Explain Options Trading

Harry said: "Please Explain Options Trading. I've never done it...what are good resources? What are the benefits over stock trading?"

Rbreb13 said: "[url]http://www.cboe.com/LearnCenter/Tutorials.aspx[/url] Benefits-leverage. Higher/quicker profit/loss potential."

JAP said: "You and me both Harry. Options are confusing to me, mainly because I've never bothered to learn about them. Some of trading buddies at work make a ton of money trading options. It's about time I start learning. Thanks for the link Rb, very helpful!"

duck_oil said: "There is so much to options I don't know where to even start. I guess I'll just list a bunch of things you can do with and use options for: 1. Create income If you are long a stock you can sell covered calls on that stock. If the option expires worthless you keep the premium (the price you sold the contract for.) If the buyer of the option exercises it you must sell to him at the strike price and potentially miss out on extra gains on the stock. Before you sell the option you calculate exactly what price you might be parting with the stock at, so there are no surprises and no chance on taking a loss (unless the strike price+premium is less than what you paid for the stock, but then maybe you don't want to be selling calls on that stock anyway.) You can also sell puts against a short position and like shorting stock itself, everything is just opposite. The option expiring worthless means you keep the premium and move on, and if the option gets exercised then the stock is sold to you at the strike price. Again, no surprises, no chance for a loss unless you intentionally sell puts which will result in a loss if exercised. The downside with these two situations is that if the stock rises enough to make exercising the call option worthwhile, your profit is capped at a set amount. The rest of the profit then belongs to the option buyer, and this is of course the reason he purchased the option in the first place. The same applies to selling puts. If you think a stock is going to tank hard, the extra income from sellings puts might not be worthwhile. This was selling "covered" calls and puts, where you actually own the stock or are short it. It's possible to sell "naked" as well but you'll need to approved for it first. Selling naked calls brings unlimited risk (just like shorting stock) since you may be required to purchased shares on the open marked if the calls you sold are exercised by the buyer. If you sell naked puts the worst that could happen is the stock goes to zero and you are stuck buying something from the option buyer that is worthless. 2. Increase your leverage: substitute options for stock If you think you know the price direction and the timing of a stock you can really get leveraged up with options. For examply, suppose you are certain Apple will be $200 by January after they report earnings (I don't know the date they'll release earnings, this is just an example.) If you want to buy 100 shares of stock it will cost you $17,438. Buying 1 call option contract (which represents 100 shares) is fetching $725 (or $7.25/share). Both represent the same number of shares (100.) Let's say Apple ends up at $215 in January. You stock position has a profit of $4062, a nice 23% gain. The call option you purchased would be worth at least $1500 (current stock price subtract strike price, 100 shares remember) which is a profit of $775 or 107%. This comparison used equal quanity of stock (100), but let's compare using equal inital dollar investments. We'll use the $17,438 price of 100 shares of Apple to purchase our January $200 calls. $17,438/$725=24 contracts. Now we've got 24 contracts which have each earned a profit of $775 for a total of $18,600. That's the same 107% we made with only 1 contract of course. I've really simplified these examples so that hopefully my explanations make sense to someone other than me. Determining the future value of the $200 calls is not as easy as subtracting the $200 strike price from the $215 stock price. That is simply its intrinsic value. There will be time value added to the option premium and possibly volatility of the stock will play a part in the pricing as well. Of course you can also buy puts instead of shorting and again, things are just the opposite. The nice thing about using puts is that you are not exposed to unlimited risk like shorting. You can only lose what you paid for the puts. Of course, you'll need to get the time and the price direction correct. If you are wrong on either you can lose your entire investment. As a general rule for myself I won't buy more than I can stand to lose. You can't wait it out like you can with stocks and because they're so highly leveraged the value of them swings wildly. 3. Hedging This is the easiest one. You own 100 shares of Apple and you paid $190 each (whoops!) You hope it's gonna be $200 by January but you aren't super confident like the previous example. The maximum pain you want to take is selling at $160. You want to cap your losses after this point. You then purchase January $160 puts which will cost $940 (or $9.40/share.) This makes the price you can sell 160-9.40 or $150.60. It's not $160 but you have to pay something in order to buy the "insurance." If Apple goes to $130 in January instead of $200 like you had hoped you can get out at $150.60. Or you can hold your shares and sell your put option for at least the strike price less the current price ($160-$130=$30.) What you paid $940 for is now worth at least $3000, plus time value, etc. If you are short and buy calls you can limit your losses and get away from that pesky unlimited loss scenario. Again, it's just the opposite."

athanchew said: "Hi guys, My close friend that are a beginner of Options Trading, we share with me about this Options University Strategy.com, and show me that he has made about USD2200 in single day, with using a Trade Alerts Strategy that they offer. I don't know how he did it, but according to him is very simple. He also mention that when he is using the services, he manage to save himself from losing tonne of money in the US real estate market, in additional that he make 2 times back in what he invested...wah!!! I say this is impressive and I wanted to share this. Have a look and please give some feed back OptionsUniversityStrategy Dot com Athan [email]athanchew@gmail"

athanchew said: "Hi guys, My close friend that are a beginner of Options Trading, we share with me about this Options University Strategy.com, and show me that he has made about USD2200 in single day, with using a Trade Alerts Strategy that they offer. I don't know how he did it, but according to him is very simple. He also mention that when he is using the services, he manage to save himself from losing tonne of money in the US real estate market, in additional that he make 2 times back in what he invested...wah!!! I say this is impressive and I wanted to share this. Have a look and please give some feed back OptionsUniversityStrategy dot com Athan athanchew@gmail"

friend said: "Duck Oil, Last November you answered someone's inquiry about options trading. Will you please help again by telling me if my thoughts below are correct? 1) SELLING a covered CALL at a chosen strike price is an OBLIGATION in return for the premium received to DELIVER 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price and is called. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? (Any expiration day of a prior month, American option, European, etc.) 2) BUYING a covered CALL at a chosen strike price gives the RIGHT in return for the premium paid to call (purchase) 100 shares of the underlying stock upon expiration if the price of the underlying stock is then at or above the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be called? 3) SELLING a covered PUT at a chosen strike price is an OBLIGATION in return for the premium received to PURCHASE 100 shares of the underlying stock at the STRIKE price upon expiration if the price of the underlying stock is then at or below the strike price and is exercised. Is that correct? Is there any other time before the expiration date that the underlying stock must be purchased? 4) BUYING a PUT at a chosen strike price is a RIGHT in return for the premium paid to SELL 100 shares of the underlying stock at the strike price upon expiration if the price of the underlying stock is then at or below the strike price. Is that correct? Is there any other time before the expiration date that the underlying stock can be purchased? What is the risk of selling a covered put at a strike price at which you would like to own the underlying stock? The premium is collected and possibly the stock is obtained at an acceptable price. What else? Thanks to you or anyone who is knowledgeable. friend"

StockHunter said: "I know someone who uses [url]http://spreadtradesystems[/url] .com/ (no space between "speedtradesystems" and ".com") and likes it. I keep the link around incase I eventually want to learn, but for now i'm sticking to stocks then maybe look into futures."

SystemTrading said: "I would recommend you read options volatility and pricing by natenburg."

prohobo said: "[QUOTE=SystemTrading;71571]I would recommend you read options volatility and pricing by natenburg.[/QUOTE] +1 = the Market Makers Bible. I remember a ways back and wearing out my first copy."

TheOptionClub said: "[quote=Harry;57398]Please Explain Options Trading. I've never done it...what are good resources? What are the benefits over stock trading?[/quote] No one is going to be able to fully explain options in a response to your single post. There are many uses for options and many reasons why people trade options. Options are financial instruments that let you manipulate elements of risk and reward. When you buy a stock, your risk is that the stock declines in value and you will lose $1 on every share, for each $1 the stock falls in value. Your reward is comprised of a dollar for dollar increase in share prices if it appreciates, as well as any dividends it may happen to pay. Options let you get a bit more sophisticated. How you use them depends upon your particular objectives. For example, you might own stock that you want to protect against possible short-term loss but you still want to own it for the longer term. A put option can be used to offset a decline in value, while holding onto the stock. The sale of call options can provide modest downside protection. Both choices involve trade-offs, however. Once you become adept with options, you can pretty much create whatever risk profile you want to adopt in the market. Of course, you won't be able to avoid all risk, but you will be able to reduce it to a level where you are comfortable. There is a lot of information out there on options. I would suggest working your way through some of the free online tutorials to get a basic understanding of things, and then consider whether you want to invest more time and money in becoming educated on the subject."

drdan said: "[QUOTE=TheOptionClub;71683]No one is going to be able to fully explain options in a response to your single post. There are many uses for options and many reasons why people trade options.[/Quote] Yeah and Chris should know - there are certain groups that constantly have "discussions" on how best to use them. :biggrin5: (I'm a lurker on one of those groups) Nice to see you here Chris."

harrybear said: "Benefits-leverage. Higher/quicker profit/loss potential.[/QUOTE] nice post:cornut:"

prohobo said: "[QUOTE=Harry;57398]Please Explain Options Trading. I've never done it...what are good resources? What are the benefits over stock trading?[/QUOTE] [B]Don't panic[/B], the answer to your question is....... [B][SIZE="7"][FONT="Arial Black"]42[/FONT][/SIZE][/B] couldn't help myself....."

addy said: "[QUOTE=Harry;57398]Please Explain Options Trading. I've never done it...what are good resources? What are the benefits over stock trading?[/QUOTE] I prefer options over stocks mainly because of the risk capital involved. You can buy options at 1/40th to 1/100th of the cost of buying the actual stock. For example, instead of buying 100 shares of a $60 stock for $6000, you can participate in these same 100 shares and pay as low as $200."