When will I profit from an option

[GladiatorX]

Does anyone on this site trade options outside of their hedging uses?

I hedge every stock trade with a put option; Now i'm just starting to trade options 'for options'...

 

[TAjammy]

options on options?!?!?!?! lulz thats some mighty fine leverage

 

[gooseman]

how much leverage would sir like?

 

[dingo2009]

Hi All,

I learned abit about options and i need some clarification.

For Example;
when you buy call, can exit the position at any time if the call is worth something or do you need to wait for the expity date?

when you sell call and the position goes against you can you exit the position at any time or do you need ot ride it out untuil the other party exits the call?

and when you sell a call how do you exit it? is it a matter of simply closing the postions like in the futures market where you simply buy an oposite option to neutralise your position?

Also what happens if you sell a call and the other party wants to execrise their option and wants shares instead of the cash difference. How will such a transation be resolved? does it involve me having to buy the shares and then sell them to the other party?

Thanks for your help on this

 

[Technically Fundamental]

Hi All,

I learned abit about options and i need some clarification.

For Example;
when you buy call, can exit the position at any time if the call is worth something or do you need to wait for the expity date?
Options are an actively traded instrument so as long is there is a willing buyer/seller you can exit at any time.

when you sell call and the position goes against you can you exit the position at any time or do you need ot ride it out untuil the other party exits the call?
You can exit whenever you want as long as there is a buyer/seller but the point of an option is to limit your exposure. If you leave it to expiry then the maximum loss you can incur will be the premium paid... no matter how wide the spread ends up.

and when you sell a call how do you exit it? is it a matter of simply closing the postions like in the futures market where you simply buy an oposite option to neutralise your position?
Buy a call of someone else willing to sell. My knowledge of options is rather generic and pretty basic so I dont know anything about offsetting puts against calls or even if such a strategy exists. Maybe someone like gooseman can helping you.

Also what happens if you sell a call and the other party wants to execrise their option and wants shares instead of the cash difference. How will such a transation be resolved? does it involve me having to buy the shares and then sell them to the other party?
The option contract is a right to buy/sell. You're just trading the right to buy or sell, nothing more.

Thanks for your help on this

Hope this helperd y'all. If I got anything wrong or missed anything out hopefully someone will correct he post.

 

[Cadavre]

Hi All,

when you buy call, can exit the position at any time if the call is worth something or do you need to wait for the expity date?

A trade to exercise the option is a trade to acquire the underlying at a discount. For European options, so I've read, an option cannot be exercised until it expires. American options can be exercised at any time.

You can also profit on trading the option. The profit is the difference between what you acquire the option for (the "open") and what you sell the option back to the market at (the "close").

and when you sell a call how do you exit it?
You "ask" the market to "bid" for your option.

buy an oposite option to neutralise your position?
I would prefer profit to neutralizing the option

you sell a call and the other party wants to execrise their option and wants shares
I don't trade stocks. But I think you're asking about "writing" an option. Should you own stock and want to use an option as a hedge to protect your stock position you would "write" an option and then offer it to the market for other option traders to acquire. or open.

How will such a transation be resolved? does it involve me having to buy the shares and then sell them to the other party?
When you exercise an option you are acquiring the stock at a discount, or the difference between the option's strike and the market value of the stock when the option is exercised. When you "close" an option, or sell it back into the option market, the P/L is the difference of what you paid for the option (open) and what you sold the option for (close). Let's not forget the broker's fee, either.

There's a short article, with links, titled Options Level 101, here.

I use options as a cheap way to profit off the direction of the stock. I have to do a lot of research. In the American market, equities seem to be trading inverse to the dollar index - which means stock prices have more to do with the direction of the dollar(dollar goes down - stock goes up to equalize with non US denominated positions) than the prospects of the business that issued the stock. I am looking at using contingency orders to trade non US exchanges - and that's why I came to the very fine T2W!

 

[dingo2009]

ok i think i got things confused

writing an option is different from selling a call or put right?

what i meant is if i sell a call and it goes agains me if i choose i can exit the call at what ever the current price of the call?

and by exiting a call i sold, it basicaly means bying a call at the same price to neutralise the position correct?

 

[Cadavre]

ok i think i got things confused

writing an option is different from selling a call or put right?
Yes writing an option is the creation of an options contract usually by a trader that owns stock he is writing the option against. Buying (opening) and selling (closing) a call or put does not require ownership of the underlying.

what i meant is if i sell a call and it goes agains me if i choose i can exit the call at what ever the current price of the call?
The call doesn't go against you, the stock the call is written against, goes against you. When you "close" the call you have no more responsibility for it. Only the writer of an option is obliged. You would not be the "writer", you are the "holder". The holder is not liable or obliged for any risk other than what he opened the option for.

You have to have a plan. What is the minimum profit you are willing to close at. What is the maximum loss you are willing to close at. And when do you want to dump and close at what ever market price there is. An option exploits the direction of the market for the underlying. I use models that tell me what the option will be worth at various stock prices, and at various times before it expires. I then pick a "peg", or stock price to close at for those 3 sell to close conditions: close at a profit, close at a loss, close at market by a certain date. There is an example here of what forward implied spot price models look like here about halfway down the page.

The option is not going against you. The stock that underlies the "call" is going against you!

and by exiting a call i sold, it basicaly means bying a call at the same price to neutralise the position correct?
I don't know what you mean by neutralize. What it means is that you offered the option back to the market, and you "ask" the market to buy it from you. The market will counter your "ask" by offering a "bid" for your option. Should you accept the bid, you are essentially cashing out (closing) of the option and converting it back to cash. You can buy another option with the cash. When you close, the price you closed at is shown as the "last" quote on the market ticker.

You maybe talking about covered spreads. Start simple. Just do affordable buy and hold trades. Research the stock. Make a determination about what direction you think the stock will go. Then open the option. I bet on cheap call strikes where the contract cost is under a 100 USD. If the stock goes up I make money - if the stock goes down, I close at a predetermined "peg" to minimize losses. I dump, at market, around halfway between the date I opened and the date the option expires. My maximum risk is never more than what I opened (purchased) the option for.

The internet is full of information. Investopedia has some good stuff. T2W has some good info. Learn as much as you can.

That page I linked to above has a free download that reads market chains (chains are all the options being traded for a particular stick). The chains are close to the market tick and indicate the "ask", "bid" and "last" quote for both legs (the call and put) of the straddle (the strike and expiration). So, when you download a chain and look at what the stock and option is trading for, and then download the chain again a few minutes later, you can get a pretty good idea of how the market works.

The free software also has a portfolio that you can send options to, and a "mark to market" feature that will give you a P/L (profit or loss) on the exercise value and the closing value of your held "test" options. You can use that feature to create a test portfolio (and not have to buy an option) to see how well your hunches worked out. Don't invest yet. Simulate a trade and learn how everything works before you risk any money.

You also would need a broker or brokerage account. A lot of your cost will be brokerage fees and commissions. Read the fine print and ask other traders what they think. I like contingency trades because they don't require live data, they can be pegged to the value of the underlying (stock) which, depending on the broker, can better assure order execution than a trade pegged to the market for the option.

 

[dingo2009]

thatnks alot for the info Cadavre

 

[Rhody Trader]

The option is not going against you. The stock that underlies the "call" is going against you!

I beg to differ. If you are holding an option and the price of that option declines, the option is going against you. Option prices can fall without the underlying going against you (declining vol, time decay).

 

[kthor777]

old Thread but I have a question

Bought my first option after 25+ yrs of stock investing LOL
my question is , Iam sitting on a $800 profit, would like to exercise the option to buy the stock, but my confusion lies to what will happen to the $800 profit I have now? will it be credited toward the purchased of the stock? or should i just close the position and take the $800 profit?

Thanks

 

[holmes16]

I find it useful to divide the price of an option into 2 components: intrinsic value and time value.

The intrinsic value of a $1 dollar strike call option on a $10 stock is $9. If you exercise the call option, you get only the intrinsic value.

The time value is the difference between the price of the option and it's intrinsic value. This is what you give up when you exercise an option.

So, ideally, if you want to close down an option position it's better to sell, but there are times when you'll want to exercise instead:

1.) when the underlying stock is about to go ex-dividend and you hold a call option
2.) if the spread is wide and the options are illiquid, then it may be better to exercise than to place an offer and face the price risk and liquidity risk.

 

[WellsWilder]

If you own the 1.00 strike and the stock is trading 10.00 sell 100 shares at 10.00 and keep the option.