Total newbie options questions

Discussion in 'Options' started by Feyd, May 6, 2008.

  1. Feyd


    Hi folks - please bear with me here... I trade stocks but Ive never traded options before. I am trying to learn and understand how people use them typically. Thanks in advance to anyone with the patience to teach a nub.

    So ... let's use YHOO as an example. If I had bought a $30 June put... and YHOO went down like it did today.. Im curious as to what happens when you exercise that put. Does one typically buy the stock at the current price, then exercise the put? Can you exercise a put if you dont have the stock? Im trying to understand that part of the trade.

    Thanks all - retarded question but I just read 3 options tutorials and none of them explain that. Calls make sense since you are about to buy the stock.
  2. MTE


    There's no reason for you to exercise the put or call for that matter if you bought it just a speculative trade, you are better off just selling it. If you do have an explicit wish to exercise then exercising a put would create a short stock position in your account, which will then have it's margin requirement.
  3. The situations when it makes sense to exercise an option are so rare that you may as well begin with the assumption that you should NEVER exercise an option. You can learn the exceptions to that rule later on, and they will make more sense to you when you have more experience.

    If you buy a put and the stock drops, the put (the investment you bought) should go up in value. Sell the investment you bought (sell the put to close) to close out your position for a profit. No exercise, no shares to worry about, nothing complicated.
  4. Feyd


    Ah hah - thanks MTE and Commiebat.. thats awesome. I didnt realize that was how options were typically played.

    Thanks a lot for your time :)
  5. Most options are never exercised and expire worthless. Most options traders either enter the trade with the expectation of either getting back out of the trade before expiration OR if they wrote the option and it is out of the money they are expecting it to expire worthless so they keep the money they made writing the option.

    Now that being said there is a LOT more to options that there is to stocks. For instance you MUST learn what the "greeks" are and how they can affect your trade. You MUST understand how implied volatility, open interest, time, volume, and stock price movement will affect your trade. When trading stocks you only have to be right about direction. When trading options you have to be right about direction AND time. Make damn sure you know what you are getting into or you will blow your account fast.
  6. Feyd


    Thanks for the advice Mav - Im definitely not itching to jump into this and go crazy at the moment or anything like that :). Im taking a day seminar in options next week being offered for free in town here and just trying to explore them a bit.

    I didnt realize that the sell value of an Options contract made it worth selling and profiting from regardless of the stock interaction. Thats really cool ... makes it much easier.
  7. heypa


    Be careful of that infomercial you are about to attend.Keep your wallet in your pocket.Free advice(?) is worth every penny you paid for it.
  8. LOL so true. Most (not all) of the "free trading seminars" only teach you that you cannot trade at all unless you buy more training from them. I will say that there are a few "free classes" that while they don't provide enough info to be the best you can be they do provide a basic foundation from which to build. Almost all of the classes that fall into this category are broker sponsored classes such as those sponsored by Think or Swim and you can usually find the same info in any book on the subject.
  9. Feyd


    Thanks for lookin out for me guys - nice to find some cool chaps here on ET. Im a tough sell.. Im only heading there to learn. If I smell BS or sales rubbish Im out ;)

    It's actually being sponsored and held by eTrade, and since I have a few accounts there they really cant sell me a whole lot I dont think. I realize since it's free though, the point of it is to sell something. I wont get scammed tho ;)


  10. Leave your checkbook at home.
    #10     May 6, 2008