During June, I bought my first shares.
Then after a few months of reading, watching videos, listening to podcasts and attending courses, I finally took my first step to buy my first options. And it's during the election night.
The only reason that I'm doing that is that I'm insane and don't know what I'm doing. That's mostly true. Initially, I wanted to start trading options next year when I get familiar with the trading mechanism via paper trading.
But lo and behold, like nature's call, if it got to go, it got to go. No, I'm kidding. Still, why did I do it? Here are my five beginner thoughts when I bought my first options.
I'm not going to pretend that I know what exactly VIX entails or how to read it exactly.
...the Cboe Volatility Index, or VIX, is a real-time market index that represents the market's expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors' sentiments. It is also known by other names like "Fear Gauge" or "Fear Index."-- Investopedia
I mainly hear about VIX through the TastyTrade and Options Boot Camp podcasts. Especially TastyTrade, during their last call, they will usually mention S&P500, Russell, Nasdaq and VIX.
From what I learn, a more volatile market could mean options trade at higher premiums. One point to note is that VIX went up on 28 Oct and has been declining after that.
In the bull put spread, due to the 10-points-wide spread, the max loss of the options is 810USD and the max gain is 185USD. A risk-reward ratio of approximately 4:1 is not something that I want to be putting myself in. Yup, say the person whose value of crypto has evaporated.
However, in order for the max loss to happen on expiration, Spotify has to drop to 208.09 in the next 44 days, which denotes a 15% drop. Which is possible in the current situation, especially since we might go into an extended election period. The put-call ratio is 0.74 so the market might be a slight bearish in Spotify.
However, my idea is Spotify is not one of the Big Tech that the government is going after. Spotify announces it's earning, missed the Q3 results, went from 266 to 231 and went up a few percentages after that.
Is there a strong justification in me that Spotify might not go all the way in the next few days? To be honest, not exactly. But it does seem like there are a new norm and acceptance of the current situation, even though it is still not under control.
From the chart above, UAL has been trading relatively in a sideways motion since it came tumbling down during February. The options week has an implied volatility of 71.07% but the IV percentile is only at 18%. I'm not very familiar with the whole association of implied volatility and percentile as of yet, but this trade seems like a safe trade to me.
At the point of purchase, it has a vega of -1.02, theta of 0.73 and non-existent beta weighted delta and gamma. In my opinion, the aviation industry is not going to reopen within the next 45 days, the next US stimulus might take a while since both parties seem to be keen on contesting the election.
Nothing major seems to be able to rock the boat of the aviation industry. Though of course, one cannot exactly use the past to predict the future.
As per the TastyTrade mechanics, they manage their trades with 21 days to expiration. And they also recommend closing the trade when it hits 25%-50% of the target max profit for defined risk trade.
For my first year of trading, this will be the mechanics that I will follow until I get more familiar with options and the nuances of such derivatives.
What if my trade is at a loss, especially on Spotify? I'm currently putting a mental note for the threshold of loss at 1x the credit received, which means if I need to use $3.60 to buy back my SPOT bull spread, I will close the trade and assume the loss.
I'm starting my options journey with a small portfolio. If I were to lose my funds in options, it will be painful for me but it is not a life devastating situation. My plan is to slowly increase my size year by year.
The max loss of each trade will be set at 10% of the portfolio value. The funds allocated to options, at least in the beginning will be at most 10% of my total portfolio. Otherwise, I might just blow through my account in no time, be so scarred and give out on options entirely.
That's it, that's my thought process from 1 day old of experience in options trading.
If you read all the ways till the end, let me know what else I could do to educate myself. Or if you think my process of thought is way off from reality, please share your opinion with me as well.
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