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Trader's Guide to Options Part 2The information in this guide is intended to get you started with your understanding of options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn. Types of Options: Call Options: Call options increase in value when the underlying stock rises. Buyers of calls have the right, without any obligation, to buy the underlying stock at the strike of the options contract. They retain their right until the option no longer exists, defined by the expiration date. Call buyers anticipate the value of the underlying stock will rise. When it does, the value of the option will also increase at approximately the rate of the Delta. Buyers pay for the right to buy the stock in the future, sometime before expiration of the option. When buying the option, they pay the ask price. The premium they pay is less than buying the stock, yet they will still benefit from any appreciation in the value of the stock. Say you wanted to buy XYZ stock because you think it is going to move up from its current price of $84. Instead of buying the stock a trader could buy a call option for a fraction of the price of the stock. Remember, all the trader is doing is buying the right to buy the stock without any obligation to actually buy it. The option only costs $4.00 for the right to buy the stock at some future date. Buying 1,000 shares of the stock would require $84,000 but buying 10 options contracts would only cost $4,000. Call Options – The Sellers… Sellers of call options are selling to someone else the right to buy the underlying stock from them. When/if the buyer chooses to buy the stock from the seller, (remember, the buyer has no obligation to do so) it is referred to as an exercise…the buyer is exercising the right to buy the stock. The seller is obligated to deliver the stock to the buyer. A seller’s obligation ends when the stock is exercised, the option expires, or the option is bought to close (BTC). Call sellers receive a premium from the buyer. The buyer is paying the seller for the right to buy the stock in the future. Sellers want the price of the stock to go down. Why? If the price goes down, the buyer will have no reason to exercise since they could buy the stock for less at the current market price. In this case, the seller gets to keep the premium paid by the buyer. So, what does this mean in plain English? The concept of a call option is present in many situations. For example, you discover a painting that you would love to purchase. Unfortunately, you will not have the cash to buy it for another two months. You talk to the owner and negotiate a deal that gives you an option to buy the painting in two months for a price of $1,000. The owner agrees, and you pay the owner a premium of $50 for the right to buy the painting. Consider two possible scenarios that can impact the value of this “option”: Scenario 1: It is discovered that the back of the painting has a signature of a famous artist, which drives the value of the painting up to $10,000. Because the owner sold you an option which gives you the right but no obligation to purchase the painting at the previously agreed price, he is obligated to sell the painting to you, the buyer, for $1,000. The buyer would make a profit of $8,950 ($10,000 value – $1,000 purchase price – $50 for the cost of the option). Scenario 2: After closer review of the painting, it is discovered that the signature on the back is not of a famous artist, but is the brother of a famous artist. This actually drives the value of the painting down to $500. If the buyer exercised their option to purchase the painting it would cost $1,000. This would not make sense because the buyer could instead just buy it at “market price” for just $500. Since the buyer had no obligation to purchase based on the option contract, the agreement, or contract, would just expire and the buyer would lose the $50 premium paid. The example demonstrates two important points. When you buy an option, you have a right, but not an obligation, to do something. You can always let the expiration date pass, at which point the option becomes worthless. If this happens, you lose 100% of your investment, which is the money you paid for the option. Put Options Put options increase in value when the underlying stock decreases in value. Buyers of puts have the right, without any obligation, to “put” the underlying stock to someone else at the strike price of the options contract. They retain their right until they sell to close (STC) the option or it no longer exists, defined by the expiration date. Put buyers anticipate the value of the underlying stock will go down. When it does, the value of the option will increase at approximately the rate of the Delta. Buyers pay a premium for the right to be able to put (sell) the stock to someone else in the future, sometime before expiration of the option. When buying the option, they pay the ask price. Say you thought XYZ stock is going to move down from its current price of $84. Buying a put with a strike of $85 gives the buyer the right in the future to sell or put the stock to someone else at $85. So, if the stock declined to $75, the buyer of the option could buy the stock at $75 and immediately exercise their right to sell/put the stock at $85, making a $10 profit. Remember, all the trader is doing is buying the right but has no obligation. Put Options – The Sellers… Sellers of put options are selling to someone else the right to sell/put the underlying stock to them. When/if the buyer chooses to put their stock to the seller, this is referred to as being assigned……the buyer of the put option is assigning the stock to the seller. The seller is obligated to buy the stock based on the strike price of the contract. A seller’s obligation ends when the option expires or the option is bought to close (BTC). Put sellers receive a premium from the buyer. The buyer is paying the seller for the right to sell the stock to the seller in the future. Put sellers want the price of the stock to go up. Why? If the price goes up, the buyer will have no reason to assign the stock since they could sell the stock for more at the current market price. In this case, the seller gets to keep the premium paid by the buyer. Exercise and Assignment Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration. Indexes such at SPX , NDX and RUT are European style options. This means that any exercise or assignment may only occur at expiration. Who wins when the stock moves? 1. Buyers of Calls – win when the stock goes up 2. Sellers of Calls – win when the stock goes down 3. Buyers of Puts – win when the stock goes down 4. Sellers of Puts – win when the stock goes up Are you new to options trading? Stay tuned for Part 3 of Trader's Guide to Options which will include in-the-money, at-the-money, and out-of-the-money options as well as the reality of trading.
SP:SPXEducation
by NewCycleTrading
8
Trader's Guide to OptionsThe information in this guide is intended to get you started with your understanding of #options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn. What is an option? An option is a financial contract between a buyer and a seller. It is an agreement to buy or sell the underlying equity (stock or index) at a set price by a pre-determined date. Instead of buying the stock a trader could buy an option for a fraction of the price of the stock. Options have the following characteristics: Traded as contracts and each contract represents 100 shares of the underlying stock or index. Pre-set expiration dates. Standard monthly options expire the third Friday of each month. Some index options like TVC:RUT , TVC:SPX , and TVC:NDX cease trading on Thursday before the third Friday. Weekly options expire each Friday. Price points, referred to as the strike price, are the prices at which buyers and sellers trade option contracts. Options are, usually, available to trade in standard price increments of $5 and $10. Quotes to buy or sell an option are presented as the bid and ask. When selling an option, the bid price is used. When buying an option, the ask price is used. Sell the bid / Buy the ask. Delta is the change in the value of an option relative to each $1.00 change in the value of the underlying stock. If an option has a Delta value of .45, it will change in value by 45 cents for each $1.00 change in the value of the stock. - NASDAQ:GOOG is trading at 1445. -The 1445 call strike has a Delta of .50 -GOOG goes down $10 -The 1445 call will decline in value by $5.00 = ( $10 * .50) The Options Chain: All option information for any stock or index is listed on an options chain. The options chain can be found on the website of the broker you use to trade. The chain will list all available strikes and expirations, the Delta, and the bid and ask prices. It will also display both Call and Put options. Ways to trade Options: There are four actions that could possibly be taken when trading options: 1. Buy To Open (BTO) - buying an option as part of opening a new position. 2. Sell To Open (STO) - selling an option as part of opening a new position. 3. Buy To Close (BTC) - buying back an option that was originally sold to open 4. Sell To Close (STC) - selling an option that was originally bought to open When a position is Bought-To-Open, it is referred to as a long position . When a position is Sold-To-Open, it is referred to as a short position . When a position is Bought-To-Open, it is done for a debit . When a position is Sold-To-Open, it is done for a credit . Are you new to options trading? Stay tuned for Part 2 of Trader's Guide to Options which will include teaching about call and put options. <- Direct link to chart image.
NASDAQ:GOOGEducation
by NewCycleTrading
SE | Short Opportunity | 84 RSI | Overextended from EMA SE is highly oversold and has gained over 200% the three months. Looking at RSI in the weekly chart, we see that the RSI has reached 84. This is the highest level it has achieved since its IPO. Our second confirmation on oversold levels is that it is very far away from our 21 days moving average at $63.44. It has to at least bounce off the 21 EMA to reach new highs. The fib retracement tells us that it a minimum of 38.2% retracement before it could go higher at $74.50. if the bounce occurs during this retracement, it might be combined with the 21 EMA. Looking at the chart there is no healthy support level from $52.70 to $97, this means that the trend could be quickly snapped making bull take profit. A second support level is $46.07, which is a more reliable level than 52.70.
NYSE:SEShort
by Winallday310
SPY - Is support beneath the 21 Day EMA?What a wild ride its been for the markets! I am definitely having a beer after this week is over... but before we kick off the weekend, we have to take a look at the SPY. As you all know, I like to look for trade setups when trending stocks pull back to their 21 daily exponential moving average. Today is no exception. SPY has been trending higher over the last 3 months and with the help of the last two days, the SPY has pulled back near it's 21 day moving average. However, I am not entirely sure that this is a pull back opportunity that I would trade just yet. There is a previous resistance level resting just below the 21 day EMA, near 295. So, SPY could keep moving lower. Also, today is Friday, so taking and holding positions in SPY (or in anything for that matter) over the weekend is a bit risky given the current environment. Consider that next week could easily gap up or down in either direction by a few hundred points. I would like to see what happens on Monday first. Have a great weekend everybody!
AMEX:SPY
by UnknownUnicorn6775423
2
Put/Call Ratio should climb herePCC, which is the driver of options sentimate is ready for a test to 1.0 which is a HUGE bearish indicator. Everytime it got slightly faked out it came roaring to over 1.0. I am looking for this trend to continue. When you overlay the PCC with S&P Futures I think its ready for a short oppurtunity. Looking for $SPY to finally come down to earth a bit and retest 280. if your ambishious load 06/01's like me. I am fighting futures software and the fed pump here (LOL!)
OANDA:SPX500USDShort
by GK-Trades
Raytheon (RTX) - Pull back or breakout?Here at YouCanTrade, we have been keeping watchful eye on defensive stock Raytheon NYSE:RTX , which has been trading below its 8 day EMA over the past 2 weeks of trading. The last two days of positive market activity has helped Raytheon pullback to its 21-day moving average, which could be a signal for taking a position in the direction of the downward trend. However, the option volume tells a slightly different story. The current call volume for RTX is 14,500 calls, largely outweighing the 5000 puts traded today. That is nearly 3 times as much volume on RTX calls than puts. So, I am going to watch this trade idea and put it to the test. As of 12 pm ET on May 19th, the RTX 59 strike puts expiring June 19th, 2020 are trading at a mid-price of $2.50. I am simply going to monitor the price change on this put option over the next few days to see who got it right. The bulls? or the bears?
NYSE:RTX
by UnknownUnicorn6775423
Bearish Outlook With Next Bounce Near $274-278Very simple chart. Things are going wild right now in the market and playing daily options may result in you getting burned. The Fed has shown with their unlimited QE that they are willing to do what's necessary to prop up our markets. That said, looking at the extremely low volume the past week, you can see everytime there is an influx in volume, the ticket begins trending down. I stated in a previous post how the resistance at $294 was going to be the turnaround point, although I will admit I didn't suspect the second double top to occur. That said, if you played had I mentioned with some long-dated Puts, you'd be swimming in cash right now. This move down is a clear indication the .68 Fib level held as expected and the market is pulling back now. This will continue to happen until we reach the next support zone which is looking like won't come until we reach the .5 Fib retracement level. I will need to spend the day watching price movement to see if a buying opportunity will be present, but that will be the next buy-zone to watch for. If this leg down is a violent one, it's very much a possibility we dive through this zone with enormous volume. For now, shorting to this area should be a relatively safe play to scalp some profit. Hope this chart gets more exposure than my last!
AMEX:SPYShort
by larsontw16
1
SPX SPY Confirmed Entering Wave Three Down (Edited Repost)Wanted to add my wave count for the rally we saw from 3/23 lows. We have formed a large ABC zigzag down from the ATH's in Feb, down to the 3/23 lows, then up to the 297 level (A and B). We are now entering wave C down, which can be broken up into subwaves. Inside of the large ABC zigzag's wave C, this wave three should take us to 258 levels according to the length of wave one from out recent high at 297 to the 279 range. There may be some support speedbumps along the way, 285, 279, 272, but 258 is the target according to basic elliot wave analysis and it has been extremely accurate lately. Entered shorts during wave two up, and finalized my positions at 289.5. We deviated from the waveform last night, so we could see a near straight down drop here today as correction. Good luck all!!!
OANDA:SPX500USD
by yosip1115
2