Understanding Options

[riskarb]

Tip of the iceberg. Please don't consider trading options unless you first call me to make you a market. Seriously, it's not a personal attack. Options are a cautionary tale for 99% of those that attempt to trade them.

Payoff/greek convexity make options a fairly difficult topic. Thinking simply of the algebraic payoff at expiration isn't enough.

 

[momoneythansens]

Quote from fastbusiness:

it would be nice to some of you post a simple example.

Seriously, before you call riskarb to make a market for you, suggest you read any introductory text on options. Then read it again!

Good luck!

MoMoney.

 

[fastbusiness]

I did. http://www.investopedia.com/university/options/

Can you learn language just from reading books?! Sure you can't. And texts about options are theory part and I learn best from examples.

 

[MajorUrsa]

Quote from fastbusiness:

I did. http://www.investopedia.com/university/options/

That's not good enough.
If that is all you read before you started firing questions than I'm done with you for now. First read about 50 times as much before coming back. There's hundreds of texts on the internet on options. And buy some books. And start reading previous threads etc etc etc ..sigh...

Quote from fastbusiness:
Can you learn language just from reading books?! Sure you can't. And texts about options are theory part and I learn best from examples.

Bad analogy. You can't learn a language by asking questions. You learn by doing. After you read 20 texts and 3 good books on options you can start papertrading and be amazed at how different everything is than you expected. Then ask questions.

There's about a 1000 steps to be taken before you can call yourself a true optiontrader. You have just taken the first 2 steps. At step 100 it is safe to start trading for real.

Now do some work by yourself.

Ursa..

 

[fastbusiness]

I must be very stupid when I can't understand something this simple. I have just finished reading Understanding Options from www.asx.com.au and I'll try to write down what I picked up while reading.

For call option taker (buy call) the break even point is the exercise price (strike price) of the option plus the premium paid. So, option bought when rate was 220.00 and strike price set to 220.00 and premium of 1.00 paid means that break-even point is 221.00. Everything above that is pure profit. If rate is in a range of 220.00 -221.00 there's an unrealized loss (that will get realized once option is exercised). If rate is below 220.00, there is no loss (except premium).

For call option writer (sell call) premium is all the profit you can take. The break-even point is the strike price of the option plus the premium received. So, option sold when rate was 220.00 and strike price set to 220.00 and premium of 1.00 received means that the break-even point is 221.00. If rate goes to 222.00 there is 1.00 loss. But I didn't understood this part, if it goes down to 219.00, what will happen:

1.I'll get just a premium,
2.I'll get premium + 1.00 profit?

 

[momoneythansens]

Quote from fastbusiness:

I did. http://www.investopedia.com/university/options/

Can you learn language just from reading books?! Sure you can't. And texts about options are theory part and I learn best from examples.

Apologies if I came across as patronizing in any way. What I meant by introductory text was something like the very popular Options as Strategic Investment or if you prefer online education www.888options.com. Take all of the basic and intermediate classes and quizzes.

You'll find plenty of example oriented education therein.

After you have the basics covered, I'm sure you'll come back and cringe at the questions you were asking.

If you're expecting folks on here to provide you worked examples on the basics of going long/short CALLs and PUTs you may be disappointed.

Good luck.

MoMoney

 

[daddy'sboy]

Quote from fastbusiness:
But I didn't understood this part, if it goes down to 219.00, what will happen:

1.I'll get just a premium,
2.I'll get premium + 1.00 profit? [/B]

If underlying expires at 219 or less, you get to keep your $1 premium - it's your maximum profit, as you said yourself earlier in your own post ("For call option writer (sell call) premium is all the profit you can take").
Please take the advice from the other posters - they're good folk.
Btw, I see you're also in Australia - it's a small world, lol. So, what brings you to elitetrader of all possible places?
daddy's boy

 

[FullyArticulate]

Quote from fastbusiness:


1.I'll get just a premium,
2.I'll get premium + 1.00 profit?

No matter what, you'll never make more than the premium.

Keep in mind that you've dramatically simplified options by considering only the "at expiration" case. If you sell a 220 call for a $1, 221 is your break even point *at expiration*. If the underlying heads to 221 tomorrow, you will lose big. If the underlying heads to 219 tomorrow, you will have an unrealized gain of a small percentage of your premium, NOT the whole thing.

Due to vega, it's also quite possible that you sell the call for $1 today, the underlying does not move at all, and tomorrow the call is going for $2, giving you an unrealized loss of $1. All for an underlying that never moved.

 

[fastbusiness]

Hi all,

I have found all the info and now I understand options. I needed this material not to trade live (even demo trade), I just wanted to learn options basics to know what it's all about and be able to explain when someone asks. Anyway, thanks for help and suggestions.

fast

 

[daddy'sboy]

Quote from fastbusiness:

Hi all,

I have found all the info and now I understand options. I needed this material not to trade live (even demo trade), I just wanted to learn options basics to know what it's all about and be able to explain when someone asks. Anyway, thanks for help and suggestions.

fast

You are very welcome.
It's good to see that you now understand options. Unfortunately I'm still struggling a bit with the finer nuances, but I guess the basics are quick to learn, i.e. what is a put/call etc..
Best
daddy's boy