For newbies: Delta explained for options.
Options 101: The Bare Bone Basics...
Presented by Ian L. Cooper
Some of you have requested a primer on the ins and outs of options basics, as well as a list of options trading sites to use.
Let's start with the sites...
One of my favorite trading sites is OptionsHouse.com. There's even TradeKing.com and InteractiveBrokers.com. I've heard good things about ThinkorSwim.com, too.
You just need a basic options trading account. We trade basic puts and calls in addition to sporadic use of straddles and strangle hedges. Nothing fancy...
We like to make money and move on...
As for options basics, I'm prepping a series of articles for those of you still skittish on options trading. Let me first say that options trading becomes easier the more you do it.
Let's go over the basics of investing in options today...
An option is a contract that gives an investor the right, but not the obligation, to buy or sell a stock at a specific price on or before a specific date, or the expiration date.?Just like stocks, investors can buy and sell options, including call options and put options.
Call Options give the buyers the right to buy an underlying security at a specific price on or before a specific date of expiration.?
Put Options give the buyers the right to sell an underlying security at a specific price on or before a specific date of expiration.
When you place options trades, you'll need to concern yourself with "Buy to Open" and "Sell to Close."
Buy to Open allows you to open a long position in an option trade. Sell to Close allows you to close that long position in an option trade.
But don't get hung up on "Sell to Open" or "Buy to Close" at this stage of the game.
Investing in Options Primer
You may already know that a call option, for example, may show a price of $3, but you'd pay $300 (price x 100 shares).
A strike price is the price at which the underlying stock can be bought or sold, as detailed in the option contract. Options are identified by month of expiration, whether they are a put or call, and by a strike price (or the price you believe the underlying stock will reach).
For example, an ABC January 2014 25 call would refer to a call option on ABC with a strike price of $25 that expires on the third Friday of January 2014.
Options have limited lifetimes. At expiration, options cease to exist. If you buy an option, you either exercise it (buy or sell the underlying security) or it will expire worthless.
In the Money... Out of the Money...
This is very simple.
If the price of the underlying stock is at or above your strike price, the call is considered in the money. Say you bought a call with a 40 strike. If the underlying stock trades at 40 or above, too, your call is in the money. It would be considered out of the money if the underlying stock were below 40.
You must also pay attention to the delta.
Delta: Not just an Airline
Let's start with the difficult explanation first.
Delta is based on the underlying security value. Delta is the amount by which an option's price will change for a one-point change in the price of the underlying asset. Call options have positive deltas, while put options have negative deltas.
A 0.50 delta means that for every $1 gain in the stock, a call option gains 50 cents in premium. A -0.50 delta means that for every $1 loss in the stock, a put option gains 50 cents in premium.
For example, say you buy a call option on ABC and it has a delta of 0.50.
Now, every time the underlying ABC stock moves up just $1, your call option will appreciate in value by 50 cents.
There are other Greek symbols involved with options but this is one of the big ones to know. You, as a reader, don't have to worry about these. We do. I just wanted you to be familiar with another basic.
Those are some of the bare bone basics. We are working on more reports as we speak.
Oh, and if you have any questions that you'd like me to add to these “basics” reports, please send them in. We'll be happy to answer anything and everything.
AI
