Hi, Iâve just started learning about call options and puts and before I start trading I would just like to make sure that I understand the whole process. There are some questions I havenât been able to find out answers to in the various forums etc. You can tell I'm a total newbie but here goes... OK so in call options I understand what the "bet" is. But Iâm interested to fully understand what happens when I choose to sell the option. So as an example, I buy an option that says I think AAPL shares will go up to 170, when they are at 160, then they rally to 180. The option rises from 1.30 that I bought it for to 2.0 because of the $20 rise in underlying share value. So my profit is that 0.7 minus commission. So how do I do this? Do I just call the broker and say "sell sell sell" lol and do I automatically get that 2.0 price? Or do I have to wait until my broker finds a corresponding buyer? Or does the relevant exchange do all of this? I just need to know when I decide to sell the option that I am guaranteed that price? Who decides that it is now worth 2.0? Is it the invisible hand of the market? Do we know this just because other people are trading at that value? I understand it is less profitable to exercise the option due to extra commission etc, I also understand that by exercising the option I take the risk that I might not be able to sell the shares for the price I had hoped if they drop in value between my decision to exercise and actual receiving them. Is this correct? BUT I also heard you can buy before you sell? So if I found a buyer could I receive cash for the buy and use that money to purchase the underlying shares on the option? How long would it take before I received the money form the buyer? How soon would I be expected to make the purchase from the options writer? If I sold before I bought would I have to rent some shares or get a margin loan? How much does this cost? Would the broker offer these facilities? Sorry loads of questions but I just want to understand fully before purchasing. I'm going to invest a few hundred and see how I do. Many thanks!
Yikes. You have a big mountain to climb. Learn the mechanics of trading and the market in general by trading the underlying stocks for a few years. You will learn about the financial industry. roles of various participants etc etc. A lot of option traders started out as stock or futures traders. It's not that they got better. It is just that options allow them to extract money out of the market in more different ways. But to answer some of your questions, option bid/ask are set by market makers. The pricing is set with the guidance of a theoretical model. After some adjustments, their secret sauce, they set their computers on auto pilot to make bid/ask prices on all the options they cover. Also, don't post on this forum until you can step back into Thunderdome. Good luck.
Thanks or the reply. I found a friend who is a stockbroker and is showing me on a virtual system. I made $2,000 virtual today - shame it wasn't real money lol. Will be back on the forum when I have some actual experience and a lot more knowledge. Thanks again.
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That is such a stupid comparison. Anyone.....reasonably intelligent....can learn to understand markets and trading after a period of study and practical experience If 12 to 16 years are needed then trading isn't a good choice.
In general, there are three "streams" of learning/figuring it out. First of all, you need to understand the complex nature of the product you are going to trade. A good introductory book like Option Trading: Pricing and Volatility Strategies and Techniques by Euan Sinclair or Option Volatility & Pricing: Advanced Trading Strategies and Techniques. Playing with the pricing models in a spreadsheet while reading these will get you comfortable with greeks and pricing inputs. Second of all, you need to understand the actual mechanics of trading, which is fairly easy - order types and trading process. Most brokers will have some sort of tutorial, I would imagine. Third of all, you need to figure out how you are going to make money - that's where the real fun begins.
Books should teach it the way experts use it (after some introductory material to variance, quadratic functions/parabola and normal distributions). The concept, and the mechanics/insights of hedging should be taught well. One could make it clear that hedging is not an edge, as some people may think that it is. I would also add a course on simulation: what it is and how to do it properly. The other main missing element is capital. University lectures teach it well, but they are dry and conceptual/mathematical. Popular books may have practical examples, but they are not good at teaching the core of it. They could also teach BS model via normal distributions and intuitively explain why one should center the mean by an additional 0.5*T*(sigma^2)