Investing in Options (Q's for Eye)

Discussion in 'Overtime: Off-Topic Discussion' started by reznick, Mar 7, 2011.

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  1. reznick

    reznick New Member

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    Hey eyerate, I was wondering if you could help me understand option a bit better.

    I got a quick run down from a friend, and basically what I understand is that

    there is a premium price (price for option per share), and a strike price (the amount per share you hope it will hit)

    And basically, your trying to hit the strike price before the given time of the option expires?


    So hypothetically if MSFT is at 25, and I want to buy 1000 options for a $.50 premium on each share, and the time limit on the option is one year (not sure how long these typically last), for a strike price of 29 per share; then I am "betting", so to speak, on MSFT hitting 29 before the 12 months are up? If it doesnt I lose the investment, but if it does, what is the typical earning for hitting your strike price?

    Also isnt true you can also invest in options for a negative strike price? But you have to chose one or the other? So volatility is something to look for correct? And do all option' premiums/strike price differ, or do they go by a formula?


    Sorry a lot of questions, but am I on the right track?
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  2. Eyerate

    Eyerate The Definition of Real..

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    you are generally on the right track..

    An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

    rather than parrot ipedia, i'll just link you to the page on options. its a fairly simple concept with MANY complex ways to exercise puts/calls and can compound pretty seriously. most brokers will force you to sign up under special parameters to trade options. if you dont have a VERY comfortable feel for markets and trading i would avoid options. i trade very few if any options. i prefer standard long/short positions.

    Options Basics: Introduction
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  3. larry word

    larry word get sauced n dip

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    options trading is basically manipulating black scholes blablah tryna find arbitrage opportunities, for example you can compare implied volatility for an entire chain and be like 'o shit this one's underpriced baby'

    just putting it out there, that that's different than just throwing in some options into your normal investing. it's a good look if you know what you're doing.

    tradeking (I used to use them) doesn't require anything fancy like 25,000 balance for options. and they spun off this options segment for beginners: Learn Options Trading | Options Trading Beginners - The Options Playbook

    draw the payout graphs yourself for practice, given a certain strike price and current stock price. eventually it'll come naturally (pause)
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  4. Eyerate

    Eyerate The Definition of Real..

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    im going to note that this post comes across like trading options is a very nonchalant thing. in reality, options trading is, in many cases, much higher risk than trading normal securities. do the due dilligence before you jump into anything.
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  5. reznick

    reznick New Member

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    thanks for the answers guys

    okay so what if you hit the strike price lets say motnhs before the options expire. Boom, you cash out? Or do you have to be above the strike price at the time of expiration?


    I remember hearing some examples for some and the strike prices didnt seem too ridiculous at all. I feel like, like you said, just doing some research specific to individual companies/stocks will get you in the right direction to make the right picks.



    I heard "How to make Money" by William Oneal is a very good book about investing. Ive read some highschool level stuff a few years ago but I heard this guy explains things very well and that you can follow his website and his picks. You heard of him by any chance? I guess hes a Motley Fool type of guy.


    But yea Im gonna give the options a whirl on the marketwatch "play money" portfolios, and see what its really all about.
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  6. Eyerate

    Eyerate The Definition of Real..

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    investopedia is your friend... seriously. it goes from the basics to intricacies and beyond. and if you cant find it there, theres zerohedge forums. a word of warning... take ANYTHING you read on ANY forum or blog with a grain of salt. very few of these guys are successful at generating cash. if they were, they wouldnt be writing blogs.
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  7. larry word

    larry word get sauced n dip

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    yeah just google "call option" "price option" it's really simple

    no offense but judging from your questions, I'd say it's best if you just read up on basic definitions for clarity. also yeah options trading is definitely some beast level shit, few people on some sit-at-home status actually do that. I was just tryna point out the distinction between that and implementing basic to intermediate options plays into your portfolio.

    basic example. let's say you do a simple bearish play--buy a put option (the price you pay is called the "premium") on XYZ company (the "underlying"), a year out ("expiry date" march 2012), strike $30 from a guy named chad. this means "ok I have the option to sell 100 shares of XYZ within a year from now at 30 bucks a piece."

    if it's currently trading at 40, there is no way you would exercise your option and sell 100 shares, because you could sell them at 40 right now on the open market instead of 30! so you have an entire year to hold onto this piece of paper, crossing your fingers and hoping that XYZ dips well below 40, and crashes to say, 22.

    so right now, everyone in the world is buying and selling shares at 22. but you, thank god, have an option to sell 100 shares of XYZ at 30. now we cakin out here, because you can just snatch up 100 shares at 22 bucks on the open market, then sell it all to that sucker for 30.

    you might be wondering "what if it hits like 29 or 28.50, should I exercise then? I mean that's technically profit, right, since I can sell it for 30!" well you gotta finally take into account the premium you paid to buy the option in the first place. you bought that from chad for some amount of money. say you spent $300 on the contract. then your breakeven point is 27, because if you exercise, you'd spend $2,700 buying the 100 shares from the open market, then sell it for $30 a piece, meaning $3,000. so you'd pocket $300, but oh wait you paid $300 for the option in the beginning.

    wow that was long and drawn out, my bad. lmao
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  8. Eyerate

    Eyerate The Definition of Real..

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    thats actually really well put.. i couldnt be fucked to build a scenario. its nice to finally have someone else to answer the basics :funny:
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  9. reznick

    reznick New Member

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    thank you larry, that made a lot of sense, and brought a lot more clarity to options trading


    I was kind of thrown off by the Chad thing. Is that who you are saying in this example is offering the option and thus the parameters of the option (strike price, premium, expiry date) Are those not based on a single formula for all options? And whose Chad, a broker? Is he offering the option in hope that it wont go below that strike price, and can anyone play the role of Chad and sell options?


    You know I'll just do some more research on the subject but thanks again man I really appreciate it
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  10. larry word

    larry word get sauced n dip

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    word. well, I was giving a theoretical scenario to demonstrate the fundamental idea: Chad would be some random guy who is thinking that the company is going well. so he sells you the piece of paper thinkin "hah, rez is such a sucker, he thinks the company is gonna crash within the next year? well Imma bet $300 that it won't happen!" so in his mind, what's going to happen is the option will expire "worthless" (i.e. the stock price will never dip below the strike, or below the strike minus three, so you'll just hold on to it forever).

    the strike price is typically not really "formulaic" per se but it's just in small increments from the trading price. so you'll have like 45 46 47 48 etc. for a stock that's trading at 46.61 right now. or a stock at 225 might have an options chain with strike prices at 230 220 215 210 205 etc.

    you are right, we have zero control over strike prices, premiums (well, premiums fluctuate over time just like stock prices do, but you know), and expiry dates. in the real world (in contrast to the theoretical scenario above), Chad could just be another guy on the other side of a broker, or you can think of him as a broker. so you can go on scottrade and buy a put right this minute; scottrade doesn't tell you the name of the other guy though obviously. so for all intents and purposes, the identity of Chad is irrelevant.
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