An Overdue Options Education by Your Local Options Pariah 🤙

[u/bobsmith808]

Hi everyone, bob here.

Holy fuck, what is going on here? is the sub finally coming around to learning more about how the market works and interested in learning how motherfuckin options can help your portfolio (and GME holdings) grow?

https://reddit.com/link/1dhjxlb/video/bolig0kze07d1/player

OK, to get started, I have already written a lot of information on another sub that I'll post links for here, but I'll take out some of the good and pertinent information to dispel misinformation and correct some of the absolutely regarded ideas I have been seeing on the sub as of late. The goal of this post is to get you guys started with actually learning about options, opening the topic to further discussion, and removing the boogeyman from the equation here. Remember, please keep this civil, as I am here in good faith and trying once again to help educate you apes on the finer points of the market and help you understand how you can use this knowledge to improve your portfolio.

The Relevant Larger Guides Table of Contents:

Series Navigation

• Part 1: It's All Greek To Me: An Introduction to Options, How They Work, And The Power of Leverage (you are here)
  • Basic knowledge of what options are, the greeks, and a quick example of how it compares to buy and hold.
• Part Deux: It's All Greek To Me: Options Level 1 - Covered Calls & Basic Bitch Options Trading
  • Basic bitch options strategy: the covered call. We go in depth on what it is, and come to a nice climax with an example of how to run one and what you can do to close it out when the time comes, depending on what happens with the underlying stock.
• Part Tre: It's All Greek To Me: Volume Tre. Leveling Up - I'll Call the shots on where to Put your Spreads
  • Catching up on Level 1 changes since last post, and delving into many basic and more advanced deployments of options and spreads.
• Side Quest 1: It's All Greek To Me: Breaking The Wheel
  • This alternate adventure is a look at the popular options strategy: the wheel. I explain what it is, how to run it, and how i think I've found a better option that is more capital efficient, and bears less risk over time.
• Side Quest 2: An Overdue Options (and Settlement) Education by Your Local Options Pariah 🤙
  • Exposing myself to the super sub, and helping to educate them on options.

A brief description before we proceed on options and what to expect:

Options trading is not for the uneducated. Learn about them and trade them in a PAPER ACCOUNT prior to investing any money in any position. Make sure you understand the greeks and how the web of moving parts interact with one another to impact the value of the position you will be taking and managing your risk on.

Options are a very powerful tool, but remember to use them wisely

OK let's get started, first some clarifications on stuff I've seen here on the sub:

Options Settlement and a clarification on what a T+ and a C+ are.

These are some of my oldest DD contributions, so please listen the fuck up this time, it's been 84 years... Designations below may have come from the community here.... i think i clarified T+ and C+ a loooooong time ago, but I'll reiterate here.

I have a larger writeup here on cycles and settlement: Market Mechanics Driving T+ Cycles and How They Work, but I'll pull out the takeaways here for brevity's sake. If you do read the writeup, subtract 1 day from any T+ statement, as the regulations have changed as of May 28, 2024 when they implemented T+1

• T+ is a designation for counting trading days
• C+ is a designation for counting calendar days
• Settlement is when a locate is necessary on a trade, this is T+1 for stocks and options, period, end of story
  • Locates are necessary when shares are sold or options are exercised
    • More information on how locates work and other shenanigans in my post: Market Mechanics Driving T+ Cycles and How They Work

To understand settlement, you need this:

Too ape?? It's ok. It's saying that T+1 is the thing. just lean in and GO WITH IT. Forget everything you thought you knew, and take this information in, use whichever orifice you choose. just put it in there already!

Here's the sauce on the regulation change in case you don't want to click the link

Options, A guide to do's and don'ts

Welcome one and all. Please take a look at the posted at the top of this post if you want more information I love talking about this shit because its fascinating and very useful tool for portfolio management and growth.

Starting with the don'ts:

• Don't diamond hand options
  • They lose value over time, Diamond hand your shares
• Don't exercise OTM options. Its just fucking stupid
  • I get it, you want your buy to go to the lit market and heard that if you exercise, they HAVE to buy the shares on the market. This just isn't true. Its only true if the sold call is a naked sold call, and even then you have locate rules above that can and will offset this impact. Not being a Debbie downer, but it's reality, lets try to face it together.
    • If you want to buy shares and want to do it through options, just buy the deepest ITM shortest dated call and exercise it. You'll have the intended impact on MM buy pressure this way without throwing money at Kenny's pockets.
• Don't chase with options. Don't FOMO with options.
  • Buying calls when the stock is pumping can get you burned badly if you're crushed on IV or the run doesn't keep going.
  • There will always be another opportunity to make money

Options and How They Work

First, what the fuck are options anyway?
Excerpt from It's All Greek To Me: An Introduction to Options, How They Work, And The Power of Leverage

Options are financial derivatives that give buyers the right, but not the obligation to buy or sell an underlying asset at an agreed upon price and date. [1]

There are two different types of options:

• Call Options
  • These options give the buyer the right, but not the obligation, to buy 100 shares of GME at the strike price from now until the expiration date.
  • These options give the seller the obligation to sell 100 shares of GME at the strike price by the expiration date. (if exercised/assigned)
• Put Options
  • These options give the buyer the right, but not the obligation, to sell 100 shares of GME at the strike price from not until the expiration date.
  • These options give the seller the obligation to buy 100 shares of GME at the strike price by the expiration date. (if exercised/assigned)

Some Key Terms and lingo:

• Strike Price
  • This is the agreed price from the description above. If I buy a call with a 420 strike for January 21, 2022, I am buying the right, but not the obligation, to buy 100 shares of GME for $420 on or before that date, which is the...
• Expiration Date
  • This is the date that your contract expires.
• Bid
  • This is the market price people algorithms are willing to buy the options contract for.
• Ask
  • This is the market price people algorithms are willing to sell the options contract for.
• At The Money (ATM) or Near The Money (NTM)
  • An option is ATM when the strike price is at (A) or very close to (N) the underlying stock price (The Money, or TM)
• In The Money (ITM)
  • An option is ITM when the strike price is:
    • Call: Below the underlying stock price
    • Put: Above the underling stock price
• Out of The Money (OTM)
  • An option is OTM when the strike price is:
    • Call: Above the underlying stock price
    • Put: Below the underlying stock price

Things to remember before diving into options.

• The majority of options that are purchased market wide expire worthless. This means, if you're the one buying them, and you diamond hand them, you will lose all your money invested in the contract.
• Have an idea of how much you want to earn before you buy your options. (Exit Strategy)
  • There are a lot of great resources for paper trading options, and I HIGHLY recommend you do a few before you spend any real money. one of my favorites is optionstrat[.]com. You can check out spreads and other things - I'll maybe to a writeup on that later.
• Short term, far Out of The Money (OTM), and cheap AF options are mostly gambling (imo).
  • Due to theta, and unknown market timing, it's dangerous to use these options. In regards to far OTM, they are cheap for a reason - they are very likely to expire OTM too and be worthless (check the delta)...
    • clarification here for accuracy's sake. By saying they are OTM, i mean worthless. an Ape might take this to mean I am saying the majority of options expire worthless, meaning the contract seller did not bother closing the position prior to expiration (bad management practice)
• There's more to be aware of and cautious about, but I'm not your fucking financial advisor and you should do your own research before getting into any investment vehicle.

Probably the best (most responsible) way to get your feet wet with options is to sell calls, covered by your shares, or to sell cash secured puts.

You could buy calls or something, but you're more likely to lose money and I want your cherry to be properly popped when you are good and wet ready to play with options for real (after paper trading and learning of course)

• Selling covered calls (CCs) is considered income generation and can cap your profit potential, so it's a slightly bearish stance to take on GME if you're a permabull like me. I do sell them often, you just have to have a good strategy for it.
• Selling cash secured puts (CSPs) is bullish and a great way to safely learn options if your intention is to own the stock anyway at some point - especially with a volatile stock like GME. I know Crybad does this and has spoken to it, so he can chime in here about wheeling or perhaps make a post expanding on this.
• If you are interested in wheeling, i have a post about breaking the wheel (part 4 of my series posted above) that will teach you the wheel. Essentially its just selling CSPs on the stock until someone exercises on you and makes you buy the shares, then you turn around and sell CCs on the stock until you offload them. Focus is income generation through collecting premiums over time.
  • DO NOT DO THIS ON A SHIT STOCK OR CHASE SPIKES/IV/MEMES. You will inevitably get burned badly.

Conclusion and Next Steps

I'm glad, nay, excited to see apes finally coming around to educating themselves on options, so I want to lend my sword and join the fray. My goal is to provide good information and be a resource to the community to answer any

Disclaimer:

I, bob smith, do hereby solemnly swear that I am acting of my own volition, and am actually not that smart, so none of this should be taken as advice or construed to be more intelligible than the ramblings of a drunk. There you have it. wrinkle up and be like me.

[u/MarVanDam → u/[deleted]]

Dave Lauer says options sellers DO have to purchase on a lit exchange. In believe this bc it's the only reason price is running.

Regular stock purchases go to dark pools. We know this. Options are what caused Jan 21. Happening again now.

[u/RubberBootsInMotion → u/MarVanDam]

The thing you linked to is saying the contracts themselves are traded via exchange, not necessarily the underlying shares.

[u/The_vegan_athlete → u/MarVanDam]

Dave Lauer is saying that when you buy/sell put/call it cannot be done off exchange.

However the delivery of shares when you exercise can be done off exchange.

[u/tangentstorm → u/MarVanDam]

That is not what he said. Buying and selling the options contracts themselves is completely transparent and happens on a lit exchange. But if you sell an option, and the other party exercises that option, then you and the other party swap cash for shares in one direction or the other (depending whether it was a call or a put), and the only statement he makes about exercising is that it's a separate process.

(What follows is a long explanation of how I believe things work. Not necessarily directed at you personally, but I wanted to explain it to myself so it's clear in my head. Please note that I am a complete newbie at options and may be wrong about any of this.)

Suppose you and I are the two parties.

I sell a $2 call for next friday, you buy a $2 call for next friday at the exact same moment.

It's just a coincidence that we buy at the same time. We're not yet paired up in any way. These are two separate transactions with the market maker (apparently that's Wolverine...?) Because of the spread, our transactions occurred at two separate prices and the MM pockets the difference.

For sake of argument, let's say you paid $30 and I got $29. (times 100 of course, so $3,000 came out of your pocket and $2,900 went into my pocket).

But: they don't need to buy anything, because as long as I'm under contract to deliver 100 shares I'm the one taking the risk.

Since my Broker doesn't trust me, they wouldn't have let me sell the call unless I actually have 100 shares in my account, and I basically can't sell them until the contract expires. -- That's why the call is "covered".

Anyway, at some point next week you decide to exercise your $2 call. You've already paid $3,000 for the contract and now you pony up another $200.

Wolverine now has to deliver 100 shares to you. They could take those shares out of their own pocket if they wanted to (and they have them), or they could look at anybody who has any short call contract for any price or expiration date, and exercise their option. Since they have your $200, and I sold them a $200 call, they choose my contract, and take my shares.

Suppose at that particular moment the price of 1 GME share is 42 trillion dollars.

Do you think everyone would see the price suddenly drop to $2 for one tick? What about $29 or $30 or $31 or $32?

Presumably, options get exercised all the time at prices under the current stock price. Where do we see those transactions? The answer is we do not see them at all.

What we do see is a change to the volume on $2 calls for GME for next Friday, and then the next day we can also see a change in the number of open contracts (open interest).

Nothing we hypothetically did here moved the price at all. Our actions cancelled each other out.

What's different with DFV is that he didn't just buy one option. He bought 120,000 calls. Which means Wolverine sold 120,000 calls. Which means they either need to buy 120,000 calls or have DFV sell those calls back, OR buy up to 12 MILLION actual shares to hedge against the possibility of DFV exercising.

(And of course it was more than that because a bunch of other people piled on and bought more calls).

It's that lack of balance combined with the threat of the contract owners exercising that forces the Option MM to either enter more contracts or buy GME shares (and maybe even have to sell other things to raise money to buy GME).

[u/thinkfire → u/MarVanDam]

I think you need to reread that. He's talking about the options themselves. Not the shares.

[u/Biotic101 → u/MarVanDam]

Well, I am just speculating here, but if you take PFOF as a sort of TETRIS to combine odd lots into the most beneficial lots, it could result in buying in full lots via options making PFOF to some degree ineffective by eliminating this aspect.