Options Education

[malice]

So this will be the thread to read before beginning any options endeavors.

First and foremost, options are tradeable securities that exist on a large number of stocks that represent a Right to buy/sell the underlying stock at a determined price. They have a bid, ask, and volume. Obviously, stocks with higher volume have more active options, and those with less have options that don't even trade.

Options LingO:

Call- one of the 2 types of options. It represents a Right to buy the stock at expiration if you're long, but an obligation to sell it if you expire short and are assigned on it. It is a BULLISH derivative, so the value Increases as the stock Increases.

Put- the other type of option. It represents a Right to sell the stock at expiration if you're long, but an obligation to but it if you expire short and are assigned on it. It is a BEARISH derivative, so the value Decreases as the stock Increases.

Strike Price- Price at which stock is bought/sold at expiration. Different options exist in different strike prices, and thus their value changes accordingly. The Lower the strike price, the more expansive calls will be, and the higher the strike price the more expensive puts will be.

Expiration Month- month in which options expire. Options expire on the 3rd friday of that month. Expiration months apply to every month of the year.

Premium- price paid per each contract/amount recieved for selling contract. The most important number in the options world is 100!!!!!!! 95% of options revolve around that number. Why? Because each call/put represents the agreement to buy/sell 100 shares (it can be adjusted by splits, but more on that later). You pay 100 X the ask per each contract. So if a call has an ask of $1.00, you will pay $100 per contract, or recieve $100 if you short it. Just remember, in the options world, just times everything by 100 and you'll be safe

An example:

AAPL Calls with a strike price of 125 that expire in February (AAPL Feb 125c for short) are 5.5x5.55 w/ a volume of 12,763. You would pay $555 per contract (assuming you bought on the ask) They would increase as AAPL increases and vice versa. If you decide to buy these calls now in anticipation of AAPL increasing and by February 15, you wish to own AAPL the stock, you may exercise your calls so that you own 100 shares of AAPL.

[malice]

Okay a little more in depth lingo.

In the money- a call is said to be "in the money" IF its strike PRICE < current STOCK price. These types of calls 9and puts) have little time value and have mainly intrinsic value. A put is "in the money" (ITM for short) if its strike price > stock price.

Ex: GOOG right now is 518. Any call w/ a strike below 518 is ITM, any put w/ a strike above it is ITM.

At the money- means the same for both calls and puts. It occurs when the strike is equal to or close to the current stock price. Generally, ATM options are most active of all options, especially in the front month (soonest expiry month). For me, ATM also refers to one strike price above and one below the current price. For the GOOG ex, i would consider 510 and 520 calls ATM and 520 and 530 puts ATM, but that is just my preference.

Out the money- for calls, when the strike > the stock price and for puts when the strike < stock price. These are the riskiest and most lucrative options. If you buy an OTM call that becomes ITM over time, you make Serious $$$$$$$$$$. They are all composed of time value, and thus are subject the most to time decay. Many times OTM options are more active than the ITM ones.

Ex: GOOG at 518. GOOG 580 calls are out the money, and 480 puts are also out the money (OTM).

[MC]

UNG stock is at $7 per share.
Sell 1 $9 strike PUT contract (100 shares) and collect $200 premium ($2 per share).
Total maintenance margin used is $840 as stock price is $7 x 100 shares +20% of $7 stock price.

If stock expires at $9 option will NOT execute and I keep the $200 premium (which I can apply to buy the stock purchase if I desire)
If stock expires at $8 option will execute and I have to pay $9 per share keeping the $100 difference
If stock expires at $7 option will execute and I have to pay $9 per share giving back the $200 and breaking even
If stock expires at $6 option will execute and I have to pay $9 per share losing $100 + premium collected
If stock expires at $5 option will execute and I have to pay $9 per share losing $200 + premium collected

Of course the commish is a given and par for the course.
In theory the price of course can go lower than $5 and you could lose your ass. But before that point you would sell a put further out and apply the premium collected to closing the current put.
Am I understanding this properly?

With TOS's platform what greeks if any should I focus on?
Would covered calls be a better choice?

I've read 2 books on options and while I grasped many concepts I'm still lacking some aspects of trading these things.
Anybody have teamviewer or a screen sharing tool where they are willing to tutor me some?

[Timmyb]

Originally Posted by MC

UNG stock is at $7 per share.
Sell 1 $9 strike PUT contract (100 shares) and collect $200 premium ($2 per share).
Total maintenance margin used is $840 as stock price is $7 x 100 shares +20% of $7 stock price.

If stock expires at $9 option will NOT execute and I keep the $200 premium (which I can apply to buy the stock purchase if I desire)
If stock expires at $8 option will execute and I have to pay $9 per share keeping the $100 difference
If stock expires at $7 option will execute and I have to pay $9 per share giving back the $200 and breaking even
If stock expires at $6 option will execute and I have to pay $9 per share losing $100 + premium collected
If stock expires at $5 option will execute and I have to pay $9 per share losing $200 + premium collected

Of course the commish is a given and par for the course.
In theory the price of course can go lower than $5 and you could lose your ass. But before that point you would sell a put further out and apply the premium collected to closing the current put.
Am I understanding this properly?

With TOS's platform what greeks if any should I focus on?
Would covered calls be a better choice?

I've read 2 books on options and while I grasped many concepts I'm still lacking some aspects of trading these things.
Anybody have teamviewer or a screen sharing tool where they are willing to tutor me some?

I would be willing to give you some time one night and show u deeper the analytics of TOS. Then i think you can answer your own question

[MC]

*SCALPSWINGSTRADDLE* ($$$): Options Lesson:

Options Lesson:

Learn you Greeks. Understand Implied Volatility and how it affects option premium.

Greeks and Implied Volatility

Greeks help you anticipate changes in option price compared to change in the stock price

Delta:
A ratio that compares the price change of an option with the price change of the stock
Ranges from 0.00 to 1.0
A delta of 1 means that for every dollar the stock rises or falls, the option will also rise and fall one dollar
A delta of of .50 woulf mean that for every dollar the stock rises or falls, the option rises or falls 50 cents
Out of the money strike prices deltas range between .5 and .75
The farther In the money an option becomes, the higher the delta climbs

Gamma:
A ratio that compares the rate of change of DELTA with the rate of change of the stock
Gamma shows how DELTA rises and falls as the stock rises and falls
Gamma=.10 means that for ever dollar the stock moves, DELTA will move by .10

Theta:
Theta compares the rate of TIME DECAY with the passing of each calande day.
Theta= .05 means that the option will lose time value at a rate of .05/share or $5.00 per contract per day
Theta will increase and Time Value will erode more quickly as exp date approaches
there are factors which affect time decay such as volatility


Vega:
Vega estimates how much the theoretical value will change when volatility changes by 1%
High volatility means higher options prices
Low volatility= lower options prices
+VEGA means the value of the option position will increase when the volatility increases and the value of the option position will decrease when the volatility decreases
-VEGA means that the value of the option position will decrease when volatility increases and increase when the volatility decreases
Example: A vega of +.03 and volatility of 20% has a value of 5.00.
(This is a call)
If the volatility rises to 21%, the call will be worth 5.30
If the volatility falls to 195, The call will be worth 4.70
19%


Rho:
Estimates how much the theoretical value will change when interest rates change 1%
RHO is rarely used
Long calls and short puts have +RHO
Short calls and long puts have -RHO
An increase in interest rates increases the values of calls and decreases the value of puts
A decrease of interest rates decreases the values of calls and increases the value of Example:
A call with a RHO of +.05 is worth 5.00 when the interest rate is 5%
If Interest rates rise to 6%, the call would be worth 5.05


Implied Volatility:
Indicates how much the stock is expected to move during the life of the option
This number is almost always higher than historical volatility, because the future is not certain
You should view an option as overvalued if the option's implied volatility is greater than it's historical volatility
If the options current implied volatility is lower than its historic volatility, the stock is undervalued
In theory anyway
In real life, determining whether an option is under or overvalued is quite difficult because implied volatility changes from day to day
sometimes violently
: News, earnings and other factors cause the implied volatility rates to rise sharply because there is s greater chance the stock may move very high or low quickly
Implied volatility can also drop as quickly as it climbs.
Comparing current implied volatility to past implied volatility is better than comparing current implied volatility to Historical volatility
High Implied Volatility means the MM's expect the stock to move alot in the future
If implied volatility is 31%, that means the stock must move 31% to make a profit


Greeks and Spread Positions

If net Delta is +, you want the underlying to rise.
If net Delta is -, you want the underlying to fall.

If net gamma is +, you want the underlying to move rapidly, up or down.
If net gamma is -, you want the underlying to move slowly, up or down.

If net Theta is +, time decay benefits you.
If net Theta is -, time decay hurts you.

If net Vega is +, you want volatility to rise.
If net Vega is -, you want volatility to fall.


Implied Volatility and Spreads

Note:Vertical spreads are usually not as sensitive to volatility spreads as the spreads listed below.

If implied volatility is low and expected to rise, spreads with a net + vega will benefit.
1. Long Straddles and strangles
2. Long calendar and diagonal spreads
3. Short Butterfly spreads
4. Ratio Backspreads

If implied volatility is high and is expected to fall, spreads with a net - Vega will benefit.
1. Short straddles and strangles
2. Long butterfly spreads
3. Short Calendar and diagonal spreads
4. Ratio Vertical Spreads-

[MC]

I think this has been covered here but going over it in text like this helps me drive the concepts home in my mind, and hopefully help others at the same time.

You are a bull if you
Buy calls OR Sell puts

You are a bear if you
Buy puts or Sell calls

Saying you are "covered" indicates you own an equal number of shares to cover the option contracts you're holding. Remember every option contract is equal to 100 underlying shares.

Sellers collect and get to keep the premiums paid, but MUST deliver the shares at the strike price should the option contract be exercised. If it doesn't exercise you pocket the premiums. Selling options is often used to take the premium collected and apply it to your cost basis on long term investments to work your way to a net cost of $0. A $0 cost basis means free dividends and you still have the ability to tap into selling options to collect further premiums.

Option buyers pay the premiums to the seller and never get the premium money back. An option buyer has the OPTION to buy the underlying shares but they are not obligated to do so and can walk away down only the premium.

Another suggestion seems to be...

SELL options when the VIX/IV is high or expanding since you're being PAID the premium and premiums will rise as VIX/IV does.

BUY options when the VIX/IV is low or contracting because premiums are coming out of your pocket and they will be cheaper.

If you think about how convenient this is...bear markets are marked by rising volatility aka higher premiums. Wouldn't you like to be selling covered calls on your long term investments AND netting top dollar for premiums? Conversely, wouldn't you love to be buying calls with the OPTION to buy for next to nothing? And if you're wrong and the market falls further you're only out the small premiums?

Just this rookie option traders thoughts.