Newbie question about Options trading

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#1 Fri, Jul 22, 2011 - 6:42pm
madcow
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Newbie question about Options trading

So ive got a bit of reading lef to do on Options trading, and this is something i wanna try my hand at in the future. Nothing crazy of course off the bat. But im still not sure HOW options work. I tend to learn things a lot quicker/better when i am given a direct working example. So basically is the following example correct?

Lets say i want to buy a Call Option on SLV* (using it as an example since this is a metals forum). The strike price is 40$ or whatever the current price is, 39$ to make it easy for say april 2012.

I buy 1 call contract at say 100share with a strike price of 39$ for whatever the cost of the contract is. $2.00 or something i dunno.

So as i understand it, the price goes up over 40$ i can just straight sell it at a profit at any point before exp? So say the price goes to 45$ a share of SLV. I sell the contract that day and boom goes the dynamite?

Im a bit confused on when at what point one actually makes money (intrinsice/extrinsic) off the contract. Also a bit confused on what happens when the end price is below the strike price come exp date.

I understand the benefits of the profits, but not the severity of the losses.

A straight forward example of how this works would be sweet. And i thank anyone who can help me.

*yes i know slv bad blah blah i bet someone still points this out tho :p

Edited by: madcow on Nov 8, 2014 - 5:16am
Fri, Jul 22, 2011 - 7:05pm
Eric Original
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options

You can sell your calls anytime you want, for profit or loss as the case may be.

When expiration comes, if the underlying price is less than your call option strike price, POOF! your money is gone. You end out of the money. Your options are worthless.

This isn't a metals blog anymore. It's a right wing circle jerk, masquerading as a metals blog.
Fri, Jul 22, 2011 - 8:05pm
Sterling
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Re: Newbie question about Options trading

Here is a link to what I wrote in the SVM forum. I'd copy and paste it but you may want to read it in context for it to make sense

https://www.tfmetalsreport.com/comment/499737#comment-499737

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Fri, Jul 22, 2011 - 8:09pm (Reply to #2)
madcow
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Eric Original wrote: You can

Eric Original wrote:

You can sell your calls anytime you want, for profit or loss as the case may be.

When expiration comes, if the underlying price is less than your call option strike price, POOF! your money is gone. You end out of the money. Your options are worthless.

If i understand it correctly you are just out THAT money, nothing more? So you buy 200$ worth of call options, and they are worth nothing at exp then you are only out that 200$ right? Not some crazy fees on top of it or anything? (i get confused between stock options and futures options i think :p)

Fri, Jul 22, 2011 - 8:10pm (Reply to #3)
madcow
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Sterling wrote: Here is a

Sterling wrote:

Here is a link to what I wrote in the SVM forum. I'd copy and paste it but you may want to read it in context for it to make sense

https://www.tfmetalsreport.com/comment/499737#comment-499737

ha! i actually read that when you posted it but at the time wasnt looking into options so it was confusing as farts too me. But i will re-read and thanks :)

Fri, Jul 22, 2011 - 8:13pm (Reply to #4)
Eric Original
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Yes, just out the $200.

Yes, just out the $200.

This isn't a metals blog anymore. It's a right wing circle jerk, masquerading as a metals blog.
Fri, Jul 22, 2011 - 8:14pm (Reply to #5)
Sterling
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Let me know if you need any

Let me know if you need any clarification on anything and I'll be happy to help

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Fri, Jul 22, 2011 - 8:17pm (Reply to #5)
JoeyJoeJoe
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Investopedia has your basics

Investopedia has your basics for everything. Here's the link for options with examples too: 

https://www.investopedia.com/university/options/

Fri, Jul 22, 2011 - 8:20pm (Reply to #3)
madcow
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Sterling wrote:Here is a

Sterling wrote:

Here is a link to what I wrote in the SVM forum. I'd copy and paste it but you may want to read it in context for it to make sense

https://www.tfmetalsreport.com/comment/499737#comment-499737

Ok i kinda understand that to break even you must equal the cost of the strick price (ie the 17$ in your example) + the premium (ask price of .95) for a total of 17.95 in your example. If it closes under the strike price of 17$ you lose money even if the stock price is say a bit highr than the current 11$? So if by the exp date the price is 15$ wich is still 4$ > than the current price that is a loss?

And you totally lost me on how to trade the premiums :p.

Man being a noob sucks ><

Fri, Jul 22, 2011 - 8:24pm
madcow
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errr now that i think about

errr now that i think about it, trading the premiums seems to make more sense since its a more direct correlation in price.

You paid .95$ for the premium, then it goes to 1.90$ and sell it then boom you double your money (minus fees and what not)? And this really has nothing to do with teh price of the stock itself except that it went up correct?

Fri, Jul 22, 2011 - 8:25pm (Reply to #8)
madcow
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JoeyJoeJoe

JoeyJoeJoe wrote:

Investopedia has your basics for everything. Here's the link for options with examples too: 

https://www.investopedia.com/university/options/

ahh joeyjoejoe i see you also asked such questions! Have you been able to learn a lot more since then?

Fri, Jul 22, 2011 - 8:30pm (Reply to #10)
Sterling
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The price of the premium

The price of the premium actually does have a bit to do with the price of the stock. The price of the premium is also affected by the time left until expiration (theta), the volatility of the stock (vega), the dividend of the stock (if any) and the interest rate (rho). There are formulas out there that take all this in consideration when pricing an option. I think most exchanges use the Black-Scholes model when quoting prices.

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Fri, Jul 22, 2011 - 8:46pm (Reply to #11)
JoeyJoeJoe
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@ madcow: I understand the

@ madcow: I understand the basics of how options work. I was interested in getting insights on my bid/ask spread question that I posted there. As Sterling noted there are a few factors that influence the premium - when the option is close to expiry, the time factor influences the premium the most in all likelihood. I still haven't made any options trades yet (still haven't gotten around to opening an account LOL).

@ Sterling: Do we really need to know what formula is used to calculate that?? hehe j/k good info there! yes

Fri, Jul 22, 2011 - 10:52pm (Reply to #13)
madcow
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JoeyJoeJoe wrote: @ madcow: 

JoeyJoeJoe wrote:

@ madcow: I still haven't made any options trades yet (still haven't gotten around to opening an account LOL).

@ Sterling: Do we really need to know what formula is used to calculate that?? hehe j/k good info there! yes

Ha i applied to open one today. I figure i should have it up and ready just in case an opp arises that one should not pass up ;).

I read that investopedia link you posted... well still reading it... but i understand the premium and how it rises a bit more.

Sterling, i will have to look into this equation stuff. For right now, is basically that as the price of stock rises and time decrease the price of the premium will rise? And vice versa for the price of the stock if it starts dropping?

Thanks again for helpin me out :) Hat tips for all!

Sat, Jul 23, 2011 - 12:11am (Reply to #14)
Sterling
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lol Joey - no need to learn

lol Joey - no need to learn the formulas just know that they are used to determine price.

madcow and joey - if you really want to know the formula, you can find it on wikipedia under Black-Scholes, just be careful - I hurt my brain just looking at it.

and to answer your question - as the stock price goes up, so does the premium (for the most part) but as time runs out, the premium goes down. The premium decays the most during the final thirty days to expiry. So basically, the stock price must rise to boost the premium faster than time decay will reduce it, but you don't really need to worry about time decay if you're planning on exercising.

cliffs notes: stock rising = good for premium

time decay = bad for premium

but let me clarify - when you buy a call, you want the stock to rise in price. When you buy a put, you want the stock to decline.

and then there are spreads........

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Sun, Jul 24, 2011 - 5:18pm
lakemike49
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madcow newbie question

madcow you have received some great feedback from sterling and the others I will just add my 2 cents here. open an account with a brokerage house that gives you free live virtual trading " I personally use options house very easy to use site and free to join ". this is only for stocks and ETFs I do not know anything about futures. read all you can but there is no substitute for actually watching your money either grow or disappear. options trading is like alice in wonderland, the deeper down the rabbit hole you go the weirder it gets. there are different levels for different types of trades some require a margin account and if you get in and out of trades to often they will label you a day trader and make you fund your account with more money. go slow and steady.

wish you the best of luck

lakemike

Mon, Jul 25, 2011 - 6:20pm
madcow
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so i got my options account

so i got my options account up and running. Did a little browse to see what the interface looks like (using Zecco for this one). And bam... i was immediatly confused about what was going on :D

Dont plan on start messing around in the immediate futures (and lakemike49, good idea on doing a virtual trade first) but my question now is, were does one find the available put/call contracts for X company/whatever?

Mon, Jul 25, 2011 - 7:50pm (Reply to #17)
lakemike49
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madcow-options contracts

madcow I am not familiar with the zecco site " truth is in the beginning when I first started out I found just trying to learn how to use most of the sites almost as frustrating as learning options ". that being said, that is why I settled on optionshouse. so I will use them as my example. In optionshouse you would simply go to the upper right hand corner and select virtual account, then at the top of your screen you would choose options. this would take you to your options chain, the left hand side will be your call options, the right hand side put options the center is your series " the month of these options " strike prices scroll down and you can pick your month and price, and see the current bid and ask you can also see the current open interest and contracts available remember with american style options, they expire on the 3rd friday of each month. I do not know how zecco works, but in here you do not have to know the actual options ticker, you only have to type in your stock ticker. example SLV or GLD or AGQ or ZSL. these will update in real time from 9:30 am to 4:00 pm EST. hope this helps.

lakemike

Mon, Jul 25, 2011 - 9:10pm (Reply to #17)
Eric Original
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On ameritrade, I get a quote

On ameritrade, I get a quote for the stock, click on the ticker and get an expanded quote page, and then click where it says "View Option Chain". Hope that helps.

This isn't a metals blog anymore. It's a right wing circle jerk, masquerading as a metals blog.
Tue, Jul 26, 2011 - 5:14pm
madcow
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For Zecco here is the basic

For Zecco here is the basic load out:

Trade type: Basic, Covered Call, Long/Short Rollout, Married Put

Underlying: seems to be the ticker symbol (ex. SLV)

Transaction: Buy to Open, Sell to Close, Sell to Open, Buy to Close

Contracts: enter in a number here

Experation: different dates blah blah

Strike-Root: Different prices, guessing this is the Strike price needed?

Call/Put: choose one

Order type: Market, Limit, Stop, Stop limit

The rest is all the usual stuff

So i guess what confused me was the Trade Type and Transaction. For now i would be using Basic as i have no idea what the others do. But for transaction.... im lost. 

If i am doing a Call order, would it be a Buy to Open and a Sell to Close im guessing? The other 2 would be for Puts?

Ill have to play around with it a bit, see if i can finda tutorial or something. I mean i see a Strike-Root for 15$, doesnt make sense :p

EDIT: ahh, on there streamer thre is an options tab wich shows the chains. Not that i know what that means, but Eric you helped me find it :D

Tue, Jul 26, 2011 - 5:17pm
madcow
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On SLV for OCT 11 i

On SLV for OCT 11 i see:

Bid Ask Last Change Volume Open Interest Strike Price
$6.80 $6.90 $6.90 +$0.46 95 10,922 34.00

If i understand this correctly, the price of SLV would need to be over $40.80 to break even + start to gain a profit?

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