YAInvestmentT: Options Trading?

[arrfep]

Okay, so I've been in the market for about seven months or so, made a lot of mistakes, but I've finally got the hang of it and am now up a decent percentage. I have lots of faith in one of the positions I hold, and I'd like to try trading options. But everything I read still confuses me. Can someone break it down for me? This is my understanding:

X is currently trading at 23.30. I think it will go up significantly.

I buy calls with October strike price of 25.00. I buy 10 contracts (1000 shares) @ premium of $0.70 for $700.

By 3rd friday of October, X is trading at $27.00.

I then sell my options for $27.00.

My profit is ($27-$25-$.70)x1000 = $1300

Is that correct? I can sell at any day up till the strike date, or only on the strike date?

I think I've got it...but obviously I'd like to be certain before I put any money on the line.

Thanks doods.

 

[PokerGuy]

If you have to ask such questions, options trading is a dangerous thing......

 

[arrfep]

Originally posted by: PokerGuy
If you have to ask such questions, options trading is a dangerous thing......

:roll: Thanks. Hence the attempt to learn.

 

[ahurtt]

Originally posted by: PokerGuy
If you have to ask such questions, options trading is a dangerous thing......

You could have just simply said "I don't have any farking clue either." Or better yet, said nothing at all.

 

[SLU MD]

Yeah thats pretty much how it works. Depending on your broker, they may actually deliver the shares to you when you exercise the options. (ie: when you sell the options, you are actually buying the stock at a price of $25; you can turn around and then sell it at market value of $27).

 

[arrfep]

Originally posted by: SLU MD
Yeah thats pretty much how it works. Depending on your broker, they may actually deliver the shares to you when you exercise the options. (ie: when you sell the options, you are actually buying the stock at a price of $25; you can turn around and then sell it at market value of $27).

Got it, thanks. That's one of the things I was confused about as well.

 

[DaWhim]

For someone who doesn't know investing, I always tell them to go with KISS, (keep it simple, stupid)

 

[fisheerman]

If you excercise the option (say 1000@$25) even if you are going to sell do you have to have the funds to cover the purchase in your account? $25K in this case?

Don't trade options but am trying to learn more.

-fish

 

[JS80]

you mean you sold the options for intrinsic value for $2?

if you've been trading options for 7 months and you are asking these types of questions you need to go back to hitting the books or considering sticking to equities.

 

[Miramonti]

Originally posted by: JS80
you mean you sold the options for intrinsic value for $2?

if you've been trading options for 7 months and you are asking these types of questions you need to go back to hitting the books or considering sticking to equities.

Exactly, if you sell them *with the stock at $27*, you will get atleast $2 (probably more if the Put still has a premium in it.) So your profit is $2 - $.70 = $1.3 (x100 = $130 per option).

If the stock is at $27 when they expire, and you don't sell them before that, you will receive 100 shares of stock per option that you have. The risk there is that settlement is at $27, but by the time you have the shares in your account (the next Monday?) the stock is lower than $27 and you can't sell at that price anymore. So definitely sell them before the expiration if they are 'in the money' so you can liquidate your position, take your profits, and not get stuck with the stock.

(you got to admit tho JS80, that he has a much better understanding of options than most people who post about wanting to trade them. )

 

[arrfep]

Originally posted by: JS80
you mean you sold the options for intrinsic value for $2?

if you've been trading options for 7 months and you are asking these types of questions you need to go back to hitting the books or considering sticking to equities.

Originally posted by: arrfep

I'd like to try trading options

I have been trading only equities thus far. Have been doing well.
Have not traded options yet. Mild success in equities, and faith/research in position I hold currently makes me want to start trading options (in aforementioned security)...this is why I am asking questions.

 

[gordita]

can someone suggest the top 2 books to read on options.

Also, the top 3 online resources for options trading?

I'm mostly interested in the books though....

 

[Nerva]

options is like having leverage, a double edged knife. dont do it.

personally i dont know much about it, but mainly because i can't short, trade options (unless to hedge on a 1 to 1 basis) and a bunch of other crap.

also, you can learn about the fundamentals from reading book, but how you can trade based on reading a few books is beyond me. people at banks use complex models in order to trade options... at the way you guys are describing it, go play the slots, or roulette, you have a better chance with those.

 

[Alphathree33]

Originally posted by: 3cho
options is like having leverage, a double edged knife. dont do it.

personally i dont know much about it, but mainly because i can't short, trade options (unless to hedge on a 1 to 1 basis) and a bunch of other crap.

also, you can learn about the fundamentals from reading book, but how you can trade based on reading a few books is beyond me. people at banks use complex models in order to trade options... at the way you guys are describing it, go play the slots, or roulette, you have a better chance with those.

Institutional investors only rarely trade derivatives.

 

[Nerva]

Originally posted by: Alphathree33

Originally posted by: 3cho
options is like having leverage, a double edged knife. dont do it.

personally i dont know much about it, but mainly because i can't short, trade options (unless to hedge on a 1 to 1 basis) and a bunch of other crap.

also, you can learn about the fundamentals from reading book, but how you can trade based on reading a few books is beyond me. people at banks use complex models in order to trade options... at the way you guys are describing it, go play the slots, or roulette, you have a better chance with those.

Institutional investors only rarely trade derivatives.

...oh i am sorry, that's why ML has such a huge equity derivatives desk. or LEH and JPM having huge fixed income (including swaps, interest derivative desks)...