Class 4: Option Trading - Part Assessing Risks and Rewards. Foundations of Stocks and Options Class 4: Option Trading - Part 1.

Transcription

1 Today s Class Assessing the risks in stocks Renting your stock Insuring your stock How Options work Class 4: Option Trading - Part 1 1. Assessing Risks and Rewards Benefits of Buying Stock (Long) You own part of a company Ownership will never cease Holds monetary value Seen as a security As stock value increases, you can make money PAGE 1

2 Foundations of Stocks and Options Class 4: Option Trading - Part 1 PAGE 2

3 Foundations of Stocks and Options Class 4: Option Trading - Part 1 Risk of Owning Stock Benefits of Selling Stock (Short) You can make money when the stock goes down. What is the most you could lose? Rewards PAGE 3

4 Foundations of Stocks and Options Class 4: Option Trading - Part 1 Risks of Shorting Stock How high could AMZN go? PAGE 4

5 Foundations of Stocks and Options Class 4: Option Trading - Part 1 Risks of Shorting Stocks What is the most you could lose? - Unlimited? You OWE the stock. No ownership You re in debt until you cover Must have 150% margin in your account as collateral How can you lower the risk? You need insurance Stock Insurance Right to sell for more if the stock goes down (with a Long trade) Right to buy for less if the stock goes up (with a Short trade) PAGE 5

6 II. Introduction to Stock Options What are stock options? The buyer of an option buys the right but not the obligation to buy or sell a specific stock, at a specific price, on or before a specific date. Two Types of Options Call Option - Right to BUY a stock at a certain price Put Option - Right to SELL a stock at a certain price Stock Option Basics Two directions (sides) of the trade: Buyer of the option Seller of the option Four Total Trades Buy a Call Buy a Put Sell a Call These four trades can be combined into seemingly endless strategies Sell a Put PAGE 6

7 Options Definition Expanded BUYER of an option BUYS the right but not the obligation to buy (call) or sell (put) a specific stock, on or before a specific date. SELLER of an options SELLS the right but not the obligation to buy (call) or sell (put) a specific stock, on or before a specific date. The seller has become obligated. Stock Option Basics Buy Option = Right Sell Option = Obligation Options can be played 4 ways Buy Call Right to buy certain Price Put Right to sell certain Price Sell Key Concepts Option = RIGHT Obligated to sell certain Price CALL Option = RIGHT to BUY PUT Option = RIGHT to SELL Premium is the amount of money paid for the right. Options trade in Contracts (always 100 shares) The price of 1 contract = Options price x 100 Obligated to buy certain Price If the option price is $3.00, then the contract would cost $3.00 x 100 or $300 PAGE 7

8 Why would you want the right to Buy or Sell? Example: Right to buy: GOOG At a Certain Price: $750/share For a Premium: $30/share By a Certain Date: 3 months What just happened? The Seller The Buyer Bill Joe Owns his stock Owns a RIGHT to buy Receives $30/share Has agreed to sell stock for $750/share if Joe wants If time runs out keeps his stock and $30/share Pays $30/share Has right to buy $750/share if he wants If time runs out loses $30/share PAGE 8

9 Foundations of Stocks and Options Class 4: Option Trading - Part 1 Rewards for Bill if GOOG goes up: Risks for Bill if GOOG Does not go up: PAGE 9

10 Bill Sold a Covered Call - Like Renting your stock Rewards for Joe PAGE 10

11 What happens if GOOG does not go up for Joe? Put Options Bill wants a guarantee to get at least $750/share for his stock (before a certain date). So Bill pays a premium of $30/share as insurance to Sam. Bill Sam Owns his stock Assumes Obligation Pays $30/share Has the right to sell his stock to Sam for $750/share If time runs out, he has to buy more insurance Receives $30/share Has obligation to buy if Bill wants If time runs out, he makes $30/share Rewards if GOOG Goes Up PAGE 11

12 Foundations of Stocks and Options Class 4: Option Trading - Part 1 What if GOOG goes down? What transaction just happened? How do options work? When you BUY an OPTION = The right to buy or sell a specific stock at a specific price on or before a specific date When you SELL an OPTION = The obligation to buy or sell a specific stock at a specific price on or before a specific date. PAGE 12

13 Action Steps Continue working on the line drawing you have learned Options part 2 Next Class We are here to help you all throughout your journey in the Stock Market. Reach out anytime through at success@tradesmartu.com or Schedule a Call and one of our Student Coaches will contact you. PAGE 13