Options strategies to consider during Earnings Season

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doctorpot1 joined discussion · Jan 4, 2023 22:34

Explained Simply: Options 103, ITM ATM & OTM; Risk, Reward and Strategy.

In this Options 103 for layman, we will discussed about the difference between In The Money (ITM), At The Money (ATM) and Out of The Money (OTM) options. We will also discuss about their risk reward profile, and finishing up with a general rule of thumb that I use when selecting a strike price when I'm trading options, where I would share some real examples where I had used the said strategies and give some reflection on the wins and the losses.

If you have not read Options 101, you can start from here

doctorpot1: Explained Simply: Options 101

If you have not read Options 102, you can read it here too: Explained Simply: Options 102, option pricing, Moo Moo's option price calculator, and the greeks

Let's get started
Let us first understand the 3 terms first.

At The Money (ATM): This just means that the underlying price and the strike price of the option is the same. E.g. $Tesla (TSLA.US)$ is at $100 a share and the strike price is at $100.

In The Money (ITM): In simple term, this option is earning money ignoring cost. So ITM = Got Money (GM). This means that there is value in your option if you exercise it, it has some intrinsic value. Which means if you exercise it now, you will "earn" some money out of it. Let's use $Palantir (PLTR.US)$ as an example and assume $Palantir (PLTR.US)$ is currently at $6 a shares.

If you have a CALL option for Palantir with a strike price of $2, your CALL option is $4 ITM. This is because you can exercise your CALL option and buy Palantir at $2 each and sell immediately to the market at $6 each, netting you $4 per share.

If you have a PUT option for Palantir with a strike price of $10, your PUT option is $4 ITM. This is because you can buy PLTR from the market at $6 each, and immediately exercise your PUT option and sell Palantir at $10 each, netting you $4 per share.

Out of The Money (OTM): In simple term, this option is losing money ignoring cost. So OTM = No Money (NM). This means that there is no value in your option if you exercise it, it has no intrinsic value, it almost makes no sense to exercise it. Let's use $Bank of America (BAC.US)$ as an example and assume $Bank of America (BAC.US)$ is currently at $33 a shares.

If you have a CALL option for BAC with a strike price of $34, your CALL option is $1 OTM. This is because if you exercise your CALL option and buy BAC at $34 each, you immediately lost $1 per share as the market is selling it at $33 each, netting you $1 loss per share.

If you have a PUT option for BAC with a strike price of $31, your PUT option is $2 OTM. This is because if you exercise your PUT option and sell BAC at $31 each, you immediately lost $2 per share as the market is buying it at $33 each, netting you $2 loss per share.

What is difference between ATM, ITM and OTM?
From a simple perspective the main difference is something we called moneyness (intrinsic and extrinsic value), cost and the probability of success, which does have impact to risk, reward and the leverage we can gain from it. From a more technical perspective, there is are differences in the exposure you have to the underlying (a.k.a delta), gamma's progression, delta's progression due to gamma (which is the core principle for a gamma squeeze), and theta burn rate too.

In this 103 post, I will only talk about the simplified perspective and how to think about them. But let me give you some interesting charts to think about if you are more interested in the technical stuff, such as why do option price grows "exponentially" at some points but flat at other points (the yellow line), stay tune for the more advance course in the future.

How CALL option value and their greeks changes as underlying price moves. not drawn to scale.

How PUT option value and their greeks changes as underlying price moves. not drawn to scale.

In this 103 post, we will look at everything with the assumption that the options are to be sold or exercise on expiry, for simplicity's sake.

What are the difference? What are the risk?
Before I talk about which one we should choose, let me first talk about what do I mean by risk here. People usually look at risk as just about losing money. However, for post I will like to split it into 4 different risks for simplier understanding and better visualisation. The 4 risks I will talk about here are wipeout risk, assignment risk, capital risk, and time capital risk.

Wipeout risk (buyer only): The chances of a complete wipeout at expiration date. I.e. the option is worthless, we lose all our premium paid, the option doesn't make any sense to be exercised. We lose, GG

Assignment risk (seller only): The chances of the option buyer exercising the option, and we have to fulfil our obligation to buy or sell the shares at the strike price.

Capital risk: For buyer of option that is the risk of losing your own capital due to "owning" the intrinsic value of the position. For seller of option that is the risk of losing your own capital due to the assignment.

Time capital risk: For buyer of option that is the extrinsic value or time value paid in terms of premium. For seller of option that is the time value collected in terms of premium for the risk we take.

So I will be breaking them down one by one, looking at the risk on its own so that we can see a clearer picture of how the moneyness of the options affects the different risks.

Wipeout risk analysis (buyer only)
We can easily analyse what are the chance that options we bought will expire worthless. The tables below shows the scenarios whether an option will or will not expire worthless. Do note that only ITM will not expire worthless, the rest will.

Buy CALL option "win rate" at expiration ignoring cost

Buy PUT option "win rate" at expiration ignoring cost

As we can see, buying ITM options have a lower chance of a wipeout as compared to buying OTM options. This is because only ITM options won't expire worthless, and for OTM option to get ITM, the price needs to move a lot more in our favor. For ATM option, if price does not move at all, it still expire worthless. Thus, ITM options have lower wipeout risk as compared to ATM and OTM options.

However, not getting wipeout doesn't mean that we made money there are still cost and payout to consider, but at least we won't lose it all and we can live to fight another day

Assignment risk analysis (seller only)
We can easily analyse what are the chance that the options we sold will be exercised and we have to fulfil our obligations. The tables below shows the scenarios where an option will or will not be exercised. Do note that ITM would likely be exercised, and the others should not.

Side note: There are rare cases where some crazy people may not exercise ITM options and even exercising OTM options.

Sell CALL option "win rate" at expiration ignoring cost

Sell PUT option "win rate" at expiration ignoring cost

As we can see from the tables above, selling OTM options have a higher chance of the option expiring worthless as compared to selling ITM options. This is because only OTM options will not be exercised and expire worthless, and for ITM option to get OTM, the price need to move a lot more in our favor. For ATM option, if price does not move at all, it still expire worthless. Thus, OTM options have lower assignment risk as compared to ATM and ITM option.

However, that does not mean that we should sell super deep OTM option because the more deep OTM the option is, the less premium we receive. So we still have to consider the risk, rewards and fees

Capital risk analysis
Capital Risk - Option buyer
For capital risk as a buyer of options, we are talking only about the intrinsic value that we paid. Only ITM options have intrinsic value, ATM and OTM options does not have any intrinsic value (please refer to Explained Simply: Options 102, price and the greeks for more details).

Buy CALL option's intrinsic value at risk excluding time value

Buy PUT option's intrinsic value at risk excluding time value

Looking at the tables above, we can see that if we buy ITM options, we stand to lose all the intrinsic value. The deeper ITM we buy, the more we stand to lose. It is as though we had bought a fraction of the real shares. For example, assume that we had bought the $10 ITM CALL option with a strike price of $15. We have paid $10 per share in intrinsic value. If the share price of the underlying drop by $2, we lose $2 of intrinsic value. If the share price drop by $5, we lose $5. If it drop by $10, we lose all $10 of intrinsic value. But $10 is the max we can lose on the intrinsic value, so if the share price drop by $20, we still only lose $10 of intrinsic value. So even though we have a lower chance of wipeout risk with ITM options, we have a higher capital risk with ITM options.

Buying ATM or OTM options doesn't have such capital risk. Therefore, it is it a lot cheaper to buy such options. The more OTM the option the cheaper it cost which allows us to create more leverage. With $1,000 we might only be able to buy 1 ITM option, but we could get 5 or more ATM option or 10 or more OTM options with the same amount of capital.

Capital Risk - Option seller
For seller of option, capital risk here is the risk of losing your own capital due to the assignment. For the case of selling CALL options, we will assume the max price the shares can go to is $50, to simplify the matter. Otherwise, the total capital risk would be infinity.

For selling of options we need to account for 2 parts to understand our capital risk. The first part is the intrinsic value that we have collected for selling the options, and the second part is the maximum amount we have to pay to fulfil our obligation. Which can be seen in the table below.

Sell CALL option's intrinsic value gained and capital at risk excluding time value

The max assignment capital at risk for selling the CALL option is calculated by taking the max share price minus the strike price. So assuming the price of the stock rockets to $50; If we had sold a $15 CALL option and the option is exercised, we have to buy 100 shares at $50 each from the market and sell them at $15 to the buyer of the options. Thus paying an extra $35 each. If we had sold the $30 CALL option, then we have to buy 100 shares at $50 each and sell them for $30 each, paying an extra $20.

Adding the intrinsic value that we have collected for options, we get our net capital risk.

Sell PUT option's intrinsic value gained and capital at risk excluding time value

For PUT option, the max assignment capital at risk is just the strike price of the options as that is the price we have to pay to buy the shares at. Adding the intrinsic value that we have collected for options, we get our net capital risk.

There are a few things we can see from the tables above. Firstly, the maximum net capital risk for ITM option is the same as ATM option. This is because we will collect money for the intrinsic value of the ITM option, and that helps to offset the max assignment capital. So even though the chance of assignment is much higher for ITM option, the net capital risk is the same as ATM option. This dynamics allows for interesting option play for certain strategies.

Next, the more ITM we sell our options, we have the potential to burn the buyer's intrinsic value as the share price goes in our favor. For example, assume that we had sold the $10 ITM CALL option with a strike price of $15. We have collected $10 per share in intrinsic value. If the share price of the underlying goes down by $2, we gain $2 of intrinsic value. If the share price goes down by $5, we gain $5. If it goes down by $10, we gain all $10 of intrinsic value. But $10 is the max we can gain on the intrinsic value, so if the share price goes down by $20, we still only gain $10 of intrinsic value.

Compare that with say the $2 ITM CALL option with a strike price of $27. Since we only collected $2 in intrinsic value, not matter how much the share price crash, $2 is the maximum intrinsic value we can earn from it. So even though we have a higher chance of assignment risk with ITM options, we have the chance to burn our opponent's intrinsic value, and yet we do not have a higher capital risk compared to ATM options.

Selling OTM options however reduces the amount of capital risk, which in turns means lesser margin requirement. Couple it with lower assignment risk, that could be a great move for certain strategies.

Time capital risk analysis

Time is money

This is the only 1 thing that is certain in options. As time goes by, the time value of the option is 100% guaranteed to go to zero. Price crash, price rally or price didn't move, time value will go to zero on expiry. Volatility crash or rally, time value will go to zero on expiry. This is the principle that is leveraged by theta gang strategies.

Note: The option prices below are theoretical prices that is calculated using Black–Scholes options pricing model.

How time value of option changes per share with different strike price

As we can see from the tables above, time value is the highest for ATM option, and it drops as it goes further away from the current underlying price. What is interesting is that ITM option have a much lower time value as compared to their OTM counterpart. This is because money now is worth more than money in the future. So as we sell ITM option, we collected a lot more money now, which may or may not be used to fulfil our assignment in the future. E.g. if we sold a $100 ITM CALL option, we would have recieved $10,000 in intrinsic value. Those money gain can be used to get more money such as putting them in T-Bill while waiting for the option to expire. So all those are priced in and thus we get lesser time value for them. The market priced in many things.

Breakeven Analysis
Now that we know all the risks and how the strike price affects them, we can put them all together to analyse. The easiest way to look at all the risk factor is to understand the breakeven point of the options. To find out at which share price, will we not lose a single cent. This will allow us to know how much the share price have to move in order for us to not lose money, and when we will earn or lose money. So if the stock price needs to go up 1,000,000% before we breakeven, then maybe we should reconsider it a bit.

Note: The option prices below are theoretical prices that is calculated using Black–Scholes options pricing model.

Breakeven analysis of options per share with different strike price

So piecing all the data together we came out with this table above. Both buying and selling option have the same breakeven point, this is because the P&L of the buyer is just the opposite of the seller. It is a zero-sum game. So how can we read the table?

Looking at CALL option: If say we bought a $30 CALL option, then we need the share price to rise 23.20% to $30.7996 to breakeven. If the price is above $30.7996, we start to earn money; If the price is below $30.7996, we start to lose money. However if we sold the $30 CALL option instead, we will breakeven if the share price rise 23.20% to $30.7996. If the price is above $30.7996, we start to lose money; If the price is below $30.7996, we earned money.

Looking at PUT option: If say we bought a $20 PUT option, then we need the share price to drop by 20.74% to $19.8142 to breakeven. If the price is below $19.8142, we start to earn money; If the price is above $19.8142, we start to lose money. However if we sold the $20 PUT option instead, we will breakeven if the share price drop by 20.74% to $19.8142. If the price is below $19.8142, we start to lose money; If the price is above $19.8142, we earned money.

For buyer: So what we can see is that for the buyer it is a lot easier to breakeven when we buy deeper ITM option. We just need the share price to move a tiny bit to breakeven. However, we also put more capital at risk, which means we have more to lose. Although buying OTM option is way harder to breakeven, however it is a lot cheaper which allows trader to gain some crazy leverage by buying a lot of it.

For seller: For an option seller, selling deep OTM option is less risky and more advantageous as the chances of assignment is much lower, since the profit we earn are capped and fixed. So long the share price is ATM or OTM, we earn the full premium. So time is our friend as time value always going to zero. However, if we go too deep OTM, the time value that we can earn from will get smaller and smaller, which may make the risk reward to go out of balance. Although selling ITM option is way harder for the option to expire worthless, it locks in huge amount of intrinsic value for us to burn through. Which might work in our favor since the max capital loss for ITM and ATM is the same.

What about reward and leverage?
The above only consider it from a risk standpoint, however we should also consider the reward. It is not impressive if we can earn $1 per $100 dollar risked per year 100% of the time, that is only a 1% return. T-bill is giving us 4% return 100% of the time.

Before talking about reward we first need to understand what is expected value.
Expected Value: is just the expected result when we factor in all the probabilities of a outcome and the result of the outcome. This is calculated by multiplying chance of event A happening by the outcome of event A, plus multiplying chance of event B happening by the outcome of event B, and so on. Let me give you an example, assume that we have a fair coin flip game, where if the coin is head we win $1, and if it is tail we lose $1. The expected value is just 50% x $1 (coin land on head) + 50% x -$1 (coin land on tail) = $0.

In the examples below, I would assume price will follow a normal distribution with the centroid at $25 which is the current underlying price. This will not make sense in many examples below, because if we assume price is normally distribute at current share price, then why buy a CALL or PUT option? We should buy CALL when we believe it is more probable that price will go up and less likely that price will go down (left-skewed normal distribution or some other distribution). So when you are analysis your own case, do choose the appropriate distribution curve.

Buying options reward

expected P&L of buying CALL option

The base used for the percentage (%) gain or loss calculation here is the price paid for the option contract.
For buying of option, under the assumption we had, we can see that we are expected to lose the time value paid. Since ATM option have more time value, the expected losses in value terms will be higher there. We can also see that the max loss for buying option is 100%, so the more ITM the more capital we might lose. But what is interesting is the max win %.

What is observed in the table above is that the max win % for OTM CALL option is a lot higher than those ITM option by orders of magnitude. If we bought the $10 OTM CALL option for $23.37, and we are super lucky and manage to hit the best case scenario, our $23.37 will reap a $1,453.26 (6,218%) profit. However, if we bought the $10 ITM option instead, our $1,003.12 will earn us a $1,493.76 (149%) profit. Now that is some serious leverage. Using lesser money, we could get greater gain. Now what if we decided to utilize the leverage to the max?

Assume we only have $1,005 in our account, we could buy 1x $10 ITM CALL option, or we could have bought 43x $10 OTM CALL options. 43x CALL options which means we have exposure to 4,300 shares as compared to 100 shares. So if we are super lucky and hit the best case scenario, that $1,005 will produce a profit of $62,490.18. Compare that to earning $1,493.76 in profit for the 1x ITM option. High risk, high reward.

expected P&L of buying PUT option

For buying of PUT options, it is similar. What is observed in the table above is that the max win % for OTM PUT option is a lot higher than those ITM option by orders of magnitude. That is because the option prices are cheaper. If we bought the $10 OTM PUT option for $2.32, and we are super lucky and the company goes bankrupt, our $2.32 will give us a $1,495.36 (64,455%) profit. However, if we bought the $10 ITM instead, our $1,027.41 will earn us $1,445.18 (141%) profit. Now how will that look like if we decided to utilize the leverage to the max?

Assume we only have $1,028 in our account, we could buy 1x $10 ITM PUT option, or we could have bought 443x $10 OTM PUT options. 443x CALL options which means we have exposure to 44,300 shares as compared to 100 shares. So if we are super lucky and the company goes bankrupt, that $1,028 will become $662,444.48. High risk, high reward.

Now we know why a number of WallstreetsBets Reddit users all love to gamble on OTM options. With $2,000 and a lot of luck, we too might become an overnight millionaire.

Selling options rewards

expected P&L of selling CALL option

The base used for the percentage (%) gain or loss calculation here is the max net capital at risk for selling the option contract. So if we sell a PUT option with a strike price of $15 and collected $2.32 in premium, and if the contract expired worthless and we earn the full $2.32, we did not get a return of 100%. We had risked $1,500-$2.32=$1,497.68 to get that $2.32. Which gives us a return of almost 0%. Put in bank also earn more la

For selling of option, under the assumption we had, we can see that we are expected to earn the time value collected. Since ATM option have more time value, the expected gain in value terms will be higher there. We can also see that the max loss for selling option is 100%, so the more ITM the more capital we might lose. However, we can see the ITM option max loss amount are all very close. It doesn't scale the way buying option does.

What is interesting is that for selling of option, our max win % isn't as crazy as buying of options. There isn't any 200% gains, 1,000% gains, 60,000% gains. That is because when we are selling options we risk a lot more capital. If we want to increase the max win amount, we have to sell more ITM. This is so that we have more intrinsic value to burn.

Therefore the max win % for ITM CALL option is a lot higher than those OTM option by orders of magnitude. If we sold the $10 ITM CALL option for $1,003.12, and we are super lucky and share price drop to $15 or below, we will keep all $1,003.12 earning a 40% return. However, if we sold the $10 OTM CALL option instead and share price drops to $15 or below, we only get to keep $23.37 earning a 2% return. That is a difference of $979.75. So choosing the right price does affect our P&L.

Because option seller are always guaranteed to earn the time value, that is why we are able to do something known as rolling the option. This is where we close our current option and open another one further down the dates (hopefully for a lower strike price), taking on more risk due to time but earning the additional time value. So keeping this in mind, if we are intending to sell OTM option, we might choose to sell it not too deep OTM. Let me give you an example using the PUT option table below.

expected P&L of selling PUT option

So let's say that we initially wanted to sell a $5 OTM PUT option with a strike price of $20, that will earn us a 1% return or$18.58 in premium if the option expires worthless. Knowing that we can roll the option, maybe we choose to sell the $2 OTM PUT option with a strike price of $23 instead, collecting $137.45 in premium for a 6% return.

If on expiry day, the share price dropped to $22. We can buy back the option for $100 and still get a profit of $37.45, 2x more money comparatively.

But if on expiry day, the share price dropped to $21. Had we sold the $20 PUT option, we would have clocked our profit and closed shop. But with the share price at $21, if we buy back the option for $200 that will be a loss of $62.55. So what we can do is to roll our option. On the day of expiry, a $21 PUT option expiring 1 month later would fetch $235.37 in premium. So we will buy back our $23 PUT option for $200, but then we will sell the $21 PUT option for $235.37. We would be getting an extra $35.37 for taking on 1 more month of risk but at a lower strike price. This is called rolling down and out. Down in strike price, out into the future.

So if on the next expiry date if the share price is $21 or above, the PUT option would have expired and we would have net a total return of $137.45 + $35.37 = $172.82. That is a lot more money than the initial $18.58. However, if on the next expiry date the share price drop again, we can keep rolling and rolling and rolling. However, do note that we did take more risk when we roll our options, and it is harder to roll the options once it gets more and more ITM because the time value drops very quickly, so do be wary of it. Rolling is not magic.

In summary when I'm doing an option trade which strike price should I choose?
Here are some general rule of thumb that I use when selecting a strike price when I'm trading options. Everyone have different preference, so you can take what I do as a reference but do form your own strategies and opinion

I'm sharing some examples where I had used the said strategies and gave some reflection on the wins and the losses

disclaimer: The examples used are not recommendation or financial advice, but only used for educational purposes.

For buying options (OTM):

These are for high risk high reward play, because it is cheaper and we can gain more leverage. However there is lower chance of winning, and we can expect relatively bigger swing in option price movement. So use it if we are super confident of a huge movement and getting the direction right. On top of that, If we don't overleverage and buy a lot of them, the losses are tiny but the gain screenshot would be amazing

Explained Simply: Options 103, ITM ATM & OTM; Risk, Reward and Strategy.

For example when words on the streets is that $Credit Suisse (CS.US)$ may go bankrupt. I bought an $0.2 slightly OTM PUT option on it instead of an ITM PUT, trying to ride the trend betting that they will crash. It did crash but it did not crash hard enough, thus only manage to clock a 33% gain screenshot. Had it crashed to $3, the current price, that day, this would been a 500% screenshot. Luckily, I didn't go for deeper OTM $4PUT option, otherwise everything will be lost.

For buying options (ITM):
These are generally my option of choice as it have a lower breakeven price and lower risk of wipeout, so on expiry I still can convert it into a different strategy. They also have the lowest time value to pay, I'm a cheapskate so I don't like to pay . I also usually go for LEAPS, where the expiry date are more than 1 year. However it does have a higher capital risk.

I had been getting a number of $Grab Holdings (GRAB.US)$ deep ITM CALL option when it crashed to around $4. I had ride with it down to $2.19 and now it is going back up. These options had gone from losses to profit, to losses to profit. That is why I like buying LEAPS, because we have more than 1 year for our hypothesis to be correct. All these short term movements are insignificant to me. To breakeven, GRAB will need to rally by another 28% in a year to reach a share price of $4.376. Even if it still stay flat at $3.42, I can still get the shares and sell CALL option on it, to slowly reduce my cost.

On the other hand, I had also bought $UP Fintech (TIGR.US)$ deep ITM LEAPS CALL option when TIGR was at about $8 and also added more when it $5 each in early December, optimistic that all the negative overhang of Chinese stock are going away. Everything was going well until China regulator asks Futu and UP Fintech to take corrective measures as they have conducted unlawful securities businesses in China, and the price crashed more than 30% . Because it is deep ITM option, a significant part of my intrinsic value is burnt.

Since the option still have 1 year left on the clock, it still have the chance to go in my favor. Since it is deep ITM, even after a 30+% crash, it is still ITM. If the price of Tiger is still around $3 one year later, I would still be able to exercise it, and probably sell covered CALL option on it to lower the cost. We live to fight another day

For buying options (ATM):
These are in between ITM and OTM, have no intrinsic value so cheaper than ITM option. However, it have the highest time value and theta burn rate. Initial gain or loss due to price movement is huge too due to gamma. I use it when I think the current price is a good entry price but there are some potential negative headwind that can go against me.

As there are more and more positive news about China's economy, and analysts expecting the whole world except China to head into a recession in 2023, and more than 100 new IPOs are expected to be listing in HK market in 2023. I fired more shots betting the elusive "China has bottom". So I fired a shot at $Alibaba (BABA.US)$ and $Futu Holdings Ltd (FUTU.US)$.

However, with experience from the past 2 years, we know that when we think China had finally bottom, it can bottom somemore Since I believe that $Alibaba (BABA.US)$ at $90 is a good price, and I would not want any of my capital to be locked as intrinsic value which is at risk of being burn away by any bad news, I bought ATM CALL option instead of ITM option. So now to breakeven, BABA need to rally 23% to reach $110.80 in a year.

Because buying CALL option is so much cheaper as compared to buying the shares, I can use the savings to buy more options, thus gaining some leverage. Alternatively, I could park the cash into T-bills to earn 4.2% on the $7,000 saved, earning an additional $294, if I would not want to leverage.

Of course, I used the "savings" to buy more options instead of T-Bills I also had bought ATM CALL options for $Futu Holdings Ltd (FUTU.US)$, this is because $FUTU-W (03588.HK)$ is doing a new IPO in Hong Kong which will ensure that even if US delist FUTU using HFCAA, we still can trade it in HK market. Just a day before the IPO, China regulator asks Futu and UP Fintech to take corrective measures as they have conducted unlawful securities businesses in China, and the price crashed more than 30% .

This move to buy ATM CALL option saved me a lot of money, had I bought 100 shares of FUTU instead, I would be losing $3,780 instead of $1,040. Had I bought ITM CALL options, I would have lost a lot more than $1,040 too. Phew Now I'm just waiting for the price to settle down and I would top up cash to roll the strike price down.

For selling options (OTM):
These have lower risk as we have a lower chance of getting assigned, however we will get lesser premium. Our margin requirement will also be lower with a lower max loss comparatively. However, we can relatively bigger swing in option price movement. I usually use it and peg the strike to my own target price to enter or exit a position.

Since I had bought a ATM CALL option for FUTU, I also sold a deep OTM CALL option to help me claw back some cash back. Making it into a bull CALL spread (will talk about options combo in Simply Explained: Options 201). Entering FUTU at $60 and exiting when the price is $100 sounds good to me. If on expiry FUTU did surpass $100, I would be getting $4,000 on a $1,000 investment, 4x my money. Thus, I sold the CALL option. Since capital gain is what I'm mostly after, I'm less concerned about how much premium I can earn back.

For the longest time, I had also been selling $2.50 PUT options on GRAB trying to accumulate position in it as journaled in this chain post Reload and fired again for 400 shares, pondering Sept quotas strategy. Since then, $Grab Holdings (GRAB.US)$ had rallied by 36.8% to $3.42 a share. However, because my target entry price in this bad environment is at $2.50, I'm sticking to selling OTM PUT options with a strike of $2.50 hoping to get them cheap. Until there are signs that the future will be brighter, I will stick with $2.50.

For selling options (ITM):
Relatively higher reward play with same capital risk as ATM option, with a higher risk of getting assigned which can be avoided by rolling. I use it when I think the current price is good, so I can increase my chance of assignment at current price with a tiny discount, or when I believe price will move greatly in my favor and I get to burn a lot of intrinsic value to my maximise gain.

When $Grab Holdings (GRAB.US)$ rise from $2.50 to $3 a share, trying to accumulate shares at $2.50 each is tougher. So I had adjusted my strategy. Since I believe that GRAB will go back up in the long run, as they reach their goal of hitting profitability by 2024, I started selling deep ITM PUT instead. Because it is deep ITM, I have lots of intrinsic value that I can burn. As GRAB price goes up, I burn the buyer's intrinsic value away. If GRAB's price is above $4 by 2024, I would clock in a 41.25% ROI. However, if GRAB's price is not above $4 buy 2024, then the diluted cost per shares is $2.35. 41.25% ROI or getting GRAB shares at $2.35, sounds like a win win to me, as mentioned in this post.

For selling options (ATM):
These are in between ITM and OTM in terms of assignment risk, and have the highest time value and theta burn rate. Initial gain or loss due to price movement is huge too due to gamma. I use it when I think the current price is a good price to take assignment at and my goal is just to burn as much time value as I can.

When $NIO Inc (NIO.US)$ fell to $10 a share, I had been selling ATM $10 PUT option on it, trying to grab the shares to average down my cost. Nio is an automotive stock, which are unlikely to perform well if there is a recession, but it is also a Chinese stock which could rally in 2023. In the short term it seems like it can go either way, so it is not something that I'm dying to grab. If I get assigned it's ok, if not it's ok too. Most important to me is to try and get more cash out of it. So I sold ATM PUT option because it have a higher chance of getting assigned compare to OTM option but not so high like ITM PUT option. This ATM option balances my goal of trying to get more money out of time value, while giving me a ok chance of being assigned. If the option expires worthless, I will just continue to sell ATM PUT on it. Like how I had mentioned it in this post where I Turned a 44% loss into a 6% loss on Nio.

Conclusion
Hope that this post is simple to understand by giving you lots of details. Hope you had gain more insights about how and why risks and rewards differs at different strike price, and gained some ideas on what strike price to choose for different scenarios. Feel free to ask me if you have any questions.

You could also join Moo Moo's option group chatroom too, to have more in depth discussion or simply to ask questions Just search options, click on groups and here are the 3 options group chat in Moo Moo

Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only. Read more

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ZnWC : Thanks for sharing your valuable experience and trading strategy

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doctorpot1 OP ZnWC : no problem glad to help, more to come

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Mooers Lab :

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Milk The Cow Mooers Lab : Why moomoo don't have the chart for the strategy used & checking the estimated profits / losses w.r.t the time line of decay duration?

Nvm, even got, I don't think moomoo will give it for free +...

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doctorpot1 OP Milk The Cow : you can use the option price calculator to do that manually, just move the time slider and you can see the effect.

it is not possible to show all the possible P&L at every time point and price point in a simple chart because when the price move by 1c, the greeks move. the time move by 1 second, the greeks move. plus no one knows what will be the implied volatility as those are determined by the price people are paying. so in order to chart it out, that will be a multi dimension chart liao and to present a multi dimension chart on a 2 dimension phone display is another challenge.

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doctorpot1 OP Milk The Cow : they do have this though

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Milk The Cow doctorpot1 OP : ic.

Because I see those pro investors got use those special graph to see the profits / losses .

I guess they paid for those service, maybe ...

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Milk The Cow Milk The Cow : Using spread strategy , a rough estimation.

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doctorpot1 OP Milk The Cow : oh they show multi dimension chart? I never seen those before, usually those that I saw is just 2 dimensions.

in my head I'm thinking
dimension 1: p&l
dimension 2: time
dimension 3: underlying price
dimension 4: implied volatility

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Milk The Cow doctorpot1 OP : They can drag the graph if the strike price drop / increase with the time decay, a rough estimate of the profit / loss .

I don't really know how to calculate the spread strategy profit / loss I'm getting back or the time decay when I hold as time go .
I only know as long as I made is good enough .

But then I was thinking if it's not efficient if I wanna maximise profits with time decay .
Too complicated so temperory put it aside for study later .
But then I saw "they" use those cool graph estimate, so I was wondering if moomoo got this service or other broker got such services .

"If I got a calculator, why should I use mental calculation = leave it to the technology " = I only need how to use the system is enough although idk how they calculate it .

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doctorpot1

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crawled out of poverty, working towards FIRE!! (financial independence, retired early)

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