Am i understanding options correctly?

[JJacksET4]

Quote from 1a2b3cppp:

Thanks a lot for that reply!

Do you know of an paper trading options simulators? Or do I need to just do it all in Excel (and just assume I'm buying the ask and selling the bid)?

I use Optionsxpress for my brokerage and they have a virtual trading account where you can place trades like they were real and you can track the trades, etc. It's pretty nice even though it doesn't have all the features and options their actual trading has.

However, I think that just doing it in Excel or even on a piece of paper is OK if you are just tracking prices and trying to understand options price movement. I think Virtual trading would help mostly if you need to learn the actual steps to do the trades, and/or if you wanted to track a bunch of trades and it would be too much work to do on your own.

If you are only tracking a few trades, it would probably be good learning to enter in the new values each day into an Excel sheet, calculate your gain/loss etc. anyways.

I use Virtual trading sometimes, but sometimes it can be quicker and easier to just make a note of a trade or enter it into Excel/Word anyways.

As far as bid/ask goes, you can either assume worst case scenario, or you could always average them out and assume sometimes you would get better pricing. If Bid=200 and Ask=210, it's probably OK most of the time to assume you could buy or sell for $205. It's only paper anyways.

JJacksET4

 

[Maverickz]

While JJacks and Rosy2's answers were spot on, I will add that options trading is a LOT more complex than stock trading and with the leverage you can blow an account a lot faster using options if you don't fully understand them. So I highly suggest you read some books or take at least some basic course on options trading before putting in any real money.

I personally use ThinkorSwim as a broker and they do have a paper money account you can practice with. They are partnered with <a href="http://www.optionplanet.com/assembled/list.html">OptionPlanet</a> to provide FREE basic and complex options classes. While these are not super in-depth, they will lay out a lot of fundamental NEED TO KNOW information. TOS also has numerous tutorials and videos that explain various option strategies. These appear to be free even if you are not a customer of theirs so take a look even if you go with a different broker.

 

[Maverickz]

Actually the thread <a href="http://www.elitetrader.com/vb/showthread.php?s=&threadid=123545">here</a> also has a lot of useful options info. If you can't take a course then at least read through that thread so you understand at least some of what can affect an options price and future value.

 

[murray t turtle]

Quote from 1a2b3cppp:

^ thanks for the point about bid/ask vs. last.

So say you have an option that is profitable. Can you use trailing stops and such on options the same way you would on stocks so that if it starts to go back down, your option position is closed out for profit?


Next question:

How profitable is it to find stocks where you're expecting high volatility and do long straddles (I think that's what it's called... where you buy 1 call option and 1 put option @ the same strike price)?

I seem to be good at picking stocks that are going to move... I'm just not very good at picking the right direction. Is the straddle a solution to this problem of mine?

======================

Yes,1a2b;
somewhat, except the leverage makes it more difficult when it goes against you;
also most options are not liquid at all [bid ask spread, simple supply & demand of options & lower volume of options requires, by necessity , a larger bid ask ].

Also nice exemple on XOM, its a liquid option;
may as well split the bid ask on limit entry, they [market makers]may very well do that for you unless market moves quick..

Also with liquid options,may get price improvement....................;
did last trade.

Also keep in mind option market makers/exchanges are exceedingly skilled in TA;
not necessarily an advantage for buyer,, but helpful to know...................


Note stock price does not have to move at all for XOM option to move or be protitable or lose ;
time decay, like an ice cube also moves it. Cool

 

[dagnyt]

Quote from 1a2b3cppp:

Hi,

I've been investing for years with stocks but I just recently got into options.

Ok so say I'm looking at XOM Dec 08 options. As of the time of typing this post, the call option XOMLP.X with a strike price of 80 traded last at $3.15.

Question 1:
If I were to buy this contract it would cost me $315 + commission, right?

Question 2:
In order for me to make money on this long call position, the price of XOM would have to get above $83.15, right?

Question 3:
Say before Dec 2008 the price of XOM gets to $100. Owning this contract gives me the right to buy 100 shares of XOM at $80, and this is called "exercising" my contract, right? So I hear that the way options pricing works, there is never a time in the life of a contract when it is more profitable to exercise the option and buy the stock and then immediately sell the stock, and it's always more profitable just to sell the long call contract to close the position. Is this true?

Question 4:
In the event that XOM goes to $100 before this contract expires, how much would I be able to sell it for?

$10,000 (value of 100 shares of XOM @ $100)
- $8315 (value of 100 shares @ strike price + premium)
-------------
$1,685?

Or do I have that wrong?

If that's correct, does that mean the contract would be trading at $20 then? So my profit would be $2000 - the $315 I paid = $1,685?



Thanks.

I think it's a shame that whoever taught you how options work failed to get this message across to you. I'm sorry you are confused. Let me try to make this easy.

1) Except for certain dividend considerations, you NEVER want to exercise an option you bought. Just sell the option. Yes, it's more profitable (occasionally it's only 'just as profitable').

2) Exercising the call and then selling the stock immediately - is a boon for your broker who collects lots of fees. Just sell the option and take your profit (or loss).

3) When you own a call option, time is important and the value of your option fades away. But, when the stock increases in price rather quickly, so does the price of your call option. It does not have to pass 83.15. It has nothing to do with 83.15.

That number you calculated is the BREAK-EVEN price - if and only if - you hold the option all the way to expiration. Holding that long is generally a bad idea.

4) Yes it costs $315.

5) When you sell an option - just as when you sell stock - the price you paid for it is 100% irrelevant. If the stock is $100, your XOM 80 call is worth $20, or $2,000. That's because it is in the money by 20 points (100-80). Depending on how much time remains, the option may be worth a bit more than $20.


If you pay $315 and sell @ $2,000, the difference is your profit (less expenses).

Mark
The Rookies Guide to Options (my book that will not leave you confused)

 

[dagnyt]

Quote from 1a2b3cppp:

Isn't the only way the option would go above $3.15 would be if the stock price got above $83.15?

You paid $3.15, didn't you?

The person who sold it to you did not have to wait for the stock to reach 83.15 to sell it at that price.

Thus, you don't have to wait for a specific stock price either. You own the option, not the stock. You own the <i>right</i> to pay 80 for 100 shares.

But, you can sell the option at any time before it expires. Any time you sell it for more than you paid (just as when you trade stocks), you earn a profit.

One more point: If you own an option that finishes ITM but a penny or two, and if you do not want to exercise, you may instruct your broker "DO NOT EXERCISE."

Mark

 

[murray t turtle]

XOM is a strong stock, its spending more time above its 50 day moving average;profit targets like $100 , dont see any problem with that.

Except DEC expiry is fairly close;
since you asked for suggestions, may want to have multiple targets, like $95.77 +/.........................................................52 week hi/area.

Last & first week ................ of month maybe rally more.

Fundamentals seem bullish, also .Assuming this is a correct quote, daily range,one day, this past week [one day move]about $5.00-$2.50.

Even if that is not an exact quote, it maybe right ;
exspect moves like that, closer to 3rd friday. Its why some trade XOM