Option Trading for Rookies, Session I: Option Trading Terminology

Transcription

1 Trading for Rookies, Session I: Trading Terminology Disclaimers s involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized s, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at (877) 495-KING visiting or by downloading the file from the recourses tab on your screen. System response and access times may vary due to market conditions, system performance, and other factors. Margin trading involves risks and is not suitable for all accounts. Market timing is a complex investment strategy which involves risk and may incur additional commission costs. Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor as need. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. 2 1

2 Disclaimers Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as a recommendation, or solicitation to buy or sell securities. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing s systems, services or products. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results TradeKing Group, Inc. All rights reserved. Securities offered through TradeKing, LLC, member of FINRA and SIPC. 3 Trading for Rookies, Session I: Trading Terminology 2

3 What Are s? s are contracts: Giving the owner the right to buy or sell an asset at a fixed price for a specific period of time And, obligating the seller to take the opposite side if and when the right embedded in the option contract is exercised by the owner. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help: Call or Put Calls are options to buy a stock. The buyer obtains the right (but not the obligation) to purchase the underlying stock. Puts are options to sell a stock. The buyer obtains the right (but not the obligation) to sell the underlying stock. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help:

4 Long or Short Long Implies you bought an option contract. When you re talking about options and stocks, long implies a position of ownership. After you have purchased an option or a stock, you are considered "long" that security in your account. Short Implies you sold an option contract that you didn t own. If you ve sold an option or a stock without actually owning it, you are then considered to be short that security in your account. Examples Bought Long XYZ January 70 Call at $3.10 Sold Short ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help: Underlying s are customarily on one underlying. options ordinarily represent 100 shares of the underlying stock. Exceptions to the norm are usually caused by corporate actions and stock splits. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help:

5 Strike Price The pre-determined price at which the underlying asset will be bought or sold should the option be exercised. In the listed options marketplace the strike prices are standardized. s priced between 0 25, intervals of 2 1/2 s priced between , intervals of 5 s priced greater than 200, intervals of 10 Many exceptions to these guidelines. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help: Premium The price of the option. Paid by buyer; received by seller. The price is multiplied by the number of shares the contract represents, generally 100 shares. $3.10 option actually costs 100 x 3.10 or $310 Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help:

6 Expirations American Style options can be exercised on any business day up to expiration Usually American-style stock options expire on the Saturday following the third Friday of each month. Some exceptions to this rule also. The last day they can be exercised or traded is the third Friday of the month. PM Settlement. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help: & Assignment Defined : to invoke the right contained in an option contract Assignment: to be required to fulfill the obligation Buyers pay cash and receive a benefit The ability to exercise Sellers receive cash and have a obligation May be assigned Speaker: Brian Overby Audio Help:

7 Four Basic s Buyer (long) CALL Right to buy PUT Right to sell Seller (short) Obligation to sell Obligation to buy Speaker: Brian Overby Audio Help: In s and Out s for Call s 70 In-The-Money 65 Price At-The-Money Out-Of -The-Money 60 Strike Call Speaker: Brian Overby Audio Help:

8 In- At- or Out-of-the-money? Calls: If I exercised the call first and then sold stock at the market, would I get anything? Question: at 23 on expiration, Currently - Long 20 Call, this option is considered. a) ITM b) OTM Get $3 per share. Speaker: Brian Overby Audio Help: In s and Out s for Put s 90 Out-Of-The-Money Price At-The-Money In-The-Money 80 Strike Put Speaker: Brian Overby Audio Help:

9 In- At- or Out-of-the-money? Puts: If I bought stock at the market first and then exercised the put, would I get anything? Question: at 74 on expiration, Currently - Long 75 Put, this option is considered. a) ITM b) OTM Speaker: Brian Overby Audio Help: In- At- or Out-of-the-money? Puts: If I bought stock at the market first and then exercised the put, would I get anything? Question: at 74 on expiration, Currently - Long 75 Put, this option is considered. a) ITM b) OTM Get $1 per share. Speaker: Brian Overby Audio Help:

10 Intrinsic & Time Value 30 Strike 7 36 Price 36 Strike Price - 30 Intrinsic Value 6 s Price 7 Intrinsic Value - 6 Time Value 1 Speaker: Brian Overby Audio Help: Intrinsic & Time Value Strike 7 36 Price? Strike Price -? Intrinsic Value? s Price 2.00 Intrinsic Value -? Time Value? 2.00 Speaker: Brian Overby Audio Help:

11 Volume and Interest Volume volume is the number of option contracts that have traded within a day. Open Interest Open interest is the number of outstanding option contracts of a particular strike price and expiration date that have been bought or sold to open a position. An opening transaction increases open interest and a closing transaction decreases it. Open interest is calculated at the end of each business day. Examples XYZ January 70 Call at $3.10 ABC February 35 Put at $1.20 Speaker: Brian Overby Audio Help: I m Long or Short, What Now? Sell to close or buy to close or accept assignment - Shares are exchanged at the pre-determined price (strike) Let expire (worthless) Speaker: Brian Overby Audio Help:

12 Index s vs. s There are quite a few differences between options based on an index versus those based on stocks. First, index options typically can t be exercised prior to expiration, whereas stock options typically can. Second, the last day to trade most index options is usually the Thursday before the third Friday of the expiration month. But the last day to trade stock options is the third Friday of the expiration month. Third, index options are cash-settled, but stock options result in stock changing hands. Note: There are several exceptions to these general guidelines about index options. If you re going to trade an index, you must take the time to understand the option contract characteristics. Speaker: Brian Overby Audio Help: Trading for Rookies Next Session An Introduction to Pricing Thursday, November 13th Register: 12

13 TradeKing s Trader Network Twitter.com/TradeKing Twitter.com/BrianOverby Facebook.com/TradeKing Youtube.com/TradeKing Linkedin.com/company/TradeKing Member FINRA & SIPC Discuss options trading with me via: Twitter.com/BrianOverby Twitter.com/TradeKing To learn more about option strategies: splaybook.com 13

14 Trading for Rookies, Session I: Trading Terminology Homework Mechanics 47 _ Long 1 50 Call 116 _ Long Put 88 _ Long 1 90 Call 14

15 Mechanics 47 _ Long 1 50 Call _ Long Put 88 _ Long 1 90 Call Mechanics 47 _ Long 1 50 Call 116 _ Long Put 88 _ Long 1 90 Call 15

16 Mechanics 47 _ Long 1 50 Call 116 _ Long Put 88 _ Long 1 90 Call Mechanics 47 _ Long 1 50 Call 116 _ Long Put 88 _ Long 1 90 Call 16

17 Mechanics 47 _ Long 1 50 Call 116 _ Long Put 88 _ Long 1 90 Call Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call 17

18 Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call 18

19 Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call 19

20 Mechanics 71 Long 300 Shares Short 3 65 Calls 34 _ Long 1 25 Put 42 _ Long 1 40 Call Mechanics 46 _ Long 5 40 Calls & Short 5 50 Calls 20

21 Mechanics 46 _ Long 5 40 Calls & Short 5 50 Calls Mechanics 46 _ Long 5 40 Calls & Short 5 50 Calls * Retention of premium collected at time of contract opening 21

22 Trading for Rookies, Session I: Trading Terminology Thank You for Your Participation 22