What is an option?

[clavocat]

i hear it alot and its prolly something very simple but how does it differ to just buying stock?

[Mad Girl Investor]

Clavo, for almost all basic stock market questions, www.investopedia.com can answer them all.

[clavocat]

Clavo, for almost all basic stock market questions, www.investopedia.com can answer them all.


i looked and i understand its getting a stock at a fixed price...but now what is it when people say..i trade options, i think im just confused, i looked it up but am kinda lost. :oops:

[Thierry Martin]

From www.investopedia.com

Stock Option

A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

In the U.K., it is known as a "share option".

American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.

____________

Some traders prefer trading options, because you control a lot more stock than if you buy it outright. The danger here is that if your trade goes bad, you end up with nothing - when you actually own stock, it may be worth less, but except for companies that go belly up, you still have the shares.

[jacobnbr1]

i hear it alot and its prolly something very simple but how does it differ to just buying stock?

They are tricky things to trade. My advice for you is to stay away from them until you become more familiar with trading.

I am sure by now you have read some articles of how guys have made thousands on simple trades with options. You have to know what direction the stock is going to trade it, it has to do it by a certain amount of time also.
I do options but i go after time decay trades vs's the trend trades.

[Bman409]

Don't mess with options

You WILL lose your money.

All of it, if you stick with it long enough.

[clavocat]

hmm i guess i understand a little better...i do not plan on trading these anytime soon, if ever...but i was just curious as ive heard people talking about them, so basically you either make tons of cash or lose it all?

[chinaman711]

Lots of info at cboe.com for options. Im holding calls on cvx and vlo as i think oil goes higher and calls on paas as i think silver goes higher and calls on my favorite chinese company xing. Gives you lots of leverage

[clavocat]

Lots of info at cboe.com for options. Im holding calls on cvx and vlo as i think oil goes higher and calls on paas as i think silver goes higher and calls on my favorite chinese company xing. Gives you lots of leverage


i understand it better now...but what really makes it THAT much riskier than stocks?? is it cuz u either make it big or lose it all??

[chinaman711]

Because options are dated but if you are trading them for a few days not any more risky then the stock and alot less money tied up. Example last thur i bought 30 calls on VLO at .35. I call + 100 shares of stock so my investment to control 3000 shares of vlo was $1050.00 where as it ould have been over $190,000 to buy 3000 shares. I have a sell in for today at .85 see what happens.

[Bman409]

i understand it better now...but what really makes it THAT much riskier than stocks?? is it cuz u either make it big or lose it all??


what makes it far more risky than stocks is the SPREAD between the bid and the ask...


If you take a large position in an option at the ask of $0.35 (for instance) and the bid is $0.30...... then the trade starts to go against you... and you want to get out

Well the BID might have dropped to 0.25 by then... and the ask is now 0.30

so you decide to bail out at 0.25

This is a very real scenario.... Trust me..


You just lost 0.10 out of a 0.35 investment.. that's a 28% loss

and it can happen to you instantly.

[clavocat]

gotcha thanks alot bman! yea ill stay away lol...at least for now.

[chinaman711]

I just sold my vlo calls for .80 : )

[chinaman711]

Now .85 oh well

[GDFLS]

Clavo, I set up a virtual portfolio at investopedia.com and trade options there. Scottrade denied my application for options for now, (thats cool) so this is a great way for me to learn and get a feel of what it is like.

Try trading options on investopedia, it helps a lot in the learning process.

Also Lenny Dykstra, yeah the ol baseball player, loves options. His strategy is to buy in the money calls, of solid companies that have been beat up, with an expiration date 6-8 months out. And he sells as soon as he turns a profit. He doesn’t stay long at all. He holds a couple days at times.

I followed some of his picks and he did pretty well with this strategy. Again, it’s very HIGH RISK, but high reward.

Just take the time to learn as much as you can.

[madcowdisease]

I think he was asking about trading options. To attempt to answer the question about trading options look at what chinaman711 did with VLO. Bman's advice about the spread is good advice to keep in mind though. An option is the right but not the obligation to buy a stock at a certain prices. You can trade the piece of paper related to the stock, or a derivative, just like a stock. You can also exercise your options and make a killing if you're in the money, meaning the stock price has since crossed the strike. Most ppl eff up by buying out of the money options hoping to hit it big. This method has cost ppl I know much of their once free capital. So if you hear someone saying they are trading options they are buying them, waiting 'til they get closer to or more in the money and therefore have increased in value and then flipping them. If someone is buying them and exercising them they are waiting 'til the expiration date.

I think I may have just confused you even more after reading the above. I'll just stop there so as not to make the situation any worse. It seems these things are rather difficult to explain and perhaps that's why everyone says "stay away from them."

[chinaman711]

Just sold the rest of my vlo calls at .90 sweet

[chinaman711]

vlo is moving and the calls just hit .95 : ( oh well

[chinaman711]

Some of my sells just went thru on cvx sweet

[chinaman711]

Bought my calls back that i sold on cvx see what happens : ) as oil going higher imo

[chinaman711]

Heres another way to play options and it works well in an IRA account. Sell covered calls against the stock that you own in your ira and of course you want to sell out of the money calls and take the premium. Don't forget you can always make a little extra money in any account by renting out your stocks to the brokers. I can't believe how many long term holders don't know they can collect rent on the stocks that they own. Now if you really want to gamble you can sell naked calls or puts and if you want to play it safe you could always do a chickentrade. I have been trading options for 30 years but i only do options in a strong market or better yet in a market crash like we had in 2000 as stocks go down alot faster then they go up. Then there are spreads but you better know what you are doing.

[clavocat]

u make alot of cash doing this, you seem very knowledgable.

[roehrigs01]

I got bored with stocks and waiting for profits...

i strickly do options now...the money moves quicker and is the profit is greater without have to put up so much to make some... plus, they there are many different ways to invest in options besides buying calls and puts... just seems more fun and entertaining to me...

not a lot of option activity on this forum which is prob better that way...i have started posted my option stuff on the other online form that has a section for options...

however, the posters are right... you can loose your money very quickly with options... I have put many hours into option's buying learning and chart TA studies.... many books, many online sessions about the different ways to buy options, such as buying calls & puts, selling calls & puts, vertical, iron condors, calendar, straddles, etc... You can seriously loose all you money in 1 dayand be at $0, if you buy the wrong stuff... but you can also make 20-300+% profit on your investment too, in a few weeks or few months...if you do it right...

[chinaman711]

I only do options in strong sectors like oil and the metals for now and i like to buy on dips like the one we had yesterday when cnbc and maria caused a selloff in the market. Before the selloff i had sold cvx may 60 calls for 2.35 and i bought them back on the close at 1.85. CVX needs to get back to 62 today if so the calls should hit 2.35 to 2.40 again not bad a 27% gain for an overnight trade. Who knows it could take off and really run. Good lck and lets hope for another day like yesterday.

[chinaman711]

CVX 61.90 and the option is at 2.35

[chinaman711]

Just sold my calls for 2.40 for a real nice 30% 1 day gain and that is how you trade options. Now buying calls on PAAS on this dip see what happens. Got the june 25 for 1.15

[chinaman711]

PAAS really coming back and the calls are now 1.70 on the ask : ) im putting in a sell at 1.75 for a nice 52% day trade gain see if it goes thru today.

[chinaman711]

sweet the sale just went thru 52% day trade not bad. Options are great when you are right

[chinaman711]

SIL was a steal too : )

[Bman409]

I only do options in strong sectors like oil and the metals for now and i like to buy on dips like the one we had yesterday when cnbc and maria caused a selloff in the market. Before the selloff i had sold cvx may 60 calls for 2.35 and i bought them back on the close at 1.85. CVX needs to get back to 62 today if so the calls should hit 2.35 to 2.40 again not bad a 27% gain for an overnight trade. Who knows it could take off and really run. Good lck and lets hope for another day like yesterday.


This is a good strategy to use, if you're going to do it

I found for my style of trading, options didn't work because I don't like to take much of a loss... so I'm quick to close out the position as soon as it goes against me

This works well for swing trading individual stocks, but does not work well with options because the spread between the Bid and the ASK was killing me..

one of the most important things I would say to people who are TRADING options (as opposed to using them as part of a hedge strategy) is to MAKE SURE THE OPTIONS are liquid enough that there's isn't a big gap between bid and ask... or, if there is, only buy at the BID...

It's not uncommon to see a BID of $0.30 and and ASK of $0.45.. or a BID Of $1.00 and an ASK of $1.20

those kinds of trades will kill you if you buy at the ASK and sell at the BID

[chinaman711]

Yep i agree 100%. I usually look for plays like the ones today in silver and it worked out well. CVX has been real good to me too. If you trade options you had better know whay your doing and don't get too greedy just buy the dips and look for a quick profit or if you like a stock l/t like i do with xing then you just pay up. Well im heading for virginia beach for some fun with my grandkids at the beach and a retirement party for my son who is in the navy. Good lck the rest of the week as it can't get much better then this : )

[nancy180]

Hi Cat! I love cats but they jump on my computers all the time!!

I trade the occasional option. However, I won't buy an option unless I like the stock enough to actually buy it. For instance, lots of folks like Suncor. Great company. Very stable. but very expensive.So 100 shares would be 8500 bucks. Lots of money.

So an option gives you the right (but not the obligation) to buy the stock in the future. Sort of like a small deposit and you are betting it will go to, lets say 100. You would buy a call (100 shares) and your strike price is 100. If it reaches 100 before the day it expires, you can now sell it even though you don't really own it yet. Or you could do the opposite. IE: short the stock. When google took a dive, what a load of cash those guy made!

Some people buy a put and call on the same stock at the same time. that way they are covered either way. Now, if you don't reach your strike price before it expires, you lose your deposit. gone. nada. (But it's not that much, my average is 600 bucks and thankfully never lost yet. But I'm very conservative)

So to use options, start very small with perhaps one call on a stock you are 100% confident in. My strike price on Finning Internation is 46 bucks. I only have one call and wish I had bought more.

I really recommend you take an options course but don't buy those expensive programs. Try the library, you should find something. Good luck nancy

[clavocat]

cat is my last name, Lavocat haha, but cats are pretty cool i guess...so you can take a course on options?? where would i look to sign up for one...speaking of courses anyone have an idea on where to take a day trading class or even an investment class, id like all the knowledge i can get. ive been reading, im taking economic classes next semester and have been researching and looking at charts. any help would be appreciated, thanks.

[madcowdisease]

cat is my last name, Lavocat haha, but cats are pretty cool i guess...so you can take a course on options?? where would i look to sign up for one...speaking of courses anyone have an idea on where to take a day trading class or even an investment class, id like all the knowledge i can get. ive been reading, im taking economic classes next semester and have been researching and looking at charts. any help would be appreciated, thanks.

The only "courses" I have seen, mostly on TV infomercials, are courses where they want you to buy their product such as a computer program and claim you can quit your job and live fatter than you've ever dreamed. Of course this is all bullsh!t. I'd be willing to bet 95% of the posters here are self-taught, and that's a conservative estimate.

I'd highly recommend loading up on the Econ classes partly because that's what I have a degree in. But, take the Econ courses to get a feel for supply-demand principles, equilibrium, the money supply, GDP, CPI, PPI, inflation, unemployment rates, real estate, home sales, and The Fed and you should have a pretty good idea how the markets work. Not to mention all the microeconomic stuff you will pick up as well.

I don't know what your major is but all the BOK [Breadth of Knowledge] stuff they make you take is worth it. Take as many liberal arts classes as you can to get a true "world view" of what is going on. A broad based education will help you game the market by thinking with a macro perspective. Plus, your profs are pretty worldy ppl to begin with and will tell about some things such as current events and trends that will be brilliant investment ideas. I only wish I had the money to play around with in college. I'd have been all over the housing boom, Napster, AAPL, the makers of myspace.com, The European Union, solar power, Brazil, Russia, India, and China long before anyone on Wall St even thought about allocating money there, and I must not forget shorting GM. Hell I've thought about going back and sitting in on a few classes just to get investment ideas.

[clavocat]

well im in engineering right now, but I'm transfering out to general studies, im good at math and science i just think engineering is boring...i was going to go business for financial advisor but my engineering credits wont transfer STRAIGHT into the business curriculum so im going Gen. ed first..what courses do u suggest (im going to take macro and micro economics) but what else gave u investment ideas?

[chinaman711]

You can spend alot of money on learning to trade options. Bettertrades.com charges $3,000 for a 2 day class and they will hold your hands and work with you for 12 months. They do offer a free seminar and its worth going to if you do not know anything about options. All this info is available free on the net just takes time. If you are new to trading i would stay away from options and go slow. Best to learn all you can first and then set up a paper trading account on options before you use real money. JMHO