| Owning stock has only two, maybe three,
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| | obligations. Buying an option cannot cost
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| possibilities. The stock goes up. Or the
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| | you more than what you pay for the
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| stock goes down. Or, as a third
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| | option. Selling an option can cost you
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| possibility, it does a little of both. If
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| | far more than what you receive for
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| you buy a stock, all you want it to do is
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| | selling the option.
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| go up.
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| | Let's examine the terminology of calls
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| If you sell a stock short or close a
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| | and puts. The underlying is the actual
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| position (or consider buying it and then
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| | instrument such as a stock or commodity
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| decide not to ;), all you want it to do
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| | that is being represented by the options
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| is go down. I call this one-dimensional
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| | contract. In the real estate example, the
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| trading. You're long, you're short, or
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| | house would be the underlying. Options
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| you're flat. Your gains and losses travel
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| | are said to be derivatives because their
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| up and down the number line you may
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| | value is directly tied to or derived from
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| remember from elementary school in lock
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| | that of the underlying. An option has no
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| step with the movement of the stock. Not
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| | meaning without an actual asset
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| only that, but it takes a big move to
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| | underlying it. It is the right to buy or
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| make a big profit. And a big move against
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| | sell that underlying asset that gives the
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| you can mean a big loss. Potentially all
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| | option a reason for being and some value.
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| the way down to zero.
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| | The strike price is the agreed upon price
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| You need to add a second dimension to
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| | for which the underlying can be bought or
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| your trading. You need more choices than
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| | sold under the terms of the option
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| picking a direction and hoping you are
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| | contract. In the real estate example, the
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| right. You need to limit your losses,
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| | strike price was $100,000. The expiration
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| improve your returns, and increase your
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| | date, obviously, is the date when the
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| flexibility. You need options.
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| | option expires. The day after expiration,
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| For many people, options are something to
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| | an option is worthless. This is the
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| avoid, being dangerous, complex, and
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| | single most important fact about options
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| scary. I would like to introduce you to
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| | that you must remember. This is why your
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| the joy of options. Any time you think
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| | friends think you are crazy for your
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| you want to buy a stock, I'd like to get
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| | interest in options. Unlike a stock,
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| you in the habit of first looking at how
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| | which you can hold forever, an option has
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| you could do more with less using
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| | a clearly defined shelf life.
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| options.
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| | One term remains, and that is the
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| In the stock and commodities markets, the
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| | premium. The premium is what you pay for
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| type of option we just described would be
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| | the option, when you are the buyer. Or
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| known as a call. A call typically
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| | what you receive for an option, when you
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| represents 100 shares of a stock. In the
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| | are the seller. In our real estate
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| commodities markets, a single option
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| | example, the premium was $500. That's
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| contract represents a single futures
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| | what it cost you to hold the right to buy
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| contract. (For simplicity, from this
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| | the house any time in that thirty-day
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| point forward, I will talk about options
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| | period. The last day of the thirty-day
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| on stock. Just remember that the same
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| | period would, again, be the expiration
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| discussion applies to options on
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| | date.
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| futures.)
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| | We have barely scratched the surface. I
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| Owning a call gives the owner the right
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| | say that not to intimidate you, but to
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| to buy 100 shares (usually) of the
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| | make you realize that you only have
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| underlying stock at the agreed upon
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| | enough knowledge to be dangerous to
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| strike price at or before the expiration
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| | yourself. Please do not think that you
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| date. (I say "usually" 100 shares
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| | are ready to go out and buy calls or
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| because, due to splits or acquisitions,
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| | place spread trades. You are not. You
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| there are times when an options contract
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| | don't know how an option moves relative
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| may represent something other than 100
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| | to moves in the price of the underlying.
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| shares.) Selling a call gives the seller
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| | You don't know what time does to the
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| the obligation to sell, if asked, 100
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| | value of an option. You don't know what
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| shares of the underlying stock at the
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| | volatility is or how it plays into option
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| agreed upon strike price any time up
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| | prices. You don't know the types of
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| until the expiration date.
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| | spreads or what they are used for.
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| The other kind of option is called a put,
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| | Please, please get yourself better
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| and it is exactly the same as a call with
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| | educated before you start putting money
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| one simple difference. A put gives the
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| | into option trades. Resist the temptation
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| owner the right to sell 100 shares
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| | to buy some cheap options, just to try it
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| (again, usually) of the underlying stock
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| | out. This is expensive education. There
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| at the agreed upon strike price at or
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| | are plenty of advantages to trading
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| before the expiration date. You can think
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| | options, but it's still a ruthless
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| of a put as insurance. No matter how
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| | market, happy to take your money, your
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| badly the stock price crashes, having a
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| | wallet, and your hand if you give it an
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| put means that you can sell your stock
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| | opportunity. Learn the rules of the game
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| for the strike price. On the flip side,
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| | before you put money on the line.
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| selling that put means you may be obliged
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| | Trading options can be satisfying,
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| to buy stock at far more than its current
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| | rewarding, stimulating, and fun. I invite
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| market price.
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| | you to add another dimension to your
|
| An important distinction to always keep
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| | trading by including options to your
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| in mind: Buying an option gives you
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| | repertoire.
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| rights. Selling an option gives you
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| |
|
