EXAMPLES OF THE FOUR BASIC TYPES OF CONTRACTS: A long call option is the standard call option in which the buyer has the right, but not the obligation, to buy a stock at a strike price in the future. Imagine a scenario where a trader purchases a call contract for a specific stock for $1 with a strike price of $50. The expiration date is three months away. The trader decides to buy one contract, which represents 100 shares. So, the total cost of the call option is $100. Over the next few months, the stock price starts to rise steadily. As the expiration date approaches, the stock price reaches $60 per share. At this point, the call option is "in the money" because the stock price is above the strike price. The trader has a couple of choices to consider. First, the trader can exercise the call option. This means they put up cash to buy the stock at the strike price of $50 per share. Since one contract represents 100 shares, the trader would need to pay $5,000 to purchase the stock, receiving $6000 worth of stock for only $5000. However, the trader may choose not to exercise the call option and sell it instead before it expires. As the stock price has risen, the value of the call option has also increased. Let's say the fair market value of the call option is now $12. This means that the trader can sell the call option to another buyer for $1,200 (100 shares × $12 value per share). By selling the option, the trader would make a profit of $1,100 ($1,200 - $100 initial cost). It is important to note that this example assumes the stock price remains above the strike price until expiration. If the stock price had fallen below the strike price, the option would have expired "out of the money," and the trader would have lost the entire initial investment of $100. A long put is a position when somebody buys a put option. It is in and of itself, however, a bearish position in the market. Investors opt for long put options if they think a security's price will fall, or to hedge a portfolio against downside losses. Assume that an options trader believes that the stock price of XYZ will decrease. To take advantage of this belief before the expiration date, the trader buys a put option with a strike price of $50 for a premium of $2 ($200 per contract since contract represents 100 shares of the underlying stock) with an expiration date of July 30th. If the stock price of XYZ falls to $40 before July 30th, the put option is now "in the money." The options trader decides to exercise the put option, selling 100 shares of XYZ at the strike price of $50. They realize a profit of $800 ($5000 - $4000 - $200 premium paid) from the difference between the stock market price and the strike price, minus the premium paid. However, if the stock price of XYZ rises to $55 before July 30th, the put option expires "out of the money," and the options trader loses the premium paid. In conclusion, buying a put option allows options traders to profit at expiration if they correctly predict that the stock price of the underlying corporation will fall below the strike price before the expiration date. If the put option expires out of the money, they lose only the premium paid for the option. A short call is an options position taken as a trading strategy when a trader believes that the price of the asset underlying the option will drop. Therefore, it's considered a bearish trading strategy. Short calls have limited profit potential, but their theoretical loss potential is unlimited. For example, suppose an investor sells a short call option on a stock with a strike price of $50, and collects a premium of $3 with the stock currently selling for $45. At expiration, if the stock price remains below the strike price of $50, the call option will expire worthless, meaning the investor will get to keep the entire premium of $3 as profit. (Even though the investor was obligated to potentially sell the stock if it went above the strike price, since it did not reach that level, they do not have to worry about that obligation.) This outcome allows the investor to profit from the premium received without having to deliver the stock. In this case, the investor's profit at expiration would be the net premium received, which is $3. [Don't you mean $3 × 100?] They would not have any losses since the call option expired worthless and the stock price did not exceed the strike price. On the other hand… Suppose a trader decides to short a call option contract on XYZ stock with a strike price of $50 and receives a premium of $2.50 per share, with the trader believing that the stock price will remain below $50 until the option expires. However, a few days before the expiration date, the stock price suddenly shoots up to $60 per share, and the short call option is now in the money! The call buyer exercises the option, and the trader is forced to sell the XYZ shares at the strike price of $50, incurring a loss of $10 per share. Since each option contract covers 100 shares, the total loss incurred by the trader is $1000 ($10 x 100 shares). If the trader had exercised proper risk management by buying the stock to cover the short call before the price surge, the losses would have been limited. A short put is when a trader sells or writes a put option on a security. The idea behind the short put is to profit from collecting the premium associated with a sale in a short put. Consequently, a decline in price will incur losses for the option writer. Imagine you're a confident investor, who firmly believes that XYZ won't fall below $430 over the next month. So, you decide to sell an uncovered put option on XYZ with a strike price of $430. You collect a sweet premium of $3.45 per share (100 shares, to be precise) which is a cool $345 in your pocket. Now, if XYZ stays above the $430 strike price, you keep the premium you collected, which is your maximum profit of $345. But there's a catch. If XYZ dips below $430 before option expiration, you're on the hook. You'll be obligated to buy 100 shares of XYZ at $430, even if its price falls to $400, $350, or even lower. So, no matter how far it drops, you're liable for purchasing the shares at the strike price. But, here's the thing. You don't necessarily have to hold onto that put option until expiration. As the underlying stock price moves, the option's premium will change accordingly. You can choose to sell the option before expiry and minimize your loss or even realize a profit, depending on how the option's price has changed since you bought it. It's all about timing! If you're feeling brave and decide to let it ride until expiration, and the underlying price is above the strike price, the option will likely expire worthless, and you'll get to keep the entire premium. On the other hand, if the underlying price gets too close to or drops below the strike price, you might want to consider an alternate plan to avoid ending up with a massive loss. As another example, assume an options trader shorts a put contract on a tech company with a strike price of $100 and receives a premium of $5 per share. The expiration date of the contract is fast approaching, and the stock price of the tech company has fallen to $90 per share. At expiration, the trader is obligated to purchase 100 shares of the tech company at $100 per share, resulting in a loss of $1,000 ($100 per share strike price - $90 per share stock price = $10 loss per share x 100 shares = $1,000). So, even though the trader received a premium of $5 per share, it does not cover the loss incurred at expiration. Therefore, the trader loses money on the short put trade. Finally, as already mentioned, remember that options have time value, and timing is everything. My own words... So then, a long is always buying, whether it is a call or a put, whereas a short is always borrowing/selling, whether it is a call or a put. An options trader who is bullish on an asset will want to be long a call or be short a put. An options trader who is bearish on an asset will want to be long a put or be short a call.
If I were considering the purchase of long call options, these are the candidates that would be on my list (if options were available). But honestly, just about every prospect that appeared on my radar looked like it was in the initial stages of rolling over, so I would be very, very wary about buying calls right now (if I were trading options for real). VRT @ 37.52 VMW @ 156.18 WMT @ 161.17 WW @ 9.35 HMC @ 32.17 VRSK @ 231.36 Conversely, my list of candidates for long put options would include... DIS @ 83.09 M @ 11.33 NKE @ 102.81 FL @ 20.50 LMT @ 446.31 RVLV @ 13.33 HAIN @ 10.68 PLNT @ 53.55 (especially this one) MKTX @ 235.26 So then, I will be curious to see where the prices on these securities will be in a couple of weeks from now.
At this point, your trepidation about going long any stocks at this time looks to have been well founded, given that only WMT has gone up the way you hoped. Worse still, more than half the equities you expected to go down have risen (M, LMT, RVLV, HAIN and PLNT), which recommends that you make one or more modifications to your filter/screener.
Of these four long put candidates suggested by a modified screener/filter, my first pick (for the short term) would be EMBC. DIS - 79.78 ETSY - 63.17 STAA - 38.79 EMBC - 14.80 Candidates for long calls: META - 294.94 CCJ - 39.16 DELL - 65.71 DXJ - 85.06
Wait...that doesn't add up right! Let me take a look at what the video had to say... MEET THE OPTIONS GREEKS: Here is an example of how the Greeks can be used to analyze the sensitivities of a single option: Suppose your option’s premium is $1.30, and has a Delta of 0.35, Gamma of 0 .06, Theta of 0.02 and Vega of 0.07 Today, price moves one dollar from $45 to $46. This means the premium will increase by (1 × $0.35) + $1.30 = $1.65. But, because a day has passed, the premium decreases $0.02 due to Theta. So now, you’re looking at a premium of $1.63. Tomorrow, price moves from $46 to $47. The premium increases $0.41 to $2.04. (This is Delta plus Gama.) Also, another day gone by means another day of time decay, and another $0.02 down the drain, which now puts the premium at $2.02. Implied volatility rises one percentage point, increasing the premium by $0.07 to $2.09. Putting all these factors together shows how a relatively small change in the underlying can lead to a pretty significant change in the option’s premium.
As of today, all the long candidates are up; by ETSY is the only one of the four put candidates that is down.
Later this week I plan on consulting someone who knows options trading to get some clarity on this topic. So, let me start compiling my questions as I think of them so I don't forget about any when the time comes: What do all the formulas in Post #87 mean in plain, simple, straightforward English. Don't give me all this "where this means that" gobbledygook. Insert whatever it is the symbols are referring to in the first place and stop using characters like δ and σ. Just go ahead and spell it all out in everyday language. (For instance, what in the heck are "first derivative" and "second derivative" actually referring to?) Also, the description of Gamma in Post #77 makes it seem like Gamma is nothing more than a second, additional or supplemental Delta. So, why not just add it into the original formula instead of doing so after the fact? Is it because you add Gamma if the underlying stock price goes up, but you subtract Gamma if the underlying stock price goes down? If so, does this mean that Gamma's positive effect on Delta can (theoretically) continue into infinity, but that it's negative effect is capped when Delta minus Gamma eventually equals zero? And why was Gamma added onto Delta the second time the stock price rose one dollar in Post #86, but NOT the first time? (Was it an error in the video?) And what happens if the stock price rises another dollar on the third day? Will the premium increase another $0.41, or will it be by some other amount?