Closing option contract

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dimzakharov

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Hi all,

Thinking of buying some option contracts and I need some help.

When I bought an option contract (e.g.call contract) and I want to sell it how does it happen?
I indicate the price at what (and above) I want to sell it and then just simply wait for the purchase? It can take from minutes to days. Is that right?
Explain this process please.

Thanks advance for your help.
 
dimzakharov said:
Hi all,

Thinking of buying some option contracts and I need some help.

When I bought an option contract (e.g.call contract) and I want to sell it how does it happen?
I indicate the price at what (and above) I want to sell it and then just simply wait for the purchase? It can take from minutes to days. Is that right?
Explain this process please.

Thanks advance for your help.
Click to expand...

An option is a derivative product based upon an underlying instrument. If you buying a contract on an equity like AAPL it works slightly different than for indices. The important things remain the same. Vanilla options are either puts or calls.

Example
AAPL (Apple inc.)
AAPL1624C106 has a premium of $1.57 if you are buying.
Underlying instrument AAPL $106.69
Expiry 2016-03-24
Strike $106.00
Ask = $1.57, bid = $1.54

If you buy 1 contract at $1.57 it will cost you $157.00. The price of the premium will increase if the underlying increases in value. The greeks help to determine how much the premium will increase based upon an increase in the underlying. If the contract has a high delta, the premium will increase in direct tandem with the underlying.

Say that after AAPL goes up by a certain amount that the ask is now $1.67 and the bid is now $1.64. You can trade out the option. (1.64-1.57)*100 = $7 gain. You could also choose to exercise the option, which would allow you to buy AAPL at $106.00. However, doing so would be inadvisable at that point. You would have to $10,600 cash on hand. You paid a premium of $157.00. $10,600 + $157.00 = $10,757. $10,757/100 = $107.57. You would have to wait $107.57 before it would be advisable to exercise the contract.
 
Sorry slightly off topic, but would be much grateful if somebody could enlighten me as to why IB's commissions for stock option trade varies so much, even for the same stock and number of contracts? Eg. sold 5 contracts of GE Feb 19' 16 29 PUT, commission then $2.48, sold 5 contracts of GE Mar 18' 16 29 CALL, commission then $3.92, sold 5 contracts of GE Apr 18' 16 31 PUT, commission then $6.17. Many thanks
 
danjuma said:
Sorry slightly off topic, but would be much grateful if somebody could enlighten me as to why IB's commissions for stock option trade varies so much, even for the same stock and number of contracts? Eg. sold 5 contracts of GE Feb 19' 16 29 PUT, commission then $2.48, sold 5 contracts of GE Mar 18' 16 29 CALL, commission then $3.92, sold 5 contracts of GE Apr 18' 16 31 PUT, commission then $6.17. Many thanks
Click to expand...

You haven't provided enough information to tell. You do realize there's more than one option exchange. Look on your orders and see you which exchanges your commissions were from. I am guessing since your commissions vary that you were using the tiered commission structure. All of the exchanges have different removal liquidity fees. The commissions all depend on whether or not you are a for- or contra- order. IB lists the exact calculation per exchange. There are clearing fees that are added with the tiered commission structure.

If you don't have options market data then you can't direct your order where you want it.

Five contracts should never cost more than six dollars. Post a screenshot of the order.
 
Thank you for the answer, but I wanted to clarify the selling process.
When in the example above I want to sell AAPL contract and bid is 1.64. When I press sell at 1.64 will I get money immediately or I have to wait until somebody buys my contract?
 
dimzakharov said:
Thank you for the answer, but I wanted to clarify the selling process.
When in the example above I want to sell AAPL contract and bid is 1.64. When I press sell at 1.64 will I get money immediately or I have to wait until somebody buys my contract?
Click to expand...

First of all, we should clear up a few things. Do you have real time options market data? If you have real time information then you do not need to guess. The price for the bid exists because there is actually a buy waiting at that price if you are willing to sell at that price. If you do not have real time options market data, then you will not know what that price is. You are flying blind. If you place a market order, it will transmit immediately. If you place a limit order for $1.64, it might not get filled immediately, unless you can see that your limit order is at or below the current bid.
 
Thank you very much. So if there is bid price that means that somebody placed an order.
Does that mean the order is placed for the same expiry date and strike price?

Also what do you mean no real time market data? How is it possible? When could it happen?
 
dimzakharov said:
Thank you very much. So if there is bid price that means that somebody placed an order.
Does that mean the order is placed for the same expiry date and strike price?

Also what do you mean no real time market data? How is it possible? When could it happen?
Click to expand...

Are you paying for real time market data? If not, why are trading without it? That will lead to many problems.

Screen_Shot_2016_03_21_at_3_33_56_PM.png

Screen_Shot_2016_03_21_at_3_33_05_PM.png
 
I am not trading yet. Just thinking of buying an oil option.

I am thinking to open an account. Everyone advises Interactive Brokers but they require 10k minimum to open an account. I have that money but I wanted to start with 1000 - 1500. Though I can open account with 10k and spend only 1k-1.5k.
Any advise on that plan?
 
dimzakharov said:
I am not trading yet. Just thinking of buying an oil option.

I am thinking to open an account. Everyone advises Interactive Brokers but they require 10k minimum to open an account. I have that money but I wanted to start with 1000 - 1500. Though I can open account with 10k and spend only 1k-1.5k.
Any advise on that plan?
Click to expand...

I would advise you to use IB. They have the best commissions around. It is true that you do not need to expose your entire account. You will have to pay for market data fees. If you do not invest enough money in the market, you may not make enough to even pay for the market data fees. If you only invest $1,500, you will need to make about 2% per month just to cover the fees. These fees are not charged by Interactive Brokers, they are charged by the exchanges.
 
I tried to find that info on their web-site but I could not. Is it possible to point that out?
Sorry for being a little boy and asking silly questions. Just trying to get my head around a new area of expertise.
 
So, as I understood I need to pay this (if I want to trade american oil options):

Non-pro Pro
NYMEX (Globex) Level 1 USD 1.25 N/A
NYMEX (Globex) Level 2 USD 6.00 USD 90.00

What is the difference between level 1 and 2?
 
hhiusa said:
You haven't provided enough information to tell. You do realize there's more than one option exchange. Look on your orders and see you which exchanges your commissions were from. I am guessing since your commissions vary that you were using the tiered commission structure. All of the exchanges have different removal liquidity fees. The commissions all depend on whether or not you are a for- or contra- order. IB lists the exact calculation per exchange. There are clearing fees that are added with the tiered commission structure.

If you don't have options market data then you can't direct your order where you want it.

Five contracts should never cost more than six dollars. Post a screenshot of the order.
Click to expand...

Hi hhisua, thanks for the reply. Will investigate further based on suggestions. Probably to do with the exchanges.
 
dimzakharov said:
So, as I understood I need to pay this (if I want to trade american oil options):

Non-pro Pro
NYMEX (Globex) Level 1 USD 1.25 N/A
NYMEX (Globex) Level 2 USD 6.00 USD 90.00

What is the difference between level 1 and 2?
Click to expand...

Why is a complete newbie starting out with options on commodities? Derivative products are not the place for you to start trading.
 
danjuma said:
Hi hhisua, thanks for the reply. Will investigate further based on suggestions. Probably to do with the exchanges.
Click to expand...

Why don't you post screenshots of the orders and I will help you? Do you have real time options market data?
 
dimzakharov said:
I believe that oil prices will go up.
Click to expand...

That is your first problem right there. Derivative products are based upon underlying instruments in this case a commodity are presenting the price of oil. There is not just one price of oil, there are several different types of oil commodities. An increase in oil does not mean that all oil commodities will go up. Even if the oil commodity which underlies the option you are trading goes up, it does not necessarily mean that the option will increase in value.

Why are you treating a product but you know so little about?
 
As I said I believe that oil prices will go up and I want to make a couple bucks on that.
I didn't know what to start with and started reading about futures and options. Because options imply limited risk (when you don't go short) I thought that it is pretty suitable for me.

I also maybe bought oil by itself but I neither know any details nor have experience.

I am just trying to earn extra money apart from my usual work.
 
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