Options can be a powerful tool to add to your investing/trading toolkit. They can dramatically increase your risk or they can mitigate it and everything in between. This thread is for discussing options plays, options education and questions.

I have been trading options for about 20 yrs now, though I began doing so more in earnest about 5 yrs ago. There is a lot of lingo and terminology around options that can be daunting for traders new to them. Some basics definitions, I'm purposely leaving out nuance to avoid confusion and try to give definitions that are most practical rather than all inclusive of every situation:

Let's take a look at how the ticker of an option is written. Here is an example of a put option on Apple:

AAPL210212P132

Now break it down into it's different parts:

AAPL (this is ticker symbol of the underlying)

210212 (This is the expiration date written in YYMMDD format

P (Signified that is a Put option, would should C for a call)

132 (This is the strike price)

This Put at the end of the day on Feb 9 is selling with a premium of 0.25 with a strike of $132 and an expiration for this Friday (2/12) the stock was trading at $136.01. So the put is Out of the Money as it trades above the strike of $132 so there is no intrinsic value. If we fast forward to Friday if Apple trades at any price greater than $132.00 this option will expire worthless. If you were to buy this option your break even would be $132 (strike) minus $0.25 (premium paid) = $131.75 Break even.

Why would an investor purchase this Put. There are two main reasons, they believe the price of AAPL is going to decline and they plan to resell the option at a higher price before expiration. This is a way of going short a stock without actually borrowing the shares. Let's look at an example:

Investor A shorts 100 shares of Apple 100x$136=$13,600 it then drops to $130 before end of day Friday they could then buy back the shares (close their short) for $13,000 netting them a profit of $600.

Now let's look at the trade using the above Put. Investor B buys 1 contract on AAPL210212P132 for $25.00 (0.25x100 ) the stock drops to $130 before end of day Friday and the investor sells their option contract for $2.00 and they receive $200.00 for a profit of $175.00.

So in the first example the investors risked $13,600 in upfront capital and took on infinite risk and walked away with $600 a 4.4% return, not a bad haul. In example B the maximum amount risked was $25 which then became $175.00, a profit of 700% . The flip side of this is that when a trade doesn't work the option buyer is more likely to lose 100% of their investment.

So in our Apple example, the stock fails to drop and just stays at $136, Investor A could cover his short and walk away even. Investor B's option will expire worthless and he will be out the $25.00. What if it goes completely wrong Apple moves up to $140. Now investor A would cover for a loss of $400 and Investor B still just loses his $25.

Investor A buys 100 shares of Apple believing that it will rise in value over the next month. He pays $136.00/share and purchases 100 shares for a total cost of $13,600

Investor B wants to use options instead so he goes long by purchasing a call option with a strike of $136.00 and a cost of $4.75 per contract for a total cost of $475.00

30 days later Apple is worth $150.00

Investor A sells his 100 shares of Apple for a total proceeds of $15,000 and a profit of $1,400.

Investor B sells his 1 call contract for $14.00 resulting in a profit of $925.00 ($1,400 proceeds less $475 original cost)

So Investor A made $1,400 on his $13,600 investment and Investor B made $925 on his $475 investment. So like we say with the put example the option allows for a much larger percentage gain via a smaller up front outlay of cash. Now lets look at how it plays out if stock goes sideways or goes down.

30 days later Apple is still worth $136.00

Investor A sells his 100 shares of Apple for $13,600 and walks away even.

Investor B will have is call option expire worthless out of the money, he loses his $475 (Since he bought the call at the money he paid a high premium upfront and this premium decayed over the 30 days as the stock stayed stuck in the mud.

30 days later Apple is worth $122.00

Investor A sells his 100 shares of Apple for $12,200 for a net loss of ($1,400)

Investor B will have his call option expire worthless out of the money, he loses his $475

So while a call option is going long you can see by the results that the rewards and losses can vary significantly than just being long the stock both for and against the favor of the option holder. These are very important basic concepts to understand when considering buying a put or a call to go long or short.

NEVER enter an options trade until you have evaluated, and are comfortable with, how will you fair in the three possible outcomes (Up sideways or down)

MORE TO COME selling puts and calls

I have been trading options for about 20 yrs now, though I began doing so more in earnest about 5 yrs ago. There is a lot of lingo and terminology around options that can be daunting for traders new to them. Some basics definitions, I'm purposely leaving out nuance to avoid confusion and try to give definitions that are most practical rather than all inclusive of every situation:

**A Call Option**- this is a contract to buy 100 shares of an underlying instrument (could be a stock or an ETF) at a fixed price (Strike) with a set expiration date.**A Put Option**- this is a contract to sell 100 shares of an underlying instrument (could be a stock or an ETF) at a fixed price (Strike) with a set expiration date.**OOM/ITM/ATM**- Out of the Money and In the money. For a call option it is OOM when trading below the strike price and ITM when trading above the strike, and thusly reverse for the Put option it is OOM when trading above up the Strike and ITM when trading below the strike. At the money is when t he stock is trading at the strike.**Premium**- this is the price paid for the option it is made up of the intrinsic value and extrinsic value (this term is not used particularly often).**Intrinsic Value**- When an option is ITM the difference between the current price and the strike is it's Intrinsic value. For example a call option with a $50 strike on a stock with a current price of $60 has $10 of Intrinsic Value. (Want to note don't let the initial IV confuse you here, when you see IV mentioned around options it stands for Implied Volatility more on that later)**Extrinsic Value**- This is made up the Time Value and a factor for Implied Volatility. I'm not going to get too into the weeds on the statistics and math of how this is derived, for starters it's best to understand that this is the RISK related to an unknown future. Ignoring the implied volatility the time value will decay each moment as the option moves towards expiration. So the seller of the option wants paid more based on how far out expiration is as more can happen the more time that is left. This time value decay (referred to as theta) is factored against the volatility of the underlying. If a stock is more prone to huge price swings that will be reflected in the IV. If a stock is boring and rarely moves it's IV will be very low.Let's take a look at how the ticker of an option is written. Here is an example of a put option on Apple:

AAPL210212P132

Now break it down into it's different parts:

AAPL (this is ticker symbol of the underlying)

210212 (This is the expiration date written in YYMMDD format

P (Signified that is a Put option, would should C for a call)

132 (This is the strike price)

This Put at the end of the day on Feb 9 is selling with a premium of 0.25 with a strike of $132 and an expiration for this Friday (2/12) the stock was trading at $136.01. So the put is Out of the Money as it trades above the strike of $132 so there is no intrinsic value. If we fast forward to Friday if Apple trades at any price greater than $132.00 this option will expire worthless. If you were to buy this option your break even would be $132 (strike) minus $0.25 (premium paid) = $131.75 Break even.

Why would an investor purchase this Put. There are two main reasons, they believe the price of AAPL is going to decline and they plan to resell the option at a higher price before expiration. This is a way of going short a stock without actually borrowing the shares. Let's look at an example:

**BUYING A PUT OPTION:**Investor A shorts 100 shares of Apple 100x$136=$13,600 it then drops to $130 before end of day Friday they could then buy back the shares (close their short) for $13,000 netting them a profit of $600.

Now let's look at the trade using the above Put. Investor B buys 1 contract on AAPL210212P132 for $25.00 (0.25x100 ) the stock drops to $130 before end of day Friday and the investor sells their option contract for $2.00 and they receive $200.00 for a profit of $175.00.

So in the first example the investors risked $13,600 in upfront capital and took on infinite risk and walked away with $600 a 4.4% return, not a bad haul. In example B the maximum amount risked was $25 which then became $175.00, a profit of 700% . The flip side of this is that when a trade doesn't work the option buyer is more likely to lose 100% of their investment.

So in our Apple example, the stock fails to drop and just stays at $136, Investor A could cover his short and walk away even. Investor B's option will expire worthless and he will be out the $25.00. What if it goes completely wrong Apple moves up to $140. Now investor A would cover for a loss of $400 and Investor B still just loses his $25.

**BUYING A CALL OPTION:**Investor A buys 100 shares of Apple believing that it will rise in value over the next month. He pays $136.00/share and purchases 100 shares for a total cost of $13,600

Investor B wants to use options instead so he goes long by purchasing a call option with a strike of $136.00 and a cost of $4.75 per contract for a total cost of $475.00

30 days later Apple is worth $150.00

Investor A sells his 100 shares of Apple for a total proceeds of $15,000 and a profit of $1,400.

Investor B sells his 1 call contract for $14.00 resulting in a profit of $925.00 ($1,400 proceeds less $475 original cost)

So Investor A made $1,400 on his $13,600 investment and Investor B made $925 on his $475 investment. So like we say with the put example the option allows for a much larger percentage gain via a smaller up front outlay of cash. Now lets look at how it plays out if stock goes sideways or goes down.

30 days later Apple is still worth $136.00

Investor A sells his 100 shares of Apple for $13,600 and walks away even.

Investor B will have is call option expire worthless out of the money, he loses his $475 (Since he bought the call at the money he paid a high premium upfront and this premium decayed over the 30 days as the stock stayed stuck in the mud.

30 days later Apple is worth $122.00

Investor A sells his 100 shares of Apple for $12,200 for a net loss of ($1,400)

Investor B will have his call option expire worthless out of the money, he loses his $475

So while a call option is going long you can see by the results that the rewards and losses can vary significantly than just being long the stock both for and against the favor of the option holder. These are very important basic concepts to understand when considering buying a put or a call to go long or short.

NEVER enter an options trade until you have evaluated, and are comfortable with, how will you fair in the three possible outcomes (Up sideways or down)

MORE TO COME selling puts and calls

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