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i need detailed info. on options trading.
can someone give me a crash course on optionstrading101?
Answers
2183 points
ChaosNantuko answered 2 years ago …
This is by no means the whole thing... but here's the simple 101 of it all.
An option gives you ability to buy or sell a stock at a certain price before a certain date.
An example is i could buy an option that lets me buy microsoft at 40$ any time before the beginning of next year. If microsoft goes up to 200$, i can still buy it at 40. If microsoft goes down to 30, i can just buy it on the open market instead. If microsoft is at 200, and the option lets me buy it at 40, then the option is said to have $160 worth of "intrinsic" value. Other then "intrinsic" value, options also have "extrinsic" value, also known as time value. Over time, options lose time value, so, ignoring external factors such as price movement and volatility, options become less valuable over time.
Now for a couple definitions.
Strike price - The price the option lets you buy/sell the security at.
Expiration date/month - The last day you can use the option. Options generally expire on the 3rd friday of every month, so if only the month is mentioned, assume its the 3rd friday.
call option - Lets you buy the stock at a specific price before a specific date
put option - Lets you sell the stock at a specific price before a specific date
Option premium - The cost of the option
Intrinsic value - For a call option, its how much the stock is above to strike price. For a put option, its how much the stock price is below the strike price
In the money (ITM) - This means the option has intrinsic value. Deep in the money means it has a lot of intrinsic value
Out of the money - This means the option lacks intrinsic value. Far out of the money means it is very far from the stock price.
An option that lets you buy something is a call option. An example of a call option is given in the above example. Call options are used when your bullish on what the stock will do. An option that lets you sell something is a put option. These can be used to either protect your current holdings, or profit from downward moves in the stock price.
When used to protect your current holdings, its called a "protective put". Lets say you buy microsoft at $40. You could buy a protective put that lets you sell it at $35. Even if the stock drops to $5, you can still sell for 35, so your protected from downside moves. That being said, you also lose some upside because of the cost you pay for the protective put.
When using a put to profit from a downside move, you simply buy the put without owning the stock. The value of the option will always be greater then the extrinsic value, so as the stock drops, the extrinsic value increases, and so the value of the put increases. The put can then be directly sold for a profit, or you can buy shares at the current stock price, and then use the put to sell them. Selling the puts directly is usually better because you retain the time value.
A covered call is a strategy where you buy the stock, and sell a call option. You will make a small profit from selling the call option, and if the stock price is less then the strike price of the option when the option expires, then the option you sold expires worthless. If the stock is above the option price when it expires, then you'll have to sell the stock for the strike price. Note that you still pocketed the premium.
For more information on simply buying a call, go to... http://www.investopedia.com/terms/c/calloption.asp
For more information on protective puts, go to...
http://www.investopedia.com/terms/m/marriedput.asp
For a more complete look at options basics, go to...
http://www.investopedia.com/university/options/
For a more advanced look at the more complicated options spreads (combining multiple options to form a single position), go to...
http://www.investopedia.com/university/optionspreadstrategies/
For more information about how options are priced, and how they react to changes in market conditions, go to...
http://www.investopedia.com/articles/optioninvestor/04/121604.asp
127 points
dnce answered one year ago …
As ChaosNantuko mentions, there is a lot of information available on investopedia. Schaeffer Research also offers a CD with a good introduction to options. Another good place to look is The Tycoon Report at http://tycoonreport.tycoonresearch.com/. It's a free daily news letter with a lot of good stuff in it, including options. The Motley Fool, at fool.com is another good place to do research towards your understanding of options trading. This will take a couple of hours, at best--you just can't expect a couple of paragraphs from anyone to give you a complete overview of a trading venue.
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244 points
KenLong answered one year ago …
The OIC, Options Industry Council , www.888options.com has all the information you need for free. Full explanations of everything you need to know, web based courses for all levels, seminars in area hotels, all for free! The best source for all basic options knowledge, as well as much advanced knowledge.
Next, I would say a good options broker such as OptionsXpress or any of the other big options brokers would have the best information without paying for expensive courses and the opinions of writers with an agenda. The biggest advantage here is that you also get a platform to trade on, with a simulator to test your theories, all the tools you need to find and analyze your trades, and a constant flow of webinars from many of the top experts to educate you. Along with OptionsXpress, I like ThinkorSwim and InteractiveBrokers for the same reasons. The biggest differences being the setup of their trading platform and their pricing structures. If you read their information and listen to some of the webinars on topics of interest you'll know far more than most people, and certainly all of the basics.
After this there are a number of web sites with different information, just remember almost everyone has an agenda, usually involving their premium services and newsletter subscriptions, and they all like to interject their opinions rather than just giving you the facts and letting you decide.
You could also just run Options Education through your search engine and you'll have too much information.
