Long winded Stock options questions , sorry

[cmecu]

I apologize if this has already been answered, but I cant find the exact answers to my questions, and I have watched so many videos on you tube, videos on Ameritrade and Fidelity but they dont quite answer my questions I have.

I have many questions..

First. I see Stock XYZ has option chain. I want to buy the option.. so that would be a " Buy to open" correct? because I am opening a deal with a person who owns 100 shares of that stock. I am basically asking, hey I would like to open a deal with you, that I can rent your stocks for say.. a week, for a price of just say .20 cents.. So i do a " Buy to open " it costs me 20 dollars.. Say the value of the stock right now is 10 dollars. The agreed strike price is 11 dollars.

Ok I feel I have everything correct so far.

So my first question is.. I have 7 days to watch the value of the share. Of course if it never hits the strike price the entire week, the contract will just expire I never make any money. I lose my premium I paid of 20 dollars.

However if they value of the share goes up to 15 dollars on the first day.. The strike price was hit at 11 , and I decide to sell and collect a profit. How do I do that? Would I " Sell to close?" Is it a sell to close MARKET price? meaning it would sell them at the current price of the share?

If I didnt feel like keeping my eye on the stock, could I had just done a Sell to close LIMIT of 15 dollars, and if it hit that number then it automatically sells it for me?

Would most people just hold onto the option and wait to see if it goes any higher? because it could come down quickly and you then would lose out on your chance to make money. ?

Im guessing you could be in the money, and if you get too greedy, it may come back down fast.. back down under the strike price, and you make no profit any more. You would have to wait for it to go back up into the money.



Also what I dont understand, If I do a call to buy, and I am basically renting someones 100 shares.. When I go to sell them , are they just basically buying them back from me? Since they technically own them they only have to pay me the difference of the strike price and the current value of the share?

I just didnt understand if I have bought an option and then sell it, does that person , if they want , they can just put them back up for sale again at a higher strike price now since the value of the stock went up?



Here is another question.. IF I have a call to buy of Stock XYZ strike price is 10, and it stayed at 10 dollars fluctuating around 10 dollars.. it expires that day at close.. Then at the very last minute there was a sudden increase. I figure there wouldnt be profit if the share value is 10 and the strike was 10. There is no money to be made. But like I said, in the last minute it shoots to say 13 dollars.. That would put you in the money by 3 dollars. I would figure you would make a profit, but you didnt have to to sell it.. So I am guessing you would then choose to Exercise to buy the shares outright? But here is the thing.. What if you dont have the money to buy 100 shares? I mean you will make a profit, but you have to buy the shares with money you dont have.. How does that work?



Here is a different kind of question. I do own 100 shares of a stock. I would like to do a sell option with them. This is called a Buy - Write , where I am bascially writing ( selling a call option )

This particular stock isnt a very popular atm . Its value has been 3.28 and its been going sideways for a while. When I chose to do a sell to call option , because it doesnt have much volume, there are not very many options for strike prices. It only have 3 Strike prices avialble for me to pick. 2.5 , 5 , 7.5 Not much choice I guess because not many people interested, no volume. So my question here is.. Lets say I choose the strike of 5 dollars .. IM looking at Feb 18th When i look at the current call option is has .05 bid and 4.00 ask at a 5 dollar strike .. SO here is my question , My action is a Sell to open , and can set a limit price.. So basically the limit price of my sell to open would basically the ask price? Like someone already has a contract , they have a sell to open themself, and they chose a 4 dollar limit , which creates a 4 dollar ask on the option? and the .05 bid was some other person doing a call to buy and they did a limit of .05?

If I am going to try to make money off of doing this call to sell , my strike price is 5 dollars the date is feb 18th.. how would I know what to set my limit at? My limit is the ask price im guessing.. Since i can freely put it in, I wouldnt know how much to ask.. I wouldnt know what a fair deal is, not to high, but not too low either.

Now here is a follow up question to that.. If someone does do a buy to call, strike price is 5, and the stock value goes up to 8 dollars and they decide to sell ... they dont exercise to buy my stocks, they just sell.. How do they get paid from me? That would be about .. what 300 dollars I would owe them.. Would I need to have extra money in my account to pay them? Would I end up selling my 100 shares to pay them? I dont know how it works.

These are alot of questions, but I just cant find these specific answers from videos. The only thing I ever see are videos of something making a call .. they just dont go into detail how you do everything from the very beginning to the end.

Any help would be great. I would even like to find someoen local I could ask.. I do have a fidelity account and TD ameritrade .. Im not sure if I called them up, if they would be able to answer that stuff. The investment teams.. Im guessing they have staff to answer questions like I have asked?

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[smallfil]

You have way numerous questions that can be answered by reading a book. I would suggest you read George Fontanills, The Options Course book. It should answer your questions as well as other questions that may come up for you. You got the basic idea of how to buy and sell an option. Better to read the book though.

 

[cmecu]

I know it was a lot .. they are the questions that werent quite answered from watching so many videos on those places I said above.
As for reading a book, that is not my learning style. I can do it, Well I do , do it because I am a Senior in a University, but I learn better from watching and hands on.. Like using Think or Swim from TD Ameritrade. My A.D.D. is really high so that is why I have a hard time reading deep detailed information. I just wouldnt retain or absorb what I am reading.
I tried asking on Reddit, but most of the communities you have to have X amount of karma to post, or been part of the community for a period of time..
I will look at that book you said and see if its online, maybe in audio form.. Also maybe you know good videos that go into detail. I have seen so many as it is now but they quite dont answer some of the questions I am asking.
Anyway thanks for your reply.

 

[smallfil]

I know it was a lot .. they are the questions that werent quite answered from watching so many videos on those places I said above.
As for reading a book, that is not my learning style. I can do it, Well I do , do it because I am a Senior in a University, but I learn better from watching and hands on.. Like using Think or Swim from TD Ameritrade. My A.D.D. is really high so that is why I have a hard time reading deep detailed information. I just wouldnt retain or absorb what I am reading.
I tried asking on Reddit, but most of the communities you have to have X amount of karma to post, or been part of the community for a period of time..
I will look at that book you said and see if its online, maybe in audio form.. Also maybe you know good videos that go into detail. I have seen so many as it is now but they quite dont answer some of the questions I am asking.
Anyway thanks for your reply.

When you buy an option, you use the order "buy to open" and when you want to sell it, you use the order "sell to close". Preferably, you use only limit orders on your stock option trades. The options premiums has implied volatility in it so, its value fluctuates at times with huge price swings. There is also, time decay as options is a wasting asset. The closer to expiration date, the greater the time decary. So, a stock option can be moving your desired direction but, you still end up losing monies because the premium has gone down in value. The only thing that matters as far as options prices is the bid (buyer price) and ask (seller price). You both should agree on the price of the stock option for the sale to go thru. So, you can match the bid price if you want to sell your stock option the soonest. Or you match the ask price if you are buying the option. If you can afford to wait, place a limit (in between the bid and ask prices), so bid is $2.00 and ask is $3.00, you would put a limit order for $2.50.

 

[cmecu]

Thank you for your feedback. Yes I did read about the Greeks.. So time decay, the Theta is working against me as we reach expiration. I know that Implied volatility is good for the buyer, the higher the IV the more aggressively a stock is moving in direction. I may not quite remeber which is which with alpha and delta? I may using the wrong Greek words, but the one is how much it moves per dollar .. etc.. I know what they are, just will need to do more studying on how they work.

I had just thought about not messing with options at all.. Just research more on certain companies.. maybe ones that just start their IPO.. buy some initial stock.. hopefully it takes off high in the beginning, and sell it later that day.
For me, my age is 49, im a disabled vet.. I have guaranteed income. IM about to finish school (computer science major major cyber security networking , so I will be working soon.
I dont have any kids, no obligations, no debts, no one to pass my money down onto. I have never invested my entire life until about 2 months ago. I had just initially bought stocks outright.. maybe like 20 or so just to get the feel for it. I invested about 6k dollars. Now I am slowly selling all of that as I get back into green on them so I dont have any losses.. I may sell some for a small loss to help balance out capitol gain taxes.

What got me into options, was just looking for information about leaning about investing. Of course it is a high risk high reward system.. It does add that thrill of gambling like you get when you go to a Casino and throw the dice, or pull the arm on a slot machine. But the house always wins ( I know I used to be a dealer in a Casino for 6 years). Thats why I like to invest more in buying shares outright.. Because you dont really lose money until you sell your shares and if your patient enough, you can hold onto them until they came back to even or hopefully above.

I have 100 shares of ENSC ( Ensyce bio science) .. But it doesnt have a lot of popularity right now. When i go to do a covered sell call , I only have 3 options to make a strike price 2.5, 5, 7.5 The value of them right now are about 3.29 dollars. So I could put them up for a 5 dollar strike for like an entire month, BUT I dont know what I should sell my premium for,, Setting my Limit which I guess is the ask price that creates the premium.

I know you said above its too much to answer, but if there is one question I would like answered if someone can.. How does a person figure out the premium price when doing a covered call of selling 100 shares.. Is there a calculator that does it?

Anyway thanks again for your help. Im doing some more looking for my answers..

 

[BKR88]

1-To buy a call you don't own it's "Buy to Open". Enter a limit order at the price you're willing to pay.
2-When you want to take profit it's "Sell to Close". Enter a limit order.
3-The price of the stock doesn't have to reach the strike price of the option to make a profit. If you bought the 11 strike on a 10 stock and the stock rose to 10.50 your option price might rise from .20 to .35 so you can "Sell to Close" your call for a .15 profit. ($15 minus $1.30 commission = $13.70 profit) If there's not much time left before expiration though, the value of the option will usually decline a bit every day if the stock isn't rising fast enough.
4-If you don't want to monitor the stock price, you can set a GTC (good-till-cancel) order to sell the option at a limit price. Set the price according to the option price & not the stock price.
5-Don't worry about what someone on the opposite side of your trade is doing. If you bought the option, it's your choice when to sell. If you sold a covered call then the buyer of the call can purchase the stock from you at the price you agreed to sell (strike price).
6-If you hold an option to expiration that's ITM (in-the-money), your broker will either exercise the option by purchasing the stock for you or sell the option if you don't have enough money to buy the stock. You can specify what you want your broker to do with the option at expiration.
7-If you sell a 5 call and the stock is at 8 at expiration, you don't have to do anything as your position will be sold. If you don't want to sell your stock, you can buy back the call you sold.
8-ENSC ... Don't try to trade options on a stock that has no "open interest" or the spread is a mile wide. If the spread isn't so wide, you can place a limit order to sell at the midpoint of the bid-ask. If it doesn't get filled, move it a bit closer to the bid price until you get filled. Compare options bid-ask on other more popular stocks to the ENSC quotes below. You'll see a big difference in the bid-ask and "open interest".

9-Options basics video (

)

 

[cmecu]

3-The price of the stock doesn't have to reach the strike price of the option to make a profit. If you bought the 11 strike on a 10 stock and the stock rose to 10.50 your option price might rise from .20 to .35 so you can "Sell to Close" your call for a .15 profit. ($15 minus $1.30 commission = $13.70 profit) If there's not much time left before expiration though, the value of the option will usually decline a bit every day if the stock isn't rising fast enough.

Oh man I had no idea.. See even watching all the videos I seen. Probably like 20 just on stock options... None of them ever explained what you just did .
And that sucks too because I missed out on making some money. not much .. but anything more than nothing, is something.. I had Ford Stock option I bought.. back on wednesday.. it was OTM .. I think ITM was like 13.50 .. I did a strike price at 15.50 because the bid premium was so much cheaper.. I took that long shot that the price would go up.. It didnt that wednesday, but thursday it did go from like 13ish all the way to to 15.80 ish.. so that was .30 cents over the strike price.. I didnt get a chance to sell because I was actually at a Financial Investor meeting Edward Jones was the place for investing. When I got home, I seen it had went up but then it come back down to like 15.50 and hung around there. I didnt know.. I ended up keeping it to this past friday and it dropped down to like 15.20.. so I let it expire.
Oh i just realzied Volume would be how many people are selling a contract.. interest is how many people are looking to buy a contract.. that that first one I just talked about isnt a buy, its a seller? If so lets just pretend that is someone interested in it.. I want to figure out how to set premium price for if I ever choose to do this

I mean we live and learn.. Many times I have specific questions, that some of these videos just dont address. Like I said I dont recall one video I watched that mentioned you can still make money even if it doesnt hit the Strike price. I think it was impossible to make money unless you hit the strike because because the person who owns those stocks doesnt have to give me anything until the strike price was hit. I understand Strike price gives me the option to exercise the right to take them from him, but I know most people dont, they just sell to close to make money once they are ITM. Geez .. makes me sick lol..

And the thing is I kept wondering why I was looking at my TD Ameritrade account, those few options I had.. SPY was one, FORD was one, and CFVI , on the website under positions they were green to me, and it said my account balance was up like 60 dollars .. but , none of them were at the strike price .. they were under it.. So im guessing, I could had done a Sell to close and got something back ..?

If you happen to know a video off hand, or website that can explain how you can still make money even if you dont hit your strike I would be more than happy to do the research more myself.

And as your saying about me selling a covered option .. I would had not known if you didnt say this " Don't try to trade options on a stock that has no "open interest" or the spread is a mile wide." Ill have to research what causes open interest. Im guessing that means people are showing interest in buying a call.. Like the one you pointed out. there was 1 open int.. so IM guessing that means there is 1 person who is bidding for a contract.


One last thing , I think you addressed my one question " 7-If you sell a 5 call and the stock is at 8 at expiration, you don't have to do anything as your position will be sold. If you don't want to sell your stock, you can buy back the call you sold."
I believe you were referring to if I out my ENSC shares up for Call to buy for someone to bid on. I was worried if I put them up for a call to buy that someone would get a contract with me.. say a 5 dollar strike price.. and they stocks soared to like 10 dollars.. that would be 500 dollars I would owe them if they did a Sell to close.. How do you pay someone if the share went up that far? If they dont exercise to take the stocks and just want to collect the profit. Do i have to sell some of my 100 shares to cover the 500 profit they made?
Once again the videos I watched dont cover stuff like this. So sorry for not knowing.
IM looking at the one that is in the money 2.5 person is bidding .10 other is asking 3.30 exp date of Feb 18th I think or whatever.. How would a person know where to set your asking price ? I have 100 shares .. My cost Basis is 3.88 which makes them with 388 dollars in value to me..
So this is theoretical not doing it.. If I wanted to sell a contract asking price 3.80 , that means someone would have to pay a premium of 380 dollars.. that would cover the value of my 100 shares.. but if the strike price is 2.5 they are already in the money by 1.30 .. So i would have to pay them 130 dollars if they sold them.. So would I just think of a premium between 130 dollars and 380 dollars ? 1.3 to 3.8 range?
If you owned this stock in my situation.. would you just hold it? Or would you maybe since there is a 1 person who is bidding .10 Maybe I could do a .30 premium asking price.. or just not bother until there is more interest

 

[BMK]

First. I see Stock XYZ has option chain. I want to buy the option.. so that would be a " Buy to open" correct? because I am opening a deal with a person who owns 100 shares of that stock. I am basically asking, hey I would like to open a deal with you, that I can rent your stocks for say.. a week, for a price of just say .20 cents.. So i do a " Buy to open " it costs me 20 dollars.. Say the value of the stock right now is 10 dollars. The agreed strike price is 11 dollars.

Buying an option is not analogous to "renting" the stock.

When you own an option, you do not have voting rights, and you do not collect dividends. You cannot sell the stock. And on the expiration date, you do not "give back" something that you "rented" or "borrowed." I'm not sure where you got that analogy, but that's not how options work.

An option is a contract, and if you own a call option, you own the right to buy the stock at the strike price, until the expiration date. You are not renting or borrowing anything.

Also: the guy on the other side of the transaction--the party selling you the option--does not have to own the stock. He has to sell you the stock, at the strike price, if and when you choose to exercise your option. But he does not have to own the stock at the time he sells you the option. If you exercise your option, and he does not own the stock, then in order to fulfill his contractual obligation to sell it to you, he will have to go buy the stock at the market price. Or he can choose to sell the stock short. But that's irrelevant to you, and you won't know what he's doing. The guy's broker and the OCC stand behind the contract. If the guy who sold you the option somehow can't sell you stock, the broker will step in and make it happen behind the scenes.

Before you actually start trading, you need to get your head around some of the core concepts.

I sent you private message.

BMK

 

[BKR88]

1-The price of an option moves up & down just like the stock it represents so you can buy/sell it anytime you want just like a stock.
2-Don't try to think about what the person/institution opposite your position is doing. It doesn't matter. You're just buying/selling an instrument that's moving with the stock price. Don't complicate it. Most of the time the market maker is opposite your trade.
3-"Open Interest" is the number of options that are open. So from the screenshot you can see that someone bought or sold 1 call. No other transactions have taken place. The "BxA Size" is the total number of options being bid/ask at each strike.
4-ENSC ... If you sell the 5 Call, you have agreed to sell your 100 shares at 5 if the price is at or above 5 at expiration. You don't have to come up with any money. You already own the shares if you sell a covered call. Nothing to worry about. If you sold the 5 Call for 1, you keep the 1 if the stock closes below 5 at expiration. If the stock closes above 5 at expiration, you keep the 1 plus you sell the stock for 5 so you essentially sold the stock for 6. ***You can enter a GTC limit order to sell the 5 Call for 1-2 and see if it gets filled.

 

[cmecu]

This is my last 2 options I have. the other thing I have in there is just equity I bought straight up.
Right now they both are in the red.. They were green.. Theta and plus the value going down took them into red.. So even though my strike price on the CFVI is 15 and my FUBO is 15.5 I dont have to have a total loss even if I dont hit my strike price.. If those turn at some point in time.. like say they say +20 dollars.. I could do a Sell to close and atleast get 20 dollars that would help offset the amount of money i coughed up for the premium?