If you are new to Stock Option Trading and want to know “How to Trade in Stock Market”, then you can find your queries related to option in the following content presented by ProfitAim Research.
What is an Option?
- An Option is an agreement between buyer and seller. Gives the RIGHT to the BUYERS and the OBLIGATIONS to the SELLER to buy or sell the stocks, at a later date, at a certain place.
- 1 Contract = 100 shares
- Premium: Price per contract of the option (Bid and Ask).
- Strike: Price that shares can be bought for call options, or sold for put options.
Option Classifications
Call Option : an option which gives a right to buy the underlying asset at a strike price.
Call option is an option which gives a right to buy the underlying asset at a strike price.
Put Option : an option which gives a right to sell the underlying asset at strike price.
Put option is an option which gives a right to sell the underlying asset at strike price
- Both the Call and Put option buyers are buying the rights, that is they are transferring their risks to the sellers of the option.
- For this transfer of risk to the sellers, buyers have to compensate by paying Option Premium.
- Option premium is also known as Price of the option, Cost or Value of the option.
Buying and Selling Options
Think Stock in Bullish Or Think Stock in Bearish
- Buy Calls or Buy Puts
Point to be noted
- Pay a premium
- Unlimited Reward
- Limited Risk
- “Buy to Open” and “Sell to Close”
- Possible in a Cash Account-Low Capital Required
- Pattern Day Trading does not apply to Cash Accounts
- Option settle the next day not 3 days
The Stock Option Chain
- Volume: Contracts traded in current day
- Open Interest: Outstanding contracts not yet exercised
- Delta: +/- of option price related to $1 move in stock.
- Gamma: Measures rate of change of Delta
- Theta: Time decay, drop in price of option per day
- Vega: Measures change in Volatility
Example:
- Delta 0.4, stock moves up $1, the option goes up 0.40
- Gamma 0.1, Delta goes to 0.5 if stock moves up $1
- Theta 08, Option price losses that per day all else equal
Entries and Exit
Which options to play?
- Bid/Ask Range
- Volume/Liquidity
- In or Out of the Money
Stop Loss
- Much more tricky than with stocks
- Wide bid and ask stop out
- Sell while the stock is moving in your direction at the ask, not chasing the bid down.
Selling Options for Consistent Income
- “Sell to Open”
- Paid premium right way
- Only for companies you WANT to own, even with no intention to do so
- Stock stays above strike, you keep premium and walk away
- Stock falls below, you keep premium but must buy 100 shares per contract
- Margin vs. Cash
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