All About Options
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Option Greeks:
Delta: Represents the expected change in the option value for each $1 change in the price of the underlying stock.
Gamma: Represents the expected change in delta for the $1 change in the price of the underlying stock.
Theta: Represents the option's expected daily decline due to time.
Vega: Represents the expected change in the option value due to changes in volatility expectations for the underlying stock.
Rho: Estimates changes in the option value due to changes in the risk-free interest rate (usually T-bills). Option price changes attributable to interest rates are much smaller, so this last measure receives less coverage.
Delta: Represents the expected change in the option value for each $1 change in the price of the underlying stock.
Gamma: Represents the expected change in delta for the $1 change in the price of the underlying stock.
Theta: Represents the option's expected daily decline due to time.
Vega: Represents the expected change in the option value due to changes in volatility expectations for the underlying stock.
Rho: Estimates changes in the option value due to changes in the risk-free interest rate (usually T-bills). Option price changes attributable to interest rates are much smaller, so this last measure receives less coverage.
So, let's see if I can't continue the process of gaining a better grasp on the concept of options...
A call is the right to buy a stock. (Is that 100 shares of it?)
A put is the right to sell a stock. (Is that 100 shares of it?)
So then, when I buy a call, I myself and paying someone else for the right to buy shares from them at a designated price.
This means that when I sell a call, there is someone else who is paying me for the right to buy (my shares of?) a stock at a designated price. (So, then, do I have to actually have physical possession of the stock I am selling them the right to buy from me, at the time they pay me for this option? Or is this automatically built into the transaction?)
When I buy a put, I myself and paying someone else for the right to sell a stock (their shares of it?) at a designated price.
Then I sell a put, there is someone else who is paying me for the right to sell a stock (my shares of it?) At a designated price. (Again, do I have to actually have physical possession of the stock that I am charging them for the right to sell, at the time they pay me for this option? Or is this automatically built into the transaction?)
A call is the right to buy a stock. (Is that 100 shares of it?)
A put is the right to sell a stock. (Is that 100 shares of it?)
So then, when I buy a call, I myself and paying someone else for the right to buy shares from them at a designated price.
This means that when I sell a call, there is someone else who is paying me for the right to buy (my shares of?) a stock at a designated price. (So, then, do I have to actually have physical possession of the stock I am selling them the right to buy from me, at the time they pay me for this option? Or is this automatically built into the transaction?)
When I buy a put, I myself and paying someone else for the right to sell a stock (their shares of it?) at a designated price.
Then I sell a put, there is someone else who is paying me for the right to sell a stock (my shares of it?) At a designated price. (Again, do I have to actually have physical possession of the stock that I am charging them for the right to sell, at the time they pay me for this option? Or is this automatically built into the transaction?)
I am sure some others will give it much more fleshing out. How's this for a simpler overview...
Buying an option (you pay money for it) is the right to exercise the option if you choose to do so.
Selling an option (you collect money for it) is the obligation to agree to the terms of the option if the buyer of your option exercises it.
Each option always refers to a 100-share unit. Accordingly, stock transactions commonly occur in blocks divisible by 100, called a round lot, which has become the standard trading unit on the public exchanges. However, if you buy fewer than 100 shares in a single transaction, you will be charged a higher trading fee. An odd-numbered grouping of shares is called an odd lot. So then, each option refers to 100 shares, conforming to the commonly traded lot, whether you are operating as a buyer or a seller.
~ Getting Started in Options - Illustrated Edition
~ Getting Started in Options - Illustrated Edition
The purchaser of a call option enjoys a marked benefit in the auction market in that there is always a ready market for the option at the current price—meaning the owner of an option will never have a problem selling it.
This fact is of paramount importance. For instance, if there were constantly more individuals looking to buy options than sell them, market value would become incredibly distorted. A certain amount of distortion does occur to some degree, due to rumor or speculation, but usually this is only in the short term. Generally speaking however, option values are directly formulated on the basis of stock prices and the amount of time until the option will cease to exist.
If buyers had to scramble to find a limited number of sellers, the market wouldn't operate very efficiently. Even so, the demand between the buyers and sellers of options is rarely balanced because options do not possess supply-and-demand features of their own. Consequently, the Options Clearing Corporation (OCC) acts as the seller to every buyer, and the buyer to every seller.
This fact is of paramount importance. For instance, if there were constantly more individuals looking to buy options than sell them, market value would become incredibly distorted. A certain amount of distortion does occur to some degree, due to rumor or speculation, but usually this is only in the short term. Generally speaking however, option values are directly formulated on the basis of stock prices and the amount of time until the option will cease to exist.
If buyers had to scramble to find a limited number of sellers, the market wouldn't operate very efficiently. Even so, the demand between the buyers and sellers of options is rarely balanced because options do not possess supply-and-demand features of their own. Consequently, the Options Clearing Corporation (OCC) acts as the seller to every buyer, and the buyer to every seller.
Call Option Scenario #1:
If the price of a stock rises after the purchase of a call option, a trader can either exercise the call by following through on buying the 100 shares of the stock at a price that is now below the current market value, or the trader can sell the option for a profit. (So, what are the specifics on selling the option for profit?)
If the price of a stock rises after the purchase of a call option, a trader can either exercise the call by following through on buying the 100 shares of the stock at a price that is now below the current market value, or the trader can sell the option for a profit. (So, what are the specifics on selling the option for profit?)