Okay, I've been trading stocks for the past 6 months or so, and have been mildly profitable. I'm looking into options trading now. I've done considerable research on them, however I still fail to see how they work out in the real world. I would like to start out small, by simply purchasing call options and selling them back in the market if they gain value before the expiration date. Unfortunately, my broker does not allow the selling of put options, so that is out of the question for the time being. My question mainly is this: options are usually only worth anything if they a) the equity exceeds the strike price of the contract, and b) the stock price goes up enough for you to make money back on the option and the commissions, right? If I understand this correctly, that would only apply if you decided to actually exercise the contract ... what about if you simply bought and sold the contract? If you catch the option price at a low, but the stock turns around, and the price of that same option turns around as well ... even if it doesn't hit your strike price, couldn't you still sell the option for a bit more than you paid for it? Example: Company ABC is trading at $21.50/share but dropping at a somewhat steady pace. You purchase 1 ABC 20 call for $1.60 that expires in May 07. The stock drops a bit, but turns around and starts heading upwards ... the ABC 20 option suddenly increases in value, but the stock has not necessarily reached your strike price ... the option would still have increased in value though, say maybe to $200 or so depending on the upward trend? I hope this isn't confusing ... but thanks!
You can close the position at anytime prior to expiration. Simply sell to close if you are long the call. And yes, it is certainly possible to show a profit although the stock has not reached the strike price prior to expiration, so long as the stock is above the price when you opened the trade. But that depends on many factors, not the least of which is how long you have been in the trade, and how much time decay has worked against you. If you are only mildly profitable thus far, options are not likely to help you. You will be fighting spreads and time decay, which are hurdles you don't face when trading the underlying stock.
Lindq- Does the same apply when selling ITM Calls and Puts (GUTS)? If stock XYZ has run up from 40 to 50 and you sell the 40 ITM @ 10 when XYZ is at 50 and then XYZ moves back down and hovers above 40. Now the 40 ITM call has lost lots of Intrinsic Value and is worth 2.00 or less. Can you close or exercise the position and lock in the drop in Intrinsic Value before it turns back up again even if it has not dropped below 40? I am assuming it would follow the same rules you stated in regards to pcqeek86's question below. Many Thanks.
You've been trading for only 6 months?... I've been trading for a year now, and NO BROKER will take me. I've contacted Speedtrader.com, and I've tried with my broker (Scottrade) more than once, but keep getting turned down. If you get a broker for options..PLEASE let me know. cm69
I am only mildly profitable so far, and that's one of the reasons I would like to trade options, because of the power of leverage. How would you suggest that I get into it?
Scottrade approved my account for options trading yesterday. Keep in mind that they do not allow selling of put options.
You don't say what are the extent of you PnL swings. If they are not small, going leveraged may not be a good idea. One thing you could do is download an option pricer (for Excel for instance, many are available for free), and run simulations -stressing the results- to see how the results would look under various conditions. If what you are looking for is leverage, can your broker let you trade on margin ? (sorry I don't trade through brokers so I have no idea if it's possible). Or trade Futures ? or FX ? They might be viable... "options" as well. In particular with FX you won't suffer from the time decay of buying an option.