The Ugly Truth About Options Success Sep 23, 15 06:15 PMThe ugly truth about options success. A List of the Best Free and Paid Options Trading Courses Sep 23, 15 05:31 PMThe option profit formula options trading course is not for everyone so here is a list of other option courses.
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All stock options trading and technical analysis information on this website is for educational purposes only. Now that you have a better understanding of what options are, what calls and puts are, let's look at how to buy a call option in a little more detail. When you request an option chain on the CBOE website for the stock that you want to buy a call, you will see the calls listed in the left column and the puts listed in the right column. Finally, to buy a call you need to understand what the option prices mean and find one that is reasonably priced. As you might expect, option prices are a function of the price of the underlying stock, the strike price, the number of days left to expiration, and the overall volatility of the stock.
Call and Put Option Trading Tip: When you buy a call option, you need to be able to calculate your break-even point to see if you really want to make a trade. Now in the Table 2 below, we go ahead and invest the same initial amount in options as in the stock so we spend $8,400 on 100 shares, of IBM and about the same on each of the calls.
Scenario 3--Invest Equal Amounts of Money in Each Stock and Option then IBM Closes at $83.00. Buy a Call Conclusion: If you are sure that a stock is going to pop up a few points before the next option expiration date, it is the most profitable (and the most risky) to buy a call option with a strike price slightly higher than the current stock price. When in doubt as to whether to buy a call with a low strike price or buy a call with a higher strike price, it is always good to look at the volume that is happening in the real market and go where the volume is (I call this following the "smart money"). Now that you know how to buy a call and understand the importance of strike prices when you buy a call, the next topic addresses selling calls, also known as writing calls. Options that cover only 10 shares of the underlying stock instead of 100 and cost only about 10% of the price of regular options. The International Securities Exchange, ISE, released a remarkable new options product on 18th of March 2013 called "Mini Options" on five heavily traded, high priced stocks; AAPL, GOOG, GLD, AMZN and SPY. This free options trading tutorial shall delve in-depth into what Mini Options are, how they work and what they can do for your options trading!
In a nutshell, mini options are exactly the same as regular, weekly and quarterly options, have the same strike prices and expiration dates, almost the same premium price but covers only 10 shares instead of 100. While 1 contract of regular option would cost you $2000, one contract of mini option would cost you only $200. Even though mini options share the exact same characteristics as their regular counterpart, they are not sold as fractions of the regular options but are seperate trading instruments of their own and accounted for in their own options chains.
Writers of uncovered puts or calls must maintain 100% of the option proceeds plus 20% of the aggregate contract value (current equity price x $10) minus the amount by which the option is out of the money, if any, subject to a minimum for calls of option proceeds plus 10% of the aggregate contract value and a minimum for puts of option proceeds plus 10% of the aggregate exercise price amount. As you can see in the specifications above, apart from the multiplier of underlying asset making them cheaper to own, there are basically no differences between mini options and their regular, weekly or quarterly counterpart. Mini options are primarily created with the hedging needs of small retail investors in mind. The creation of mini options seek to provide an avenue of hedging for these small retail investors by chunking down the amount of shares covered from 100 to just 10. Mini options are obviously not created with the express intention of helping small retail options traders buy cheaper options because the options of some of these expensive stocks, such as SPY, are really as cheap as options on stocks trading at $50 or below. Even though the launch of mini options is considered a success in the industry and is widely acclaimed as a "respectable start", trading volume on mini options is still only a fraction of the trading volume of regular options of the same stocks (2013).
Indeed, it is quite surprising to the industry that mini options are so thinly traded when compared with regular options. You can perform any options strategies using just mini options exactly as you would using regular options.
As mentioned repeatedly above, the most notable options strategy for mini options is perhaps the Covered Call. Another purpose for which mini options are created is the hedging needs of small retail investors through protective puts. With mini options, it is now possible to perform a 2:1 ITM Ratio Spread by writing 5 contracts of ITM mini options against your single contract of regular option! The good news is, most options brokers do recognise the short mini options as part of an options spread against the long regular option so very little margin is required. When the option is exercised the owner of the option will "buy" (Call option) 100 shares of IBM stock for $50 a share. They have more value, and because of this they move up in price at a quicker rate then any other option.
When you get a quote on a stock on most sites you can also click on a link for that stock's option chain. If YHOO is trading at $27 a share and you are looking to buy a call of the October $30 call option, the call option price is determined just like a stock--totally on a supply and demand basis. While the first 3 of these (stock price, strike price, and days to expiration) are easily agreed upon, it is the volatility and the expected volatility of the stock that traders differ in opinion and therefore drives prices. Scenario 1--Buy 100 Shares of Stock, buy a call with a strike price of $80, buy a call with a strike price of $85, and buy a call with a strike price of $90. If you want to be a little more conservative, you can also buy a call option with a strike price below the current stock price. If prices are random, then over a short period of time you would expect stocks to move up 33% of the time, move down 33% of the time, and stay roughly the same 33% of time. For a long time, these options traders and investors had a hard time trading high priced stocks because even the options on these stocks work out to be quite a huge investment for them.
Evil has his "Mini-Me" in the movie "Austin Powers", options also have their mini counterparts known as "Mini Options". That means that when you buy a mini option, you would multiply the premium by only 10 instead of 100 to arrive at the price of one contract.
This means that when you buy a mini option, you are not buying one-tenth of the regular option of the same strike price but rather a seperate different option that has only ten shares of the underlying stock as their contract size.
This allows small retail investors to buy put options in order to protect their shares or write covered calls against their shares in multiples of 10 shares instead of 100 shares. Most options premiums of mini options also tend to be slightly higher than their regular options counterpart due to wider bid ask spread from being thinly traded (read more about options liquidity).
Prior to the launch of mini options, most experts speculated that mini options would attract most of the retail investor herd and would explode in trading volume and surpass that of regular options. Options traders are mainly directional speculators rather than hedgers or covered call writers. Mini options could still be so new that very few options traders know about their existence or understand how they work yet. There isn't as much small retail investors and options traders involved in these big stocks than previously expected.
Mini options tend to have slightly different premium and bid ask spread than their regular options of the same strike price and month. Most options brokers still apply the same round lot commission that they do to a single contract of regular options to a single contract of mini options. This results in commission inefficiency for mini options as you are basically paying more commmissions for lesser exposure. Small retail options traders have never been able to take advantage of the advantageous risk profile of ITM ratio spreads due to holding only one contract of an expensive option. Since 5 contracts of mini options covers only 50 shares of the underlying, it is effectively half of a regular option. May affect liquidity of regular options should trading of mini options become very popular.
May be commission inefficient as most options brokers charge the same commission for mini options as they do regular options. They have more horsepower so to speak.OTM options are the cheapest of the three and move in value, dollar wise, slower than the other two kinds of options.
The option chain lists every actively traded call and put option that exists for that stock.
Because I think IBM will go up I want to buy a call and since option strike prices are in multiples of $5, I could buy the $80 calls, the $85 calls, or the $90 calls.
Of course, stocks don't always move the way we think, so Table 3 shows what happens if the stock price just declines a bit to $83 a share.
Small retail stock traders holding a small amount of shares in these stocks also found it hard to protect their portfolio using regular options that covers 100 shares per lot. Mini Options are options contracts that cover only 10 shares instead of the usual 100 shares covered by plain vanilla options or even weeklies or quarterlies (Read about Options Distinguished by Expiration). Yes, the main reason behind the creation of mini options is to cater to the needs of small retail investors.
This also mean that buying ten contracts of a mini option doesn't mean you bought one contract of the regular option counterpart. Since regular options cover 100 shares of the underlying stock, small retail investors holding lesser than 100 shares of these stocks would not be able to protect their stock using put options nor write Covered Calls against their stocks since each contract of regular options cover 100 shares. As stated above, one of the main reasons for the creation of mini options is the fact that small retail covered call writers owning non-round lot (100 shares per lot) of these expensive shares would not be able to write even one contract of call options against them without incurring margin. This situation could change as time goes by but whether mini options would become more heavily traded than their regular counterparts as more and more options traders know about them remains a question. You won't be able to write a covered call using regular options since regular options cover 100 shares so you decide to write the covered call using mini options which covers only 10 shares. As such, small retail investors holding only 10 shares (or multiples of 10 but lesser than 100), could not protect their shares using put options even if its just one contract of a put option.
Since one contract of regular put options covers 100 shares, you decide to use mini options which covers only 10 shares.
This kind of opportunity has never before existed for small retail options traders who can afford to buy only one contract of an expensive option!
Notice in Table 1 that we spent $8,400 on the stock position and we spent very little on the options. Are you starting to see the attractiveness of trading options and are you ready to buy a call! However, if allowing small retail options traders buy options for speculation is one of the main objective of the mini options program, then certainly expensive stocks with cheap options, such as SPY, would not be included.
Since mini options are one-tenth the size of regular options, they can easily get up to ten times the trading volume of regular options.
However, since there are alot more directional speculators who trades options directly rather than use options for hedging, there is lesser reason to use mini options especially since options on expensive stocks such as SPY isn't more expensive than options on other cheaper stocks. With mini options, small retail investors can now buy protective put for protection even if they own only 10 shares of the underlying stock.
This is useful when your bullish or bearish outlook is no longer true and you wish to profit from a more volatile condition (learn more about the Six Directional Outlooks in Options Trading). Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. So if YHOO is trading in the $30 range, it might have strike prices of $20, $25, $30, $35, and $40. On the other hand, mini options have indeed given small retail options traders an avenue of trading more expensive options, such as those of GOOG and AAPL, with just a few hundred dollars a time. This is done by writing lesser number of contracts of ITM options against your existing long options. Thirdly, you will not always find the expiration month you are looking for on the option for which you want to buy a call. Like how Weeklies and Quarterlies started, it is expected that if trading response is good, mini options would be made available for more stocks down the road. Fourthly, even if you do find the option that you want to buy a call on, you need to make sure it has enough volume trading on it to provide liquidity so that you can sell it if you decide to.
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