Options Basics
Options: These are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell (depending on the type of contract they hold) the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to. Call options: Allow the holder to buy the asset at a stated price within a specific timeframe. Put options: Allow the holder to sell the asset at a stated price within a specific timeframe. Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Options are typically bought and sold through online or retail brokers.
Call Options: Allow the holder to buy the asset at a stated price within a specific timeframe.
Put Options: Allow the holder to sell the asset at a stated price within a specific timeframe.
Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Options are typically bought and sold through online or retail brokers.
How Do Options Work?
Options are a versatile financial product. These contracts involve a buyer and a seller, where the buyer pays an options premium for the rights granted by the contract. Each call option has a bullish buyer and a bearish seller, while put options have a bearish buyer and a bullish seller.
Options contracts usually represent 100 shares of the underlying security, and the buyer will pay a premium fee for each contract. For example, if an option has a premium of 35 cents per contract, buying one option would cost $35 ($0.35 x 100 = $35). The premium is partially based on the strike price—the price for buying or selling the security until the expiration date.
Another factor in the premium price is the expiration date. Just like with that carton of milk in the refrigerator, the expiration date indicates the day the option contract must be used. The underlying asset will determine the use-by date. For stocks, it is usually the third Friday of the contract's month.
Traders and investors will buy and sell options for several reasons. Options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. Investors will use options to hedge or reduce the risk exposure of their portfolio. In some cases, the option holder can generate income when they buy call options or become an options writer.
Options Spread: Options spreads are strategies that use various combinations of buying and selling different options for a desired risk-return profile. Spreads are constructed using vanilla options, and can take advantage of various scenarios such as high- or low-volatility environments, up- or down-moves, or anything in-between. Spread strategies, can be characterized by their payoff or visualizations of their profit-loss profile, such as bull call spreads or iron condors, are theoretically possible.
Option Premium: An option premium is the current market price of an option contract. It is thus the income received by the seller (writer) of an option contract to another party. In-the-money option premiums are composed of two factors: intrinsic and extrinsic value. Out-of-the-money options' premiums consist solely of extrinsic value. For stock options, the premium is quoted as a dollar amount per share, and most contracts represent the commitment of 100 shares.
Investors who write, which means to sell in this case, calls or puts use option premiums as a source of current income in line with a broader investment strategy to hedge all or a portion of a portfolio. Option prices quoted on an exchange, such as the Chicago Board Options Exchange (CBOE), are considered premiums as a rule, because the options themselves have no underlying value.
The components of an option premium include its intrinsic value, its time value and the implied volatility of the underlying asset. As the option nears its expiration date, the time value will edge closer and closer to $0, while the intrinsic value will closely represent the difference between the underlying security's price and the strike price of the contract.
Volume And Option Premium: These both describe the liquidity and activity level of contract in the options and futures markets. Volume refers to the number of trades completed and is, therefore, a key measure of strength and interest in a particular trade. Open Interest reflects the number of contracts that are held by traders and investors in active positions, ready to be traded.
Trading Rules:
Risk management: play to your account size, Never trade with more than 20% of your account.
Stop losses: a way to protect your capital.
Don't be afraid to lose. Take the trade and enter with proper risk management and a stop loss. Remember the trades we signal are high probability meaning they work MOST of the time, so stick to the plan each day and never second guess yourself.
Only play earnings with profits. Never risk money you cannot make back on earnings. Trust me on this, earnings are speculative and are 50/50.
Control your FOMO: if you don't see confirmation or one of your strategies don't check out then don't enter.
Never buy an Opening Bell. Wait for a ticker to choose its direction
Never buy an Options without News or TA. This is a huge risk you are taking, more times than not you will get burned.
Learn to take profits: If you feel as though those gains are good enough to screenshot then lock them in, you can always buy it back.
17 Rules for Momentum Traders / Active Trading:
Create a game plan and stick to it – You should have reason to enter a trade, stop loss price and level to take profits before you enter a position. In the long run, discipline is the key to consistent success.
Adapt to changes quickly – If a short-term trade isn’t working, then don’t hesitate to switch sides. Market action can change quickly; you must be able to change with it. Don’t be stubborn.
Don’t’ get married to stocks.
Don’t try to pick tops and bottoms
Accept losses as part of the game.
Stay confident and positive.
Be consistent with Your Game Plan, Size and Execution.
The first stop is the cheapest stop!
When you are wrong, admit it and move on
Give your trade time
Never let a winning trade turn into a losing one!
Try to capture 60% of full move of a trade.
Know your trade type – Know your time frame.
It’s ok to take the money and run!
Trade the same way whether you are up or down.
Trade Stocks that are in play.
Learn a proven method.
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