GO4AWILDRIDE, this is some of my Option notes I follow that may help explain making money in options better. As with any investment there is risk so timing is very important.
Option basics: You can
BUY TO OPEN (BTO) – you pay to open and is a Debit.
SELL TO OPEN (STO) (My favorite money maker both Covered Calls and naked PUTS) – you receive credit into your act. This is the money maker as you ether (STO a PUT) – my favorite or a Covered Call on stock you own. You receive a Credit into your account and use the Time Decay to ether buy to close it back at expiration date or before.
Some Technical chart knowledge helps as you need to see Support and resistance areas. I STO a PUT when pps is close to low Support zone and STO a Covered Call when pps is high up close to Resistance area.
SELL TO CLOSE (STC) – you sell ( receive credit) to close an open position
BUY TO CLOSE (BTC) – you buy (debit) to close open position.
IN ADDITION, YOU CAN LET YOUR OPEN OPTION EXPIRE ON THE EXPERATION DATE IF YOU ARE IN THE MONEY AT THE TIME OR YOU WISH TO HAVE YOUR OPTION ASSIGNED OR STOCK CALLED OR SOLD FROM YOUR POSITION.
Option Expiration date: Is always the 3rd Friday of each month, which could be next month or years away – the more time to expiration date would demand the most premium. Unless your stock does weeklies which I love as you can play them every week - weekly expiration dates which make stock more volatile and better for options players.
VERY IMPORTANT: To be a better stock trader You must understand the time value of option premium as option traders receive or pay the most if you have more time before expiration date, which could be many months or years out. You must also understand the big players like Hedge funds make more money with options and they manipulate the pps of stock to maximize their premium. Even if you are not an Option player you must understand why the pps of you stock moves up and down depending on the time value of the option expiration date.
WHY WOULD YOU WANT TO?
BUY to open CALL OPTION – you feel the underlying instrument (in this case stocks) will move above the strike price at any time up to expiration.
STO - SELL A CALL OPTION or called (covered Call) you first own the stock, and you would want the pps to close below strike price on expiration date. I do this often to generate cash flow and watch the option premium and time as expiration date gets closer to buy to close my position or if I feel comfortable the pps will close below I let it expire and collect 100% of my premium.
- To SELL TO OPEN PUT OPTION – My favorite - you believe the pps of the stock is currently to low and feel the pps of stock will move up rapidly or close above the Strike price on expiration date. You collect the premium at time of sell but the negative with selling put option is you must have the cash reserves in your account to buy stock if it is assigned. Note: If you want to buy a stock you could first write a sell to open put, which is called a naked PUT and use the collected premium you received to lower your cost IF you get the stock assigned. To make the most premium you sell to open put when the pps moves down rapidly along with the time value. I like letting the big hedge funds manipulate the pps monthly to maximize my own portfolio of stocks. b]You must have cash or margin reserves in your account if you get assigned or forced to buy at your strike price. I ONLY open a STO PUT if I feel the pps will be higher than strike price at expiration or I want to buy the stock and us a PUT option to buy at lower pps.
-BUY TO CLOSE PUT OPTION – if you had a sell to open put option you could buy it back to close your position.
Option buyers and sellers want stocks with high implied volatility.
High and Low Volatility trading:
High Volatility = you want to be Option Seller
Low Volatility = you can be Option Buyer, but Option Sellers have highest % of profit because of Time decay works against buyers
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