Trade Options Online

10 Trade Options Online Tips

noreply@blogger.com (About Me) — Mon, 01 Mar 2010 05:36:00 +0000

Here are 10 Trade Options Online Tips to help you with your online options trading.

1. Option Strategies range from high risk to low risk. The risk on each side of an options trade can work to your advantage. Options provide you with a wide range of choices.

2. Option Buyers can profit whether the market rises or falls; for example, The Call Option and The Put Option; the difficult part is knowing ahead of time which direction the market will take.

3. Stock Price Movement - It is not enough to accurately predict the direction of a stock's price movement. For option buyers, that movement has to occur within a very short period.

4. "The House Wins" - When selling options, the seller benefits from time. The options seller, just like the casino owner, benefits from selling an option as opposed to buying an option.

5. Market Forces - Market forces affect the value of a stock. An option itself has no actual fundamental value. An option's market value is formulated on the stock's fundamentals.

6. Fees and Charges - While setting option trading standards for yourself, make sure you take into account any fees and charges for a trade. This will help you set a profit level that takes into consideration any fees and charges and your trades. Shop around for how much it costs to trade quantity of options.

7. Don't Trade Options on Impulse - It takes discipline to trade options. Disciplined to apply a formula given the circumstances rather than trading on impulse.

8. Short Term Speculation – For anyone speculating over the short term, buying options is an excellent way to control large amounts of stock with a low commitment of capital.

9. The Options Prospectus - You can get a copy of the options prospectus, called “Characteristics and Risks of Standardized Options”, online at The Options Clearing Corporation.

10. Call Sellers – Call sellers have much less risk when they already own 100 shares of a stock. Typically the Call seller will be profitable.

The Options Trader Glossary

noreply@blogger.com (About Me) — Wed, 06 Jan 2010 23:11:00 +0000

This is, in no way, a complete glossary of all the terms you'll find when you trade options online. One could certainly fill a book and then some. However, for new folks who are learning to trade options online or someone who needs a handy list, this glossary should fit the bill. If you think there is a term missing or needs updating, just let me know and I will update the glossary.

Ask: The asking price of an option is the lowest price someone will sell an option for at that moment.

Assignment: Also know has being assigned. The exercise action taken against a seller, done on a random or orderly basis by the Options Clearing Corporation and brokerage firms. For example, you sell a covered call and receive payment for the covered call, if you get assigned you have to sell the underlying stock of the covered call at the strike price of the covered call.

At-the-Money: When the strike price of an option is the same price of the underlying stock. For example, xyz stock is trading at $12.50 a share, the corresponding option for July that we're interested in has a strike price of $12.50.

Beat Estimates: When companies report their quarterly earnings and they're higher than what analysts estimated. The company "beat estimates". Sometimes you'll see stocks and options go higher because of a company beating estimates.

Bearish: If you're bearish, you think the market, a stock or an option will go down in value.

Beta: A measurement of relative volatility of a stock, made by comparing the degree of price movement in comparison to a larger index of stock prices.

Bid: The bid price is the highest price an options trader will pay at that moment.

Breakout: The movement of a stock's price below support level or above resistance level.

Bullish: If you're bullish, you think the market, stock or options will go up in value.

Buy, Downgrade, Hold, Outperform, Sell, Upgrade: Broker recommendations, ratings or opinions on a stock.

Call Option: The buyer of a call option is granted the right to purchase the underlying stock for a fixed price in the future. For that fixed price, the seller receives a premium from the buyer. One call option represents 100 shares of a stock. The call buyer is hoping the underlying stock will go up because the call option will become more valuable. The call seller hopes the stock stays the same or goes down.

CBOE: Chicago Board Options Exchange. The CBOE was the first options exchange to trade options on stocks in 1973. It is located in Chicago, IL and is the largest exchange where options are traded.

Contract: The option contract represents 100 share of stock. The contract identifies the stock, the strike price, and the expiration date.

Covered: Protecting yourself by owning the underlying stock (100 shares) of an option.

Covered Call: A covered call is an option that gives the right to the option buyer to buy a stock at a fixed price in the future. The buyer pays the seller for the right to buy the stock at the fixed price. So if you're the owner of 100 shares of xyz stock and you sell one covered call of xyz to a buyer, the buyer has the right to buy your 100 shares of xyz at a fixed price in the future. For that right, the buyer pays you for that option.

Delta: The degree of change in option premium, in relation to changes in the underlying stock.

Exercise: Exercise happens when the underlying stock is bought or sold under the terms of the option. For example, if you sell a covered call and you are exercised, then you have to give up your 100 shares of stock for the price that was agreed upon when you sold the covered call.

Exit Plan: Whenever you enter an option trade, know what your exit plan is. Set a price at which you will exit the trade whether profitable or not.

Expiration: The date in which an option becomes worthless. Options are known as a wasting asset, something that has value but over time becomes worth less. Also known as Expiration Date.

Fundamental Analysis: A way to study a company by the attributes of their financial information and statements.

Gamma: Gamma is the first derivative of delta and is used when trying to gauge the price of an option relative to the amount it is in or out-of-the-money. When the option being measured is deep in or out-of-the-money, gamma is small. When the option is near the money, gamma is largest.

Hedge: A strategy involving the use of one position to protect another position. When you own 100 shares of xyz and you buy a put option on xyz, you are hedging your position.

Implied Volatility: Implied Volatility increases when the market is bearish and decreases when the market is bullish.

In-the-Money: The call option is in-the-money when the strike price of the option is less than the price of the stock. The put option is in-the-money when the price of the stock is lower than the strike price of the option.

Index: A major category or basket of stocks considered to represent a particular market sector of the U.S. stock market or the economy. The DJIA is an index, the S and P 500 is an index, the Russell 2000 is an index, the Wilshire 5000 Total Market is an index.

Indices: Indexes that represent major categories or baskets of stocks considered to represent a particular market or sector of the U.S. stock market or the economy. For example, the Dow Jones Industrial Average (DJIA) is an index of 30 "blue chip" U.S. stocks of industrial companies (excluding transportation and utility companies). The S&P 500 Composite Stock Price Index is an index of 500 stocks from major industries of the U.S. economy. There are indices for almost every conceivable sector of the economy and stock market.

Intrinsic Value: An option has intrinsic value if the option is in-the-money. If the option is out-of-the-money, the option's intrinsic value is zero. An option also has time value. See time value below.

LEAPS: Long-term Equity AnticiPation Securities, long term option contracts that work just like standardized options, but with expiration up to three years.
Leverage: Money borrowed to buy options. Leverage increases the potential for profit as well as loss.

Margin: A brokerage account that has enough cash and security to provide collateral for the purchase of options.

Naked: Also known as uncovered. Selling an option when the seller doesn't own the underlying stock. For example, a seller of a covered call would be considered going naked if they didn't own the underlying stock.

Open Interest: The number of contracts of a particular option at any given time, which can be used to measure market interest.

Option: The right to buy or sell 100 shares of stock at a specified, fixed price and by a specified date in the future.

Options Clearing Corporations: The organization that handles clearing of the options trades for the various options exchanges and regulates the listing of new options.

Option Valuation: Every option is married to a stock. The value of an option changes as the value of the underlying stock changes.

Out-of-the-Money: The price of the call option is out-of-the-money when the strike price of the option is higher than the price of the underlying stock. The price of the put option is out-of-the-money when the strike price of the option is lower than the price of the underlying stock.

Paper Trading: Trading an option on paper for practice. No money is exchanged while paper trading, just experience.

Premium: The current price of an option, which a buyer pays and a seller receives at the time of an option transaction. For example, if the buyer of a call option is pays $0.50 cents premium for one option, the buyer will pay $50.00 for that one option, $0.50 x 100 (shares) = $50.00.

Put Option: The buyer of a put option is granted the right to sell the underlying stock for a fixed price in the future. For that fixed price, the seller receives a premium from the buyer. One call option represents 100 shares of a stock. The put buyer is hoping the underlying stock will go down.

Resistance Level: The price for a stock identifying the highest likely trading price under present conditions, above which the price of the stock is not likely to rise.

Risk: The chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Prior to buying or selling an option, investors must read a copy of the Characteristics & Risks of Standarized Options, also known as the options disclosure document (ODD). It explains the characteristics and risks of exchange traded options.

Risk Tolerance: The amount of risk that an investor is able and willing to take.

Spread: The simultaneous purchase and sale of options on the same underlying stock, with different strike prices or expiration dates, or both. There are many option spread techniques that limit an option trader's risk. Some include: Bear Put Spread, Bull Call Spread, Calendar Spread, and Butterfly Spread just to name a few.

Straddle: The simultaneous purchase and sale of the same number of calls and puts with identical strike prices and expiration dates. The option trader would consider a straddle when the underlying stock could go up or down.

Strike Price: The fixed price to be paid on 100 shares of stock. For example, the strike price for the June $12.50 is $12.50 per share of a stock, regardless of the value of the stock at expiration.

Support Level: The price for a stock identifying the lowest likely trading price under present conditions, below which the price of the stock is not likely to fall.

Symbol: The symbol of a stock or an option. For example, AA is the stock symbol for Alcoa, Inc and the symbol AAAT is the option symbol for the $17.50 January 2010 call option.

Technical Analysis: A study of the trends and patterns of the unTechnical Analysis:derlying stock using charts, trends of highs and lows and pricing over time.

Theta: Measures the daily rate of depreciation of a stock option's price with the underlying stock remaining stagnant. For example, if the strike price of an option is $1,150 and theta is 53.80, then in theory the value of the option will drop $53.80 per day.

Time Decay: Since options are a wasting asset, their value declines over time. As an option approaches its expiration date without being in-the-money, its time value declines since the probability of that option being profitable (in-the-money) is reduced.

Time Value: Time value is the one part of the value of an option. Time value is the portion of the value of an option that is above the option's intrinsic value.

Underlying Stock: The stock represented by the option.

Vega: The Vega of an option indicates how much, theoretically at least, the price of the option will change as the volatility of the underlying asset changes. Vega is quoted to show the theoretical price change for every 1 percentage point change in volatility. For example, if the theoretical price is 2.5 and the Vega is showing 0.25, then if the volatility moves from 20% to 21% the theoretical price will increase to 2.75. Vega is most sensitive when the option is at-the-money and tapers off either side as the market trades above/below the strike.

Volatility: When a stock trading range is wide, in other words higher highs and lower lows over time, it is considered more volatile than a stock that has a more narrow trading range over time. Typically, a more volatile stock can make for more profitable option trades. However, the option's premium can also be higher.

Volume: The amount of trading activity in a stock, option or the market as a whole.

VIX: The VIX is the volatility indicator for the S and P 500. Often referred to as the fear index, it represents the market's expectation of volatility over the next 30 day period.

VXN: The VXN is the volatility indicator for the Nasdaq. When the VXN is high, it's an indicator that the there's a lot of risk in the Nasdaq and can be a bullish indicator.

Wasting Asset: An asset that declines in value over time. An option is a wasting asset because it has an expiration date.

Writer: The seller of an option.

The Put Option

noreply@blogger.com (About Me) — Mon, 28 Dec 2009 23:40:00 +0000

In my blog post Trade Options Online, I introduced you to trading options online by giving you an example of a call option and a general overview of options and how to view options at BigCharts. I also explained some terms and definitions that you need to know when you trade options online. I concluded the article with an example of buying a Call option.

Options Review

So let’s do a review here real quick, options are a way to control stocks. Since we’re talking about put options in this article, we’ll use put options for the examples and definitions.

One option, whether it would be a call option or a put option, represents 100 shares of stock. So when you buy one option that costs $1.00, you end up paying $100.00 for the contract. Calls and Puts are traded in terms of contracts. Again, with one option contract representing 100 shares of stocks.

Note: When you trade options online, there will be a transaction fee. Depending on what online broker you use, will determine how much that fee will be.

I typically use the example of $10.00 to open (buy or sell) a position on one option contract and $10.00 to close (buy or sell) the position. And some online brokerages charge $1.00 for each contract after the first contract. So 10 contracts could cost $19.00 for the transaction - $10.00 for the first option contract and $1.00 for the remaining 9 contracts. Thus, $19.00 to open and close 10 options contracts.

The Put Option

What the heck is a Put Option? Let’s buy one Put Option for this example.

A put option allows the put buyer to control 100 shares of stock. As the stock goes down in value, the value of the put option goes up, hopefully.

You buy put options just like call options.

Mindset

Why would you want to buy put options? Well, you might want to buy put options to act as insurance against stock you already own.

For example, if you own 100 shares of xyz stock and you think the stock might be heading south, in other words going down, you could buy one put option and that would act as insurance against xyz stock when it goes down.

So if xyz stock goes down, the value of your put option goes up. Acting as insurance or a hedge against the 100 shares of xyz stock that you own. Does that make sense?

You might want to keep the 100 shares of xyz stock and that is why you’d be interested in buying a put options.

Yet another reason to buy a put option is to make money on a stock as it goes down in value without owning the stock.

Put Option Example

Recently, the stock symbol PALM for the company Palm, Inc. had some news surrounding it that caused some option traders to purchase put options.

So if you look at the options listing at BigCharts, you’ll see that the open interest is huge, 34,000+ for the January 2010 Palm put option with a strike price of $10.00.

Click image for larger view

This tells us that some option traders are betting that Palm stock will go down in value sometime before the third Friday in January, 2010. They are hoping that the stock goes down below the $10.00 strike price. That is when the Palm $10.00 put option for January 2010 will actually rise in value and become profitable. I know, weird. A stock loses value and the put option rises in value. But, that’s the options market. :)

That’s it for this article. Again, put options allow you to make money on a stock that is actually losing value. As a stock goes down, the value of the put option goes up.

As trade options online and start to make money with options, always remember the old say, “Pigs get fat and hogs get slaughtered.” You want to be a pig and not a hog. ;)

The Call Option

noreply@blogger.com (About Me) — Sun, 20 Dec 2009 00:07:00 +0000

This first blog post is just a warm welcome to you from my Trade Options Online blog.

What are Options?

Do you know what options are? You buy and sell options as a way to take advantage of stocks that are trading on the stock market. You don't actually own the stock. That might sound confusing but as you learn how to trade options online, you'll see how it works.

Option Attributes

Here are some of the attributes related to options:

You can buy and sell options.
Options are traded in terms of contracts.
One contract represents 100 shares of stocks.
You must trade options in contracts.
You can NOT trade less than one contract.
Options can be mixed together that make up different trading techniques.
Options are traded on the CBOE.
Options begin trading 30 minutes after the market opens.
Options end trading 30 minutes before the market closes.
Options are a wasting asset. In other words, when you trade options, there will be a date in the future they expire worthless.
Options expire every 3rd Friday of the month. That doesn't mean your option expires every month you trade in. You select the date when your options expire.

Those are just some of the attributes of options. There are many more attributes and rules that apply to options.

Let’s walk thru two types of options to get a feel for what they are.

Calls and Puts

Remember I talked about trading options in terms of contracts? One option contract equals 100 shares of stock. So when you buy or sell one option contract, that contract represents 100 shares of stock.

I also mentioned that you can use options to take advantage of stocks and you don’t have to actually own the stock. With options you can do that through what are called Calls and Puts.

What is a Call Option?

A call option can be bought or sold. When you trade options online, the simplest example is buying one call option that represents 100 shares of a stock.

The mindset you are typically in when buying a call option is, you think a stock will go up over a period of time. When you buy a call option and the stock that represents that call option goes up, the value of your call option will typically go up.

When stocks move up it is also referred to a bullish position because bulls represent the market is going up or that particular stock is moving up. So you’ll hear that term in the context of “investors are bullish today” signifying that investors are buying stocks.

Call Option Example One

For this example, we’ll use the website BigCharts. Well use the stock symbol HES for Hess Corporation, a leading global independent energy company. Let’s take a look at the charts for the stock symbol HES from the BigCharts website.

Click image for larger view

To get the chart above, enter the stock symbol HES and press enter or click on the Basic Chart button. The default view is a one year chart.

In the center of the page, above the chart, there is a link called options chain, click on that and you’ll be presented with the options chain page as seen below.

Click image for larger view

The above image is the options chain for the stock symbol HES for January 2010. The data on this page reflects the stock market close as of Friday, December 18, 2009.

There’s a lot on this page and I’ll touch upon a few of the columns of data. When you trade options online, there are some options definitions you need to know about.

Options Definitions

Now that we’ve seen some of the details of call options, we need to talk about some definitions related to both call and put options.

1. Expiration – I talked earlier in this article about options being a wasting asset. They are wasting away because options have an expiration date.

In the above chart, the data in the list also reflects the third Friday in January 2010, the expiration date, January 15th, 2010 to be exact. On that date the January options expire and are worth nothing.
Now, you could buy a January call option but you would only have a few weeks to make money. That’s pretty aggressive and risky for some people. You’re betting that if you buy a call option now that it will go up so you can make money before the third Friday in January 2010.

On the other hand you could have bought an option call that expires in January 2010 more than a month ago – two months, 3 months, a year, etc. We’ll get into long term options in another article.

2. Strike Price – If you buy a call option on HES for January 2010, you have to pick a strike price. What’s that?

For our example, the Strike Price is what you think the price of the HES stock will be at sometime on or before the third Friday of January, 2010.

So let’s make a decision to buy one HES call option for January 2010 and we want to buy it using the strike price of $60.00 a share. So we go to the list on the HES calls and puts page of BigCharts.com (shown above) and look at the strike price column for January 2010 $60.00.

Here’s what we’ve got from the screenshot below.

The Symbol of the Jan 2010 60s is IGGAL. Options have their own symbol that represent each option.

The last option was sold for $1.09 as you can see from the Last column.

The Change column tells us the value of the option went up $0.34 cents for the day.

The Volume column (Vol) tells us there was 1,303.00 calls traded for the day on HES.

The Bid column tells us the last bid that someone was willing to pay for the option.

The Ask column is the column that a buyer was asking to pay for the option.

The Open Interest column (Open Int.) is the number of open contracts for an option. This can be an indicator for the amount of interest that traders have in this option. And in our case, 14,898.00 is a lot.

Tip: By the way, when you’re trading options online, you’ll want to make sure there are at least a few hundred under the Open Interest column. If you trade an option with any thing less, it could be harder when it comes time to sell an option.

What’s it All Mean?

With everything we’ve learned so far, here’s what the above means:

We’re going to buy one contract for the Jan 2010 HES 60s and
we’re going to pay about $1.00 for that contract based on the bid column price.

However, remember that one contract represents 100 shares of HES stock, so we have to take 100 shares x (times) $1.00 which means this trade will cost us $100.00 take get in.

Now, you also have to pay for a transaction fee. We’ll say for this example that to get into the trade the fee will be $10.00. So our total outlay for this trade is $110.00.

The Call Buyer’s Mindset

And the mindset is that we think the stock will rise sometime between now (December 21, 2009) and January 15, 2010 high enough that our call option that we just bought will also go up.

Because we paid $10.00 for the transaction fee, we want it to go up at least that fee plus the fee for closing the trade which will most likely be another $10.00. So we’re in this for at least $20.00.

That is pretty aggressive and risky. But this is just an example. If there was some news or compelling reason the stock would rise that much it might work. But again, there would have to be some research that tells us or gives us a reason that the stock would actually go up that much between now and the third Friday of January 2010.

Another mindset perspective here is we are now “controlling” 100 shares of HES. We don’t own the shares but we are controlling them. So if you were to buy 100 shares of HES, you would have to put out 100 x $57.61 or $5,761.00.

That’s a lot of money. So, to take advantage of the stock HES we bought one call option for $110.00. Not a bad deal. So in the worst case scenario, if the stock goes down to $0.00, we only lose $110.00 and not $5,761.00 plus transaction fees. See the difference?

But, we only own the call option for a short period of time and if you owned the stock you’d own it for a long period of time. That is the difference. The stock could possibly come back sometime. However, the call, would be gone forever. But, there are trades you can make with options from hedging your losses. That’s for another article.

I think that’s it for this article. This is one way to trade options online and make money.

Put Options

Now, to get you thinking, imagine the above example (call option) in reverse. That is called a Put Option. The Put Option is where you think the stock is going down. So you would buy a put option, which would actually make YOU money as the stock goes down.

Options are great. You can actually make money as the stock and stock market go down. We’ll save Put Options for another time.

We’ll also talk about more definitions and answer those questions that are probably swirling around in your head.

I’ll leave you with this – at some time, you have to decide how much you want to make per trade. To help you set that bar, there is an old saying, “Pigs get fat and hogs get slaughtered.” You want to a pig and not a hog. ;)