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Options Coaching

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Posted: #1
Ok.  I'm trying to learn this stuff, haven't done any options trading yet.
 
this is hypothetical for learning purposes.  let's go with DRYS.  I just looked at the Options Menu and there is a November $150 call with a bid of $5.70 and an ask of $6.00.  If i think that DRYS will hit $150 on or before November expiry, then i should buy some calls.  So lets say I buy 100 contracts at $6.  that will cost me $600 right?  and in two weeks, DRYS is trading at or near $150.  So I'm guessing at that point, the bid would be something higher, lets just say $9.  So i would have made $300.  is that the game?  what am i missing?  what does the "contract size 100" mean?  does that mean i only buy 1 contract and it costs $600 or do I buy 100 and it costs $600?  also, what is the difference of when it hits the strike price or just looks like it might?
 
obviously i'm a beginner at this. 
 
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Posted: #2
one contract is $600 if option is priced at 6...
 
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Posted: #3
Gunners,

Yep sounds right to me, except add two zeros on the end.

Each contract costs 600 (each option contract represents 100 shares of stock, so 6 means 600) so you would buy 100 contracts and spend 60k or so..
 
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Posted: #4
ok... what happens on the day of expiration.  say i own 1 contract of DRYS nov $150s like above and the expiry comes and i still own it.  does it automatically sell at whatever the ask is? 
 
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Posted: #5
also... WSC, you just bought 20 contracts of the october 120s.  I'm guessing those were puts, no?  so you are just hoping that tomorrow DRYS goes down below 120 and you make money?  is that correct. 
 
and on the other side of the table, if they are calls, what are you hoping for at this point.  it is already over 120.  will the contracts increase in price if it keeps going higher?
 
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Posted: #6
Gunners,

They were the 120 calls..

I bought them not to excercise but trade as investments..

Had an order in to sell at 5.40 and they took it right there and sold it off hard after that.

I need 121 to sell today.

As for your other question..if the stock is BELOW the strike price and they expire, they will be worthless. If the stock is above the strike (or below for puts) then if you dont sell then it becomes a little more complicated..I need to lay out what happens in more detail...  

 
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Posted: #7
ok.  thanks for the help, don't go crazy explaining.  I'm just trying to understand the basics. 
 
on ETRADE they claim that the upside on calls is unlimited, and that there is a limit on what you can lose.  what is the truth behind that?
 
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Posted: #8
Gunners,

Yes...that is true.

You limit the ammt you can lose by the ammt of principal you pay for the calls..

And since a stock can go to infinity, the upside is unlimited.  
 
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Posted: #9
but how is that different from a normal stock.  i buy $1000 worth of stock, it goes to zero, i only lose the amount i paid for it.  but that's everything.
 
with my example above, the bid was 5.70 and the ask was 6.  thats a pretty big gap, a lot bigger than a normal bid/ask on a stock.  how do you manage that?  do you throw in a bid at 5.70 and hope for the best? 
 
sorry for all the questions, you are being a great help
 
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Posted: #10
Gunners,

The spread is wider on options because there are FEWER people trading them..the greater the number of contracts traded the better the spread..look at other examples, say like INTC or MSFT options..the spread is tighter.

And yeah, the thing about options is the LEVERAGE..you spend less to gain more control over shares and potential for greater gain, but also greater risk (because if a stock drops 10 pts and you own shares, you lose 10 pts..with options you could lose it ALL)

Hope that makes sense.  
 
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Posted: #11
For example I bot 20 contracts today which cost me about 9,200 bucks. That controls 2,000 shares..those shares would cost me 240k.

Now I lost 650 or so including comissions on the trade..the stock dropped about a buck from where I bot the options.

If I had sold the stock instead, I would have lost 2,000 bucks (2,000 shares times 1 buck per share)


 
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Posted: #12
Quote Originally Posted by wallstreetcappers:

Gunners,

The spread is wider on options because there are FEWER people trading them..the greater the number of contracts traded the better the spread..look at other examples, say like INTC or MSFT options..the spread is tighter.
 

Ok.  so what would you do in that situation, you have to just suck it up an pay the ask?

 

thanks for the example on the losing less money thing.  i get it now

 
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Posted: #13
Gunners,

I try and buy at the bid, sell at the ask, or in between. I rarely pay the market price.

Problem is to play the options game you really have to deal with and be ok with the spread...
 
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Posted: #14
this is great help.  thank you. 
 
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Posted: #15
Quote Originally Posted by Gunners:

Ok.  I'm trying to learn this stuff, haven't done any options trading yet.
 
this is hypothetical for learning purposes.  let's go with DRYS.  I just looked at the Options Menu and there is a November $150 call with a bid of $5.70 and an ask of $6.00.  If i think that DRYS will hit $150 on or before November expiry, then i should buy some calls.  So lets say I buy 100 contracts at $6.  that will cost me $600 right?  and in two weeks, DRYS is trading at or near $150.  So I'm guessing at that point, the bid would be something higher, lets just say $9.  So i would have made $300.  is that the game?  what am i missing?  what does the "contract size 100" mean?  does that mean i only buy 1 contract and it costs $600 or do I buy 100 and it costs $600?  also, what is the difference of when it hits the strike price or just looks like it might?
 
obviously i'm a beginner at this. 
  2 big things that effect premiums is the price of the underlying stock and how close it is to expiration...ie. the closer to the date the higher the premium
 
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Posted: #16

  Gunners:

  Do a lot of readng up and either small real trades (I sometimes have bought just one option!) before you do anything serious. Lots of good info on basics and advanced options stuff, just start maybe here and go from there... GL...

https://biz.yahoo.com/opt/education.html

Tradeking and other option trading sites have lots of FAQs that are helpful as well.

 
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Posted: #17
i appreciate it.  i don't even have the capability on my account to trade options right now, so i'm not going to do anything stupid just yet.
 
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Posted: #18
I'm looking to update my account so that i can play the options game if i'd like to... what do i need to choose?
 
Level 1:    Write covered calls
Level 2:    Write covered calls, purchases
Level 3:    Write covered calls, purchases, spreads, and uncovered puts (requires a margin account)
Level 4:    Write covered calls, purchases, spreads, uncovered puts, uncovered equity/index calls, and uncovered index puts (requires a margin account)
 
Which one of these levels is the right one for me?
 
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Posted: #19
Level II

Nothing higher..
 
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Posted: #20
that's what i thought.  Thanks
 
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Posted: #21

So i was thinking about GOOG yesterday and how I thought they would open up today with Alibaba coming out in hong kong and a bunch of people bullshitting about GOOG to 800 by friday. 

So i sign up for Options approval.  obviously it takes three days or something to get approved.  so i made a "fake trade" by putting in a buy of November 800 calls at $1.50 on my watch list.  well, low and behold, GOOG flies up this morning, could have sold those calls for a 70% return at $2.60.

I am beginning to see why you guys have said that Options trading is the crack of the stock market.  because that just sounds too good to be true.

 
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Posted: #22
Gunners,

Those options are SUICIDE options..

haha
 
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Posted: #23
i'm pretty sure that's my style, unfortunately
 
good thing this is only a side game for me, right?
 
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Posted: #24
Gunners,

Yeah options can be either investments or gambles, either way if you are in control of the trade it will be fine.

Gambles CAN be fun, like FSLR 170s at 1.50 per contract yesterday..


 
 
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Posted: #25
damn!  that one's a bummer.
 
well, I've been watching about 30-50 stocks since I started doing this in May.  I'm trying to figure out how some of these guys move before I actually buy any options.  I think i'm getting better.  time will tell.  but i'm excited to be able to afford things like GOOG
 
and thanks to this board for making me smarter
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