Option rookie here, mind if I ask a question. If I purchased one call of APC monday morning before the earnings at $2.60, Strike 75, Feb 11 and APC is at $74.18 currently. How much will the stock have to go up for me to profit or how much would it have to sink for me to take a loss. Thanks.
You would need APC to reach 75 + the cost of your call 2.60 to breakeven. Anything over 77.60 would be profit (not including commissions) Any price under 75 you lose the full value of your call. any price between 75 and 77.60 you will experience a loss that decreases the closer you get to b/e. the most you can lose is the cost of your call while your profit is theoretically unlimited Edit: you only lose the value of the call if you hold it to expiration and APC does not reach 75. It will still hold some time value up until the expiration date at a stock price under 75.
thank you for your answer friend. one more if i might: if i were to purchase 1 PUT of SPY at $2.30, Strike 128, Feb 11. Then would SPY have to go down to $125.70 and below for me to be profitable? And the price could theoretically go down anytime between monday morning and Feb 11th correct for me to make $$? but, if SPY rises between now and Feb 11 to $132, would I only be out $230 plus commission or a lot more. Thanks.
And one more: what about order execution. if i put a limit order for the above scenario at 7 am would it get filled or do i have to wait until 9.30 am? also, do you recommend market orders on entries or exits or not? and I am reading a book on options now to learn more. thanks.
No problem, glad to help That is correct. Excluding commissions, for a long call your breakeven will always be Strike + cost of Call and a long put will always be Strike - Cost of Put. The difference is the risk/reward profiles. A call can have theoretically unlimited profit b/c the stock could rise to infinity. A put on the other hand can only fall to zero so your max reward in the SPY example would be 128 - cost of call. If it fell to zero, you would have the right to sell the SPY to the writer for 128 (but we'd have way bigger problems if that happens) Its important to understand that holding long options limits your risk to the premium paid, IE you are basically paying on option writer for the privilege of either selling or "putting" the stock to them or buying "calling" the stock away from them. Check out CBOE's website. They have a great educational program that you can access for free. If you have any other questions, feel free to keep posting. There are a lot of very knowledgeable options people on these boards.
No you would not get filled pre-market, you would have to wait until the open. I use limit orders almost exclusively to enter but it depends on how liquid the contract is. Thinly traded contracts I would recommend always using limit orders (this applies to all instruments) On exit, its really a tough call, especially on contracts close to expiration as they are extremely volatile if they are at the money or close to ATM. I've gotten greedy several times when I'm up a good % and throw in a limit order just to have it move right back against me and I find myself chasing it all the way back down. These are times when I should have just hit the bid but... c'est la vie
You need only the following books to understand and trade options 1. Options as a Strategic Investment by Lawrence G. McMillan 2. Option Volatility & Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg 3. Options Trading: The Hidden Reality Charles M Cottle Of course you need to know how to use your broker's platform. No seminars/courses will teach you what these books teach. They are tough to read, but it is worth reading them. Based on my experience most of the seminars are waste of money. Also, you will learn wrong methods/strategies. Most of the things that these seminars teach must be available from your broker for free.
The breakeven for long options at expiration is strike + call cost for calls and strike minus put cost for puts. However, they can be profitable long before expiration if you get movement in your direction (see link). An earnings play is a bit more complicated because implied volatility (IV) tends to rise before an earnings announcement, making the option more expensive, and fall after the news release. In the case of APC, not much of a factor since IV is pretty much in line. http://www.optiontradingtips.com/strategies/long-call-option.html
Lol, obviously zero chance - for demonstrational purposes only Its a good point that you bring up in your previous post though. for the OP, it's important to understand that you can have a profitable position without ever reaching your strike price Example: Say GS is trading at 140 and I buy 3 month out 150 calls for $1 If Goldie gaps up and opens the next day at 145, my calls may raise in value to say $1.35 I offset my position and make a nice profit.