Option newbie practical situations

[privador81]

Lets say i have XYZ puts
smth like 0.2/0.4 spread

1)When i buy option,Who is selling me options- real trader or marketmaker?

2)Is there any diffrence how to enter puts order?
Should i try Limit order 0.25,0,3?
Or what happens if i enter market order?

Second example

ABX underlying is 10$
ABX calls 3.3/3.4$
There will be fake news and stock falls smth like 3$ and in one time and during 5 minutes it will be back 10$
1)Is it possibility that underlying influenced CALL so much that i would have been given calls in ridicelousy low prize (20 cents)if i would have had order @0.2 and done massive profits?


Thx for any helps

 

[BeatingtheSP500]

Quote from privador81:

Lets say i have XYZ puts
smth like 0.2/0.4 spread

1)When i buy option,Who is selling me options- real trader or marketmaker?

2)Is there any diffrence how to enter puts order?
Should i try Limit order 0.25,0,3?
Or what happens if i enter market order?

Second example

ABX underlying is 10$
ABX calls 3.3/3.4$
There will be fake news and stock falls smth like 3$ and in one time and during 5 minutes it will be back 10$
1)Is it possibility that underlying influenced CALL so much that i would have been given calls in ridicelousy low prize (20 cents)if i would have had order @0.2 and done massive profits?


Thx for any helps

Could be either a MM or trader
Market order would likely get you filled at .40 but enter any limit price you want. btw, prices should be in pennies - looks like your example uses nickels.

Second example: If the call is 33% of the underlying it ain't gonna drop to .20 under your scenario. No you won't have massive profits. That I assure you.

 

[JohnGreen]

I think you may be confused about strike prices. On a $10 stock, the strikes will either be $1 apart or $2.50 apart depending on the interest in the options. So you would probably have to choose a 5 call or a 7.50 call is you thought the stock would skyrocket or a put if you expected it to plummet.

The price of an option varies by several factors--two of the most important are by volatility and by position relative to the stock price. Obviously, calls become more valuable if the stock price is rising.

In your situation, where there is a rapid see-saw in the price, the price of the calls would rise and fall, but not as much as the stock price. Usually, if the stock price is lower than the call strike (Stock = 10, strike = 12.50), you will get less than half of the rise. This is a quick rule of thumb. The delta (which any good option broker will tell you for free) will give you more exact calculations.

Newbies often find this quite disconcerting, but you have to realize that OTM (out of the money ) calls have value even if you can't exercise them, so you shouldn't expect them to rise dollar for dollar with the stock price if it rises.

Also, you will find some comfort to realize that when the stock price falls, the value of your call will fall, but also not as quickly as the stock price falls!


If you want dollar for dollar changes, try CFD's, but beware--they offer large leverage and charge you interest on the margin every day.