What is the strategy of binary option tournament traders

2 months back at trading (update) and some new questions

Hi all, I posted a thread back a few months ago when I started getting seriously back into trading after 20 years away. I thought I'd post an update with some notes on how I'm progressing. I like to type, so settle in. Maybe it'll help new traders who are exactly where I was 2 months ago, I dunno. Or maybe you'll wonder why you spent 3 minutes reading this. Risk/reward, yo.
I'm trading 5k on TastyWorks. I'm a newcomer to theta positive strategies and have done about two thirds of my overall trades in this style. However, most of my experience in trading in the past has been intraday timeframe oriented chart reading and momentum stuff. I learned almost everything "new" that I'm doing from TastyTrade, /options, /thetagang, and Option Alpha. I've enjoyed the material coming from esinvests YouTube channel quite a bit as well. The theta gang type strategies I've done have been almost entirely around binary event IV contraction (mostly earnings, but not always) and in most cases, capped to about $250 in risk per position.
The raw numbers:
Net PnL : +247
Commissions paid: -155
Fees: -42
Right away what jumps out is something that was indicated by realdeal43 and PapaCharlie9 in my previous thread. This is a tough, grindy way to trade a small account. It reminds me a little bit of when I was rising through the stakes in online poker, playing $2/4 limit holdem. Even if you're a profitable player in that game, beating the rake over the long term is very, very hard. Here, over 3 months of trading a conservative style with mostly defined risk strategies, my commissions are roughly equal to my net PnL. That is just insane, and I don't even think I've been overtrading.
55 trades total, win rate of 60%
22 neutral / other trades
Biggest wins:
Biggest losses:
This is pretty much where I expected to be while learning a bunch of new trading techniques. And no, this is not a large sample size so I have no idea whether or not I can be profitable trading this way (yet). I am heartened by the fact that I seem to be hitting my earnings trades and selling quick spikes in IV (like weed cures Corona day). I'm disheartened that I've went against my principles several times, holding trades for longer than I originally intended, or letting losses mount, believing that I could roll or manage my way out of trouble.
I still feel like I am going against my nature to some degree. My trading in years past was scalping oriented and simple. I was taught that a good trade was right almost immediately. If it went against me, I'd cut it immediately and look for a better entry. This is absolutely nothing like that. A good trade may take weeks to develop. It's been really hard for me to sit through the troughs and it's been even harder to watch an okay profit get taken out by a big swing in delta. Part of me wonders if I am cut out for this style at all and if I shouldn't just take my 5k and start trading micro futures. But that's a different post...
I'll share a couple of my meager learnings:


My new questions :

That's enough of this wall of text for now. If you made it this far, I salute you, because this shit was even longer than my last post.
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Selling your Covered Call - Thoughts on How to Select Your Strike and Expiration

Congratulations! You are a bag holder of company XYZ which was thought to be the best penny stock ever. Instead of feeling sorry, you consider selling covered calls to help reduce your cost basis - and eventually get out of your bags with minimal loss or even a profit!
First - let's review the call option contract. The holder of the call option contract has the right but not the obligation to purchase 100 shares of XYZ at the strike price per share. This contract has an expiration date. We assume American style option contracts which means that the option can be exercised at any point prior to expiration. Thus, there are three parameters to the option contract - the strike price, the expiration date and the premium - which represents the price per share of the contract.
The holder of the call option contract is the person that buys the option. The writer of the contract is the seller. The buyer (or holder) pays the premium. The seller (or writer) collects the premium.
As an XYZ bag holder, the covered call may help. By writing a call contract against your XYZ shares, you can collect premium to reduce your investment cost in XYZ - reducing your average cost per share. For every 100 shares of XYZ, you can write 1 call contract. Notice that that by selling the contract, you do not control if the call is exercised - only the holder of the contract can exercise it.
There are several online descriptions about the covered call strategy. Here is an example that might be useful to review Covered Call Description
The general guidance is to select the call strike at the price in which you would be happy selling your shares. However, the context of most online resources on the covered call strategy assume that you either just purchased the shares at market value or your average cost is below the market price. In the case as a bag holder, your average cost is most likely over - if not significantly over - the current market price. This situation simply means that you have a little work to reduce your average before you are ready to have your bags called away. For example, you would not want to have your strike set at $2.50 when your average is above that value as this would guarantee a net loss. (However, if you are simply trying to rid your bags and your average is slightly above the strike, then you might consider it as the strike price).
One more abstract concept before getting to what you want to know. The following link shows the Profit/Loss Diagram for Covered Call Conceptually, the blue line shows the profit/loss value of your long stock position. The line crosses the x-axis at your average cost, i.e the break-even point for the long stock position. The green/red hockey stick is the profit (green) or loss (red) of the covered call position (100 long stock + 1 short call option). The profit has a maximum value at the strike price. This plateau is due to the fact that you only receive the agreed upon strike price per share when the call option is exercised. Below the strike, the profit decreases along the unit slope line until the value becomes negative. It is a misnomer to say that the covered call is at 'loss' since it is really the long stock that has decreased in value - but it is not loss (yet). Note that the break-even point marked in the plot is simply the reduced averaged cost from the collected premium selling the covered call.
As a bag holder, it will be a two-stage process: (1) reduce the average cost (2) get rid of bags.
Okay let's talk selecting strike and expiration. You must jointly select these two parameters. Far OTM strikes will collect less premium where the premium will increase as you move the strike closer to the share price. Shorter DTE will also collect less premium where the premium will increase as you increase the DTE.
It is easier to describe stage 2 "get rid of bags" first. Let us pretend that our hypothetical bag of 100 XYZ shares cost us $5.15/share. The current XYZ market price is $3/share - our hole is $2.15/share that we need to dig out. Finally, assume the following option chain (all hypothetical):
DTE Strike Premium Intrinsic Value Time Value
20 $2.5 $0.60 $0.50 $0.10
20 $5.0 $0.25 $0 $0.25
20 $7.5 $0.05 $0 $0.05
50 $2.5 $0.80 $0.50 $0.30
50 $5.0 $0.40 $0 $0.40
50 $7.5 $0.20 $0 $0.20
110 $2.5 $0.95 $0.50 $0.45
110 $5.0 $0.50 $0 $0.50
110 $7.5 $0.25 $0 $0.25
Purely made up the numbers, but the table illustrates the notional behavior of an option chain. The option value (premium) is the intrinsic value plus the time value. Only the $2.5 strike has intrinsic value since the share price is $3 (which is greater than $2.5). Notice that intrinsic value cannot be negative. The rest of the premium is the time value of the option which is essentially the monetary bet associated with the probability that the share price will exceed the strike at expiration.
According to the table, we could collect the most premium by selling the 110 DTE $2.5 call for $0.95. However, there is a couple problems with that option contract. We are sitting with bags at $5.15/share and receiving $0.95 will only reduce our average to $4.20/share. On expiration, if still above $2.5, then we are assigned, shares called away and we receive $2.50/share or a loss of $170 - not good.
Well, then how about the $5 strike at 110 DTE for $0.50? This reduces us to $4.65/share which is under the $5 strike so we would make a profit of $35! This is true - however 110 days is a long time to make $35. You might say that is fine you just want to get the bags gone don't care. Well maybe consider a shorter DTE - even the 20 DTE or 50 DTE would collect premium that reduces your average below $5. This would allow you to react to any stock movement that occurs in the near-term.
Consider person A sells the 110 DTE $5 call and person B sells the 50 DTE $5 call. Suppose that the XYZ stock increases to $4.95/share in 50 days then goes to $8 in the next 30 days then drops to $3 after another 30 days. This timeline goes 110 days and person A had to watch the price go up and fall back to the same spot with XYZ stock at $3/share. Granted the premium collected reduced the average but stilling hold the bags. Person B on the other hand has the call expire worthless when XYZ is at $4.95/share. A decision can be made - sell immediately, sell another $5 call or sell a $7.5 call. Suppose the $7.5 call is sold with 30 DTE collecting some premium, then - jackpot - the shares are called away when XYZ is trading at $8/share! Of course, no one can predict the future