Trading Options can be very exciting and rewarding but it is not without risk. If you are becoming interested in trading Options, you need to learn the basics about Options and how to trade them before jumping in with both feet. Options are very different from stocks and there are more factors that go into the pricing. For reference, you are welcome to read the following articles posted to our Free Research Blog:
- July, 10, 2021 – Top Five Reasons To Be An Options Trader
- July 3, 2021 – Don’t Ever Trade Blind – Understand The Difference Between Stocks, Options, And Futures
Many view trading Options as a get-rich-quick scheme while others think of it as gambling. I am here to say it is neither. What I will say, is that you have to know the rules before you begin trading if you want to be successful. Keep reading as I cover some little-known basic facts that, if you are new, will surely spark your interest.
There are Options on More Than Just Stock
Most people hear of options and think they only apply to stock. In reality, you can trade options on futures, Forex, Bonds, and even the index themselves. Most assets have options available.
The OCC option symbol can consist of up to 4 parts:
- Root symbol of the underlying stock or ETF, padded with spaces to 6 characters
- Strike price, as the price x 1000, front padded with 0s to 8 digits
- Expiration date, 6 digits in the format YY/MM/DD
- Option type, either P or C, for put or call
- AAPL: AAPL210723C145 – This symbol represents a call on Apple, expiring on 23 Jul 2021, with a strike price of $145.
- AMZN: AMZN210917P3700- This symbol represents a put on Amazon, expiring on 17 Sept 2021, with a strike price of $3,700.
Buying an Option
If you own an option, you are not obligated to buy the underlying instrument; when you buy a Call Option, you have the right to BUY stocks at your option’s strike price. You can also sell the option itself before expiration.
Similarly, when you buy a Put Option, you have the right to SELL stocks at your Option’s strike price through exercising it but like Call Options you can sell the put contract as well before expiry.
Selling an Option
First, you can sell an option you don’t own stock in! However, if you sell a Call Option, you are obligated to deliver the underlying asset at the strike price at which the Call Option was sold if the buyer exercises his or her right to take delivery. If they do not exercise then you keep the premium you sold the option for. Put Options are the reverse, if you sell a Put Option, you are obligated to buy the underlying asset if exercised.
Selling Means Credit And Buying Means Debit
Options when BOUGHT are purchased at a DEBIT to the buyer and should be considered assets. So when you buy an option the money is debited from your brokerage account. It’s exactly like buying a stock.
As mentioned above you can also sell an Option, without owning the shares. Options when SOLD are sold at a CREDIT to the seller. When you sell an option it should be considered a liability and money is added to the brokerage account at the time of sale. Not many things are guaranteed in the market but this is. However, you can’t withdraw this money until the trade has been closed, usually, this money is used to offset the margin required for selling the options.
Every day on Options Trading Signals our resident specialist, Neil Szczepanski, does defined risk trades that protect us from black swan events 24/7. Many may think that is what stop losses are for. Well, remember the markets are only open about 1/3 of the hours in a day. Therefore, a stop loss only protects you for 1/3 of each day. Stocks can gap up or down. With options, you are always protected because we do defined risk in a spread. We cover with multiple legs which are always on once you own.
My team and I have been building and developing fully systematic algorithmic trading strategies for many years and can tell you that unless you have a solid foundation related to knowing when and where opportunities exist in market trends, you are likely churning your money in and out of failed trades. Though I have already completed the first live presentation, I will be hosting one more at the July Wealth365 Summit on July 16th at 12 pm. The Summit is free to attend and offers unparalleled opportunities for learning…plus a potential prize or two!
Have a great day!
Founder & Chief Market Strategist