Hi Clair,

Pam forwarded on your question around probabilities to me:

In answering you I am also copying the COOL_Club email list. COOL_Club, which stands for Covered Options Online Learning Club, is a free area on bivio where we have done several webinars about Covererd Options. You can check it out at www.bivio.com/COOL_Club there are both recorded webinars and resources there, everything is free We will be doing more webinars in the not too distant future.

I don't know that I can give a specific answer to that question as asked. Probability is also effected by how far out of the money or in the money an option is rather than just the volatility. If you look at the "extra" information provided with an option quote which may be referred to as the greeks or analytics you will discover "delta". Delta can be used in two ways, first it tells you how much the option will change in value when the underlying stock's price moves. If a call has a delta of .5 that means a $1 move on the stock will result in roughly a $.50 move on the option. PUT's always have negative delta values as they move opposite of the security. The other thing that delta represents is an approximation of the probability that the option will be exercised. In this case we ignore the negative sign on PUT's delta. So a PUT whose delta is -.40 would have a 40% chance of being exercised.

I have read several studies that say on average something like 75% plus of all options still open on the exercise date expire worthless. Now lots of options do not last until the exercise date as they are bought-to-close ahead of the expiration. In fact I was going to mention that I prefer stocks that have more volatility as it gives me more opportunity to buy the option back at a profit when the stock moves in one direction and then turn around and sell it again when it flips around and moves back the other way.

Hope this helps and I hope we see you in the COOL_Clubhouse.

TheCOOLClubDude@gmail.com

Hi everyone, Happy Thanksgiving

 

Excellent question from Clair and answer from you, Paul. This gave me better insight into volatility, delta and probabilities. A couple weeks ago you mentioned running another series of webairs in COOL  Club on Options and I would really like to see that.

 

 Last week again I found out I need a whole lot more of learning in this game. Here is one high volatility example.

 

This blurb is pretty long but I hope you will bear with me. I am trying to explain a foolish process that could really burn a person. In this case I lucked out but that is very unlikely to happen in future poorly thought-out investments. I hope each of you can learn a little about this investing game and reply with points that will enlighten me and all of you. Your thoughts and comments should help all of us.

 

On  Wednesday, 11/20 I came across a weekly PUT on Green Mountain Coffee (GMCR). I had been watching Green Mountain and been very tempted to buy in, but thought it was too high and going up too fast. That morning its price was about $61.70 and had a PUT  bid/ask price of about $2.90 / 3.00 on a 22NOV 59 P. If I sold the put the approximately $3 pemium would lower my cost by that amount to 58.70, a pretty good buy price I thought. The P was dropping so at 10:17 AM I jumped in the 22NOV 59 P at $2.69, GMCR was $61.57 at that time.

If by Friday 11/22 the price dropped to or below the 59 strike and was Assigned I would save that 61.57 - 59 = 2.67 difference in price plus the 2.69 premium  - 1.07 Interactive Brokers commission for another 2.67 discount about $5 total. If it didn't drop that far I had the $269 premium for only the $1.07 commission.  Heck of a deal I thought.

 

Then I decided to do some research that I should have done before hitting the keys.

 

First, I found Earnings would be announced after closed that day, the street was expecting a pretty hefty increase in earnings and apparently didn't expect GMCR to hit it.  A CARDINAL SIN OF OPTIONS IS NEVER HAVE ONE OPEN OVER EARNINGS WEEK!  If the report missed the expected by a penny the stock could drop big time and a big loss even with the $5 plus premium and strike discounts.

 

Thursday 11/21, GMCR opened $66.84, up about $5 from the previous day. GMCR had beat the estimates; the street was happy and jumping in; and my 59 P had dropped from 2.69 to .03/.06 Bid/Ask, a $265 gain. I immediately decided to close it out, and did a stupidly fast STO of 1 - 59 P at .03 and now had TWO 59 Ps rather than none. Another stupid mistake.  I immediately did a BTC of two 59 Ps and closed the whole thing out.. I should have ended up with about a $265 profit but ended up with $256.51, $9 mistake in that second STO. Luckily this was small, but it could have been disastrous.

 

Obvious errors;

1. $2.69 for a 3 day out expiry on a $60 stock is way out of the logical range. There had to be a snake in the grass and I should have looked for it before jumping in.

 

2. Not doing a BTC on it right away to prevent what could have turned in to a $500 to $1,000 loss in two days.

 

3. Clicking STO rather than BTC to close it out the next morning. I've made that stupid mistake on simulated option trades in the past and should have in engrained in my head by now.

 

4. Always check earnings dates and Ex Divs before anything else.

 

5. Develop a good checklist to fill out before opening the trade. I have a checklist but got careless and didn't go thru it before this trade.

 

6. Get Paul's COOL tools working on my computer and use them.

 

Everyone else - add yours.

 

Art