Options Basics

Tricks and secrets of options trading have the potential to make you rich, within a day. While minimizing the amount of money you could loose.

If you already understand the basics and how options work you can skip to the strategies section where we discuss several mathematical tools and secrets useful to options trading, and tricks to maximize the profit, while minimizing the risk.

If not, here’s an example that that helped me first make sense of options:

Suppose a local sports team has a game in one month against a city with no supporters (so locals are the only ones who’d buy tickets), and tickets are on sale now for 100$. Lets say you believe ticket prices will soar in one month because the team will perform well, but that you don’t want to pay the full ticket price right now, so your ticket reseller tells you you can put a down payment of 10$ to promise you’ll pay 100$ before the game.

In the time you wait before the game, your local team plays against other teams, and depending on the outcome of each of those games, the prices rise and fall, changing the value of the ticket for the big game. Lets say for example that your team beats the best team in the league! The prices for the final game will soar to 200$, however you still only have to pay the 90$ difference you promised to pay up to your dealer. When you do you can just sell back your ticket to any one who wants to watch the game, for 200$ and still get 100$ profit!

On the other hand, if in the mean time your team performs bad, the price for the ticket will drop, lets say it goes down to 50$, but you promised to pay 90$ to complete the original price of your ticket. You are at loss in this situation, of course you could just let go of the 10$ and not pay up the 90$, that way you’d only lose 10$. That is what i find really wonderful about options.

 

What you should remember from the example above is that buying options comes down to buying a contract. There are several types of options contracts, and we will see each of them in the Learn section.

 

 

 

So what you can win comes down to the actual volatility (variation) of the asset ( stock or commodity). Where as you can only lose as much as it cost you to buy the contract, often times that is much less than the actual strike price, however keep in mind that a contract is leverage of 100 stocks.

An other important aspect of options, is that Selling or buying the asset aforementioned in the contract is Not obligated, you can do it at any time too. And often times contract’s prices fluctuate greatly.

So if you’re still with me here, you’ll understand that this means volatility on top of volatility, and potential for gain once more (loss as well).

Of course, the potential for loss is compounded by the time-value of your option, which is the value it often loses as the deadline to sell your contract approaches. However if by that time there is no real proft to be made by going ahead with the sale of your asset, you can just let it lose it’s value completely (the time value will match the so called intrinsic value, and the premium, the actual value of the options contract, sum of these two, will now be 0)

 

 

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