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post #281 of 415
I'll give this one a shot basically when you sell the put at 1.75 with the stock at .75 you are even there is no time value there. The 2.50 put is 1.75 in the money. The buyer of the put is betting it goes down more say it goes to .50 at this point the put he bought would be worth 2.00. If the stock goes up from this point say to 1.50 then the put would be worth 1.00 and you have a .75 gain at expiration.

The way you lose here is if the stock goes down to say .25 the buyer of the put gets to put the 10 puts or 1000 shares to you at 2.50 making 2.25 on the put he bought for 1.75 or .50. What you want is for the stock to go up to make the put value less. So in Dec if the stock closes at 2.50 or above you would keep the full credit. You can break down the gains from there. If it closes at 2.00 you make 1.25 the put is still worth .50. The thing about buying the put is at expiration the buyer gets to put the stock to you at the strike price. So make sure you have enough money to cover another 1000 shares if it closes below 2.50
post #282 of 415
Quote:
Originally Posted by ezrider View Post
If the stock doesnt hit the strike, how would that play out??
Short in the money options get exercised at expiration.

So if you sold a 2.50 call and stock is at 3.00 at expiration,
(in the money)
You find yourself short 100 shares at 2.5 next trading day
in your account.

Thats why people do covered calls.
If you owned 100 shares when broker sold 100 due
to short call being in the money...
you would find those shares gone next trading day.

If you sold a 2.50 put and stock is at 2.00 at expiration,
(in the money)
you will find you bought 100 shares at 2.50 next trading day
after expiration.

In the money short option expiration day outcomes.
You sell a call, you sell short 100 of stock at strike.
You sell a put, you buy 100 of stock at strike.

This all deals with holding in the money short options
past expiration day. Obviously you can buy the options
back anytime you want before expiration day
to prevent exercise.

For example, stock is at 3.00 and you sell some
2.50 puts. If stock drops to 2.50, you could buy
back the 2.50 puts and sell some 1.50 puts etc.
post #283 of 415
THANKS, Windo and Arthur- clears it up for me. Never sold (on covered positions) Puts before but have sold calls. Flip options a lot more but this scenario had me thinking- if it tanked harder and was exercised it could cost some change- technically the option could be exercised at any time provided the PPS is below the strike (on a PUT)...
post #284 of 415
Quote:
Originally Posted by ezrider View Post
- technically the option could be exercised at any time provided the PPS is below the strike (on a PUT)...
Normally options only get exercised if time value is out of them. Like say you sell a $21 put for $500 when stock is at $20 That option has $400 time value so doubt it could be exercised. But say stock drops to $1 and now the price of the $20 put is $19 or $1,900. There is zero time value there so it could be exercised.
But 99% of time, options won't get exercised till expiration. Some events like big dividend payments, splits ect can cause early exercise though.

In your example, sell 2.5 put for 1.75 when stock is at 0.75 ...
2.5 - 1.75 = 0.75
There is no time value there. It's all actual profit or intrinsic
value in option price. That is a dangerous trade because
that option could be exercised at any time. You would want
some time value to sell an option unless you are using selling
the short in the money put as a synthetic long stock position.

Look at it this way, say a stock is at $20 a share and the $21 put
is $500 The reason it doesn’t get exercised is no MM’s
would want to buy the option for $500, be short 100
Shares at 21 and be down $400.… no profit there.

Now say time value is gone… the 21 put is now priced
At $1 when stock is at 20 Say the spread is 0.80 to sell and
1.05 to buy. Now some MM/hedge fund that doesn’t pay the spread
can get the option for 0.80, exercise it and have an instant profit
of 0.10 (sell 100 shares at 21 for 0.80 and buy 100 shares at 20
= + 1.00 - 0.80 = 0.10 profit)
.… do this in 10,000 options and they make $1,000
with zero risk. So that’s why options can get exercised when time value
is gone.

A little more on that trade. If stock was at 0.75 and you sold a 2.50 put for 1.75, really this is a bet stock rises. You would want stock to go up, then you could buy back the put for less than 1.75 and make a profit. But you are getting no downside protection here. Most people would want to sell a put with some downside protection. Like if stock is at $20, sell a $20 put for $600. You make $600 if stock stays at $20 or goes up. You start losing money if stock goes below $14 That's pretty common use of selling puts. Or say something like SKX is down big to $20 a share. A common trade is to sell $16 puts there for $100 each. The trader figures if SKX goes down below $16 that’s fine as I am getting a stock I like really cheap at $15 a share. If stock goes up, I just keep the $100 It’s a win/win for them.
post #285 of 415
in regards to open interest vs volume.

volume is just the number of contracts that have been traded that particular day where as open interest are all contracts that have not been settled yet. is this right?

also, what level options trader must i be to buy calls/puts? is it level 1 or 2?

ok i guess its level 2. i accidentally signed up for level 1 and cant upgrade my account for 90 days. FUUUUUU...

i really dont get why writing calls is level 1 and holding them is 2.
post #286 of 415
Ok I "think" I have calls figured out but puts have me confused.

Say a stock is trading at $30 and I think it will go down in the next couple of months to $20. Assuming the stock does go down to $20 or lower, am I better off buying a $30 put or a $25 put or a $20 put?

If I have a $30 put and the stock is at $20 who makes up the difference and do I make $10 profit per share?
post #287 of 415
Quote:
Originally Posted by MaX PL View Post
what level options trader must i be to buy calls/puts? is it level 1 or 2?
If you google the question, all the levels come up and what you can do in them.
post #288 of 415
Quote:
Originally Posted by iweb View Post
Ok I "think" I have calls figured out but puts have me confused.

Say a stock is trading at $30 and I think it will go down in the next couple of months to $20. Assuming the stock does go down to $20 or lower, am I better off buying a $30 put or a $25 put or a $20 put?

If I have a $30 put and the stock is at $20 who makes up the difference and do I make $10 profit per share?
Easiet way to look at this for me is that I am buying the put for the right to sell the stock to the writer at X price. Say 30.00 - Now if the stock goes down to 20 by expiration. The writer still has to buy the stock from me at 30.00. (Thats who makes up the difference) So basically at expiration you could buy 100 shares at 2,000 and sell them (or put them) to put writer at 3,000 per contract.
post #289 of 415
New to the Forum. Great options primer!
post #290 of 415
I'm still confused. A few questions:
Call options---Basically, the more bullish you are on a stock, the higher strike price you should buy call options with. This means much greater risk, but greater reward also. So LVS is sitting at 48.42 right now (nov 12). And you're super bullish. So you buy january 21st call options at strike $55 for $2.42. 1000 contracts lets say for $2420. It goes to $60 before january 21st,
(question 1) So your option is worth $5-$2.42=$2.58 a contract?
(question 2) You don't have to actually buy 100,000shares, you only have to sell the contract to profit?
(question 3) Will you net very close to $2.58 a contract or do you usually get substantially less?
(question 4) Can you short sell 1000 contracts at strike $55? How is this different from put options?

Put options:
You're bearish on LVS, so you buy 1000 january 21st put contracts at strike $40 for $1.50 each. If LVS falls to $45, $48.42-$45 = $3.42, and the option is worth $3.42-$1.50 or $1.92 a contract. You make $1920
(question 5) Are these calculations correct? It doesn't seem so but I can't figure out why
(question 6) You want LVS to fall to $40 but not further? If it falls further than $40 the option is worthless? Or do I have it backwards?
(question 7) Can you short puts? How is this different from a call?

(question 8) What is open interest?
thanks in advance!
post #291 of 415
Also, can anybody with a regular trading account trade any kind of options, in or out of the money? What are the levels?
post #292 of 415
Quote:
Originally Posted by czeylanicum View Post
I'm still confused. A few questions:
Call options---Basically, the more bullish you are on a stock, the higher strike price you should buy call options with. This means much greater risk, but greater reward also.
That's an interesting take on it. I don't know I would say you are more bullish to buy higher calls. To me, it just means you are making more of a long shot bet to get a better reward and yea, risk is higher. People who buy the in the money calls and the out of the money calls are both bullish. The one who buys the out of the money just wants to add to the bet "it's going up" a few more things, like it will move this far in this amount of time. The person who buys the in the money call could think it's going to go just as high, but doesn't know how long it will take. Also, people buy higher calls just because they are cheaper. (less money at risk)

Quote:
Originally Posted by czeylanicum View Post
So LVS is sitting at 48.42 right now (nov 12). And you're super bullish. So you buy january 21st call options at strike $55 for $2.42. 1000 contracts lets say for $2420. It goes to $60 before january 21st,
2.42 = $242 So 10 contracts would be $2420, not 1000 contracts.
1 option = 100 shares normally (splits can mess things up)

Quote:
Originally Posted by czeylanicum View Post
(question 1) So your option is worth $5-$2.42=$2.58 a contract?
Well it's worth $500, but yea you spent $242 buying it so when you sell
it for $500 your profit is $258.


(question 2) You don't have to actually buy 100,000shares, you only have to sell the contract to profit?
yes you just sell the option to get the $500

(question 3) Will you net very close to $2.58 a contract or do you usually get substantially less?
If the stock was right at 60, you would get very close to that $5. The bid and ask may vary though, like 4.80 to sell 5.10 to buy. And figure in commisions too.

(question 4) Can you short sell 1000 contracts at strike $55? How is this different from put options?
Selling calls (options) is a very different trade than buying them and takes a higher option trading approval level. Huge difference. If you sold a $55 call, it means you may be forced to short 100 shares at $55 a share if option is exercised. You also lose the control of exercise. The buyer
get the option to exercise or not. Basically, if you sold a $55 call and stock was at $60 and it's expiration day, you have two options, #1. Buy the call back for $500 to close the position. #2 Do nothing and find yourself short 100 shares next trading day at $55 a share with a $500 loss in account if stock is still at $60.


Put options:
You're bearish on LVS, so you buy 1000 January 21st put contracts at strike $40 for $1.50 each. If LVS falls to $45, $48.42-$45 = $3.42, and the option is worth $3.42-$1.50 or $1.92 a contract. You make $1920

You buy ten $40 strike puts at $150 each for total of $1500 These give you the right to sell the stock at $40 If stock is at $45 on expiration day, the puts are worthless. If the stock was at $35, the puts would be worth $500 and so then you would make around (500-150) $350 on each contract

(question 5) Are these calculations correct? It doesn't seem so but I can't figure out why
nope

(question 6) You want LVS to fall to $40 but not further? If it falls further than $40 the option is worthless? Or do I have it backwards?
backwards - puts give you the right to sell at the strike so you want the stock lower than the option strike to make a profit. Now that's if you hold to expiration. You can sell the option back anytime you want if there is a profit there. (or loss) Example: Stock is at $60 and you buy a $50 put. Stock then drops to $52 next minute. You will have a profit even though stock is higher than strike because option still has time value.

(question 7) Can you short puts? How is this different from a call?
Like i said before, selling options is totally different than buying them. You are the guaranteer of the option contract. If you sell a put and it gets exercised by the buyer, you are forced to buy 100 shares at the strike. You get them "put" to you.

Sell a call, the shares get called away from you. Sell a put, the shares get put to you. Thus the names of the options.


(question 8) What is open interest?
How many option contracts are open.

You have to apply to trade options and most trades require a margin account. You can google option levels and see the list. Varies some from broker to broker.
post #293 of 415
Thanks so much, Windo.
post #294 of 415
One more question - are there any free websites or programs that can grab the raw options prices and calculate in graph or table format potential profit for a dollar investment at each strike price on a sell price line? Does that make sense?

I've seen options profit calculators, but nothing that crunches all the numbers.
post #295 of 415
ok nevermind. just figured it out myself.
post #296 of 415
Quote:
Originally Posted by czeylanicum View Post
One more question - are there any free websites or programs that can grab the raw options prices and calculate in graph or table format potential profit for a dollar investment at each strike price on a sell price line? Does that make sense?

I've seen options profit calculators, but nothing that crunches all the numbers.
The thinkorswim software does this, in the Analyze tab. It's free, but you have to register to use it.

https://www.thinkorswim.com/tos/disp...layFormat=hide
post #297 of 415
cool software, thanks
post #298 of 415
so i bought my first option last week. a ford call.

bought jan 2011 50 F contracts at .14. for $748 with commission.

my net account value is shown as my cash/settled funds minus the $48 commission.
so will the value of the call fluctuate based on price up until expiration in january, and that value will remain shown in my account. and only after expiration will the remainder be transferred to the call seller?
i guess what i'm trying to say is, the call can be traded amongst many people up until expiration, and at expiration, the last person holding the call is the one who must pay the premium to the call seller? i never really thought of it that way when learning about options.

so the seller should also look to have the call come closest to the strike without hitting it as to maximize the premiums value. is that right?
post #299 of 415
What strikes were the Ford Calls?
post #300 of 415
Quote:
Originally Posted by MaX PL View Post
so i bought my first option last week. a ford call.

bought jan 2011 50 F contracts at .14. for $748 with commission.

my net account value is shown as my cash/settled funds minus the $48 commission.
so will the value of the call fluctuate based on price up until expiration in january, and that value will remain shown in my account. and only after expiration will the remainder be transferred to the call seller?
i guess what i'm trying to say is, the call can be traded amongst many people up until expiration, and at expiration, the last person holding the call is the one who must pay the premium to the call seller? i never really thought of it that way when learning about options.

so the seller should also look to have the call come closest to the strike without hitting it as to maximize the premiums value. is that right?
Your account value should show your cash, plus the value of the contracts based on the last price of the contract. Whoever sold you the call has their cash in hand. As you hold the call, the premium, which being out-of-the-money (I'm assuming the strike price is at 20$), is going to decay, even if Ford stays at the same price until expiration. So in a week, they may only be worth .12$ even if the price doesn't move. The closer you get to expiration, the lower the price will go.

Say in a month, the price is at .06$. At this point, you can sell the contracts for the 6 cents, which is what is left of the premium.

Theoretically, a seller who could accurately predict the final price would be able to maximize their premium by setting the strike price to just out of the money. But I don't think that is the best way to think about options.

I would think of it as anyone who sells options does so with the expectation that someone else will be left holding the premium decay, so they may sell in the money, they may sell out of the money. At some point, they are likely to buy the contract back, which isn't to say they buy the exact contract, but more like they simply buy a different option, so even though they are obligated to buy/sell at the price of the contract they wrote, they own their own contract at the same strike which ultimately cancel each other out from a financial perspective (like simultaneouly owning a a stock short and long).

Applied to your situation, someone wrote 50 Jan-11 Calls with a Strike of 20$ for .14$. In Dec, maybe Ford has gone to 18$. The option is still out of the money, and the decay on the premium would be less than if the price had been constant or gone down, but let's say the price in Dec is .10$. The original option writer can buy 50 calls Strike 20$ at 10 cents, which he may just do if he thinks Ford will cross the 20$ level at expiration. At that point, he's still made 200$ if he closes his position.
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