I have a few questions about options. Surprise, surprise. I'm basically curious as to what the requirements are for buying puts and calls. My questions are: For buying calls: 1. Am I required to own an equivalent amount of shares to buy a call? 2. If stock xyz is currently 37.80 and I buy a call for 38.00, can I sell the call and take profit without offsetting the position? In other words, I'm confused about the whole "sell to close" concept. I'm wondering, if one was not interested in exercising options and only wanted to trade for the premium, how does one ever wrap trading up and take profit if you are required to continually offset your position with another position? 3. If stock xyz is currently 37.80 and I purchase a 38.50 call, can I turn around and sell the 38.50.call when stock is 38.25, before my option hit the strike price? My questions for buying puts is essentially the same, but I'm more interested in the differences between puying puts and buying calls regarding the above questions. In closing, I'm interested in scalping options for quick and small profits by trading for profits in premium prices so any confusion that you guys could eliminate as far as what this requires and what might practically prevent me from doing so would be greatly appreciated. Thanks in advance and best regards.
1. No 2. Options contracts trade in a "secondary market" separate from the underlying market. Meaning you can buy/sell option contracts freely without having to touch the underlyer. 3. Yes, you can buy / sell option contracts whenever you want, as long as the options market is open. Scalping options generally will only work if you use an extremely liquid option market, like the SPY or AAPL. Also options have a ton of factors that affect their prices (gamma, vega, theta, delta), which one are you looking to profit off exactly?
I would strongly recommend to read at least couple of books about options before starting live trading. There are so many factors impacting options prices, and you need at least some basic understanding how options work. Here is a list of my favorite books: http://bit.ly/1e8kZLg
To be read in the right order: (first) Options Trading (second) Volatility Trading (third) Options Market-Making (fourth) Dynamic Hedging my 0.25 vega
Thank you guys for the quick responses and the direct answers. As for what stocks I was considering trading, I had looked into AAPL due to the volume but I also poked around and looked at KO, YHOO, GM and a few others. I'll definitely check out some books and demo trade prior to any live trading. As for volume, when it comes to scalping I am wondering how difficult it would be to unload a significant number of contracts quickly enough so that the price doesn't fall back down/up to a breakeven or negative price. Hypothetically, if I had 500 contracts that I purchased for $17 per contract when the underlying stock was at $38.90 and the price reached the point, let's say $39.00, where the contracts were now worth $20, how quickly could I unload 500 contracts on to the market?? I realize this is a situation that obviously depends on a number of factors, but are there any high volume options where this would be feasible?
500 contracts is a lot on most stocks. Looking at AAPL 11 Apr, it had volumes around ~6k+ on most strikes closest to ATM. SPY has like 50k+ volume at some strikes, total volume 1.34M...This is for yesterday. I dont think any of these should be a problem, but you have limited selection IMO. Unfortunately I have never had the luxury problem of being able to move markets...so my knowledge is limited obviously...