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What are Options?
- In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction. Thus, they are also a form of asset and have a valuation that may depend on a complex relationship between underlying asset value, time until expiration, market volatility, and other factors. Options may be traded between private parties in over-the-counter (OTC) transactions, or they may be exchange-traded in live, orderly markets in the form of standardized contracts.
- In simple terms. You're buying contracts for already agreed upon stocks trying to predict the future for profits. Very risky, Very rewarding.
Different types of Options
- There are two types of options:
- PUTS, A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame. This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. You're investing that a stock will go down in price.
- CALLS, Call options are financial contracts that give the option buyer the right but not the obligation to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price. You're investing that a stock will go up in price.
- Expiration Date: An expiration date is the last day that contracts, such as options, are valid. On or before this day, investors can decide what to do with their expiring position. Before an option expires, its owners can choose to exercise the option, close the position to realize their profit or loss or let the contract expire worthless. (I never exercise the option, we will be selling 99.99% of the time).
- Strike Price: A strike price is the set price that the underlying stock of your option can be bought or sold at when the option is exercised.
- Calls: the strike price is where the underlying stock can be bought by the option holder
- Puts: the strike price is where the underlying stock can be sold by the option holder
- Contracts: The number of ’calls’ or ‘puts’ bought or sold. One contract controls 100 shares. For call options, you have the right to buy 100 shares of the underlying stock at the given strike price before the expiration date. For put options, you have the right to sell 100 shares of the underlying stock at the given strike price before the expiration date.
- Premium: The total amount that investors pay for a single option.
How do we profit?
- A call gains premium (value) when the underlying stock increases
- A put gains premium (value) when the underlying stock increases
- The exact amount of profit depends on the difference between the stock price and the option strike price at expiration or when the option position is closed. (The underlying stock does not always need to rise or drop below the strike price for us to profit. The closer the underlying stock gets to your strike price, the higher the premium on your option will get).
- Delta: Delta is the ratio that compares the change in the price of an option, to the corresponding change in the price of its underlying stock. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option will rise by $0.65.
- Gamma: Gamma is the rate of change in an option's delta per 1-point move in the underlying asset's price. For example, if a stock option has a gamma value of 0.05, this means that if the underlying stock increases in price by 1 point, the delta will rise by $0.05.
- Theta: Theta is the rate of decline in the value of an option due to the passage of time. It can also be referred to as the time decay of an option. This means an option loses value as time moves closer to its expiration date, as long as everything is held constant. Theta is generally expressed as a negative number and can be thought of as the amount by which an option's value declines every day. (THIS IS A KILLER, WATCH OUT FOR THIS!!!).
- Vega: Vega is the measurement of an option's price sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the implied volatility of the underlying asset.
- Basics part 1: https://www.youtube.com/watch?v=4HMm6mBvGKE
- Basics part 2: https://www.youtube.com/watch?v=1fMAjyC5lZ8
- Options Prices: https://www.youtube.com/watch?v=MiybniIIvx0
- Robinhood: https://www.youtube.com/watch?v=SD7sw0bf1ms
- Robinhood: Robinhood provides 100% commission-free stock, options, ETF and cryptocurrency trades, making it attractive to investors who trade frequently. Still, these days many big-name brokers also offer free trades, so it makes sense to compare other features when picking a broker. Here's a link to signup for FREE and earn a free stock https://join.robinhood.com/dylanm4868
- Webull: Webull ranks among the best in terms of costs, with not only free stock trades, but $0-commission options trades and no per-contract fee, either. Advanced tools: Webull was built to be user-friendly for a mobile-first generation, but that doesn't come at the expense of advanced charting and screener tools. - Use this referral link to receive 4 free stocks - https://a.webull.com/FvObrJLAfNlEBHQYip
- TD Ameritrade (ThinkOrSwim): For passive and active investors, the web-based and standard mobile app platforms are intuitive and easy to use. However, for casual traders and day traders, the robust thinkorswim platform is likely the best bet, due to its extensive screening capabilities, charting tools, and advanced analytics.