Hi, Iâve just started learning about call options and puts and before I start trading I would just like to make sure that I understand the whole process. There are some questions I havenât been able to find out answers to in the various forums etc. You can tell I'm a total newbie but here goes...
OK so in call options I understand what the "bet" is. But Iâm interested to fully understand what happens when I choose to sell the option. So as an example, I buy an option that says I think AAPL shares will go up to 170, when they are at 160, then they rally to 180. The option rises from 1.30 that I bought it for to 2.0 because of the $20 rise in underlying share value. So my profit is that 0.7 minus commission.
So how do I do this? Do I just call the broker and say "sell sell sell" lol and do I automatically get that 2.0 price? Or do I have to wait until my broker finds a corresponding buyer? Or does the relevant exchange do all of this? I just need to know when I decide to sell the option that I am guaranteed that price? Who decides that it is now worth 2.0? Is it the invisible hand of the market? Do we know this just because other people are trading at that value?
I understand it is less profitable to exercise the option due to extra commission etc, I also understand that by exercising the option I take the risk that I might not be able to sell the shares for the price I had hoped if they drop in value between my decision to exercise and actual receiving them. Is this correct?
BUT I also heard you can buy before you sell? So if I found a buyer could I receive cash for the buy and use that money to purchase the underlying shares on the option? How long would it take before I received the money form the buyer? How soon would I be expected to make the purchase from the options writer? If I sold before I bought would I have to rent some shares or get a margin loan? How much does this cost? Would the broker offer these facilities?
Sorry loads of questions but I just want to understand fully before purchasing. I'm going to invest a few hundred and see how I do. Many thanks!
OK so in call options I understand what the "bet" is. But Iâm interested to fully understand what happens when I choose to sell the option. So as an example, I buy an option that says I think AAPL shares will go up to 170, when they are at 160, then they rally to 180. The option rises from 1.30 that I bought it for to 2.0 because of the $20 rise in underlying share value. So my profit is that 0.7 minus commission.
So how do I do this? Do I just call the broker and say "sell sell sell" lol and do I automatically get that 2.0 price? Or do I have to wait until my broker finds a corresponding buyer? Or does the relevant exchange do all of this? I just need to know when I decide to sell the option that I am guaranteed that price? Who decides that it is now worth 2.0? Is it the invisible hand of the market? Do we know this just because other people are trading at that value?
I understand it is less profitable to exercise the option due to extra commission etc, I also understand that by exercising the option I take the risk that I might not be able to sell the shares for the price I had hoped if they drop in value between my decision to exercise and actual receiving them. Is this correct?
BUT I also heard you can buy before you sell? So if I found a buyer could I receive cash for the buy and use that money to purchase the underlying shares on the option? How long would it take before I received the money form the buyer? How soon would I be expected to make the purchase from the options writer? If I sold before I bought would I have to rent some shares or get a margin loan? How much does this cost? Would the broker offer these facilities?
Sorry loads of questions but I just want to understand fully before purchasing. I'm going to invest a few hundred and see how I do. Many thanks!
