projectoption 2019 apr 14 basics Flashcards
Strike price (by upcounsel website)
Strike price is the price at which a specific derivative contract can be executed. It is the most important indicator of value for contracts/ AKA: exercise price, is usually decided when a contract for an option is first written and agreed. Some financial products receive value from other financial products. These products are called “derivatives,” and there are two major types: Calls & Puts; The price at which calls and puts are bought or sold is called the strike price, which is used to tell call and put contracts apart.
Calls (by upcounsel website)
Calls give the holder the right, not the obligation, to buy stock in the future at a certain price.
Puts (by upcounsel website)
Puts give the holder the right, not the obligation, to sell a stock in the future at a certain price.
Why Is Strike Price Important
It is the most useful indicator of option value. It tells the investor what price an asset must reach before it is valuable, or “in the money.” By calculating the difference between the current market price of an option and its strike price, an investor can determine whether the option is in the money and how much profit per share would be gained upon its sale. In-the-money options are activated by default when the contract finishes. If you don’t want this to happen, you have to buy-to-close or sell-to-close the option.
ITM option could activate
Keep in mind that an in-the-money option could activate before the end of a contract if the owner is short. There’s no precise way of knowing when this will happen, but as a rule of thumb, the lower the additional value, the higher the risk of this happening.
Premium
Price of Option. The premium is the price a buyer pays the seller for an option. It is an upfront, non-refundable purchase, even if an option has not been executed. Price of Option= Intrinsic value + Time value + Volatility value;
The most major factors that set option prices (premiums)
Price of Option= Intrinsic value + Time value + Volatility value;
Other factors that set option prices (premiums)
The quality of the underlying equity; the dividend rate of the underlying equity; prevailing market conditions; supply and demand for options involving the underlying equity; prevailing interest rates
Reasons to Consider Using Strike Price
Using the strike price is the best way to tell the status, or moneyness, of an option. This refers to whether the option is in the money (ITM), at the money, or out of the money (OTM) and by how much.
Call options ITM/OTM (by upcounsel website)
Call options are in the money if the strike price is below the current stock price. Call options are at the money if the strike price is at or near the current stock price. Call options are out of the money if the strike is above the current stock price.
Put options ITM/OTM (by upcounsel website)
Put options are in the money if the strike price is above the current stock price. Put options are at the money if the strike price is at or near the current stock price. Put options are out of the money if the strike is below the current stock price.
Relationship Between Strike Price and Call Option Price (by upcounsel website)
The higher the strike price, the cheaper a call option will be, allowing investors to purchase stock at a lower price.
https://www.dropbox.com/s/p55hqv8kubu3p1g/Screenshot%202019-04-13%2015.56.07.png?dl=0
Relationship Between Strike Price and Put Option Price (by upcounsel website)
The higher the strike price, the more valuable a put option will be, allowing the investor to get as much money as possible when selling their stock.
https://www.dropbox.com/s/k7izzouggl2o4zu/Screenshot%202019-04-13%2015.56.34.png?dl=0
CALLs with no intrinsic value/PUTs with no intrinsic value
CALLs with no intrinsic value: strike price higher than spot price; PUTs with no intrinsic value: strike price lower than spot price >> OTM, Out of the money means an option has no intrinsic value, only extrinsic value. A CALL option is OTM if the underlying’s price is below the strike price. A PUT option is OTM if the underlying’s price is above the strike price.
OTM
CALLs with no intrinsic value: strike price higher than spot price; PUTs with no intrinsic value: strike price lower than spot price >> OTM, Out of the money means an option has no intrinsic value, only extrinsic value. A CALL option is OTM if the underlying’s price is below the strike price. A PUT option is OTM if the underlying’s price is above the strike price.
Intrinsic value
aka: Real value; the value associated with excercising an option to buy/sell stock at the option’s strike price as opposed to the current share price; eg. we can buy shares with call strike price 110$ and the stock price is 120$ >> intrinsic value is $10; if a PUT option strike price 130$ >> also has $10 intrinsic value; CALL intrinsic value: Current spot price-Call’s strike price; PUT intrinsic value: PUT’s strike price - Current spot price
https://www.dropbox.com/s/qpm220fgq9f11wg/Screenshot%202019-04-13%2000.00.54.png?dl=0
https://www.dropbox.com/s/ofqw8f9ma3twv8a/Screenshot%202019-04-13%2000.14.00.png?dl=0
Extrinsic value
The portion of the option’s price that exceeds it’s intrinsic value; Call option’s price - Intrinsic value = Extrinsic value (the option’s potential to become more valueable before it expires)(it can become more valueable through stock price movements, especially more intrinsically valuable); a.k.a. Time value; EV: tricky, because it varies; dep on spec factors, the amount of time till expiration and the particular underlying; EV: the potential of the option to become more valuable in the future; at expiration options will not have EV anymore: the only value they have is intrinsic; Extrinsic value is great for traders who sell options; they want their option prices to decrease; >> selling option is much more popular option strategy, time works in trader’s favour
https://www.dropbox.com/s/qpm220fgq9f11wg/Screenshot%202019-04-13%2000.00.54.png?dl=0
https://www.dropbox.com/s/ofqw8f9ma3twv8a/Screenshot%202019-04-13%2000.14.00.png?dl=0
Extrinsic value benefits traders who..
Extrinsic value is great for traders who sell options; they want their option prices to decrease (Extrinsic value decay/ time decay) >> selling option is much more popular option strategy, time works in trader’s favour; selling options is a high probability trade (more than 50% chance to make money)
https://youtu.be/3bELT5FZCic?t=2467
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Extrinsic value works against traders who..
Extrinsic value works against traders who buy options >> option buying can be a very risky trade; in general it is a low probability trade (less than 50% chance to make money) >> selling option is much more popular option strategy, time works in trader’s favour
https://youtu.be/3bELT5FZCic?t=2467
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Intrinsic/Extrinsic value CALL example
Intrinsic/Extrinsic value PUT example
because the spot price is above the PUT price > no intrinsic value in this case (all value is 100% Ext) because the spot price is going down almost to the level of PUT Strike price (in the middle of the Exp period > still chance to go lower untill the Exp time > the Ext value goes up in the middle period , but because the spot price goes back up, no chance remaining at the end that the option can create value > becomes worthless
https://www.dropbox.com/s/ofqw8f9ma3twv8a/Screenshot%202019-04-13%2000.14.00.png?dl=0
Key factors determining Extrinsic value
.1. Volatility (high volat > high extsc value; 2. Time till expiration (less time - less extc value >> aka Time Value);
Option pricing law 1
Options will always be worth at least their intrinsic value ( a CALL will always be: spot price - strike price; PUT always be: strike price - spot price
Option pricing law 2
CALL options at lower Strike prices will always be more valueable than at higher strike prices, (CALL options at lower strike prices will have more intrinsic value than CALLs at higher strike prices; in case of CALLs with no intrinsic value still more valueable at lower strike price, because there is a higher likelyhood of being intrinsically valuable at expiration because more likelyhood for a smaller stock price increase compared to a larger stock price increase.) PUT options at higher Strike prices are more valueable than at lower strike prices, (PUT options at higher strike prices will have more intrinsic value than PUTs at lower strike prices; in case of PUTs with no intrinsic value still more valueable at higher strike price, because there is a higher likelyhood of being intrinsically valuable at expiration because smaller stock price decrease are more likely compared to a larger stock price decrease.)
Option pricing law 3
Options with more time till expiration have more extrinsic value (and higher price) << over longer periods larger spot price changes possible, therefore options have more potentil for greater value increases
Option Prices EXPLAINED; https://youtu.be/-nnJ4pMBaxA?t=1177
Strike price (by projectoption)
The price at which the option can be converted into shares of stock. (Strike price $105 means the option can be converted into shares at $105/share
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Contract multiplier
Standard option contracts correspond to 100 shares (of stock) >> the actual value of an option is quoted price *100 (the prices are quoted on a per share basis)
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
The value of the CALL option is tied to
The value of the CALL option is tied to strike price; as theshare price increases > call becomes more valuable; Stock price increase > Call Option Value increase
BID/ASK price displayed for the option in the bid column on the trading platform
BID price: the highest price someone is willing to pay, for the BID price we can sell the option; ASK price: the lowest price someone is willing to sell the option, this is the price we can buy the option for; we buy for the ask (BA) / sell for the bid (SB)
https://youtu.be/3bELT5FZCic?t=300
https://www.dropbox.com/s/sarikm6tt7qcbvi/Screenshot%202019-04-13%2011.32.02.png?dl=0
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
if you by CALL (why would buy instead of shares?)
you expect the price to go UP; laverage (the increase of price is the benifit of both, but you do not need to pay for the whole share >> focus the money only for the change >> much more profit; but the amount of risk is also laveraged!!)
https://youtu.be/3bELT5FZCic?t=703
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
PUT option basics
A put option has the ability to sell (100) shares at the strike price; put option value increase if the undelying’s price decreases
https://youtu.be/3bELT5FZCic?t=697
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
PUT option buying vs shorting stocks
Risk is limited (to the premium for PUT), but shorting a stock > unlimited risk (if spot price increases); if spot price goes down > the gain from the PUTs laveraged
https://youtu.be/3bELT5FZCic?t=924
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
CALL option above the spot price
No value, the strike gives option to buy higher than the market > OTM; market price is under the CALL price
https://youtu.be/3bELT5FZCic?t=1132
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Option trade that profits when stock price remains bellow a certain price as time passes
Selling call options (one way to do)
https://youtu.be/3bELT5FZCic?t=1132
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Selling call options: what reason
Option trade that profits when stock price remains bellow a certain price as time passes (not increasing price > still make money with options
https://youtu.be/3bELT5FZCic?t=1132
https://www.dropbox.com/s/4wm2r59x5g3p32h/Screenshot%202019-04-13%2013.31.52.png?dl=0
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Call options lose value
as tock price decreases; stock price bellow strike price and time passes
https://youtu.be/3bELT5FZCic?t=1201
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Call option buyer makes money when
Call option buyer makes money when stock prices go up (after purchasing the call option)
https://youtu.be/3bELT5FZCic?t=1201
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Call option seller makes money when
Call option seller makes money when stock prices go down/remain below (after purchasing the call option); if spot price is bellow the call’s strike price (at expiration date) > the option is worthless OTM > profit for the Call option sell; BUT if spot price increases > unlimited loss potential
https://www.dropbox.com/s/27b0ojofd57vvdr/Screenshot%202019-04-13%2013.44.47.png?dl=0
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Selling a naked call option
Selling a call option all by itself: extremely risky strategy, unlimited loss potential. Call option seller makes money when stock prices go down/remain below (after purchasing the call option); if spot price is bellow the call’s strike price (at expiration date) > the option is worthless OTM > profit for the Call option sell; BUT if spot price increases > unlimited loss potential
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
PUT options value stems from…/valueable if
PUT option’s value stems from the ability to sell shares for the strike price (instead of the market price > strike price must be above the market price to be ITM
https://youtu.be/3bELT5FZCic?t=1562
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
ITM/OTM PUT options
ITM put option: strike price is above marketprice/market price below the strike price; OTM put option: strike price is bellow the marketprice/market price above the strike price; PUT option’s value stems from the ability to sell shares for the strike price (instead of the market price)
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Put options ITM/ATM/OTM
Put options are in the money if the strike price is above the current stock price. / Put options are at the money if the strike price is at or near the current stock price. / Put options are out of the money if the strike is below the current stock price
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Put option buyer makes money when
A put option buyer makes money when stock prices decreases (after purchasing the put option)
https://youtu.be/3bELT5FZCic?t=1585
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Put option seller makes money when
Call option seller makes money when stock prices remains above the market price as time passes. If the stock’s price is above the strike at expiration > the option expires worthless > seller can keep the profit; if the stock price goes down > loss > risky
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
Put option selling CHART example (by projectoption)
A stock came up from a bouble bottom, form almost like an inverse H&S (with a double top), found SUP at a previous RES (the right shoulder found the same SUP as was for the left before- started to move upwards >> SELL a PUT at RES line; if the stock price stays above the market price at expiration > the premium can be kept; if the stock price goes down > great loss > risky
https://www.dropbox.com/s/yz07vgareq8ku5k/Screenshot%202019-04-13%2016.25.36.png?dl=0
Put option selling Platform example (by projectoption)
SELL a PUT at RES line of a stock >> click on the BID (me being a seller) > fills in the price (it will be between the BID and the ASK price) we are in the TABLE tab in the platform > visualize the Risk/Rewards rate: click the CURVE tab in the platform and activating ANALYSES (it looks like that similarly to curve tab it is a tab too in tastyworks)
https://www.dropbox.com/s/z78px8q18565xpt/Screenshot%202019-04-13%2016.39.36.png?dl=0
Which is less risiky: selling one PUT option or purchasing 100 shares of stock
selling a put option is less risky (you collected premium), in case of buying stocks: no downside protection
Application of options in addition to your long stock portfolio
selling one PUT option; you collect premium > this premium will protect from downside movements, in case of just buying stocks: no downside protection
Buying call option recap
Expect the price to increase (preferably in a short period of time) >> call’s value increase
Selling call option recap
Expect the the stock price to remain bellow the strike price so the stock price will not increase >> the call’s value decline as time passes >> when it expires worthless, sellers can keep the premium (collected when selling the call); however the stock price can increase (no limit) > call option value can increase > selling calls can have unlimited loss potential
Buying put option recap
Expect the price to decrease (preferably in a short period of time) >> put’s value increases > seller will profit
Selling put option recap
Expect the price will not decrease in the near future. Expect the the stock price to remain above the strike price so the stock price will not decrease. If the put strike price is above the stock price when expires > the put option will worth nothing > the put seller can keep the premium
Spot price goes up: consequence for call buyer
Call buyer can buy the shares for lower (strike) price relative to the market > profit; unlimited gain potential
Spot price goes down: consequence for call buyer
Market price decrease > strike price increases relative to market price >> Call buyer can not buy the shares for lower strike price relative to the market > not a good option > worthless > buyer loses the premium (limited loss)
Spot price goes up: consequence for put buyer
Market price goes up > strike price decreases relative to market price >> put buyer can not sell the shares for higher strike price relative to the market > not a good option > worthless > put buyer loses the premium (limited loss)
Spot price goes down: consequence for put buyer
Market price decrease > strike price increases relative to market price >> Put buyer can sell the shares for higher strike price relative to the market > profit
Spot price goes up: consequence for call seller
Market price goes up > strike price decreases relative to market price >> Call seller has the obligation to sell for this higher strike price > unlimited loss
Spot price goes down: consequence for call seller
Market price goes down > strike price increases relative to market price >> Call seller has the obligation to sell for this higher strike price, but nobody wants to buy for the higher strike (because the market is cheaper) > can keep the premium
Spot price goes up: consequence for put seller
Market price goes up > strike price decreases relative to market price >> Put seller has the obligation to buy for this lower strike price > but nobody wants to buy for the higher strike (because the market is cheaper) > can keep the premium
Spot price goes down: consequence for put seller
Market price goes down > strike price increases relative to market price >> Put seller has the obligation to sell for this higher strike price > sucks > unlimited loss
Excercising an option
Option buyers can convert the option into shares at strike price. Put owner (buyer) would sell the shares for the strike price if they excercised the Put Option. Option buyers rarely excercise the option, because they would lose the extrensic value. The only time when excercised if the ext value is almost zero. there isan assignment process to assigned to short position > nem vagtam rendesen de link
https://youtu.be/3bELT5FZCic?t=2717
Stock Options Trading 101 | The ULTIMATE Beginners Guide by projectoption
What happens wth the option when reaches expiration day?
If no intrinsic value (OTM)> worthless, disappear from the account. If CALL/PUT ITM > automatically excercised > converted to the corresponding stock position; Call owner (buyer) will get the shares; short call option > 100 shares of short stock/negative 100 shares (per contract); Put owner: short 100 shares of stock/negative 100 shares of stock (per contract); short put options will be converted 100 shares of long stock per contract (except if they are cash settled options > they are not converted into shares, they are converted into their cash (intrinsic) value). When the put option excercised the put owner (buyer) sells the shares.
https://www.dropbox.com/s/35ykc1s9xpkyn2w/Screenshot%202019-04-13%2023.58.11.png?dl=0
Idea to visualize the CALL/PUT buy/sell
Like in the platform, ITM Calls: UP (left) part; ITM Puts: DOWN (right) part; price increases downwards; CALL buyers push the market price downwards on the platform (to extend their territory) > market price increase, CALL sellers-opponents: push backp up to decrease the price; // PUT buyers want to push the market price toward the upper part of the platform to increase their territory > to decrease market price, PUT sellers opponents, they want to keep against/push downwards > to increase market price
who wants market price increase?
Call buyers & Put seller
