Beginner Options Question

Discussion in 'Options' started by tmmaloney1, Mar 27, 2013.

  1. Hi all,
    I'd appreciate anyone's comments on my question.

    I'm a beginning options trader; meaning I've been using CBOE.com's virtual trade for about 8 months to get used to trading options. In the virtual world I've done well; I'm up about 50% since I started Typically, I only trade SPY options, and have found the most success with this.

    The question is: if for example I am long a call option, do I need enough reserve capital in my account to actually exercise the option, and purchase the underlying? (Whether it be margin buying power or actual cash) I'm not interested in exercising options, I am just interested in being long calls and puts for short term positions.

    I assume that if my trade goes wrong I can just let the option expire worthless, and not purchase the underlying.

    Another way to put it would be: If I buy $10,000 worth of SPY call options, I would need a great deal more than $10,000 to actually purchase the underlying, and I don't have it.

    Any advice is appreciated,
     
    lawrence-lugar likes this.
  2. Twinsen

    Twinsen

    You do not need to have enough cash to maintain long positions. But if you want them keep to expire worthless, for safety reasons, instruct your broker not to exercise them if they happen to appear in the money.
    If you do not have enough cash to hold a stock and you are exercised or assigned, your broker will close the position on the next trading day market open. But if, before the market opens, stock goes against you, you will lose money!
     
  3. Instead of letting the option expire (and be subject to auto exercise) sell the option before hand. On expiry day you will get at least intrinsic value.

    Broker won't exercise unless option expired in the money.
     
  4. Thanks for the help with that; that is what I thought but I read a post on here that sounded strange to me.

    Someone said they were opening a trading account with $3,000, and people responded saying that $3,000 wasn't enough money to be realistic. (So I guess virtual trading must be even more of a joke, but I say a year of virtual trading is better than throwing 100K at an AAPL call with zero experience). Although throwing your life savings at an option would be a faster way to learn I guess.

    That's not the point though; in the post they said if you start an account with $3,000 then it gives you all the options with strikes up to $30? I didn't understand what the strikes would have to do with it unless you were writing options, and I don't think the author intended to write options with the $3,000 initial deposit. I understand that 30 x 100 = 3,000, but you're not buying the strike price, as far as I know. The post author seemed knowledgable in other regards so I was just wondering what I was missing.

    I hold options intra-day, unless I'm in a swing trading mood. I'm mostly afraid of the after-hours crowd, but I love the opening price contrarian approach. The thought of exercising an option sort of takes the fun out of it for me, and I only do well when I'm having fun.

    I think starting small with options is the key to success, but I'm a newbie so what do I know; I only paper trade options. It took me about 6 months of virtual trading to be remotely content with my performance, and I started trading stocks when I was 17 (18 years ago).

    I remember asking my uncle, the one who introduced me to stocks, how come he didn't just short the names he was long throughout the 90's (DELL, QCOM, so on). He said shorting was un-American. Now he likes to write covered calls which I suppose is very American.

    Sorry for rambling so much; my girlfriend made me join a message board so I would stop talking to her about options.

    :D
     
  5. dugan176

    dugan176

    Can someone help me avoid theta decay by explaining how a spread works in my favor...