Options

Options

What are the options? Are they risky? Should you have a special license to trade? These are usually the first questions I get as an option trader. I will cover the components of the options in the pages to follow, but I want the reader to remember that in the market and option market there are always risks in the market. You as an investor you should never trade with money are not willing to lose. Who said you should also know that for every buyer there is a seller for every winner there is a loser. That no matter what your terms of trade is, there is always someone who has a contrary opinion. The only difference between winner and loser in the trade who has had experience or education. Once you have the proper education can be very successful as a trader.

Options in the most basic form is right, but not the obligation to do something. Options give us choices in the trading world. Options serve as a contract between two parties. The buyer and seller. The buyer of the options has the right, where as the seller has an obligation. When the option is purchased, a person is buying the right to buy shares at a price (call option) or sell shares at a price (put option).

Let's break this down a bit further. There are two types of options. The first is a call option which, when purchased, gives the buyer the right to call the stock out of someone else at a certain price at a certain time in the future.

Let's demonstrate this by using real estate as an example. If you were in the housing market and identified a nice home in a nice area that you felt would increase in value next year, you can do several things to profit from the movement of course. Let's use a scenario that would find a home in a rural settlement of $ 250,000 and through analysis of your home that you are going to get up to $ 300,000 next year. You could just buy the first full house for $ 250,000 and a year later if the house appreciated to $ 300,000 in value can sell the house and make a profit. If you were right in your assessment will give a $ 50,000 profit off your $ 250,000 investment, or 20% return on your investment.

Another scenario would be to approach a homeowner and offered to give the owner of 5% of the value of the house or $ 12,500 to have the right to buy a home for $ 250,000 sometime in the future, and that regardless of what market does the homeowner gets to keep $ 12,500 and can spend it immediately. Now for the good of this scenario to say the home owner gives you a year of buying a home for $ 250,000. So just like the previous example you have found the right to purchase the home for $ 250,000, but in this scenario only to leave the $ 12,500 of that right. If the home can appreciate the $ 300,000 of law or contract you have with owners will be worth $ 50,000. As you can see the ad itself extends a little better you allowed yourself to invest $ 12,500 to make $ 50,000 and give you 400% return on investment. What you bought the right to buy something for a long time and were willing to give up some money up front to have that right.
Let's look at a scenario that house still depreciated by $ 50,000, instead of respecting the $ 50,000. In the first scenario with the purchase of a home for $ 250,000 we lost $ 50,000 worth of home is not a good day in office. However in the second scenario would put up only $ 12,500 to have the right to buy a home for $ 250,000 during the year. If you realized a year later at home was now only worth $ 200,000 we can simply allow our option to purchase a home simply expire in which we will lose the entire $ 12,500. Although still not a great day at the office I managed to lose less money by using an option that we would have by simply buying a home.

In the market there are times when we have the same analysis. We believe that the shares can appreciate in value and instead of buying shares fully we can often purchase option to purchase shares in the fair market value for the later part of the cost.

Let me give you an example.Right now Apple Computer is trading at $ 140.00 per share. If I thought Apple computers were to appreciate to $ 160.00 in the next 2 months I could buy 100 shares at a price of $ 14,000.00 and if you went up to $ 160 I could then sell the shares for $ 16,000.00 and $ 2,000.00 profit trade for return on investment of 14%.

My second choice is that you can buy an option for $ 600.00 which allows me to buy 100 shares of Apple for $ 140.00 for 3 months. So if you go to Apple $ 160.00 per share in the next 3 months then my option would increase to $ 2,000.00. I could simply sell the option of leaving me $ 2,000.00 $ 1,400.00 loan from the trade or return on investment of 233%.

So by buying an option or be more specific call option which gives me the right to call the stock market out of $ 140 per share between now and the next 3 months I'm not afford to capitalize on the stock market should appreciate and I Avoid putting a large sum of money for the purchase of shares will have.

Contrary to the call option is a put option. If you buy a put option we are buying the obligation is not right to put the actions of someone else at a certain price at a certain time in the future. So when we think something is going to increase the price you want to look into buying call options and when we think something is going to see lower price put options.

Think of homeowners insurance you buy each month. To purchase this insurance to protect your house should decrease in value due to some catastrophic event. If your home was to burn then you can do is just exercise your insurance policy and put your house to your insurance company and they will give you the amount you are insured for. When you purchase your insurance you are buying the right to record your lost home, you should ignore or go down in value due to some unknown disaster.

The stock market remember for every person who thinks that something is happening up there is someone with a contrary opinion. It is easy to understand that if you think the stock will go into stocks, but low and sell higher. But let's talk about people who think that stocks can go into the price and what they can do to capitalize on this bullish biased. A trader who believes stocks will depreciate the value of the shares in shorts at a price which means they go to their broker and borrow stock with the promise of repaying it back to the future. So they want to sell high and then buying the shares back at a lower price and give the shares back to broker allowing them to keep the difference between buying and selling of high back of the lower point.

If we were looking at Apple computers that are currently trading at $ 140 per share and our analysis says is going to drop to $ 120 per share in the next few months, then you can do several things.

First we go on our brokerage site and a short 100 shares of Apple for $ 14,000.00, we are borrowing the shares which do not possess, with the promise to purchase shares in the future and give the shares back to our brokerage house somewhere in the future . And if Apple is down to $ 120.00 per share a few months later could buy 100 shares of Apple for $ 12,000.00 and give the shares back to our brokerage house close of trade. Since we are selling something for $ 14,000.00 and bought it back for $ 12,000.00 we are left with a profit of $ 2,000.00, leaving us with a return on investment of 14%.

The second scenario is if we thought Apple trading at $ 160 is going to drop in value could buy a put option for $ 600.00 which allows us the right to put the shares (or sell shares) of someone else $ 160 per share. So if after a few months ago Apple goes down to $ 140.00 our put option will be worth $ 2,000.00 (because you can buy 100 shares of Apple at its lower price of $ 120 per share or 100 shares 12,000.00 and we have the right to sell for $ 140 a share or $ 14,000 for 100 shares) at that time could sell our put option for $ 2,000.00 giving us a profit of $ 1,400.00 or return on investment of 233%.

As you can see, our low-cost options to get the trade actually reduce our risk in trading. When the analysis is correct, using options gives us the opportunity to realize greater return on investment.

There are several components of the options to be familiar with.

Strike Prices Strike price is fixed price option to buy (call) or sell (Put). Options are available at various intervals ranging from 1 point to 25 point increase gradually. For example, Apple computer has a strike price at 90 and move into
Point 5 Steps to 240th So the trader can buy the right to buy (call) or sell positions) Apple computer from anywhere from $ 90.00 per share to $ 240.00 per share.

Months of Options-You have the choice in determining which month would you like the options to choose from. Months available are classified into one of three cycles. So if it is June 3 will be able to buy options for June, July August November and will be able to buy longer term options called jumps that are available from Jan 08, and on 09 Jan.

Expiration-Date-Every month options expire on the 3rd Saturday of the month. Because the market is not open for traders to use on Saturday 3rd of the month Friday as there guide. There are still few indications that expired on Thursday before the third Friday of the month, which is why it is important to understand the vehicle you are trading.

This premium is the price of the option.

Greeks Option-There are four main Greeks, who make up the value of the option. This is not meant to be a thorough evaluation of the Option Greeks as one could write a whole manual on this subject alone.

Delta-This is the amount the option will increase the value of one point of moving the primary. Delta also may be considered as an indicator of probability. Option strike price that is right where the stock is trading will have a delta close to the 50th What this says is that the option has a 50-50 chance to have value at expiration

Gamma-Gamma is the accelerator for delta. It tells you how much delta will change after the first item 1 in the primary movement.

Theta-Theta is a measure of time decay. It tells you how much value is lost per day based on the erosion of time.

Vega-Vega is a measure of volatility in option. The higher the volatility the more expensive option. Vega can also be considered as an indicator of fear. When there is uncertainty in the future people are more fearful of the outcome and volatility will be higher, conversely, when fear is low and people feel safe trading vehicle then the volatility is lower and the price of the option decreases.

Understanding the basics and effects of each of the Greeks can greatly improve your trading, but there are some relations which need to be aware of. Some guidelines to be aware of.

1st All except the Greeks Delta are most sensitive to money.
2nd Gamma Theta reacts against the (time decay). The more positive gamma is more negative theta will be.
3rd As volatility decreases the value of theta or time keeps your options are reduced. As volatility increases, aunt or the value of time at the option increases.

Volatility
There are various forms of market volatility. Instability in its most basic form is uncertainty or fear in the market. Volatility can be monitored by looking at vix, and VXN volatility measures in the S & P 500 and Nasdaq.

The chart above is a scheme of option chain. You will see the calls on the left side and puts on the right side. This is a chain of Apple computer when it was trading $ 139.00 and it was due to expire in 30 days.

When deal-buy options to purchase units in the 100, which is called agreement. So if you see the price of an option is $ 3.50 which is in the option price, the trader will still have to buy 100 options or spend $ 350.00 to buy 1 contract.

Internal and external Value-This is the amount of the option that represents the true value. So if we are seen in 135 call strike price (which gives us the right to buy Apple for $ 135.00) option is to ask sales price of 5.40 dollars, or $ 540 dollars to buy 1 contract. Since Apple is trading in the live market for $ 139.00, then 135 call option would be $ 4.00 dollars of real (internal) value and the other $ 1.40 would be considered worth the time or external value. So, to sum up the internal real value is the value of an option and the external value represents value at time option.

ATM money options are options that are closest to where it is currently trading stocks. If Apple was trading at 139, then the strike of 140 and put the call price will be considered optional money.

The ITM-in option money will be yellow or options they represent features that have real intrinsic value.

The OTM_ of the money options are options that blue denote options that have no real value or intrinsic value. They have only time value.

Option Chain above, also has a bid / ask spread. The price quote is the lowest price the market makers will consider the price of the option. Ask price is the price marker maker guarantees to fill. The range between the bid and ask is called the spread.

If you look in the third column you will see a heading called delta. This number tells you how the option will increase the value of a dollar movement in the primary. The delta number will increase in value as you go deeper into the money.