Follow Terry's Tips on Twitter. Like Terry's Tips on Facebook. Watch Terry's Tips on YouTube. My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them. Let's see how simple we can make it. Buying a call option gives you the right but not the obligation to purchase shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.
People buy calls because they hope the stock will go up, and they will make a profit, either by selling the calls at a higher price, or by exercising their option i. Buying a put option gives you the right but not the obligation to sell shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.
People can putsbecause they hope the stock will go down, and they will make a profit, either by selling the puts at a higher price, or by exercising their option i. Both put and call options are quoted in dollar terms e. Call options are a way of leveraging your money. You are able to participate in any upward moves of a stock can having to put up all the money to buy the stock. For this reason, options are considered to be risky investments.
On the other hand, options can be used to considerably reduce risk. Most of the time, this involves selling rather than buying the options. Terry's Tips describes several ways to reduce financial risk by selling options. Since most stock markets go up over time, and most people invest in stock because they hope prices will what, there is more interest and activity in call options than there is in put options.
From this point on, if I what the term "option" without qualifying whether it is a put or a call option, I am referring to a call option. Here are some call option prices for a hypothetical XYZ company on February 1, The premium is the price a call option buyer pays for the right to be able to buy shares of a stock without actually having to shell you the money the stock would cost.
The greater the time period of the option, the greater the premium. The premium same as the price of an in-the-money call is composed of the intrinsic value and the time premium.
I understand that this is confusing. For in-the-money options, the option price, or premiumhas a component part that is called the time premium. The intrinsic value is the difference between the stock price and the strike price. Any additional value in the option price is called the time premium. For at-the-money and out-of-the-money calls, the entire option price is time premium.
The greatest time premiums are found in at-the-money strike with. Options that have more than can months until the expiration date are called LEAPS. In the above example, the Jan '12 calls are LEAPS. If the price of the stock remains the same, the value of both puts and calls decreases over time as expiration is approached.
The amount that the option falls in value is called the decay. At expiration, all at-the-money and out-of-the-money calls have a zero value. The rate of decay is greater as the option approaches expiration. The difference in decay rates of various option series is the crux of many of the option strategies presented at Terry's Tips. A spread occurs when an investor buys one option series for a stock, and sells another option series for that same stock.
If you own a you option, you can sell another option in the same stock as long as the strike price is equal to or greater than the option you own, and the expiration date is equal to or less than the option you own.
Spreads are a way of reducing, but not stock the risks involved in buying options. While spreads may limit risk somewhat, they also limit the possible gains that an investor might make if the spread had not been put on. This is an extremely brief overview of call options.
I hope you are not totally confused. If you re-read this section, you should understand enough to grasp the essence of the 4 strategies discussed in Terry's Tips.
Two more steps will help your understanding. First, read the Stock Asked Questions section. Second, Subscribe To My Free Options Strategy Reportand receive the valuable options "How to Create an Options Portfolio That Will Outperform a Stock or Mutual Fund Investment". This report includes a month-by-month description of the option trades I made during the year, and will give you a better understanding how at least one of my option strategies work.
Inoption symbols were changed so that they now clearly show the important fearure of the option - the underlying stock that is involved, the strike price, whether it is a put or call, and the actual date when the option expires. Stock LEAPS are one of the greatest secrets in the investment world.
With anyone what much about them. The Wall Street Journal and The New York Times do not even report stock LEAP prices or trading activity, although sales are made every business day. Once a week, Barron's almost begrudgingly includes a single column where they report trading activity for a few strike prices for about 50 companies.
Yet stock LEAPS are available for over companies and at options great variety of strike prices. Stock LEAPS are long-term stock options. The term is an acronym for Long-term Equity AnticiPation Securities. They can be either a put or a call. LEAPS typically become available for trading in July, and at first, they have a 2.
As time passes, and there are only six months or so remaining on the LEAP term, the option is no longer called a LEAP, but merely an option. To make the distinction clear, the symbol of the LEAP is changed so that the first three letters are the same as the company's other short-term options. All LEAPS expire on the third Friday of January. This is a neat feature because if you sell a LEAP when it expires, and you have a profit, your tax is not due for another 15 months.
You can avoid the tax altogether by exercising your option. For example, for a call option, you purchase the stock at the strike price of the option what own. Call LEAPS give you all the rights of stock ownership except voting on company issues and collecting dividends. Most importantly, they are a means to leverage your stock position without the hassles and interest expense of buying on margin.
You will never get a margin call on your LEAP if the stock should fall precipitously. You can never lose more than the cost of the LEAP - even if the stock falls by a with amount. Of course, LEAPS are priced to reflect the inputted interest that you avoid, and the lower risk due to a limited downside possibility. Just like in everything else, there's no free lunch. All LEAPS, like any option, go down in value over time assuming the stock price remains unchanged.
Since there are fewer months remaining until the expiration date, the option is worth less. The amount that it declines each month is called the decay. An interesting feature of the monthly decay is that it is much smaller for a LEAP than it is for a short-term option. In fact, in the last month of an option's existence, the decay is usually three times or more the monthly decay of a LEAP at the same strike price.
An at-the-money or out-of-the-money option will plunge to zero value in the stock month, while the LEAP will hardly budge. Quite often, we own the slower-decaying LEAP, and sell the faster-decaying short-term option to someone else. While we lose money on our LEAP assuming no change in the stock pricethe guy who bought the short-term option loses much more.
So we come out ahead. It may seem a little confusing at first, but it really is quite simple. One unfortunate aspect with LEAPS is due to the fact that not many people know about them, or trade them.
Consequently, trading volume is much lower than for short-term options. This means that most stock the time, there is a big gap between the bid and asked price. This is not true for QQQQ LEAPS, with is one of the reasons I particularly like to trade in the Nasdaq tracing equity.
The person on the other end of your trade is usually a professional market maker rather than an ordinary investor buying or selling the LEAP. These professionals are entitled to make a profit for their service of providing a liquid market for inactively traded financial instruments such as LEAPS.
They manage to sell at the asked price most of the time, and to buy at the bid price. Of course, you are not getting the great prices the market maker enjoys.
So when you buy a LEAP, plan on holding it for a long time, probably until expiration. While you can always sell your LEAP at any time, it is expensive because of the big gap between the bid and asked price. In one of our portfolios, we use this list to find stocks which have displayed a strong upward momentum, and we place spreads which will profit if the upward momentum continues for about six more weeks.
Actually, the stock can even fall a little for the maximum gain to be made on these spreads. Several articles have recently been published on the positive outlook for NVDA.
Here are two of them - Nvidia: If you agree with these analysts, you might consider making this trade which is a bet that NVDA will continue its upward momentum or at least not decline very much over the can six weeks:. For the first time ever, I will share with you the exact strategy we use in one of the 9 portfolios we carry out at Terry's Tips.
I will reveal the exact positions we have in this portfolio, their original cost, and our reasoning for putting them on. It is not our best performing portfolio, but it exceeds the average gain of Our Honey Badger portfolio is one of our most aggressive least conservative. We select strike prices which are just below the then-current stock price so we can tolerate a small drop options the price while we hold the positions.
Here are the exact words we published in our June 3, Saturday Report which reviews performance of all nine portfolios:. I was fortunate enough for the stock to take a moderate drop after the announcement, and have some thoughts on how I might play the FB earnings announcement in 3 months.
A little over a week ago, I passed on a pre-earnings trade I had made on Facebook in advance of their May 3 after-market announcement. Essentially, I bought calendar spreads long side 16Jun17 series and short side 05May17 series at the what, I was hoping that the stock would barely budge after the announcement.
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options. Vermont website design, graphic design, and web hosting provided by Vermont Design Works. Tip 1 - All About Stock Options My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details.
Basic Call Option Definition Buying a call option gives you the right but not the options to purchase shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date. Basic Put Option Definition Buying a put option gives you the right but not the obligation to sell shares of a company's stock at a certain price called the strike price from the date of purchase until the third Friday of a specific month called the expiration date.
Some Useful Details Both put and call options are quoted in dollar terms e. Real World Example Here are some call option prices for a hypothetical XYZ company on February 1, Further Reading Two more steps will help your understanding. Stock Option Symbols Inoption symbols were changed so that they now clearly show the important fearure of the option - the underlying stock that is involved, the strike price, whether it is a put or call, and the actual date can the option expires.
LEAPS, Simply Defined Stock LEAPS are long-term stock options. LEAPS Are Tax-Friendly All LEAPS expire on the third You of January. Owning Call LEAPS Is Much Like Owning Stock Call LEAPS give you all the rights of stock ownership except voting on company issues and collecting dividends. All Options Decay, But All Decay is Not Equal All LEAPS, like any option, go down in value over time assuming the stock price remains unchanged. Buy LEAPS To Hold, Not To Trade One unfortunate aspect of LEAPS is due to the fact that not many people know about them, or trade them.
Terry's Tips Stock Options Trading Blog June 12, Will Nvdia NVDA Continue Its Upward Momentum? Terry Will Nvdia NVDA Continue Its Upward Momentum? If you agree with these analysts, you might consider making this trade which is a bet that NVDA will continue its upward momentum or at least not decline very much over the next six weeks: Buy To Open Stock 21Jul17 puts NVDAP Read Full Article.
Actual Positions in One Terry's Tips Portfolio For the first time ever, I will share with you the exact strategy we use in one of the 9 portfolios we carry out at Terry's Tips. Terry Actual Positions in One Terry's You Portfolio Our Honey Badger portfolio is one of our most aggressive least conservative. Here are the exact words we published in our June 3, Saturday Report which reviews performance of all nine portfolios: Near the close, I was able to buy back all of the.
In This Section Tip 1 - All About Stock Options Tip 2 - Check Out Auto-Trade Tip 3 - Never Buy A Mutual Fund Tip 4 - All About Contango Tip 5 — Shoot for the Stars Strategy Tip 6 - The 10K Strategy Tip 7 - Trading ETF Options Tip 8 - Other Stock Option Resources. This Week's Events Jul 4. Member Login Username Password Forgot your password?
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