New to options: hope you can help me with my first trade

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EnigmaMachine

Hello,

Suppose I want to buy AAPL (just an example, I am not really interested in buying AAPL right now) when the price hits 120 (right now it is trading at ~126) so I sell put options OTM with a strike of 120 and expiration date of 1st of August. So the option code is: AAPL010815P0012000

On optionsXpress it says that this put option has a bid-ask average of 1.25.

Here are my questions:

- How many AAPL shares are there in each put option I sell? 10 or 100?
- Suppose I sell 1 put option, how much do I get paid? Do I get paid $1.25 or do I get paid $1.25 x number of shares per contract?
- If I sell 10 put options, how much money should I have in my account in case I am forced to buy the AAPL shares for $120? Do I need $12k or 120k?

I would greatly appreciate it if you can help me. I hope I don't annoy anyone with my questions, which may sound too simple and newbie.
 
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EnigmaMachine said:
- If I sell 10 put options, how much money should I have in my account in case I am forced to buy the AAPL shares for $120? Do I need $12k or 120k?
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If you are selling 10 cash-secured puts - and they should be cash-secured for your own safety - then you would be taking on 120K in Apple stock.

What is your purpose in selling puts on Apple? If you think the stock has upside, then just buy the stock. Sell puts, and you take on a lot of company risk, and market risk, for very little return.

Selling puts has been rightfully described as 'picking up nickels in front of a steam roller.' The small premiums are not worth the eventuality of getting run over.

I speak here from personal experience. Shorting puts is one of the few strategies that can really flatten a newbie quickly.
 
lindq said:
If you are selling 10 cash-secured puts - and they should be cash-secured for your own safety - then you would be taking on 120K in Apple stock.

What is your purpose in selling puts on Apple? If you think the stock has upside, then just buy the stock. Sell puts, and you take on a lot of company risk, and market risk, for very little return.
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Thank you, so there are 100 shares of the underlying stock in each contract.

I was using AAPL as an example. Not really interested in trading the AAPL.

Could you please tell me how much I get paid if I sell 10 contracts? Do I get paid only $1.25 x 10 = $12.5 or do I get paid $1.25 for every share so $1250?
 
The price of an option is per share. For a standardized option representing 100 shares you multiply by 100.

So if you sell 1 put for 1.25 you take in a credit of $125

Keep in mind your max risk is 100x(120-1.25), which is generally the margin requirement.
 
stevegee58 said:
The price of an option is per share. For a standardized option representing 100 shares you multiply by 100.

So if you sell 1 put for 1.25 you take in a credit of $125
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Wow, that is an extremely low price considering the amount of risk I am taking.
 
lindq said:
Sell puts, and you take on a lot of company risk, and market risk, for very little return.

Selling puts has been rightfully described as 'picking up nickels in front of a steam roller.' The small premiums are not worth the eventuality of getting run over.

I speak here from personal experience. Shorting puts is one of the few strategies that can really flatten a newbie quickly.
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Could you please explain why this is? The way I see it is that I am basically being paid $125 to buy a stock that I want to buy anyway for a cheaper price.
 
Something else to consider: I was talking about standard 100 share options before. There are so-called mini options that control 10 shares. Certain high price stocks have mini options, and AAPL might be one of them.

If you're looking at mini options for AAPL it doesn't make sense to sell 10 of them when you can sell 1 of a normal option. Your broker's commission structure works into this as well. There's much for you to consider before trading options with real money.
 
EnigmaMachine said:
Wow, that is an extremely low price considering the amount of risk I am taking.
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Well, the expiration date you gave (August 1) is only 2 weeks away. Not to mention that your "real" risk is based on probabilities derived from volatility.
The probability of AAPL going to 0 in the next 2 weeks is literally almost 0.

lindq's reply about picking up pennies in front of a steam roller isn't really accurate. Selling a put is the same as deciding you're willing to own the stock. If you're not willing to own the stock then you shouldn't sell puts on it.
 
Also be aware of earnings before you decide to sell or buy options, AAPL's earnings are on Tuesday July 21, 2015.


EnigmaMachine said:
The way I see it is that I am basically being paid $125 to buy a stock that I want to buy anyway for a cheaper price.
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A common put selling myth ......... the problem is that you are buying into weakness and the stock could easily drop well below the strike price - in this case $120.00. So you end up buying above market value.



:)
 
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