Wins71 - this is a huge subject and you will have to do some serious reading. In a nutshell, an option gives the holder the right, but not the obligation, to buy (call) or sell (put) the underlying asset at a fixed price (known as the strike price) on a set date in the future (expiry date).
I think the best place to start would be a good primer book. This one is as good as any, and better than most.
Options Plain and Simple by Lenny Jordan. Published Prentice Hall ISBN 0 27363878 5 at about £20.
The London International Financial Futures Exchange (LIFFE) site is a mine of information, and gives 15 minute delayed prices on all UK equity and index options for free - which is quite adequate for most purposes.
http://www.liffe-data.com/optionPrices.asp
Most option traders cut their teeth in the UK on the 76 (or so) optionable shares before moving onto the US, where there are over 2200 optionable shares! The equivalent to LIFFE is the Chicago Board Options Exchange (CBOE) which also gives 15 minute delayed prices. The main difference is the contract size (1000 shares in the UK, 100 shares in the US). Lots of useful
educational material here.
http://quote.cboe.com
and also :-
http://www.commodityworld.com/options_strategies.htm
http://www.numa.com/derivs/ref/os-guide/os-0a.htm
It is useful to have a good payoff diagram calculator. The one I use can be downloaded for free from :-
http://www.hoadley.net/options/LatestVersion.htm
You will need a reasonably up to date version of Excel to run it - I use Excel 2000. It does not run properly on pre-1997 versions.
There is an excellent series of online tutorials to use this calculator :-
http://www.hoadley.net/options/demos.asp
The basic position calculator is free, and although I say "basic", it is in fact incredibly sophisticated - esp for a freebie. I had a look at the additional programming you get for the princely sum of about £11, and it takes it on another quantum leap - probably more than most people will ever need, unless their style of trading is very frenetic.
It is absolutely essential to understand (and to be able to draw) payoff diagrams from first principles on a piece of paper rather than rely on the software. If the software shows that you have designed a strategy that looks too good to be true, then it probably is and you need to check the accuracy of your work!
You do not need to put up margin if you just want to buy an option. If you want to sell naked options then you need to put up margin, or cover the options with the underlying shares, as in a covered call trade.
Simply buying options is the toughest way to make money from options as you not only have to be right about the direction but also the time. A far better way is to both sell and buy options in various combinations (spreads, synthetics, strangles etc). Also remember that options are as much a play on volatility as they are on change in price of the underlying security (or index).
Now, go get yourself a good book and come back with more questions when you have mastered the basics! :cheesy:
I think the best place to start would be a good primer book. This one is as good as any, and better than most.
Options Plain and Simple by Lenny Jordan. Published Prentice Hall ISBN 0 27363878 5 at about £20.
The London International Financial Futures Exchange (LIFFE) site is a mine of information, and gives 15 minute delayed prices on all UK equity and index options for free - which is quite adequate for most purposes.
http://www.liffe-data.com/optionPrices.asp
Most option traders cut their teeth in the UK on the 76 (or so) optionable shares before moving onto the US, where there are over 2200 optionable shares! The equivalent to LIFFE is the Chicago Board Options Exchange (CBOE) which also gives 15 minute delayed prices. The main difference is the contract size (1000 shares in the UK, 100 shares in the US). Lots of useful
educational material here.
http://quote.cboe.com
and also :-
http://www.commodityworld.com/options_strategies.htm
http://www.numa.com/derivs/ref/os-guide/os-0a.htm
It is useful to have a good payoff diagram calculator. The one I use can be downloaded for free from :-
http://www.hoadley.net/options/LatestVersion.htm
You will need a reasonably up to date version of Excel to run it - I use Excel 2000. It does not run properly on pre-1997 versions.
There is an excellent series of online tutorials to use this calculator :-
http://www.hoadley.net/options/demos.asp
The basic position calculator is free, and although I say "basic", it is in fact incredibly sophisticated - esp for a freebie. I had a look at the additional programming you get for the princely sum of about £11, and it takes it on another quantum leap - probably more than most people will ever need, unless their style of trading is very frenetic.
It is absolutely essential to understand (and to be able to draw) payoff diagrams from first principles on a piece of paper rather than rely on the software. If the software shows that you have designed a strategy that looks too good to be true, then it probably is and you need to check the accuracy of your work!
You do not need to put up margin if you just want to buy an option. If you want to sell naked options then you need to put up margin, or cover the options with the underlying shares, as in a covered call trade.
Simply buying options is the toughest way to make money from options as you not only have to be right about the direction but also the time. A far better way is to both sell and buy options in various combinations (spreads, synthetics, strangles etc). Also remember that options are as much a play on volatility as they are on change in price of the underlying security (or index).
Now, go get yourself a good book and come back with more questions when you have mastered the basics! :cheesy:
wins71,
make sure that u fully understand options !! In 1996, I managed to blow a small account by simply buying options and treating like stock !! The time decay meant that my position got worthless over time !! Just takke the time to learn properly...........since it can get very complex ...........
make sure that u fully understand options !! In 1996, I managed to blow a small account by simply buying options and treating like stock !! The time decay meant that my position got worthless over time !! Just takke the time to learn properly...........since it can get very complex ...........
osho67 - the principles for trading US index options are exactly the same as for the UK. The CBOE website should be able to tell you most of what you need. Main difference is the contract size - usually 100 instead of 1000 as in the UK - and margin requirements tend to be greater. This is also one area where spreads on the S&P and Dow option chains can be greater than on the equivalent FTSE series. I tend to stick to the FTSE but there is no reason why the same strategies that I have discussed on other threads (ratio spreads, strangles, synthetics, ratio backspreads) can't work equally well in the US.
al-motor - I quite agree. Trading options as though it was just a geared stock is a very quick way to lose money. Unfortunately most people new to options start by using a simple buy strategy(ie. long calls or puts) and this has to be the toughest way to win at options. Normally I will only use options in a combination where premium collected on the sale of one series is used to buy options elsewhere as part of an overall strategy - eg :-
selling calls above the index to buy puts below it (a synthetic). Usually I sell more calls than I buy puts so that I can write the calls further out to provide a wider safety margin if the initial move is against me.
or simply selling calls and puts above and below the market with a view to keeping the premium collected ( a short strangle).
or selling at-the-money (ATM) calls and buying half the number of in the money calls in a ratio of 2:1 (ratio call spread) to provide premium in a market where there is little movement but you fear a correction so that you don't want the exposure implicit in selling puts (as in a short strangle).
Whatever, it is essential to understand the difference between time value and intrinsic value, the effect of time decay, the effect of changing implied volatility and the basics of delta and gamma. That is why I have urged wins71 to do some serious reading before venturing further. Understanding and being able to draw pay-off diagrams is also essential, although free software such as the Hoadley model I mentioned above will do this for you provided you understand the principles involved.
However, for all that, I find options trading the least stressful and most consistent way to trade. It does not involve screen watching all day, it enables a position to move against you without taking an immediate hit provided that you are patient, and it can be combined with other activities, including a full time job, provided that you have access to a realtime ftse100 quote 2 or 3 times during the day.
al-motor - I quite agree. Trading options as though it was just a geared stock is a very quick way to lose money. Unfortunately most people new to options start by using a simple buy strategy(ie. long calls or puts) and this has to be the toughest way to win at options. Normally I will only use options in a combination where premium collected on the sale of one series is used to buy options elsewhere as part of an overall strategy - eg :-
selling calls above the index to buy puts below it (a synthetic). Usually I sell more calls than I buy puts so that I can write the calls further out to provide a wider safety margin if the initial move is against me.
or simply selling calls and puts above and below the market with a view to keeping the premium collected ( a short strangle).
or selling at-the-money (ATM) calls and buying half the number of in the money calls in a ratio of 2:1 (ratio call spread) to provide premium in a market where there is little movement but you fear a correction so that you don't want the exposure implicit in selling puts (as in a short strangle).
Whatever, it is essential to understand the difference between time value and intrinsic value, the effect of time decay, the effect of changing implied volatility and the basics of delta and gamma. That is why I have urged wins71 to do some serious reading before venturing further. Understanding and being able to draw pay-off diagrams is also essential, although free software such as the Hoadley model I mentioned above will do this for you provided you understand the principles involved.
However, for all that, I find options trading the least stressful and most consistent way to trade. It does not involve screen watching all day, it enables a position to move against you without taking an immediate hit provided that you are patient, and it can be combined with other activities, including a full time job, provided that you have access to a realtime ftse100 quote 2 or 3 times during the day.
Thanks RogerM for your input. If I want to do a covered call in index options and I buy one contract of the index, but can I hold on to this like the shares for ever if I am not exercised? Or as I suspect the buy of the index will lapse after some time. I am not clear about this. I am also reading training material on CBOE but as yet I have not found the answer to above point. Maybe I will come across it later on. Thanks
Roger M-
It is one of the areas that I will probably go back in, further down in my career.......... it takes a lot of time to learn all the different strtaegies- i have forgotten most of them.........
But like u say, if u know what u are doing, u can be quite consistent at it...........
I have heard of people buying options quite successfully, BUT they are usually very good at predicting direction - but again, i have not seen any solid proof of their performance.
It is one of the areas that I will probably go back in, further down in my career.......... it takes a lot of time to learn all the different strtaegies- i have forgotten most of them.........
But like u say, if u know what u are doing, u can be quite consistent at it...........
I have heard of people buying options quite successfully, BUT they are usually very good at predicting direction - but again, i have not seen any solid proof of their performance.
osho67 - Not sure how you intend to place this trade.
You could buy calls for your long position and just sell calls above. However, this is not a covered call but a vertical bull spread.
It is really a case of what instrument you use to establish the long position to cover your short calls. Futures could be used but you would have to renew them periodically as each series expires. Also would you be happy to hold futures overnight?
Or you could use an Exchange Traded Fund (ETF). The ETF that proxies for the Dow (DIA) or the Nasdaq (QQQ) each has their own option chain so you could enter a covered call strategy with either of these. The ETF is effectively a stock so it doesn't have an expiry date, and by using the relevant option you could create a quasi covered call on either the Dow or Nasdaq. I don't think the ETF for the S&P (SPY) has any options, although I stand to be corrected. Both QQQ and DIA are tradeable thru IB with their associated option chain so your overheads would be low.
This strategy would, in effect, be a bit like an index tracker with call premiums to enhance returns when progress is slow, but where it could act as a brake if the index being tracked moves up rapidly.
You could buy calls for your long position and just sell calls above. However, this is not a covered call but a vertical bull spread.
It is really a case of what instrument you use to establish the long position to cover your short calls. Futures could be used but you would have to renew them periodically as each series expires. Also would you be happy to hold futures overnight?
Or you could use an Exchange Traded Fund (ETF). The ETF that proxies for the Dow (DIA) or the Nasdaq (QQQ) each has their own option chain so you could enter a covered call strategy with either of these. The ETF is effectively a stock so it doesn't have an expiry date, and by using the relevant option you could create a quasi covered call on either the Dow or Nasdaq. I don't think the ETF for the S&P (SPY) has any options, although I stand to be corrected. Both QQQ and DIA are tradeable thru IB with their associated option chain so your overheads would be low.
This strategy would, in effect, be a bit like an index tracker with call premiums to enhance returns when progress is slow, but where it could act as a brake if the index being tracked moves up rapidly.
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Roger
I am studying Options. A question has puzzled me re.
American and european options. I am using the software which came with the book.
A call option has an excercise price of $70 and is at expiration.
the option cost $4 and the underlying stock trades at $75 . Assuming a perfect market, how would you respond if the call is an American option? How does the answer differ if the option is European?
I realise American options can be excercised any time up to expiration and european is only excercised at expiration.
Bill
I am studying Options. A question has puzzled me re.
American and european options. I am using the software which came with the book.
A call option has an excercise price of $70 and is at expiration.
the option cost $4 and the underlying stock trades at $75 . Assuming a perfect market, how would you respond if the call is an American option? How does the answer differ if the option is European?
I realise American options can be excercised any time up to expiration and european is only excercised at expiration.
Bill
Bill - if I understand the question correctly, and the option is at expiry date, I don't believe there should be any significant difference between the the European and American options.
If the exercise price (which I assume means the strike price) is $70 and the underlying stock is at $75, then the expiry price of the option should be $5. Remember there are 2 components to any option price - time value and intrinsic value. At expiry there is no time value left so the option price will be the difference between the underlying stock price and the strike price i.e. 100% of the value will be intrinsic value.
As you have identified, the main difference between American options and European options is that the US option can be exercised by the holder at any time, whereas the European option is only exercisable on expiry. For that reason i generally stick to European options so that if I am short, I am in control of when it is exercised, and I don't have the holder exercise to my detriment if the underlying stock price spikes briefly thru the strike price. So for the example you have given, I would expect the time value of the US option to be greater than that for the equivalent European option because the chances of it reaching the strike price will be greater.
Not sure whether this answers your question tho'.
If the exercise price (which I assume means the strike price) is $70 and the underlying stock is at $75, then the expiry price of the option should be $5. Remember there are 2 components to any option price - time value and intrinsic value. At expiry there is no time value left so the option price will be the difference between the underlying stock price and the strike price i.e. 100% of the value will be intrinsic value.
As you have identified, the main difference between American options and European options is that the US option can be exercised by the holder at any time, whereas the European option is only exercisable on expiry. For that reason i generally stick to European options so that if I am short, I am in control of when it is exercised, and I don't have the holder exercise to my detriment if the underlying stock price spikes briefly thru the strike price. So for the example you have given, I would expect the time value of the US option to be greater than that for the equivalent European option because the chances of it reaching the strike price will be greater.
Not sure whether this answers your question tho'.
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There are a few nice options courses which you can download free. Follow the links:
http://www.21stcenturyoptionseducation.com/page/education/tco/courses/
http://www.ifgnet.com/ go to "Courses"
Hope this helps. Best regards,
Andreas
http://www.21stcenturyoptionseducation.com/page/education/tco/courses/
http://www.ifgnet.com/ go to "Courses"
Hope this helps. Best regards,
Andreas
Thankyou Roger & Andreas I'll try those links .
Roger- the book does'nt give answers which can be a nuisance .
But what you have wrote has given me another angle,
If you are short in this instance you are the seller and in that way I can see a holder excercising his right.
The way I understand at the moment is I would generally be a buyer of a Call or Put.
Bill
Roger- the book does'nt give answers which can be a nuisance .
But what you have wrote has given me another angle,
If you are short in this instance you are the seller and in that way I can see a holder excercising his right.
The way I understand at the moment is I would generally be a buyer of a Call or Put.
Bill
Bill - in the example you quote you would definitely be better off being the buyer if the option in question is a call. Clearly if it was a put it would have expired worthless and the seller would keep the $4 premium collected.
Why do you say you would generally be a buyer of a call or a put? Trading options is all about taking premium from selling options at a level with a low probability of being reached, and buying options in the direction of the anticipated move. Also take into account Implied Volatility - generally you want to be a net buyer when IV is low to take advantage of any increase in volatility, and a net seller when IV is high to take advantage of the more rapid time erosion. Also remember that 80% of options expire worthless, so why not be a seller. So many people say that time erosion is a major problem for option buyers. And so it can be, so why not be a seller and have time erosion working in your favour?
Why do you say you would generally be a buyer of a call or a put? Trading options is all about taking premium from selling options at a level with a low probability of being reached, and buying options in the direction of the anticipated move. Also take into account Implied Volatility - generally you want to be a net buyer when IV is low to take advantage of any increase in volatility, and a net seller when IV is high to take advantage of the more rapid time erosion. Also remember that 80% of options expire worthless, so why not be a seller. So many people say that time erosion is a major problem for option buyers. And so it can be, so why not be a seller and have time erosion working in your favour?
futures indicies are based on the underlying indicie, and either follow the underlying or lead the underlying, but ultimately are bought and sold between traders or arbs
options though are based on the underlying stock, but the trading tends to be with marketmakers,who dont seek to profit on outright positons, but make their money on the spread, so inbalances in supply and demand of both the option and the underlying can cause short term aberations in the pricing
options though are based on the underlying stock, but the trading tends to be with marketmakers,who dont seek to profit on outright positons, but make their money on the spread, so inbalances in supply and demand of both the option and the underlying can cause short term aberations in the pricing
well - minutes or hours- just depends on time of day, volatilty of the market
seconds - i wish - but the rules are all on the exchanges side and they can hold your order as long as they want and even just ignore your order but still hang on to it - u want to try it when a share is getting dumped by the specialists at the nyse and then the option market makers have you by the short and curlies
seconds - i wish - but the rules are all on the exchanges side and they can hold your order as long as they want and even just ignore your order but still hang on to it - u want to try it when a share is getting dumped by the specialists at the nyse and then the option market makers have you by the short and curlies
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