ongoing option newb questions

hmmm im confused now in regards to selling OTM compared to ITM.
im confused in how in one case you sell , say an ITM put at 110, for 11.35, and expires at 108,profit is (initial premium-intrinsic value gained?)

whereas when you sell an OTM option , say a 100 call, as long as price doesnt go above 100 just just make the premium?

i guess im just confused as to the differences of the effects of intrinsic value gained on OTM and ITM sells of options, can someone help calrify this?
 
Quote from TGpop:

hmmm im confused now in regards to selling OTM compared to ITM.
im confused in how in one case you sell , say an ITM put at 110, for 11.35, and expires at 108,profit is (initial premium-intrinsic value gained?)

whereas when you sell an OTM option , say a 100 call, as long as price doesnt go above 100 just just make the premium?

i guess im just confused as to the differences of the effects of intrinsic value gained on OTM and ITM sells of options, can someone help calrify this?
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yes - you sold it for 11.35. then at expiry, the owner of the put sold the underlying to you at 110. You then buy it back at 108, this is the intrinsic at expiration and is payable buy the seller. The seller makes 11.35 - 2.

Second example - the buyer of the call will not exercise. So you sold something for X$ that is now worthless. Sucks for the buyer.

For OTM, there is no intrinsic. For ITM there is. Once you understand this concept the rest should follow. I fear for you when natenberg starts up with the greeks and multi-legged strategies.
 
so basically for OTM options , when you sell premium at the price , say a call at 100, as long as the price never goes above thatl, the call is worthless to the buyer at expiration, hence he isn't going to exercise it, so you make the premium. But an ITM option WILL be exercised, so you lose , from your premium, the intrinsic value gained from when you first sold?
 
when you sell OTM options you will only make the premium, and you will only lose premium if price goes above/bloew your strike.With ITM options, when you sell them, the profit/premium that you make, is the premium you sold them for-the intrinsic value @ expiration..
is this correct? my previous post i think is wrong.
 
IMO you need something more basic than Natenburg. Try the CBOE site and their tutorials. I believe you are confused because you're interchanging vocabulary. Don't confuse premium with profit on the position. It can be, but not always.
 
bump.

I have a different question.

How do you choose the right strike price? I focus more on the

delta of the option because I want dollar for dollar movement (im

not doing anything fancy here, just buying calls or puts as a

replacement for stock shares), but when you have 3 or more

options to choose from, and the delta is the same on all, how do

you decide which one you want? I'm looking to buy some OCT GS

calls, and they (the strikes) go for as low as 70 to high of 80.

thanks.
 

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Quote from konviction:

How do you choose the right strike price? ... but when you have 3 or more options to choose from, and the delta is the same on all, how do you decide which one you want? I'm looking to buy some OCT GS calls
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You buy the highest stirke because the premium is lower. That ties up less margin and loses less if an unexpected collapse occurs.
 
Extrinsic value seems to get compressed the deeper in the money an option is.

Kind of like filling a cup with sand sitting it on a foam block, the more sand you put in the heavier it gets and the flatter the foam block becomes.

I guess intrinsic value is like mass.


It took me 4 years before I got the hang of it. Now I earn income from options.
 
Also if you are going to sell options. Stick to the tried and true.

SPY and IWM. Avoid chasing IV by going to websites looking for stocks with the highest premiums. All you are doing is setting yourself up for catastrophic losses.

IWM if you want higher premiums with bigger swings, but you need to be prepared for this.


And of course be prepared for days where you can see a short option position swinging in the double digits positive and negative.
 
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