ok, Yea...new guy back
sorry for using the forum as a learning platform, but honestly not sorry too. I like this place and trust people. So anyway, in case there are others like me, my experience with the market up until the GME thing was basically put a flat amount of my paycheck every week into an eTrade account(not 401k, I do that also, this was for me and for fun). I would then use it to buy various stocks I liked for whatever(probably silly) reason and essentially hold them until I was a zombie, aka retirement for me. Overall eTrade tells me I am doing well, I don't say that to brag as mostly I am just "smart" enough to throw in a ton of extra money when the economy is shit(like the start of covid) knowing that I have 10+ years until I retire so I should buy a bunch of stocks I think will last the long term and tough out the lows.
TLDR: I am not trying to get rich quick, just trying to make some money long term, learn more about investing, and maybe increase my profits with marginal risk.
- I am not asking for specific advice. I am capable of reading the daily chatter here and other places and making decisions
- The screenshot is just a random picture of a stock I happen to own. I am not looking for specific advice on this stock or on the specific trade options
- While I did read, google, and research and *think* I have an understanding. I am trying to be 100% certain of what the terms and conditions are....so to speak. Maybe this can help others as well?
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So...using the example above, am I correct in my understanding? Numbers matching bullets below....
- This means someone will pay me 0.15$(x100) to have the option to buy my shares at 13.50$ at the close of the market on Feb 5th 2021? They also could choose to buy my shares at that price anytime before 13.50$ once they assume ownership of this option? I understand I can already own the shares or elect to "cover" once the sale happens, which can end up costing me potentially Y x 100, where Y is new market price of the stock which may be higher than 13.50$. However if I already own the shares and originally paid a price lower than 13.50$ this could be pure profit except for the potential earnings because I am unable to sell the stock at the new market price which may be higher than 13.50$
- This means I am buying the option to purchase 100 shares of the stock at 13.5 anytime before or on the close of market at Feb 5th, 2021. The ability to have this option is costing me a premium of 0.30$(x100). Essentially this means the stock needs to be worth 13.50 + 0.30 = 13.80 in order for this to be worth it or for it to be profitable. The advantage is that I do not have to buy the actual shares so my risk is lower and I am completely protected if the stock tanks and the disadvantage is that if it does tank or stays below 13.50$ I am out 100% of the premium(0.30x100) that I paid
- This means I would like to purchase 100 shares of the stock at 13.50$. Someone is willing to pay me 0.75(x100) in order for me to take this option. So at the moment of purchase I now have 75.00$. At the close of market(or should I choose to execute earlier) if the stock is below 13.50$, I must purchase the 100 shares at 13.50$. If the stock is above 13.50$ I am not required to purchase the stock. Either way I keep the 75.00$. Advantage here is that if the stock price stays high I got a "free" 75.00$, disadvantage is that if the stock is crumbling like a pile of shit I have to buy it at 13.50$. Can someone execute this on me prior to the expiration date if a stock is in a strong swing?
- I am purchasing the option to sell 100 shares of the stock at 13.50$(no matter the current market price). I am also paying 0.85$(x100) in order to have this option. The advantage is that if the stock is below 13.50$ I can sell it at a profit and if it is above that price I am not required to execute the option, but for this to be profitable it needs to be 13.50 - 0.85 = 12.65$. The disadvantage is that if the stock is above 13.50$(or really 12.65$) it is a loss to execute the option and my 0.85$(x100) is gone. Similar to #2, lower risk for potential bigger reward.
- At any point in time I can sell/buy a my option(or a counter-option? this part is confusing to me) to cancel out the current open order. Assuming a 0 change in market(I know unrealistic but for the purposes of academic understanding), any one of these choices would be a net 0.00$ change should I cancel/close it? How does it work well I am the one selling? Someone can execute at any time, correct?
Anyway, appreciate any feedback or corrections of my understandings above. Especially on #5. I am bit confused as to who has the power to call/cancel(right term?) an option when I am the seller, not the buyer. I get that as the buyer I can execute anytime or it will automatically execute upon expiration if the option is ITM.
1. Correct, this is whats called selling (Sell to open) a covered call. You need to already have the 100 shares when you do this and those shares will be locked until you buy out the option (buy to close), the option expires because the stock is below 13.50, or it executes because its in the money (over 13.50). All your other assumptions are correct
2. Correct, this is buying a call (buy to open). The advantage to buying calls is you also don't lock up more money actually buying the shares though most people just sell the call (sell to close) if it goes up invalue
3. Also correct. This is selling a cash covered put (sell to open). Like the covered call, when you sell the put, the cash needed to buy the 100 shares will be reserved until you buy to close the put, it expires out of the money (over 13.50), or it is assigned in the money (below 13.50)
4. Correct. This is one of the ways you would "short" a stock, or if you own the stock and dont want to sell but also reduce some of your risk, you could think of it as stock insurance.
5. Yes, options go up and down in value throughout the week based on the stock price, time decay, and other factors. Look up "the greeks". So as an example, me and Sanrith sold puts on CCIV @ the 20 strike price (strike = stock price) for 3.90 premium. Since then the stock went from 20$ to 30$ and the 20 strike put has decreased in value to 1.40 premium
The 1.40 on the left is the current premium, the 3.92 on the right is the original premium we received. As you can see in the middle, if we buy to close these options right now we made 64% profit on these in just a couple days.
New price
So if I "buy to close" my put today, I'll pay 1.40, but keep the 2.50 as profit. You would do this if you think the stock price is going to go back down and you want to protect your profit, or if you need the money being reserved for something else. But essentially options prices move just like the stocks price and can be bought and sold accordingly.
Also, you mention people executing options early. While possible, almost nobody does it. At least it hasn't happened to any of us lately.
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