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What are option Greeks, and how do you use them?
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iamiam joined discussion · Dec 17, 2022 18:32

Protection in a BEAR Market

since I have some time here is a little help in this bear market.
Protection in a BEAR Market
How to protect your portfolio;
Buy a leveraged Inverse ETF - Leveraged ETFs do the work of options for you. They leverage options, company and government bonds, futures or some combination of them to obtain a return near their stated goal. (SQQQ has a goal of 3 times the inverse of QQQ etc.)
$ProShares UltraPro Short QQQ ETF (SQQQ.US)$ Very easy, QQQ goes down SQQQ goes up 3 times what QQQ went down.
$ProShares UltraShort QQQ (QID.US)$  about half the cost of SQQQ, operates the same as SQQQ, but this is 2 times leverage
$ProShares UltraShort Consumer Discretionary (SCC.US)$  Consumer services are going to get wrecked, no workers and a general cutting back on services.
Protection in a BEAR Market
Get your money out and go buy Gold, Food, and Gas. if your bank survives, great go put your money back, if not you still eat. But honestly why does anyone use them anymore? what do you get? They haven't paid a return in 15 years! What you get is access to a system they created to make you dependent on that system. that's why CBDCs will be successful, we have been conditioned to except ease as necessity... Rant Over.
these are just some inverse ETFs, most every sector has one. Here is a link to a page that lists them. (I hope this works) https://www.proshares.com/our-etfs/find-leveraged-and-inverse-etfs
There are some tax changes starting Jan 1, so some of these can only be held on moomoo until then...
Protection with Options, I will do a simple overview of options at the end
SELL CALLS - if you own at least 100 shares you can sell them, without selling any shares you simply SELL a call. The strategy depends on you, you can sell calls-
Out of The Money OTM (smaller payout, less risk of losing your shares)
At The Money ATM (*ATM is the Money printer! sell ATM *the current strike price,  good payout and in a bear market good odds of expiring worthless)
In The Money ITM (larger payout but unless you want to lose your shares, retain enough to buy them back)
In bear markets I shoot for the moon- For example at PPI release I sold BKR $Baker Hughes (BKR.US)$ Dec 16th 25 calls for 4.40 each. Friday I bought them back from 3.10 to 3.3, that's about 1.20 per share profit that I made as the stock price declined. I was hoping they would expire worthless, and if I would not have bought them back I would've lost my shares at 25 each (remember options are groups of 100 so $25 per share is $2500). it turns out after I bought them back I sold them outright at 28.41 to make a little more profit. (i bought the shares back at 3.20 avg, add that to 25 and you get 28.2 per share I owned it at, then I sold it at 28.41 a gain of 21 cents per share). So round tripping with selling calls, when shares were high - I sold shares at 29.4 bought them back at 28.2 and sold them again for 28.41. This was after I had collected my dividend for owning the stock. Overall BKR did very well for me, and is a great company, I hate to see it go, but all cuts must be made.
Below is a screenshot of QQQ's option page on moomoo. The pathway is on the upper left. In the entity page select Options then Chains and finally Call, from there select the Expiration Date, *when selling calls, closer dated is better because of time decay (Theta Θ). The goal is to Sell a Call and have it expire worthless (OTM) Highlighted are  ITM, ATM, and OTM
Protection in a BEAR Market
BUY PUTS - Puts are an option strategy where you can profit (or protect) off of a stocks decline. The way it protects you is by hedging your stock that you own. As the stock declines the value of the Put goes up, so if you bought as many puts as you had shares (each option contract is for 100 shares) then your total portfolio would remain near even while the stock declines (that is being hedged).
Below is a screenshot, again from QQQ $Invesco QQQ Trust (QQQ.US)$ (this is where the bulk of my contracts are so I watch it the most). Circled on the upper left is the Path on moomoo to buy Puts. Under the stock you want to look at select Options, then Chains, and Put to get to a page where you can select a Contract Expiration Date. * Buying Puts is a very different strategy than Selling Calls, Time is your friend! it's your guardian angel, it's going to save you from you, embrace it as the forgiver of ill planning, bad timing and greed. The choices remain the same, ITM, ATM, OTM but the strategy is different because you want these to be In The Money. The more time you give yourself, the further Out The Money it is safe to buy. If you are planning for a short quick drop - then buying In The Money puts may work *and short dated ITM puts work great as hedges. The price goes with ITM being more expensive, but options are no time to be cheap- be wise! For profit the easiest most favorable is an ATM option, this can be a strike up or down from the current price and I would give myself at least 30 days. Time Decay (Theta Θ) rapidly increases at 30 days, so the option contract value deteriorates quickly unless it is ITM. That is why I say to give yourself time. and as an example of time, if you were to buy an ATM option contract 30 days out or closer and the market turned on you - your option would deteriorate faster than the time the stock would need to recover, or in other words you would suffer a loss you probably will not recover.
As another personal example; at PPI release I bought QQQ March 300 & 290 puts (i had some money selling BKR Calls), they are now deep In The Money giving me tons of options with my options I can roll them down - essentially trading for a lower strike and collecting the difference, or Sell them outright (they are up 2.5k-3k ea.), or sell Puts or Calls against them (when you are deep ITM you can use those options as stock you own and begin selling them, if you are not experienced in options don't do this, and most brokerages probably won't let you) or I can excersize them (I sold the last of my QQQ in November 2021) as with above, don't do this unless you understand what you are doing, especially if you don't own enough shares, it will enter you into a short position.
Protection in a BEAR Market
Do BOTH and short with your own shares. This is an option strategy known as a Synthetic Short. You are essentially shorting a stock with your own shares... You simultaneously Sell a Call ATM and Buy an ATM put. This sells your shares at the current price and opens a Put at the current price (this action is bearish and has a negative effect on price- do not worry an individual investor won't move enough volume to effect price). This gives you the profit from selling your shares, that you use to buy a Put giving you overall downside profit not just protection during a stocks decline.... I DO NOT know how to do this on moomoo. the most I have done is buy and sell calls and puts on moomoo. But if your a novice that's probably best, and if you are advanced at options you probably wouldn't read this
Sell a CALL and use that money to Buy a PUT at a different (lower OTM) strike. This is a good strategy when you are certain of a downtrend as it sells your shares at or near a top and gives you free or at least cheap downside puts.
Some notes in case there is confusion -
When you Sell a Call - if the stock price goes up beyond your strike you will lose your shares, but you will be paid the strke price for them.
Do NOT Buy a Call - that is a Bullish strategy.
Do NOT Sell a Put - that is a Bullish strategy.
When you Buy a Put - My advise to close it, would be to SELL it, just like stock, buy a Put then when it goes up or down just sell it before the expiration date.
What is an Option Contract - an option contract is the right to buy or sell a certain stock at a certain price (strike) at a certain time in the future (expiration date). American options are "Live" meaning they can be excersized or traded at any point during the life of the contract (during regular trading hours for retail)
Calls - A call is calling a Contract away from the seller. If you Sell a Call and the price is above your strike then that option contract is Called away from you.
Puts - The right to Sell a stock, having a contract to sell being Put to you.
An option contract has 2 parties a buyer and a seller, so with puts and calls that is 4 separate counterparties with 2 momentum directions. Neither a Call or Put is inherently directional. (you can sell a Put, that is bullish. You can also buy a Put and that is bearish therefore the Put itself has no direction *the manner in how it was transacted does!)
Calls have a Buyer and a Seller - a buyer of the call pays for the right to own the stock, a seller is opting to sell their shares to the buyer at the chosen strike. ie I want to own your λ stock for X amount on X date.
Puts have a Buyer and a Seller - a buyer of the put pays for the right to Sell the stock at a chosen strike, the seller is agreeing to sell their shares at a chosen strike. ie I want to sell you my λ stock for X amount on X date.
OK now that i have thoroughly confused you I will go over some simple breakdowns of some aspects of an option contract.
Below, again QQQ, starting with the Strike
Strike - the agreed upon stock price at the given date
The Spread - this is simply an auction with buyers and sellers. Price is the current cost of the contract,  change and percentage change are how much the price has changed from the previous trading day and the percent it changed.
Protection in a BEAR Market
Volume is the number of transactions, Turnover is the amount of shares traded. IV is the individual contracts Volatility. When Volatility goes up or spikes so does the price of the option contract if Volatility is high and drops the price of the contract will also drop. you want a low or normal IV (*There is an entire strategy built around selling high IV)
THE GREEKS
Delta - The king of option greeks, so much information. This can be used to give you a percent of the contract ending In The Money, again using the 275 strike, it has a Delta of .48 so it has a 48% chance of ending ITM on the contract date of Dec 28. Delta is also how much an option contract will change with every $1 of stock price movement.  Again using the Dec 28 contract, for every $1 QQQ moves the 275 strike moves .48 (per contract so 100 shares at .48 cents is $48 for every dollar QQQ moves). Example: QQQ goes from 274.25 up a dollar to 275.25 then the 275 call would go from $365 to $413, and the reverse is also true.
Gamma - Gamma is a calculation (they all are calculations) of the relationship between the Delta and the stock price. When the stock price moves so does Delta, Gamma tells you how much it's going to move. Do you need this - No, it effects your options but they move so fast you couldn't keep up, Just know the higher it goes towards 1 the closer the stock price is to the strike price.
Vega - How sensitive your option contract is to IV. For every 1 point IV moves, your option will adjust the Vega amount. For example, below, the 275 Vega is .1918, let's round up to .2 to make it easy, IV is at 21, if IV goes to 22 this contract value goes from 3.65 to 3.85, so 20 dollars for every 1 point Volatility moves. Yes that correlates to Market Volatility $VIX Index Futures(DEC4) (VXmain.US)$ so when market VIX spikes so do contracts.... in a bear market Puts become very expensive. That's why you buy them at the tops when VIX is down, actually you have to time it right because the Put IV will skyrocket on most bullish runs, that's why I buought ITM puts at PPI release ITM has lower IV.
Theta - Time, this is how far an option contract will decay or lose value every day. Again using the 275 call expiring Dec 28 has a Theta of .18 therefore every day the contract will drop 18 dollars this includes weekends. so over this weekend that option contract will have dropped $57 by open Monday. THAT'S WHY YOU DON'T BUY SHORT DATED OPTIONS, AND YOU DEFINITELY DON'T HOLD THEM OVER A WEEKEND!!! the price of QQQ would have to go up a dollar everyday during the trading week just for this contract to stay even, or open Monday up 3 dollars but why sweat it just give yourself time.
Protection in a BEAR Market
Be Safe, Ba Wise, Be Careful and as always
Good Luck
If you read this and like it give me a thumbs up or something, I don't care if I get any recognition for it, I am curious if anyone reads these. With retirement iam curious if posting is worth some dedicated time.
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iamiam
Engineer, Commodity Buyer, Alert Bettor, Tesla 🌬 Commodities BULL🐘 Precious Metals Dragon 🐲 and OIL Trumpeter 🗣🎺
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