Anne Sraders: Updated: Nov 11, 2018

What Is Options Trading? Examples and Strategies in 2018 - TheStreet https://www.thestreet.
com/investing/what-is-options-trading-14772273
Home / Investing
By Anne Sraders
Updated: Nov 11, 2018
If you hadn't noticed by now, there are a lot of choices when it comes to
investing in securities.
Whether you prefer to play the stock market or invest in an Exchange Traded
Fund (ETF) or two, you probably know the basics of a variety of securities. But
what exactly are options, and what is options trading?
An option is a contract that allows (but doesn't require) an investor to buy or sell
an underlying instrument like a security, ETF or even index at a predetermined
price over a certain period of time. Buying and selling options is done on the
options market, which trades contracts based on securities. Buying an option
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What Is Options Trading? Examples and Strategies in 2018 - TheStreet https://www.thestreet.com/investing/what-is-options-trading-14772273
that allows you to buy shares at a later time is called a "call option," whereas
buying an option that allows you to sell shares at a later time is called a "put
option."
However, options are not the same thing as stocks because they do not
represent ownership in a company. And, although futures use contracts just like
options do, options are considered lower risk due to the fact that you can
withdraw (or walk away from) an options contract at any point. The price of the
option (its premium) is thus a percentage of the underlying asset or security.
When buying or selling options, the investor or trader has the right to exercise
that option at any point up until the expiration date - so simply buying or selling
an option doesn't mean you actually have to exercise it at the buy/sell point.
Because of this system, options are considered derivative securities - which
means their price is derived from something else (in this case, from the value of
assets like the market, securities or other underlying instruments). For this
reason, options are often considered less risky than stocks (if used correctly).
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But why would an investor use options? Well, buying options is basically betting
on stocks to go up, down or to hedge a trading position in the market.
The price at which you agree to buy the underlying security via the option is
called the "strike price," and the fee you pay for buying that option contract is
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called the "premium." When determining the strike price, you are betting that the
asset (typically a stock) will go up or down in price. The price you are paying for
that bet is the premium, which is a percentage of the value of that asset.
There are two different kinds of options - call and put options - which give the
investor the right (but not obligation) to sell or buy securities.
A call option is a contract that gives the investor the right to buy a certain
amount of shares (typically 100 per contract) of a certain security or commodity
at a specified price over a certain amount of time. For example, a call option
would allow a trader to buy a certain amount of shares of either stocks, bonds,
or even other instruments like ETFs or indexes at a future time (by the
expiration of the contract).
If you're buying a call option, it means you want the stock (or other security) to
go up in price so that you can make a profit off of your contract by exercising
your right to buy those stocks (and usually immediately sell them to cash in on
the profit).
The fee you are paying to buy the call option is called the premium (it's
essentially the cost of buying the contract which will allow you to eventually buy
the stock or security). In this sense, the premium of the call option is sort of like
a down-payment like you would place on a house or car. When purchasing a
call option, you agree with the seller on a strike price and are given the option to
buy the security at a predetermined price (which doesn't change until the
contract expires).
So, call options are also much like insurance - you are paying for a contract that
expires at a set time but allows you to purchase a security (like a stock) at a
predetermined price (which won't go up even if the price of the stock on the
market does). However, you will have to renew your option (typically on a
weekly, monthly or quarterly basis). For this reason, options are always
experiencing what's called time decay - meaning their value decays over time.
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For call options, the lower the strike price, the more intrinsic value the call
option has.
Conversely, a put option is a contract that gives the investor the right to sell a
certain amount of shares (again, typically 100 per contract) of a certain security
or commodity at a specified price over a certain amount of time. Just like call
options, a put option allows the trader the right (but not obligation) to sell a
security by the contract's expiration date.
Just like call options, the price at which you agree to sell the stock is called the
strike price, and the premium is the fee you are paying for the put option.
Put options operate in a similar fashion to calls, except you want the security to
drop in price if you are buying a put option in order to make a profit (or sell the
put option if you think the price will go up).
On the contrary to call options, with put options, the higher the strike price, the
more intrinsic value the put option has.
Unlike other securities like futures contracts, options trading is typically a "long"
- meaning you are buying the option with the hopes of the price going up (in
which case you would buy a call option). However, even if you buy a put option
(right to sell the security), you are still buying a long option.
Shorting an option is selling that option, but the profits of the sale are limited to
the premium of the option - and, the risk is unlimited.
For both call and put options, the more time left on the contract, the higher the
premiums are going to be.
Well, you've guessed it -- options trading is simply trading options, and is

typically done with securities on the stock or bond market (as well as ETFs and
the like).
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For starters, you can only buy or sell options through a brokerage like E*Trade
(ETFC) or Fidelity (FNF) .
When buying a call option, the strike price of an option for a stock, for example,
will be determined based on the current price of that stock. For example, if a
share of a given stock (like Amazon (AMZN) ) is $1,748, any strike price (price
of the call option) that is above that share price is considered to be "out of the
money." Conversely, if the strike price is under the current share price of the
stock, it's considered "in the money."
However, for put options (right to sell), the opposite is true - with strike prices
below the current share price being considered "out of the money" and vice
versa. And, what's more important - any "out of the money" options (whether
call or put options) are worthless at expiration (so you really want to have an "in
the money" option when trading on the stock market).
Another way to think of it is that call options are generally bullish, while put
options are generally bearish.
Options typically expire on Fridays with different time frames (for example,
monthly, bi-monthly, quarterly, etc.). Many options contracts are six months.
Purchasing a call option is essentially betting that the price of the share of
security (like a stock or index) will go up over the course of a predetermined
amount of time. For instance, if you buy a call option for Alphabet (GOOG) at,
say, $1,500 and are feeling bullish about the stock, you are predicting that the
share price for Alphabet will increase.
When purchasing put options, you are expecting the price of the underlying
security to go down over time (so, you're bearish on the stock). For example, if
you are purchasing a put option on the S&P 500 index with a current value of
$2,100 per share, you are being bearish about the stock market and are
assuming the S&P 500 will decline in value over a given period of time (maybe
to sit at $1,700). In this case, because you purchased the put option when the
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index was at $2,100 per share (assuming the strike price was at or in the
money), you would be able to sell the option at that same price (not the new,
lower price). This would equal a nice "cha-ching" for you as an investor.
Options trading (especially in the stock market) is affected primarily by the price
of the underlying security, time until the expiration of the option, and the volatility
of the underlying security.
The premium of the option (its price) is determined by intrinsic value plus its
time value (extrinsic value).
Volatility in options trading refers to how large the price swings are for a given
stock.
Just as you would imagine, high volatility with securities (like stocks) means
higher risk - and conversely, low volatility means lower risk.
When trading options on the stock market, stocks with high volatility (ones
whose share prices fluctuate a lot) are more expensive than those with low
volatility (although due to the erratic nature of the stock market, even low
volatility stocks can become high volatility ones eventually).
Historical volatility is a good measure of volatility since it measures how much a

stock fluctuated day-to-day over a one-year period of time. On the other hand,
implied volatility is an estimation of the volatility of a stock (or security) in the
future based on the market over the time of the option contract.
If you are buying an option that is already "in the money" (meaning the option
will immediately be in profit), its premium will have an extra cost because you
can sell it immediately for a profit. On the other hand, if you have an option that
is "at the money," the option is equal to the current stock price. And, as you may
have guessed, an option that is "out of the money" is one that won't have
additional value because it is currently not in profit.
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For call options, "in the money" contracts will be those whose underlying asset's
price (stock, ETF, etc.) is above the strike price. For put options, the contract
will be "in the money" if the strike price is below the current price of the
underlying asset (stock, ETF, etc.).
The time value, which is also called the extrinsic value, is the value of the option
above the intrinsic value (or, above the "in the money" area).
If an option (whether a put or call option) is going to be "out of the money" by its
expiration date, you can sell options in order to collect a time premium.
The longer an option has before its expiration date, the more time it has to
actually make a profit, so its premium (price) is going to be higher because its
time value is higher. Conversely, the less time an options contract has before it
expires, the less its time value will be (the less additional time value will be
added to the premium).
So, in other words, if an option has a lot of time before it expires, the more
additional time value will be added to the premium (price) - and the less time it
has before expiration, the less time value will be added to the premium.
Some of the major pros of options trading revolve around their supposed safety.
According to Nasdaq's options trading tips, options are often more resilient to
changes (and downturns) in market prices, can help increase income on current
and future investments, can often get you better deals on a variety of equities
and, perhaps most importantly, can help you capitalize on that equity rising or
dropping over time without having to invest in it directly.
Of course, there are cons to trading options - including risk.
There are a variety of ways to interpret risks associated with options trading, but
these risks primarily revolve around the levels of volatility or uncertainty of the
market. For example, expensive options are those whose uncertainty is high -
meaning the market is volatile for that particular asset, and it is more risky to
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trade it.
When trading options, the contracts will typically take this form:
Stock ticker (name of the stock), date of expiration (typically in mm/dd/yyyy,

although sometimes dates are flipped with the year first, month second and day
last), the strike price, call or put, and the premium price (for example, $3). So an
example of a call option for Apple stock would look something like this: APPL
01/15/2018 200 Call @ 3.
Still, depending on what platform you are trading on, the option trade will look
very different.
There are numerous strategies you can employ when options trading - all of
which vary on risk, reward and other factors. And while there are dozens of
strategies (most of them fairly complicated), here are a few main strategies that
have been recommended for beginners.
With straddles (long in this example), you as a trader are expecting the asset
(like a stock) to be highly volatile, but don't know the direction in which it will go
(up or down). When using a straddle strategy, you as the trader are buying a
call and put option at the same strike price, underlying price and expiry date.
This strategy is often used when a trader is expecting the stock of a particular
company to plummet or skyrocket, usually following an event like an earnings
report. For example, when a company like Apple (AAPL) is getting ready to
release their third quarter earnings on July 31st, an options trader could use a
straddle strategy to buy a call option to expire on that date at the current Apple
stock price, and also buy a put option to expire on the same day for the same
price.
For strangles (long in this example), an investor will buy an "out of the money"
call and an "out of the money" put simultaneously for the same expiry date for
the same underlying asset. Investors who use this strategy are assuming the
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underlying asset (like a stock) will have a dramatic price movement but don't
know in which direction. What makes a long strangle a somewhat safe trade is
that the investor only needs the stock to move greater than the total premium
paid, but it doesn't matter in which direction.
The upside of a strangle strategy is that there is less risk of loss, since the
premiums are less expensive due to how the options are "out of the money" -
meaning they're cheaper to buy.
If you have long asset investments (like stocks for example), a covered call is a
great option for you. This strategy is typically good for investors who are only
neutral or slightly bullish on a stock.
A covered call works by buying 100 shares of a regular stock and selling one
call option per 100 shares of that stock. This kind of strategy can help reduce
the risk of your current stock investments but also provides you an opportunity
to make profit with the option.
Covered calls can make you money when the stock price increases or stays
pretty constant over the time of the option contract. However, you could lose
money with this kind of trade if the stock price falls too much (but can actually
still make money if it only falls a little bit). But by using this strategy, you are
actually protecting your investment from decreases in share price while giving
yourself the opportunity to make money while the stock price is flat.
With this strategy, the trader's risk can either be conservative or risky depending
on their preference (which is a definite plus). For iron condors, the position of
the trade is non-directional, which means the asset (like a stock) can either go
up or down - so, there is profit potential for a fairly wide range. To use this kind
of strategy, sell a put and buy another put at a lower strike price (essentially, a
put spread), and combine it by buying a call and selling a call at a higher strike
price (a call spread). These calls and puts are short.
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When the stock price stays between the two puts or calls, you make a profit (so,
when the price fluctuates somewhat, you're making money). But the strategy
loses money when the stock price either increases drastically above or drops
drastically below the spreads. For this reason, the iron condor is considered a
market neutral position.
There are lots of examples of options trading that largely depend on which
strategy you are using. However, as a basic idea of what a typical call or put
option would be, let's consider a trader buying a call and put option on Microsoft
(MSFT) .
For example, if you bought a long call option (remember, a call option is a
contract that gives you the right to buy shares later on) for 100 shares of
Microsoft stock at $110 per share for December 1, you would have the right to
buy 100 shares of that stock at $110 per share regardless of if the stock price
changed or not by December 1. For this long call option, you would be
expecting the price of Microsoft to increase, thereby letting you reap the profits
when you are able to buy it at a cheaper cost than its market value. However, if
you decide not to exercise that right to buy the shares, you would only be losing
the premium you paid for the option since you aren't obligated to buy any
shares.
If you were buying a long put option for Microsoft, you would be betting that the
price of Microsoft shares would decrease up until your contract expires, so that,
if you chose to exercise your right to sell those shares, you'd be selling them at
a higher price than their market value.
Another example involves buying a long call option for a $2 premium (so for the
100 shares per contract, that would equal $200 for the whole contract). You buy
an option for 100 shares of Oracle (ORCL) for a strike price of $40 per share
which expires in two months, expecting stock to go to $50 by that time. You've
spent $200 on the contract (the $2 premium times 100 shares for the contract).
When the stock price hits $50 as you bet it would, your call option to buy at $40
per share will be $10 "in the money" (the contract is now worth $1,000, since
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you have 100 shares of the stock) - since the difference between 40 and 50 is
10. At this point, you can exercise your call option and buy the stock at $40 per
share instead of the $50 it is now worth - making your $200 original contract
now worth $1,000 - which is an $800 profit and a 400% return.
There are plenty of mistakes even seasoned traders can make when trading
options.
One common mistake for traders to make is that they think they need to hold on
to their call or put option until the expiration date. If your option's underlying
stock goes way up over night (doubling your call or put option's value), you can
exercise the contract immediately to reap the gains (even if you have, say, 29
days left for the option).
Another common mistake for options traders (especially beginners) is to fail to

create a good exit plan for your option. For example, you may want to plan to
exit your option when you either suffer a loss or when you've reached a profit
that is to your liking (instead of holding out in your contract until the expiration
date).
Still other traders can make the mistake of thinking that cheaper is better. For
options, this isn't necessarily true. The cheaper an option's premium is, the
more "out of the money" the option typically is, which can be a riskier
investment with less profit potential if it goes wrong. Buying "out of the money"
call or put options means you want the underlying security to drastically change
in value, which isn't always predictable.
And while there are plenty of other options faux pas, be sure to do your
research before getting into the options trading game.
(Editor's Pick. Originally published Nov. 9.)
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What Is Options Trading? Examples and Strategies in 2018 - TheStreet https://www.thestreet.

Well, you've guessed it -- options trading is simply trading options, and is

Historical volatility is a good measure of volatility since it measures how much a

Of course, there are cons to trading options - including risk.

Stock ticker (name of the stock), date of expiration (typically in mm/dd/yyyy,

Another common mistake for options traders (especially beginners) is to fail to

(Editor's Pick. Originally published Nov. 9.)

Economy Investing Investing basics Options Stocks

Uber Says It'll Be Profitable By 2021

Uber executives told investors that the company is

Adobe Shares Gain on Strong Earnings

Revenue and adjusted EPS estimates exceed

How Google's Fitbit Acquisition Could

Marriot Falls in After-Hours Trading as

Shake Shack Shares Melt After Revenue

Revenue gain of 32% wasn't enough to sway

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