I don't understand option trading, can anyone explain it

[RichInSpirit]

I don't understand the mechanics of options trading, can anyone explain it in simple language please.
Thanks in advance !

 

[Brendan Burgess]

Hi Rich

It's not simple unfortunately.

If you do get involved, start very low and see that you understand it first.

Brendan

 

[Gordon Gekko]

You’re essentially talking about call options and put options.

A call option gives its holder the right (not obligation) to buy something at a particular price (the “strike price”) on or before the expiry date of the option.

A put option gives its holder the right to sell something at a particular price.

If I believe the price of an asset will rise, the former can make sense.

If I believe it will fall, the latter can make sense.

Say Apple is trading at $100 but I suspect that they’ll “do a Nokia”.

I might pay $5 for the right to sell Apple for $100 at any time in the next 6 months.

If Apple’s trading at $120 in three months, I do nothing and have lost my $5.

If it’s trading at $80, I buy it for $80 and exercise my option to sell it for $100.

 

[galway_blow_in]

You’re essentially talking about call options and put options.

A call option gives its holder the right (not obligation) to buy something at a particular price (the “strike price”) on or before the expiry date of the option.

A put option gives its holder the right to sell something at a particular price.

If I believe the price of an asset will rise, the former can make sense.

If I believe it will fall, the latter can make sense.

Say Apple is trading at $100 but I suspect that they’ll “do a Nokia”.

I might pay $5 for the right to sell Apple for $100 at any time in the next 6 months.

If Apple’s trading at $120 in three months, I do nothing and have lost my $5.

If it’s trading at $80, I buy it for $80 and exercise my option to sell it for $100.

most people - traders close out their call or put options before expiry date

OP , a key point about options is that one option represents a hundred shares so lets say apple stock is @ $ 175 today and you buy one call option with a $ 200 march 1st strike , lets say the option costs $ 40 , if apple is above $ 200 on that strike date , its " in the money " , if you dont close out the purchased option prior to expiry day , you are obliged to buy 100 apple shares which will cost you $20000 , your option which cost you $40 will likely be worth at least $150 ( im not sure can it be said with certainty how much it will appreciate ) so provided you close out your position before expiry date , you have seen a nice return from a small investment

which is why most people close out their option before expiry day , were apple to drop in value from today on , your call option would dissolve away pretty quickly to almost nothing , you could hold the option and not close out provided the stock price was below the strike price on expiry day , nothing happens and you save the $ 3 close out charge

options are like ice cubes left in a window sil on a hot day if the corresponding stock is not going in the direction you desire , if the stock is going in the direction you favour , you could see a return on investment in the hundreds of percent quite quickly , i trade options every so often , its my only form of gambling , maybe every few months , made 500 euro on bmw , vw and daimler a number of months ago from an initial investment of 100 euro , stocks were depressed at the time , had i held them until near expiry ,id have made a good deal more , most option traders would rarely hold options for that long , if a stock price is swinging in a volatile manner, you could see moves of 50% in the option price in a single day so many would buy and close out the same option a few times in the one day , ive never done that as im not a trader , option trading is gambling effectively

 

[john luc]

best way to get your head around them is to set up a fictional account. pick a range of companys some stable blue chip and some volatile. It's high stakes gambling and you can lose alot quickly.

 

[galway_blow_in]

best way to get your head around them is to set up a fictional account. pick a range of companys some stable blue chip and some volatile. It's high stakes gambling and you can lose alot quickly.

gambling it probably but its a stretch to call it " high stakes "

you could spend as little as the price of a lottery ticket on an option