Options puts and calls for dummies
You can probably guess by now that the closer the market price is to the strike price, the more the option is worth. Now you can wait and see what happens on May 15th, but if you just wanted to take advantage of a short term price swing you can take your profits right now and run.
This section about reading options chains has been out dated, but it is still worthwhile to read through because you may still encounter these in various other websites. Click here to find out the latest method of reading options chains. Now that you know so much about options, lets talk about how to find them and how to interpret what you see. You can look at the diagram below or go directly to Yahoo by opening another browser page and entering the URL http: As you can see there is a table like the one below: The red circle indicates this is for May The first column shows all the available strike prices.
The green circle shows a weird looking symbol. It's certainly not the symbol for IBM, but it looks similar. There is a standard for listing option quotes which you can see by going to the cheat sheet see link on the right hand navigation.
You can probably figure out the rest of the circles if you've seen stock quotes. A couple of things to point out is the pricing standard and the highted area. It is divided by and then listed. The volume however, has not been divided by anything! It really is The final thing to note is the area highlighted in yellow.
Remember we talked about Intrinsic Value? The yellow highlighted options are referred to as "In the money" options. Buyer Beware Until now I've just been giving pure facts about options.
Now I'm going to give some advice. You have to be very careful when trading options. People often tout the upside to options investing while playing down the risks involved. If you watch T. While it is true that you can realize tremendous profits, the chances of you realizing tremendous losses are just as great..
Even the best and brightest investment professionals cannot predict price movement especially over the short term. They get it wrong just as often as they get it right. At the end of the day, options are meant to add another dimension to your entire investment strategy, so be careful not to get wiped out as soon as you enter the option world. It's best to start out playing 5 to 10 options at a time. If you find you've made some money doing it, then you can risk more capital. New Options Chains As mentioned above, there is a new way to read options chains and it is quite easy to understand.
You will see below: You can see it is almost self explanatory. The red circle represents the underlying stock symbol, the blue circle represents the expiration date, the green circle represents the type of option "C" for Call, "P" for Put , and the black circle represents the the strike price. The one small catch is that the expiration date is stated as the day after the actual expiration date.
I know weird, but the option actually expires as of close of market the day before. In the example above, the expiration date of '' reads , March 22nd. That is, the option is already expired as of that morning. But for your trading purposes you have to make sure that whatever trade you want to make has to get in before the close of market on , March 21st. Summary Okay, we've gone through a lot of material here.
And you might still be confused. I suggest you read the material again or at least the parts where you got lost. Also from the menu above you can refer to a cheat sheet which lists all the important things you need to know about options without the long boring explanations and examples.
And don't forget to come back soon for any updates or new material I add to this site. Options for Dummies Learn how to trade options. Basic Options - What is an option? Designed by The entire content of this website is meant for educational purposes only. It should not be construed as investment advice. And I am certainly not making any claims about the profitability of options trading.
Options are inherently risky and you should carefully consider the risks before investing any money. The examples given are not necessarily using real world numbers as it is used for illustrative purposes.
The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss.
The put writer believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.
The writer seller of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put.
A naked put , also called an uncovered put , is a put option whose writer the seller does not have a position in the underlying stock or other instrument. This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game.
If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at the strike price. That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit.
The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero bankruptcy , his loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received.
The potential upside is the premium received when selling the option: During the option's lifetime, if the stock moves lower, the option's premium may increase depending on how far the stock falls and how much time passes.
If it does, it becomes more costly to close the position repurchase the put, sold earlier , resulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss. In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need to post margin because the buyer would not exercise the option if it had a negative payoff. A buyer thinks the price of a stock will decrease.
He pays a premium which he will never get back, unless it is sold before it expires. The buyer has the right to sell the stock at the strike price.
The writer receives a premium from the buyer. If the buyer exercises his option, the writer will buy the stock at the strike price. If the buyer does not exercise his option, the writer's profit is the premium. A put option is said to have intrinsic value when the underlying instrument has a spot price S below the option's strike price K. Upon exercise, a put option is valued at K-S if it is " in-the-money ", otherwise its value is zero.