Top Five Things You Should Know Before Buying an Option

Transcription

1 Top Five Things You Should Know Before Buying an Option

2 Disclaimers Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at (877) 495-KING visiting System response and access times may vary due to market conditions, system performance, and other factors. Margin trading involves risks and is not suitable for all accounts. Any strategies discussed and examples using actual securities and price data are strictly for illustrative and educational purposes only and are not to be construed as a recommendation, or solicitation to buy or sell securities. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. Consider the following when making an investment decision: your financial situation, your risk profile and transaction costs. 2

3 Disclaimers Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility, there is no guarantee that this forecast will be correct. The Greeks (Delta, Gamma, Theta, Vega, Rho) represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct. The projections or other information generated by TradeKing's tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. TradeKing is a member of FINRA and SIPC. 3

4 Top Five Things You Should Know Before Buying an Option The Basics Speakers: M. Kahn and B. Overby Audio Help:

5 Terms and Conditions Options are contracts: Giving the owner the right to buy or sell an asset at a fixed price for a specific period of time and obligating the seller to take the opposite side if and when the right embedded in the option contract is exercised by the owner. Options Contracts XYZ Feb XYZ Feb

6 Four Basic Positions CALL PUT Buyer (long) Right to buy Right to sell Seller (short) Obligation to sell Obligation to buy 6

7 7 In s and Out s for Call Options 70 In-The-Money Stock Price At-The-Money Out-Of -The-Money 60 Strike Call Option

8 Top Five Things You Should Know Before Buying an Option #1 Buying ATM Calls

9 Buying Call Situation: XYZ stock is trading at $60 Market Forecast: Bullish on the stock, but want limited risk if the stock decreases in price Strategy: Buy 1 XYZ 90-day 60 Strike $3.00 Cost is $3 x 100 or $300, plus commission $5.60 Max Risk: Max Profit: Break-Even: 3 or $300 Unlimited = 63 9

10 Buying Call - Profit & Loss Graph Buy One XYZ 90-Day 60 3 Profit & Loss Long B.E. = 63 Stock Price at Expiration 10

11 Top Five Things You Should Know Before Buying an Option #2 Buying ITM Calls

12 Buying Call Situation: XYZ stock is trading at $60 Market Forecast: Bullish on the stock, but want limited risk if the stock decreases in price Strategy: Buy 1 XYZ 90-day 55 Strike $6.00 Cost is $6.00 x 100 or $600, plus commission $5.60 Max Risk: Max Profit: Break-Even: 6.00 or $600 Unlimited =

13 Buying Call - Profit & Loss Graph Buy One XYZ 90-Day Profit & Loss Long B.E. = Stock Price at Expiration 13

14 Top Five Things You Should Know Before Buying an Option #3 Buying OTM Calls

15 Buying Call Situation: XYZ stock is trading at $60 Market Forecast: Speculating on a large Bullish move on the stock, but want limited risk if the stock decreases in price Strategy: Buy 1 XYZ 90-day 65 Strike $1.00 Cost is $1 x 100 or $100, plus commission $5.60 Max Risk: 1 or $100 Max Profit: Unlimited Break-Even: = 66 15

16 Buying Call - Profit & Loss Graph Buy One XYZ 90-Day 65 1 Profit & Loss Long B.E. = 66 Stock Price at Expiration 16

17 Buying Call - Profit & Loss Graphs Profit & Loss ATM Stock Price at Expiration B.E. = 63 Profit & Loss OTM Stock Price at Expiration B.E. = 66 Profit & Loss ITM Stock Price at Expiration B.E. = 61 17

18 Top Five Things You Should Know Before Buying an Option #4 Option Pricing

19 OTM Call Pricing Question 60 Strike is Day Call Price $

20 OTM Call Pricing Question 60 Strike is Day Call Price $ Day? 20

21 Top Five Things You Should Know Before Buying an Option #5 Time Decay

22 Option Premium Time Decay Graph of Two Calls 60 A 90-Day A 90-Day Call 60 Call 22

23 Distribution of Time Premium 90-Day Call Options with Stock at Strike 60 Strike 65 Strike

24 Distribution of Time Premium 90-Day Call Options with Stock at Strike 60 Strike 65 Strike

25 Option Chain on Generic Stock XYZ at

26 Option Chain on Generic Stock XYZ at

27 Upcoming Webinars Monday, October 14 at Noon ET Weekly Options Review with Dan Sheridan of Sheridan Options Mentoring Occurs weekly Tuesday, October 15 at Noon ET Midday Market Call with Michael Kahn, CMT of QuickTakesPro.com and Brian Overby of TradeKing Occurs weekly Tuesday, October 29 at 8.30pm ET Spread Adjustments & Time Premium with Nicole Wachs and Brian Overby of TradeKing

28 Discuss options trading with me via: Twitter.com/BrianOverby Twitter.com/TradeKing To learn more about option strategies: OptionsPlaybook.com