Just the word “Options” can intimidate amateur traders. Don’t let it!
Once you learn the ins and outs of options, not only will you have no fear but you will also see why so many profitable traders, including those at TickerTank, use options to increase their profitability.
An option is a contract that allows the owner to buy/sell a specific stock at a specific price anytime they want before the contract expires.
Let’s say there is a CALL option on GOOGLE at $500 for January of next year. Whoever owns this option has the right to buy 100 shares of GOOG at $500 (no matter what GOOG is trading at) anytime before the third Friday in January of next year. This option contract has a value. If GOOG is trading at say $520, the option is worth at least $2000 ($20 per share) because the owner could exercise the option, buying 100 shares at $500, then simply sell those shares on the open market for $520, earning a cool $2000. I’d pay $1900 for that contract, wouldn’t you?
Let’s look at the various parts of an option:
The stock: In the example above it is Google, ticker GOOG. Most popular stocks have o
ptions. Most smaller companies do not have options.
CALL (or PUT): If the option is a CALL, then it gives the owner a right to buy, if it is a PUT, it gives the owner the right to sell (short if they don’t have any stock).
Call = buy
Put = sell
Strike Price: In the example above, it is $500. This is the price at which the owner of the option has the right to buy (call) or sell (put) the stock. This never changes and is not dependent on what the stock is trading at.
Expiration Date: In the example above it is January of next year. Expiration dates are always (exc
ept some weekly options) given as a month. The exact date is always the 3rd Friday of that month. So you have until the market closes on that day to sell or use your option.
Key points to remember:
One contract controls 100 shares of stock. In the example above, One $20 contract actually costs $2000 to purchase. This trips beginners up a lot. Just remember, with options, multiply everything by 100.
Using advanced option strategies, you can combine multiple option orders to create option spreads.
You can sell options to exit or even to open a position. If you are short a call, someone out there has the right to buy the stock from you, so you’re on the hook if the stock goes up. If you sell a put, someone out there has the right to sell the stock to you (and you must buy). Generally selling to exit is a risky strategy, unless you combine a 2nd option to manage risk.
Our options system utilizes options to their maximum potential. Simply buying a call or put is NOT the best way to trade options. At TickerTank we use aggressive option strategies as well as income strategies that take advantage of sideways stocks.
As with all of our membership choices, our options program centers around education given by a trading professional who is eager to help you.