apart the initial purchase: you're paying .45/share for the privilege of buying the stock at 12.5/share. That means someone (or everyone, the market) thinks there's a chance that the stock price could be 12.95 or greater by expiration. The more hype/hope for the successful launch, the higher the volatility and the more premium you will pay for the option. So yeah, there's a successful launch and the stock price rockets to $13 and you still have some time until expiration. That option now has an intrinsic value of .5 because you could exercise the option, sell the shares and pocket the difference, but since you have time remaining the option will also have some premium baked into it, i.e. someone is willing to pay for the chance that the stock will be even higher at expiration. So your calls could be worth more like $2 at that point and you could go ahead and sell them, profiting $1.55/share ($155/contract, $775 total net), without ever exercising/ having taken ownership of the shares.

Now say the rocket falls over on the launchpad (or the launch is delayed until after your options' expiration). The stock price will tank but the implied volatility will tank even quicker, and you will see your options go to 0 instantly.
rednecked
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NRD09 said:

rednecked said:

so to put your example to a real world stock.

ASTR
current price $9.26
11/19 strike price $12.50
price is $0.45 or $45/contract

so I buy 5 contracts at that price for $225.00. if, at expiration the stock is say $13.00 I profit $250-$225= $25?

If the stock is below $12.50 I lose the $225.00.

But if ASTRA next rocket launch is successful and the stock takes off to $15 in early November. I sell the contracts early and my profit is $1250.00


that about right?

Ok your example is close, but misses the concept of premium/implied volatility and the idea of having intermediate options as mentioned above
To pick apart the initial purchase: you're paying .45/share for the privilege of buying the stock at 12.5/share. That means someone (or everyone, the market) thinks there's a chance that the stock price could be 12.95 or greater by expiration. The more hype/hope for the successful launch, the higher the volatility and the more premium you will pay for the option. So yeah, there's a successful launch and the stock price rockets to $13 and you still have some time until expiration. That option now has an intrinsic value of .5 because you could exercise the option, sell the shares and pocket the difference, but since you have time remaining the option will also have some premium baked into it, i.e. someone is willing to pay for the chance that the stock will be even higher at expiration. So your calls could be worth more like $2 at that point and you could go ahead and sell them, profiting $1.55/share ($155/contract, $775 total net), without ever exercising/ having taken ownership of the shares.

Now say the rocket falls over on the launchpad (or the launch is delayed until after your options' expiration). The stock price will tank but the implied volatility will tank even quicker, and you will see your options go to 0 instantly.
so
1. worst case, my total risk here is $225.00. if the rocket and the stock crash and at expiration the stock is below $12.50 then my option goes to 0 and I am out $225.00.

2. best case between now and 11/19 either from run up anticipation of or an actual successful launch the stock moves up above 12.50 I can sell the calls back at some higher profit.

3. implied volatility - for the same option, right now looking at yahoo options page it shows implied volatility of 121.29%. Is that good, bad, nothing?

Would I be totally crazy to just do 1 call on this and just see what happens?
jh0400
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rednecked said:


3. implied volatility - for the same option, right now looking at yahoo options page it shows implied volatility of 121.29%. Is that good, bad, nothing?



That's really high to the point that the stock could go up considerably, and you're still not guaranteed to make money on the trade.
rednecked
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jumped off into the shallow end of the pool

ASTR - 2 calls
11/19 $12.50 calls, $0.55 entry, breakeven at $13.05

so my bet is that ASTRA will continue to run up as it has been since they announced their next launch windows (10/27-10/31 and 11/5-11/12).

If I'm wrong I lose $110.00. If I'm right. I make some bucks.

fun times ahead!
Charismatic Megafauna
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Nice, now just keep an eye on it and how the option (bid/ask prices and quantities) moves with stock price and it will start to make sense. Cheap education (unless you hit a homerun then you will be a degenerate binary event options gambler for life... which is generally not a smart proposition)
Charismatic Megafauna
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Oh and smart that you bought 2. Now if the first launch is successful and you are up 100% you can sell one and recover your capital, then hold the other "net free" and decide what to do with it without emotion messing with you
rednecked
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Yup! It's funny how just actually doing one, suddenly so many things start to come into focus. The whole net free thing didn't make any sense to me a couple of weeks ago. Now I get it!
rednecked
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Just to follow up on this since it was my first attempt (I've already done several others and made a few bucks). Astra reports earnings on Thursday and yesterday delayed their next launch till Thursday as well. Stock price and option price started dropping and I decided to bail at $0.50 for a loss of 10 bucks. Maybe should have held for next week. I still have plenty of stock! Oh well.
OasisMan
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hedge said:

Options trading in an IRA account doesn't seem very wise no ?
my roth YTD is ~185% -- just need a few more of those


edit:
in an account that limits you on how much you can put in during a calendar year, i personally would not buy puts or calls -- in my roth, i only sell puts, then when assigned, sell calls

my strategy in the roth is really only to capture weekly premiums
sometimes i get lucky -- get assigned a put and then stock blows up in a week or 2 and i sell for higher -- but it is not uncommon for me to sell a put of XXX at $90, get assigned, and then sell calls at $90

in my taxable accounts, my strategies are different, including spreads
azul_rain
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Got more balls than me, roth is kinda my nest egg. S&P 500 set it and forget it
Bob Knights Paper Hands
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rednecked said:

OK, so i've been doing some reading, watching the tube and I think I have a tiny bit of understanding about some of this stuff. can you tell me if I am completely wrong or if this makes sense:

I own 1300 shares of WWR

price right now is $3.40

I sell 10 covered calls with 11/19 expiration at $0.90 each for a principal of $900 (less $10 commision)

strike price is $2.50

this makes my breakeven price $3.40.

with this transaction. if the price is above $3.40 on 11/19 i've pocketed $890.00 and still have my stock.

but if the stock drops to $2.50 I lose my 1000 shares.

what if it is between $2.50 and $3.40 at expiration?
Is that right????


It's the other way. If you sell covered calls at a $2.50 strike, then if the stock price closes at $2.51 or above the calls are executed and you sell your shares for that $2.50 strike price and keep your premium. If the stock closes below $2.50 you keep your shares and premium. If you're wanting to sell covered calls to eat premium bit hoping to keep your stock, you'd likely want to select a strike price at or above the current stock price.
OasisMan
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hedge said:

Got more balls than me, roth is kinda my nest egg. S&P 500 set it and forget it
I don't view selling puts/calls as risky tho
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