Options 101. What are Options. An option is a contract sold by one individual (option writer) and bought by another individual (option holder).
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(THESE WILL BE EXPLAINED LATER)
The expiration date is the date the contract expires.
As you see from that slide AAPL has many various expiration days listed.
AAPL has weekly options as well as monthly options. (In TDA the weekly options are represented in red). Not all securities have weekly options.
All options expire on Saturday. But since the markets are not open trading ends on Friday at 4:30P.M.
Weekly options expire each Saturday on the week they are listed for. Where as monthly options expire the 3rd Saturday of each month.
In this example AAPL has a $2.50 difference between strike prices. (i.e. – 515 / 517.50 / 520 / 522.50 / 525)
If you a buying call options you are bullish on the underlying security and want the underlying to increase in price.
In the example:
The 550 strike call entities are willing to buy that contract for $1.62 and entities are will to sell it for $1.63
The 550 strike put entities are willing to buy that contract for $18.20 and entities are will to sell it for $18.90
In our example:
The 550 calls had 10900 contracts traded and had an open interest of 45289
The 500 puts had 2360 contracts traded and had an open interest of 20933
In our example AAPL at the time was trading at 532.94 which mean the strike price of 532.50 are ATM (At the Money).
For the calls any strike price above 532.50 (535 – 550) are considered OTM where as the strike price below 532.50 (515 – 532) are considered ITM
For the puts any strike price above 532.50 (535 – 550) are considered ITM where as the strike price below 532.50 (515 – 532) are considered OTM
This is where it does confuse some people but hopefully in the end it will make more sense when I show examples.
In our example:
The 550 calls have a delta of .18 this means for every point the underlying rises or lowers the option value will increase or decrease .18
The 550 puts have a delta of .83 this means for every point the underlying rises or lowers the option value will increase of decrease .83
In our example:
The 550 calls value will drop .36 every day the contract is open
The 550 puts value will drop .31 everyday the contract is open
Example of exercising calls.
Say I bought one AAPL 520 call and paid $15.30/share (premium for the contract $1530 cash outlay) and come Jan 18 when the option expires AAPL is trading @ 545 and I want to own APPL. I would exercise the option buying 100 shares of AAPL from the option writer @ 520/share ($52,000). Keep in mind I paid the premium ($1530) to buy those shares @ 520 even with AAPL trading @ 545 on the close of Jan 18th. So my total cost per share for AAPL would be $535.30
Example of exercising puts:
I bought 1 AAPL 535put @ $8.90 (cash outlay $890). I think AAPL is going to keep dropping till expiration, and I currently do not own AAPL. So come Jan 18th when it times for the option to expire AAPL dropped and now trading @ 510.
So you want to exercise that option. Here is where some brokers very. Keep in mind a put means you are “putting” it to the option writer, which means you are selling it to him. And remember I did not own AAPL so what am I selling to him? Some brokers will go out on the open market and buy the shares floating you the amount of the cost ($51,000 – 100X 510) and then sell them to the option writer for ($53,500 -100X535). Some brokers will require you to have the $51K in your account even if you are just using it for a few seconds.
Most entities who buy option are using them as a “stop loss hedge” to a long position they are holding.
Example of buying call options: (what I do)
On Friday I bought (BTO)10 AAPL 520calls @ 15.30. My cash outlay for that trade is $15,300. (10 contracts = 1000 shares underlying @ 15.30 (premium per share)) and the underlying price of AAPL is @ 532.50
Come Monday AAPL gaps up to 536.60 (4 point move). If you look at the delta those 520calls had a delta .76. So that means in minimum those option would now be worth $3.04. Granted they would be higher due to the fact they went even deeper ITM, but you can use the delta as a reference number.
So I place an order to sell (STC) 10 AAPL 520calls for $18.34
So profit on that trade is $3,040