Options brief explanation?

[Jordan]

Could someone give me brief explanation on what options are? How you make money, and your experience with it.

Thanks

[chinaman711]

Very risky stay away until you learn about options. Go to cboe.com all the info you need is there.

[aiki14]

Originally Posted by Jordan

Could someone give me brief explanation on what options are? How you make money, and your experience with it.

Thanks

Here's a link to the Chicago Board Options Exchange (CBOE) Learning Center. Your question would take a lot of space to answer.

http://www.cboe.com/LearnCenter/default.aspx

[Jordan]

Thanks guys

[Thierry Martin]

Here is a free site that explains options (you have to register first):

OptionsScholar.com

[madcowdisease]

Originally Posted by Jordan

Could someone give me brief explanation on what options are? How you make money, and your experience with it.

Thanks

Not so brief but informal explanation:

An "option" is a contract between an option writer (seller) and a buyer (you or I). The contract is the right to buy (call) or sell (put) the underlying security at a specified price (strike). The caveat here is that the option expires at a specified date so you are constrained by a time frame for your stock to make a move. Ergo, unlike standard stock you can't just buy and hold.

You can make money two ways. For example, let's look at call options on ExxonMobil [XOM]. Specifically, we'll examine the September 90 (strike price) call option. Currently it is trading at 85 cents. Since each option contract between the writer and the buyer is an agreement to buy 100 shares we must take the price and multiply it by 100. Therefore, to purchase one contract for 100 shares of XOM for September 2007 @ a strike of 90 dollars we'd take 0.85*100 and we'd pay $85 dollars for this contract.

So how does this work? We are limited to the 3rd Friday of September for XOM to move past $90/share so that we can "exercise" our right to buy 100 shares of XOM @ $90/share. If, between now and then, XOM moves to 95 you can "assign" the writer a notice for transfer of assets. Consequently, the option writer must sell you 100 shares of XOM at $90 share. Where you make your money is by inturn selling those shares for a gain of $5 share. Note the price you paid for the option though. You paid $0.85 cents a share so you would net $5-.85 or $4.15/share * 100 shares or $415 total on the trade. Easy right?

The second, and I might note most popular, way to make money on options is to trade them like you would a stock. We'll use the example above on a Sept 2007 XOM 90 call option where you paid 85 cents for the contract. Let's assume XOM moves to $95 again and the "premium" for the contract you now hold rises from $.85 to $4. You could sell your option to another trader and the profit would be the net difference. You still have the $85 (.85 * 100) initial outlay and you sell for $400 (4 * 100) so you pocket $315. This is sometimes more favorable as you can see the obviously larger percentage gain. Here you expended $85 to make $400 whereas in the first example ou still have to buy the shares at 90 a pop for an outlay of $9000 + $85 and you sell the 100 share lot for 9500 for a net of $415.

My experience with it has simply been as a hedge. I don't buy calls though I am considering it on one position. I use puts as a floor beneath my positions that act like insurance. If I buy 100 shares of common stock in PG @ 65/share I might subsequently buy a put option with the strike of 65 therefore should my stock decline I will gain value on the put essentially limiting my loss the the price of the put should PG go higher.

I hope this gives you a general overview of how options work. There are more complicated strategies such as Spreads and Straddles that I don't mess with. Also, options have their own set of jargon like Gamma, Delta, and Beta which one could write a book about. In fact, if you'd like to learn more check out a few books on the subject. That is where I got most of my info.

[Luc1Grunt]

Originally Posted by madcowdisease

Not so brief but informal explanation:

An "option" is a contract between an option writer (seller) and a buyer (you or I). The contract is the right to buy (call) or sell (put) the underlying security at a specified price (strike). The caveat here is that the option expires at a specified date so you are constrained by a time frame for your stock to make a move. Ergo, unlike standard stock you can't just buy and hold.

You can make money two ways. For example, let's look at call options on ExxonMobil [XOM]. Specifically, we'll examine the September 90 (strike price) call option. Currently it is trading at 85 cents. Since each option contract between the writer and the buyer is an agreement to buy 100 shares we must take the price and multiply it by 100. Therefore, to purchase one contract for 100 shares of XOM for September 2007 @ a strike of 90 dollars we'd take 0.85*100 and we'd pay $85 dollars for this contract.

So how does this work? We are limited to the 3rd Friday of September for XOM to move past $90/share so that we can "exercise" our right to buy 100 shares of XOM @ $90/share. If, between now and then, XOM moves to 95 you can "assign" the writer a notice for transfer of assets. Consequently, the option writer must sell you 100 shares of XOM at $90 share. Where you make your money is by inturn selling those shares for a gain of $5 share. Note the price you paid for the option though. You paid $0.85 cents a share so you would net $5-.85 or $4.15/share * 100 shares or $415 total on the trade. Easy right?

The second, and I might note most popular, way to make money on options is to trade them like you would a stock. We'll use the example above on a Sept 2007 XOM 90 call option where you paid 85 cents for the contract. Let's assume XOM moves to $95 again and the "premium" for the contract you now hold rises from $.85 to $4. You could sell your option to another trader and the profit would be the net difference. You still have the $85 (.85 * 100) initial outlay and you sell for $400 (4 * 100) so you pocket $315. This is sometimes more favorable as you can see the obviously larger percentage gain. Here you expended $85 to make $400 whereas in the first example ou still have to buy the shares at 90 a pop for an outlay of $9000 + $85 and you sell the 100 share lot for 9500 for a net of $415.

My experience with it has simply been as a hedge. I don't buy calls though I am considering it on one position. I use puts as a floor beneath my positions that act like insurance. If I buy 100 shares of common stock in PG @ 65/share I might subsequently buy a put option with the strike of 65 therefore should my stock decline I will gain value on the put essentially limiting my loss the the price of the put should PG go higher.

I hope this gives you a general overview of how options work. There are more complicated strategies such as Spreads and Straddles that I don't mess with. Also, options have their own set of jargon like Gamma, Delta, and Beta which one could write a book about. In fact, if you'd like to learn more check out a few books on the subject. That is where I got most of my info.

Great Post Cow.

My advice: Don't spend a fortune on books......beat the bushes on the web. Almost ALL the info you will get out of books for "intro" to "intermediate" are FREE on the web. Until you get into advanced strategies, watch option chains, price actions, and fully understand your methods of "predicting" stock movements.

[madcowdisease]

Originally Posted by Luc1Grunt

Great Post Cow.

My advice: Don't spend a fortune on books......beat the bushes on the web. Almost ALL the info you will get out of books for "intro" to "intermediate" are FREE on the web. Until you get into advanced strategies, watch option chains, price actions, and fully understand your methods of "predicting" stock movements.

Thank you for the accolade, Luc. I am a frequenter of my local, metropolitan library and therefore the only costs I incur are when I forget to renew. But hey, it's only 10 cents a day so it isn't breaking the bank .

I am currently reading one option strategy book regarding predicting price movements of common stock based on open interest and volume in the options chains. Pretty good stuff thus far. Any suggestions for reads based on the things you mentioned above?

[Luc1Grunt]

Originally Posted by madcowdisease

Thank you for the accolade, Luc. I am a frequenter of my local, metropolitan library and therefore the only costs I incur are when I forget to renew. But hey, it's only 10 cents a day so it isn't breaking the bank .

I am currently reading one option strategy book regarding predicting price movements of common stock based on open interest and volume in the options chains. Pretty good stuff thus far. Any suggestions for reads based on the things you mentioned above?

I am not (by any stretch of the imagination) a good source of options info. Try Aiki or Optimus (I know I missed a few gurus). I trade 3-4 stocks a day and only use options conservatively for various reasons.

"Option Volatility and Pricing" by Sheldon Natenberg is a good source for reference and to get the juices flowing.
Happy trading