want to learn options
- Thread starter janesmk
- Start date
welcome friend
IMHO the best way to start learning options trading is to start learning about cash market trading.
http://www.optiontradingpedia.com/ has some good info on options for beginners
IMHO the best way to start learning options trading is to start learning about cash market trading.
http://www.optiontradingpedia.com/ has some good info on options for beginners
Last edited:
Well so I can get rid of the "you have never posted nag" --
Options consists of calls and puts.
A call is an option to buy. Suppose I sell you an option to buy MSFT for $30 for .05 (a nickle). Then you pay $5 per contract because each contract is 100 shares: 100 times a nickle = $5
Why would you buy an option to buy MSFT for $30 when it is going for $15? Well for one thing the value of that option will increase dramatically as the price of MSFT rises towards the strike price of $30 -- so you could sell that option you bouth for .05 for perhaps $1.00 2000 percent profit. But of course it probably wont happen because the option expired. Options have a time limit. as time goes on they lose value until they are worth nothing.
I basically sold you a lotto ticket. I made money you lost money. But what if the stock priced zoomed to $100 for a share of MSFT? Now I have agreed to sell it to you for $30. That means I have to go buy 100 shares of MSFT and sell it to you for $30 well #$^%. THat sucks for me.
I sold a "naked call" - an unlikely to win lotto ticket that turned into a winner. Brokers wont usually let you sell a naked call unless you got a good chunk of change $25,000 or more as collateral.
What to do? Sell an option spread. To protect myself from getting creamed in the unlikely even that MSFT went through the roof, I should have bought a call at a higher strike price after I sold it to you. Thus I sold you a $30 call then I bought a $35 (just making these strike prices up by the way). Now if MSFT goes thru the roof then I can buy it for only $35 and then sell it to you for $30. Still a loser but but not as bad as if I had to pay $100 for MSFT.
Anyway that is the basic idea of a call, at least when bought as a far out of the money lotto ticket.
Another way to do a call is near the money. Suppose MSFT is at $19. You could buy a $20 call. If MSFT goes to $20 or $21, or even $19.50 you could make as much as 30% to 100% when you resell your call you bought. This is because the value of the call that is near the money increase faster than does the value of the stock.
BUT there are other factors that take the value away from your call even as stock price rises. The biggy is volatility. As volatility goes down the value of your stock goes down real fast too. Need an option calculator and you can see this. I bought a call the other day for 53 cents, and an hour later it was worth 44 cents and the price of the stock had not changed. But volatility came down a whole bunch. ANother factor is time. A call that expires in just a few days will lose value REAL fast everyday. A call that expires in 90 days will lose it slower, but start losing it faster as time goes on.
PUTS
Most of what I said about calls can be applied to puts, sso let met just make it simple. I sell you a PUT on MSFT for $10 strike and it costs 10 cents. MSFT is trading for $20. If msft goes to $10 then I agree to BUY FROM YOU MSFT at $10 per share. Why? Well I sold you another lotto ticket thinking it wont happen. But what if MSFT goes to $1? Now you can buy up 100 shares of MSFT for $1 per share and I have agreed to pay you $10 for each share. Dang. I'm in trouble again. I could have protected myself with a vertical spread again just like with the calls by buying a lower cost lower strike PUT - say at $5.
If you are near the money PUT value changes faster than the stock price. You think MSFT going down? its at $21, you buy the $20 PUT (whereas if you think going up then buy a higher strike price CALL such as a $25)
OK. There is my explanation. to someone. Hope someone finds it useful.
Options consists of calls and puts.
A call is an option to buy. Suppose I sell you an option to buy MSFT for $30 for .05 (a nickle). Then you pay $5 per contract because each contract is 100 shares: 100 times a nickle = $5
Why would you buy an option to buy MSFT for $30 when it is going for $15? Well for one thing the value of that option will increase dramatically as the price of MSFT rises towards the strike price of $30 -- so you could sell that option you bouth for .05 for perhaps $1.00 2000 percent profit. But of course it probably wont happen because the option expired. Options have a time limit. as time goes on they lose value until they are worth nothing.
I basically sold you a lotto ticket. I made money you lost money. But what if the stock priced zoomed to $100 for a share of MSFT? Now I have agreed to sell it to you for $30. That means I have to go buy 100 shares of MSFT and sell it to you for $30 well #$^%. THat sucks for me.
I sold a "naked call" - an unlikely to win lotto ticket that turned into a winner. Brokers wont usually let you sell a naked call unless you got a good chunk of change $25,000 or more as collateral.
What to do? Sell an option spread. To protect myself from getting creamed in the unlikely even that MSFT went through the roof, I should have bought a call at a higher strike price after I sold it to you. Thus I sold you a $30 call then I bought a $35 (just making these strike prices up by the way). Now if MSFT goes thru the roof then I can buy it for only $35 and then sell it to you for $30. Still a loser but but not as bad as if I had to pay $100 for MSFT.
Anyway that is the basic idea of a call, at least when bought as a far out of the money lotto ticket.
Another way to do a call is near the money. Suppose MSFT is at $19. You could buy a $20 call. If MSFT goes to $20 or $21, or even $19.50 you could make as much as 30% to 100% when you resell your call you bought. This is because the value of the call that is near the money increase faster than does the value of the stock.
BUT there are other factors that take the value away from your call even as stock price rises. The biggy is volatility. As volatility goes down the value of your stock goes down real fast too. Need an option calculator and you can see this. I bought a call the other day for 53 cents, and an hour later it was worth 44 cents and the price of the stock had not changed. But volatility came down a whole bunch. ANother factor is time. A call that expires in just a few days will lose value REAL fast everyday. A call that expires in 90 days will lose it slower, but start losing it faster as time goes on.
PUTS
Most of what I said about calls can be applied to puts, sso let met just make it simple. I sell you a PUT on MSFT for $10 strike and it costs 10 cents. MSFT is trading for $20. If msft goes to $10 then I agree to BUY FROM YOU MSFT at $10 per share. Why? Well I sold you another lotto ticket thinking it wont happen. But what if MSFT goes to $1? Now you can buy up 100 shares of MSFT for $1 per share and I have agreed to pay you $10 for each share. Dang. I'm in trouble again. I could have protected myself with a vertical spread again just like with the calls by buying a lower cost lower strike PUT - say at $5.
If you are near the money PUT value changes faster than the stock price. You think MSFT going down? its at $21, you buy the $20 PUT (whereas if you think going up then buy a higher strike price CALL such as a $25)
OK. There is my explanation. to someone. Hope someone finds it useful.
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