clueless about options

OK, I have no idea what options are. Well, at least I think I don't. I'm going to use an example and I want to know whether it's right or wrong.

Let's say I buy ATVI at 12.1. Now, let's say I think it's going to 15$ by the end of March, but I think there's also a chance it might go to 10.5$ in a similar time frame. Now, I would buy a put option saying it's going to 10.5$ and then if it did what I thought it would do I would just lose the money I bought the option with. If it did go to 10.5, then I'd make whatever money off the option and then decide what I wanted to do with my core position.

Is this correct? I'm just wondering, because I can read in more detail, I'm just not confident that I have the basics down. I don't want a detailed explanation, just a yes or no. I can always go and read wikipedias article again or some other website.

Also, do you need a margin account to trade with options?

If I understand your example correctly, I believe you have lost money. You have paid a premium to buy the 10.5 put and your underlying security has dropped to 10.5 so basically, you shelled out extra money for the privilege of selling the security at its current market value (and this doesn't include transaction costs and the loss on the stock itself).

So, then calls would work in that situation? Yea, that's is why I don't trade options... I tried with this demo account, but was completely lost.

You will lose the difference between your stock purchase prices ($12.10) and the put strike price ($10.50), plus the cost of the option. The put will protect you from the rest of the downside, at least through expiration. Note also that the price of the put would come out of your profits should the market go up.

Hedron,

I don't know the answer to this question.

The reason is that when you trade options, price movement is only one of the factors that influence your profits and losses. In order to value an option, you need to know the cost of carry, the risk-free interest rate, time to expiration, the volatility of the relative price changes to the underlying asset price, the strike price along with the price movement of the underlying assets price.

Unlike stocks and futures, options are not linear so you need to think more 3-D

I did a webinar on the basics behind option pricing that I think you will find useful.

Here is a link: http://pfgbest.adobeconnect.com/p3i8beo96bt/

I hope it helps...

hedron said:

Let's say I buy ATVI at 12.1. Now, let's say I think it's going to 15$ by the end of March, but I think there's also a chance it might go to 10.5$ in a similar time frame. Now, I would buy a put option saying it's going to 10.5$ and then if it did what I thought it would do I would just lose the money I bought the option with.

Click to expand...

Yes absolutely, you lose the premium you paid when you bought the 10.5 put

hedron said:

If it did go to 10.5, then I'd make whatever money off the option and then decide what I wanted to do with my core position.

Click to expand...

No,
because if the stock is AT $10.5 ON EXPIRY then the put is worthless, you will lose $1.6 =(12.1-10.5) per share .

But if the stock is below $10.5 then yes you get the difference between $10.5 and the current stock price. Your break even on the put will be 10.5-premium. So if you paid $1 for the 10.5 put, you won't lose more than $1.6 per share, and $2.6 including the cost of the put.