Everything Options

Tmac so now after you have absorbed and understand the basics above, lets put it all together...
We will use a very low beta, low IV stock like T

Current price is $29.52 and will look 21 days out at the June expiry. I picked this because at $29.52 we can look at the $29.5 strike and it has basically 2 cents of intrinsic value. Current price - strike price is intrinsic value. So that means it has 2 cents of intrinsic value plus 21 days of time value. This is because the stock price can and will move in the next 21 days. Lets assume you are bullish on T and think the stock is going to go up. Lets say you believe the stock will go above $30 on expiry. the strike ($30 is more than the current price so it has ZERO intrinsic value right now (29.52 - 30 is a negative number). We call this option "out-of-the-money". The only value this option has will be time value. The $30 strike calls are costing 29 cents. That is the premium you will pay the contract seller for the right to buy T at $30 a share in 21 days. For you to make money on this trade, T stock price has to be above $30.29 in 21 days. Why? Because you paid out of pocket 29 cents for the right to own this contract. So if the stock is $30.15 in 21 days you lost money (you pay $30 for the stock (the strike) and it is worth $30.15 (current price at expiry) so 15 cent profit, but.. you already paid a premium of 29 cents so you would lose 14 cents a share on the contract.

Now why do we see strikes below the current price of $29.52? Because those are "in-the-money" options. They have both intrinsic and time value left in them. So if you instead opt to buy the $28 strike call options instead of the $30, you are paying $1.65 in premium. The intrinsic value is $29.52 - $28 = $1.52 and the time value is another 13 cents in time value so the option value is $1.65. But why is the time value different than the $30 strike option if they expire on the same day? That is because of Delta and Gamma (Greeks) and we are going to leave that for another day. This is the free trial version of options 101. Subscribe to my newsletter for the advanced stuff. Anyways, so assuming you bought the $28 strike this time, your break even is $28 + 1.65 = $29.65. So if the stock stopped at $30.15 as before instead of losing money with the $30 strike, you actually make 50 cents profit doing this trade. Why? Because you risked more money in paying the premium. Higher risk, higher reward. "out-of-the-money" options have zero intrinsic value and thus are cheaper to buy, but need more price movement to make a profit.

Easy, peasy, Japanesey.

This is about buying a call option. One of the four possible basic options trades.

Aevian said:

One thing I thought I heard mentioned here was if you own some stocks with general intent to hold them long instead of a trailing stop loss order, you could do some sort of covered option to pickup premiums along the way? Would you mind going over that?

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So, in the example above it is "buying" a call option (or the right to buy a stock). The opposite side of that trade is "selling" (or writing as it is called) a call option. This means you are selling someone the right to buy stock from you at a certain price. It is literally the opposite or other side of buying a call option. So lets use the example above. Now lets say you think the price of T is going to stay flat or go down. You can profit from this by selling/writing call options. Again same example as above. You choose to write a call option at the $30 strike expiring in 21 days. In this example the buyer (lets assume it is TMAC on the other side of the trade above) pays you the 29 cents a share premium. Again since the current price is $29.52 it has no intrinsic value since it is out-of-the-money. So you get paid up front to sell this contract. Now 21 days later one of two things happens. The price stays below $30. This means the contract expires worthless. Why? Because TMAC wont pay you $30 a share for the stock (the strike) if the price is less than $30. He can just buy it on the market for less than $30. This means you get to keep the 29 cents a share as profit.

Now if the stock finishes above $30 (in-the-money), you have to sell the stock to TMAC at the $30 price now matter how much the real price is. Back to our example, lets assume it closes at $30.15. You have to sell it to TMAC at $30 even though the market close is $30.15. BUT.. You already got paid 29 cents in premium so in reality you made 14 cents a share profit. As long as the close price was under $30.29 you make a profit of some kind.

There are two types of calls. Naked and covered. Naked means you dont own any T and come expiry if its in the money (in our example $30.15) you need to buy the stock at the market price and sell it at the agreed upon strike. Naked options require big brass balls. The other type of call is the covered call. This means you already own the stock you are selling the option on (ie.. its covered) so you dont need to buy any if the contract ends in-the-money. You just sell your shares you own for the $30 strike.

How this is a money maker is you sell out-of-the-money covered calls on stock you own that you think will trade flat/down and let the contracts expire worthless each month while you keep collecting and keeping the premium. For simplicity sake, lets say you sold covered calls on this T stock for 30 cents each month and the stock trades flat and all 12 options you sell in a year expire worthless. In a year you collect $3.60 per share of premium on those 12 covered calls you wrote. That is a 12% profit on your T stock that you own (3.60 / 29.52) just for writing the calls. If you end up losing the stock at some point, you got paid for losing it. And while you own it, you also get to collect the dividends it pays.

You trying to drag me back into that cesspool?

Fogel said:

Hey, you drug me back into VLDR! All kidding aside, LAZR has been holding up a lot better then VLDR. Saw someone do a comparison of the two. LAZR hiring is up while VLDR hiring is down

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My gut says to stay away from that shit right now. Besides I am spending all my money on NVDA since in a few weeks it will quadruple in value when it splits.

Wingz said:

Bought 300 shares of BB at 14 today. Did 3 covered calls when it hit 20 for 22 strike Got a nice premium of 2.20 per for friday. I don't think it'll make this so rinse repeat next week.

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Yea the bb premium is juicy. Sold a 6/4 call @20 for 2.34 when I bought some stock at 18. I sold a put at 13 which I closed for a $66 gain and am sitting on a 15.5 put @ 1.2. Nice little 400 day. Worst case I buy some more bb....

Rangoth said:

Am I missing something here? Did some BB news come out recently? You bought this at 18 and have a 15.5 PUT that expired tomorrow? I have a feeling you will be owning 200 shares of BB and come next week or two it will be back down to 8-9$....

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As of the close I can close my put tomorrow for half the premium which is my plan, we will see what the after market does to me...

Well tried to hold my contract till mid day to see if theta would save me money, this was a mistake, still closed $11 in the green and closed my call for a nickle. Ended up postive $240 all together but regret buyingbb at 18... friends don't listen to friends about meme stocks...

Wingz said:

Wait for a dip. Bought at 13.75 today gonna see how it goes next week and write some covered calls. See how it goes. BB is weekly so I will lower my cost basis and should be good in a few weeks probably. Just maken that sweet speculative premium.

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Cost basis already down to 14.75, premium on the covered calls is pretty nice