In these market conditions, why 'buy' when you can 'rent'?
Options trading is cheaper, quicker and safer than ever before.
In these market conditions, why 'buy' when you can 'rent'?
With Options, you limit your risk but get to keep all the upside (which is infinite).
An Option is defined as follows:•An option contract is an agreement between two parties to buy/sell an asset (stock or Index contract as an example) at a fixed price and fixed date in the future.
•It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.
There are 2 parts of an Option
The Exercise Price: The Price at which you can buy/sell (Strike Price)
The Option Price : The Price you paid for the Option (Right) (Premium)
Type of Options
European Options : (CE/PE) Can be exercised only on maturity date.
American Options : (CA/PA) Can be exercised any time up to maturity date.
Call Option
(Buyer) Right to Buy (Seller) Obligation to Sell
Put Option
(Buyer) Right to Sell (Seller) Obligation to Buy
Option Value (Premium)
The price of an options can be broken down into two parts: intrinsic value
and time value .
•Intrinsic Value
Intrinsic value is the portion of the option that can be realized if the option is
exercised. Therefore, only in-the-money options have intrinsic value.
•Time Value
When an option is trading at more than the intrinsic value, the difference is
known as Extrinsic Value, or more commonly known as Time Value.
Understanding Options
•Quite often you will hear the terms "in-the-money", "at-the-money" and
"out-of-the-money" or ITM, ATM and OTM. These terms all refer to an
options current Intrinsic Value.
•The strike price of an option compared to the current stock price is what
determines the option's Intrinsic Value and hence determines whether the
option is in, at or out of the money. If a call option's strike price is less than
the current market price of the underlying asset it is said to be in-the-money -
as the option buyer can exercise and make an instant profit.
•Call Options
•In-the-Money = Strike price less than underlying price
•At-the-Money = Strike price is the same as the underlying price
•Out-of-the-Money = Strike price is greater than the underlying price
•Put Options
•In-the-Money = Strike price is greater than the underlying price
•At-the-Money = Strike price is the same as the underlying price
•Out-of-the-Money = Strike price is less than the underlying price
Factors Effecting Options
•Volatility is the most crucial of all option trading concepts. Volatility
indicators provide traders with an estimate of how much movement a stock
can be expected to make over a given time frame. This is crucial in
determining whether an option is likely to expire in or out of the money by
the expiration date.
•Time decay is a crucial component traders consider when deciding
when/where to buy sell options. Time decay can be represented by a Greek
term know as Theta. Don't worry too much about the Greeks for now, we will
take a look at Option Pricing and Greeks a little later.
Trading The Options
•Either We are buyers (holders) or Sellers (Writers) of Option
•Buyers: Limited Loss (to the extend of Premium paid - Unlimited Profits
•Sellers (Writers): Limited Profits ( to extend Of Premium Received)-unlimitedLoss
•Execution….
•a) Speculation:
•For Speculation : Choose the right strike (ATM/OTM/ITM)
•Imp of Time and Price Stop Loss.
•Tracking Underlying and not the Option Price.
•b) Conjunction:
•Utilizing current holding to do “Covered Call / Put”
Lets Recap
•An option is a contract giving the buyer the right but not the obligation to
buy or sell an underlying asset at a specific price on or before a certain date.
•Options are derivatives because they derive their value from an underlying
asset.
•A call gives the holder the right to buy an asset at a certain price within a
specific period of time.
•A put gives the holder the right to sell an asset at a certain price within a
specific period of time.
•There are four types of participants in options markets: buyers of calls,
sellers of calls, buyers of puts, and sellers of puts.
•Buyers are often referred to as holders and sellers are also referred to as
writers.
•The price at which an underlying stock can be purchased or sold is called the
strike price.
•The total cost of an option is called the premium, which is determined by
factors including the stock price, strike price and time remaining until
expiration.
•Investors use options both to speculate and hedge risk.
Type of Options
European Options : (CE/PE) Can be exercised only on maturity date.
American Options : (CA/PA) Can be exercised any time up to maturity date.
Call Option
(Buyer) Right to Buy (Seller) Obligation to Sell
Put Option
(Buyer) Right to Sell (Seller) Obligation to Buy
Option Value (Premium)
The price of an options can be broken down into two parts: intrinsic value
and time value .
•Intrinsic Value
Intrinsic value is the portion of the option that can be realized if the option is
exercised. Therefore, only in-the-money options have intrinsic value.
•Time Value
When an option is trading at more than the intrinsic value, the difference is
known as Extrinsic Value, or more commonly known as Time Value.
Understanding Options
•Quite often you will hear the terms "in-the-money", "at-the-money" and
"out-of-the-money" or ITM, ATM and OTM. These terms all refer to an
options current Intrinsic Value.
•The strike price of an option compared to the current stock price is what
determines the option's Intrinsic Value and hence determines whether the
option is in, at or out of the money. If a call option's strike price is less than
the current market price of the underlying asset it is said to be in-the-money -
as the option buyer can exercise and make an instant profit.
•Call Options
•In-the-Money = Strike price less than underlying price
•At-the-Money = Strike price is the same as the underlying price
•Out-of-the-Money = Strike price is greater than the underlying price
•Put Options
•In-the-Money = Strike price is greater than the underlying price
•At-the-Money = Strike price is the same as the underlying price
•Out-of-the-Money = Strike price is less than the underlying price
Factors Effecting Options
•Volatility is the most crucial of all option trading concepts. Volatility
indicators provide traders with an estimate of how much movement a stock
can be expected to make over a given time frame. This is crucial in
determining whether an option is likely to expire in or out of the money by
the expiration date.
•Time decay is a crucial component traders consider when deciding
when/where to buy sell options. Time decay can be represented by a Greek
term know as Theta. Don't worry too much about the Greeks for now, we will
take a look at Option Pricing and Greeks a little later.
Trading The Options
•Either We are buyers (holders) or Sellers (Writers) of Option
•Buyers: Limited Loss (to the extend of Premium paid - Unlimited Profits
•Sellers (Writers): Limited Profits ( to extend Of Premium Received)-unlimitedLoss
•Execution….
•a) Speculation:
•For Speculation : Choose the right strike (ATM/OTM/ITM)
•Imp of Time and Price Stop Loss.
•Tracking Underlying and not the Option Price.
•b) Conjunction:
•Utilizing current holding to do “Covered Call / Put”
Lets Recap
•An option is a contract giving the buyer the right but not the obligation to
buy or sell an underlying asset at a specific price on or before a certain date.
•Options are derivatives because they derive their value from an underlying
asset.
•A call gives the holder the right to buy an asset at a certain price within a
specific period of time.
•A put gives the holder the right to sell an asset at a certain price within a
specific period of time.
•There are four types of participants in options markets: buyers of calls,
sellers of calls, buyers of puts, and sellers of puts.
•Buyers are often referred to as holders and sellers are also referred to as
writers.
•The price at which an underlying stock can be purchased or sold is called the
strike price.
•The total cost of an option is called the premium, which is determined by
factors including the stock price, strike price and time remaining until
expiration.
•Investors use options both to speculate and hedge risk.
