Ok, but sometimes I see people on TF or television point out crazy o/i ... does that qualify? Or what are they talking about?

Poker: Wait till tomorrow and see if that volume gets added to the OI. I assume it was pretty low to begin with?

Remember, for every buyer, there's a seller.

It's also hard to track down some of the weirder option plays, but I just about bet that if you were able to get detailed information about that particular play, you'll find another that counterbalances it. Or possibly somebody just wanted to sell a ****load of puts because they don't think it has any chance at all of getting that low that fast, so they just dumped 5k on the market as a market order or just hit the ask. A market maker then would pick up the order and hedge it some other way so that he's net zero.

maybe add 2 zero's before i would care

and you're talking about the spy so make it 3 more zero's before i'd care

OK thanks Asimov, that's a good explanation.

Don't get me wrong, there's a lot of valuable information to be had from the OI and volume on options. A LOT.

But you can't read too much into them either, because there are too many unknowable factors. One good example is mentioned above:

Wait till tomorrow and see if those 5k "stuck" or if they were transitory. If the OI was 500 today and is 5500 tomorrow, then you know they did stick, and have a little more importance.

You know you can chart options too? Right click on any strike (put or call) and select "copy", then go to a chart and ctrl-v in the place you type the symbol you want to chart. Note: Right click/paste will *NOT* work. You have to ctrl-v.

Alternatively, if you understand the naming convention behind options, you can just type it in directly.

JinxxOr wrote..

No. These are not index options. These are stock options on SPY ETF. If they are $0.01 in the money they will be automatically exercised and you will own long stock.

OK this settlement concept has me confused, sorry for the newb questions ... Let's say I buy 10 contracts priced at $0.07 for $70 + commissions. And my puts wind up ITM and I decide to exercise them ... do I have to physically buy 1,000 shares of SPY and sell them for the strike price? (obviously I would not have the funds in my account to do this) Or otherwise how is the trade settled?

Yeah I'm going to have some REALLY dumb questions tonight, also reading through some tutorials ... it's not the strategies that confuse me right now, but it's the trading and execution and settlement, since I've never traded before.

Thanks for your help anyone who has the time and patience!

I have never exercised a put contract on a stock that I didn't own, so I'm not sure what happens in this case. I would think you're now short N number of shares (since you just exercised an option to sell N shares at the strike price). Maybe someone else here has done this and knows what would happen with a put.

Yes. You bought the right (if you're long) to "PUT" shares on someone. If you don't own the shares you are thus short if you exercise.

Note that you must be able to get a borrow.

Well that sucks, they sure do make it hard for someone like me to speculate, don't they? Seems unreasonable that someone would have to theoretically put up $10,000 for a $7 contract.

Is it still viable though for me and my <$1,000 account to sell the options instead of exercising them?

(i'm guessing traders do this 99% of the time anyway?)

Let me post a strategy here and see if I this is even viable, if my understanding of the process is correct. Please disregard whether the options are likely to make it ITM or not, let's just assume they do hypothetically make it ITM...

Example: Today, SPY trades at 137.xx

I decide to buy deep OTM 119 August puts priced at $0.09 or $9 / contract.

Sometime in August, before expiration, SPY trades at 113 and I decide to sell to close.

I paid $0.09 ... but I can reasonably expect these to trade at $6 + (time value) so somewhere in the $6-7 range, and close out the $9 contract for $600-700.

Is all of that right or way wrong? And if that's right, how safe is it to expect someone to be on the other side of that trade, meaning they want to buy deep ITM puts at the same time I want to sell to close?

Thanks again!

Yes, that $6 difference is called the intrinsic value of the option contract. That value occurs because you can immediately buy the stock for $113 in the market and have a guaranteed sale of $119 with the put. I just looked at the SPY 100 Aug 12 @ 119 and they are selling for 0.09 with a theoretical value of 0.10 with 30 days left. They also have a delta of .02. That roughly translates to a 2% chance of finishing at this price (so look at the other side, there is a 98% chance that you're going to lose). You can also think of the delta as the number of shares you control. So if you're long one of these put contracts above, it would be like controlling 2 shares short (or slightly less, in TOS the values are rounded at 2 decimals). If you go long contracts you also have theta, which is time decay. Each OTM contract loses a little bit of value each day based on this, so the passage of time is also working against you too. There are two others called vega and gamma. Make sure you read and understand the greeks.

As was mentioned earlier in this thread, you have to be right on three things:

1) Direction
2) Magnitude
3) Timing

IMHO, what you're talking about above is like playing roulette... with worse odds (because I think roulette has 5% odds and this contract above is 2%). You probably have better odds just betting it all on a roulette wheel and can be done with it faster, LOL.

This is not trading advice, I don't care what you buy. I'm just trying to tell you what the numbers mean.

That is correct Poker. Note that once an option goes ITM its extrinsic value starts to disappear, and the deeper into the money it goes the more of it disappears.

Ok thanks Karl and Jinxx.

My last questions are about how to place the orders. I've read through the TDA handbook and browsed online ... some of the opinions online are contradictory though.

1. Order types
Two general types, market and limit. To me it seems like limit orders would be wiser, because you will always get a price that is acceptable to you, but with a market order this may not happen. Especially if someone puts in something like a stink bid, you could really get screwed. But I found talking heads online who advocate both positions, so what do you guys use?

Also there are stops and trailing stops ...? Again it seems to me like stop limit would be wiser than stop market, but I can't see the difference between this and regular limit orders unless it gives you something like a range instead of a single price point. Is that right?

2. Expiration choices

Someone earlier in the thread said "make sure you select GTC or kaboom" ... why is that?

Having never traded before, I would have thought you just place the order and that's it ... so a little confused by Day orders, GTC, etc.

3. Special instructions

AON -- do you guys always check this? For small trades?

I guess I have one extra question too ... say I want to order 5 AUG contracts, 5 OCT contracts, and 5 DEC contracts, is there a way to order all at once and only pay the $9.99 one time, or are you forced to place 3 orders?

So many questions, sorry guys, thanks for your patience and help. I'm trying to read up as much as possible, but always tough when you've never done something before.

Edit:
oops looks like there is a routing box too with "Smart" as default ... do you just use smart or click CBOE?

OK well I figured out the execution, wasn't very difficult at all.

I finally bought the puts today, several contracts of each.

SPY AUG 120
SPY OCT 100
SPY DEC 99

Thanks for your help everyone, I really appreciate it!

Just realize that you massively overpaid for the PUTs. As one example, the SPY 120s have an implied vol of approximately 25% in their price.

The actual vol right now is 15.5, so you're paying damn close to double the implied premium that the current market says should be there.

In other words, as of right now, "actual" volatility would have to go up by nearly a factor of two just to make the puts "fairly" priced.

Of course if we CRASH that will happen -- and more.

I don't trade options much other than to possibly sell puts on stock I wouldn't mind owning at a lower price, mostly because I don't understand how to make use of the data associated with them.

Gen, from what you just posted it sounds like, looking only at implied volatility for the moment, that you would generally look to be a seller when IV exceeds the VIX and a buyer when the inverse is true, all else being equal. Would that be a correct statement? Understood that many other factors are involved but just trying on isolate on IV.

Well, no.

Selling options naked is like picking up SBAs in front of a steamroller. It will work just fine for a good long time, then kill you without warning.

I would only recommend it if you're a hedge fund and thus it's other people's money, and you really don't give a **** if you get margin called out of existence -- because eventually, if you do this for long enough, you will.

All I'm pointing out is that the buyer at this point in time is not only paying for today's premium he's also paying for a HUGE jump in realized volatility along with the time value associated with the option. That is, these options are VERY expensive, and the writer is making what he thinks is a "no-lose" deal (see above for what occasionally happens to him, however.)

Gen, this might be an ignorant question, but if puts that far out of the money become worth much, wouldn't one expect the VIX to be higher (or even much higher) than 25.5? So wouldn't that make them expensive given the current volatility, but cheap compared to expected or implied volatility?

Maybe. Certainly if we crash the VIX will be much higher than it is today.

But what if we just sell off slowly? Volatility is just that -- volatility. It is not just "did the market go down?", although many people see it that way.

Gen, thanks. Yes, I didn't mean to imply selling naked, just trying to get a handle on what the implied vol is telling me. This is the problem I have with most of the information with options, I understand the concept of time decay, etc, but not exactly sure how to make use of that information. To what I should compare that value to determine if the option is expensive/cheap is where I struggle and just looking for some general rules of thumb. It seems like comparing IV to the VIX at least gives you an idea what that particular data point is telling you. I'd be interested to hear similar thoughts on how folks use other info like open interest, the Greeks, etc. What are your benchmarks, how do you use that information.

Great thread for us novices and the sharing of knowledge is much appreciated.

Hip, if every aspect of an options pricing is fixed, and, if we agree to use the conventionally utilized Blacks-Scholes means of pricing them...and we do....then both logically and conventionally, whatever "slop" or discrepancy exists between what those options sell for or can be sold for or can be bought for in the real world is assignable to "volatility". The prevailing interest rate; the time to expiration, the distance of the underlying away from the strike price of the option under consideration....these things are all fixed, pat, inarguable.

Thus, if we enter all those pieces of data into a calculator and find the option as available for sale or as offered in the marketplace priced too high or too low, we say the option reflects a non-reality-based volatility value. Because as traders, or observers, that's where we lump in the slop, the mis-pricing, regardless of whether it is positive or negative relative to our calculator.

To the extent that you pay up too much for something should cost less, you are paying up for a fantasy, a piece of non-reality. A 1909-SVDB is a rare penny, worth $1200-$1500 in nice condition. If you pay $3000 for one, the chances of your being able to resell it at a profit are drastically reduced. This is no different.

Now, you are free to do so, but the practical, real-world effect is that the option you bought has to somehow exhibit EVEN MORE unreality for you to profit on it by selling it...which is pretty much all you care about in 99% of cases. OR...the various other elements that go into option pricing have to inflate in some way. Well, days to expiry can only go one way: against you. Distance from strike is dead nuts fixed. Interest rate, well, that's somewhat of a dead issue at present but it is a very slow moving item in any event. So the burden is on volatility or movement of the underlying.

Volatility (vega) can inflate because the particular underlying you bot goes nuts, or, the general market goes nuts, or both. But the idea is that for your option to get to that profit condition, the market (or your underlying or either, or both) has/have to get to get to a state of nuts even higher than it is now. The bottom line is that this decreases the odds of your bet coming into profit. When options exhibit overpricing, we generally wish to SELL, not buy them. But of course the choice to do that or not further depends upon whether you wish to undertake the types of plays (and risks) that require selling, versus buying options.

Once this aspect, the "implied volatility" of an option (as available for sale or to sell in the real world) is understood, you may come to understand that a great deal of options success is odds-based.

Gamma, just want to see if I'm understanding this...

Quote:

Volatility (vega) can inflate because the particular underlying you bot goes nuts, or, the general market goes nuts, or both. But the idea is that for your option to get to that profit condition, the market (or your underlying or either, or both) has/have to get to get to a state of nuts even higher than it is now. The bottom line is that this decreases the odds of your bet coming into profit. When options exhibit overpricing, we generally wish to SELL, not buy them

So, am I right in thinking that the VIX can be used as a benchmark to determine if the IV for a particular option would be considered inflated compared to the overall market, or is that a meaningless comparison? That was what I thought the point of Gen's earlier post was, that buying the SPY 120s at an 'inflated' volatility of 25% relative to a VIX at 15 would be to overpay for them - ie. you would want to be a SELLER at that level, and not a BUYER, as you point out above. Which leads me to think that IV > VIX is where you look to sell, IV < VIX is where you look to buy, which would be a useful tool for me in pricing options. Or am I missing something?

The VIX is only valid for the S&P 500, so for SPY options, yes.

VXN is for the Nasdaq 100 (QQQs)

You get the general drift. If you go to ivolatility.com, they furthermore have some statistics on *historical* volatility for underlyings of your choice...but I believe that is in the paid part of their site. They DO have their free "IVX" monitor for a number of selected underlyings. GOOG, is almost always more volatile than the general market. It's a terrific site but it's a tad klunky to learn how to use...but o/all worth it.