Option trading definition

I say generally because there are such a wide variety of option strategies that use multiple legs as their structure, however, even a one legged Long Call Option can be viewed as an option strategy.

Under the Options link, you may have noticed that the option examples provided have only looked at taking one option trade at a time. How could a trader profit from such a scenario? But what happens if the market rallies? The put option becomes less valuable as the market trades higher because you bought an option that gives you the right to sell the asset - meaning for a long put you want the market to go down.

You can look at a long put diagram here. However, the call option becomes infinitely valuable as the market trades higher. So, after you break away from your break even point your position has unlimited profit potential. The same situation occurs if the market sells off. That might not sound like definition, but consider what your return on investment is.

This is just one example of an option combination. Or more importantly, option will happen to the implied volatility of the options themselves. Well, the only tool that I know of that does this well is the Volcone Analyzer. It analyzes any option contract and compares it against the historical averages, while providing a graphical representation of the price movements through time definition know as the Volatility Cone. A great tool to use for price comparisons.

Anyway, for further ideas on option combinations, take a look at the list to the left and see what strategy is right for you. Hi Luciano, The pink line represents the change in the value of the position relative to the current theoretical price. This line, at the expiration date, will be the most you can gain or lose for each corresponding x-axis stock price point.

Hope this is clear, please let me know if not. You did a great job for newbies like me! Hi Renee, yes they are already added as either long or short i. Long Straddle and Long Strangle. Most option repair strategy only gives example starting out with a long position on a stock.

Hi Terry, Aplogogies for the delayed response! The ATM point will be at the "forward" price, which will be slightly higher than the stock price depending on the interest rate. If interest trading are zero then the ATM price will be the stock price. Some prefer to stick to a one year rate while others will use an historical level appropriate for the expiration of the options.

Hello, just downloaded your spreadhseet. The shortest term 1mo? What exactly is the pink line in the diagrams? Hi James, Right - the OptionTradingWork book is currently onlt Black and Scholes. For American options you can use the Binomial Model - there is a spreadsheet on the Binomial page. Any chance we get an american options enabled one? Regards Amit S Bhuptani. PMS ICICI Sec Ltd.

Hi Peter, I wanted to know the basics which I need to keep in mind before trading in "EXPIRY"? MultiCharts can chart, scan and auto-trade stocks through many different brokers. Plus, it provides an easy to use scripting language that allows you to design and backtest trading ideas before risking real money. I have it and love it! Hi Peter, What things I need to keep in mind before getting into intraday trading in STOCKS?

I also wanted to know the procedure of picking the right stock in intraday trading? Thx Hi Joel, It depends on what you define as the ATM strike. If you simply say that ATM strike is the strike closest to the stock price, then yes the call will normally have a higher premium than the put. However, the ATM strike should really be driven by the "forward price" of the stock.

As option contracts carry the right to exercise at a point in the future, their value is first based on the future trading of the stock, which is the stock price plus trading cost to hold the stock cost of carry or interest rates less any dividends received during that period.

As you apply the interest rates and dividends to the current stock price you will calculate a price different to the stock and this is the true ATM price. Call, put and stock prices for the same strike are all related and cannot violate put call parity. I just finished reading a book on options and one of the discussion points was that an ATM call will always have a higher premium than a put at the same strike.

If I find a put which has a higher premium then a call at the option strike price, is this unusual? Is there a way to take advantage of such a situation? Is it fair to assume that this is a temporary situation?

Hi Ash, If the option is out-of-the-money then, yes, it will begin to lose value very quickly as expiration approaches. Hi Peter, I have a question on when to close out my position on a call option. I currently have a April call option and i wanted to know if there are any best practices around when to closeout your position if you are not planning on purchasing the stock at expiry?.

I am asking this because as time goes by the definition of options go down. It is end of feb now and my options expire in Apr.

Your input is appreciated. Hi Rakesh, If you want limited risk and unlimited profit potential then you are best looking at positions like long calllong putlong straddlelong strangle etc - these are strategies where you are net long options. Hi, Can anybody tell me the statergies that I need to keep in mind before trading in "Options"?

So that the risk percentage is nominal and the probality of profit is high. Hi eh, This strategy is called a short guts and is similar to a option strangle except you are shorting a put with a higher strike price, where a strangle sells the put with a lower strike price. The payoff calculation is a little different also: with a short strangle the max profit achievable is the premium received.

Can I ask why would choose this approach instead of selling option call and the put? Hi Varun, Do you mean selling a call and a put together at the same strike price i.

Hi, I am new to this and this site has been a big helpI wanted to clarify one thing. Please do clarify whether this option possible or not Peter If I buy a call e. Thanks and when I click e. You can take a look at the option prices on Yahoo. Peter, What if I sell K put on the day of expiration of option contract and the stock does not move significantly in value to exercise the contract for who ever bought it.

Do I get to keep the commission? Further, if Trading need to rollover my position to next month, then do I need to pay some extra premium or can I rollover at the same price?

You would close your position for a profit without having to wait until expiration to exercise the option. Hi Peter, Really good information on Options.

I had one question - Suppose I buy a an option Call for Rs 30 whereas the index is at Within 2 hours, index moves to and option premium is Trading Can I sell the contract now and earn Rs 5 per lot as profit though the index did not reach? Thanks Both futures and stocks have a delta of 1 so hedging with a future is much the same as hedging with a stock. Please see the in-the-money page. Hi Azaragoza, you can check out my option pricing spreadsheet for the formula.

My qestion is let say i own akam and buy option for either put or call. I want to sell it right after i purchase the contract let say within one hour. I know that Interactive Brokers provide an API to plug external systems into that operates over the Internet.

Hi, If one is using computational systems as an aid to trading making, then is there a source to receive streaming real time prices over the internet in a way which could be easily integrated into a system?

Thanks, D Hi Anon, Premium is the price of the option as it is traded in the market. Let me know if anything is unclear.

I am using Thinkorswim. So, I am wondering that what the differences between "premium" and "commission" are? If the strike price expired Oct 31, is 125, how much would I loss or or Before the end of expiration, I thought that the market would go down. Which one should I pick between "sell it before expiration" or "do nothing in order to let it expired. If the strike price expired Oct 31, is 130, what will happen if I do nothing and let it expired?

What is the tax liablity of a trading trading when option is exercised. You can just enter a sell order into the market and if the price is right a market maker will take it. Hi Peter, I know that i can reverse the position by selling in the same market. Hence kindly clarify how to deel with such situation in e-trading like "Indian Nifty".

Yep, you can just reverse the option position by selling the same option contract in the option market. HI, Say if I am buying an in the money European option with an expiry of 4 months and If the option is deep ITM or OTM during at the end of 2nd month and if i want to crystallize my profits than is there any way out for it?

I use and can recommend Interactive Brokers. I stay in Thailand in Asiahow can I start to trade because I do not any account with any broker in USA. Hi Sam, thanks for the feedback! Yes, I think that simple naked long positions are still useful and obviously have the most bang for buck so to speak. This can be discouraging to new option traders. Anyway, talking about options strategybased on your experience, is it still useful using only simple long call or put? Hi Rajesh, are you located in the US?

You will limit your gains if the stock gets there but will have the immediate gain of income from the premium received. I am short the hpq jan put, what is a good stategy to limit my risk on the down side? Should I go long the same put at the same strike?

Thank you Dale Hi Amit, there are two firms that provide this kind of training; Options University Online Trading Academy You could try Options University I think that the best overbought oversold indicator and a reversal signal is when lets say definition stock is in an up trend definition for a couple of days in bound-range.

Hi Yogesh, any strategy that has unlimited updside profit potential e. Long Straddle, which allows for unlimited profit if the stock trades up or down. Hi, i am Indian Trading and trader. I have just this website few days back and i want to tell you this is best site on Options Trading and imparting knowledge on the subject.

Hi Lisa, Yes, you sure can trade online. That will give money in any market condition. Could you be more specific please? I say generally because there are such a wide variety of option strategies that use multiple legs as their structure, however, even a one legged Long Call Option can be viewed as an option strategy Under the Options link, you may have noticed that the option examples provided have only looked at taking one option trade at a time.

You can look at a long put diagram here However, the call option becomes infinitely valuable as the market trades higher. So, after you break away from your break even point your position has unlimited profit potential The same situation occurs if the market sells off. A great tool to use for price comparisons Anyway, for further ideas on option combinations, take a look at the list to the left and see what strategy is right for you Bullish Long Call Short Put Long Synthetic Call Backspread Call Bull Spread Put Bull Spread Covered Call Protective Put Collar Bearish Short Call Long Put Short Synthetic Put Backspread Call Bear Spread Put Bear Spread Neutral Iron Condor Long Straddle Short Straddle Long Strangle Short Strangle Long Guts Short Guts Call Time Spread Put Time Spread Call Ratio Vertical Spread Put Ratio Vertical Spread Long Call Butterfly Short Call Butterfly Long Put Butterfly Short Put Butterfly Comments Peter December 1st, at pm Hi Luciano, The pink line represents the change in definition value of the position relative to the current theoretical price.

Peter November 18th, at pm Hi Renee, yes they are already added as either long or short i. Long Straddle and Long Strangle Renee November 17th, at pm Could add Strangle option Straddle? Peter December 3rd, at am Hi Terry, Aplogogies for the delayed response! Terry B November 25th, at pm Hello, just downloaded your spreadhseet. Steve August 26th, at am What exactly is the pink line in the diagrams?

Peter March 27th, at pm Hi James, Right - the OptionTradingWork book is currently onlt Black and Scholes. Rakesh March 17th, at am Hi Peter, I wanted to know the basics which I need to keep in mind option trading in "EXPIRY"? Rakesh February 26th, at am Hi Peter, What things I need to keep in mind before getting into intraday trading in STOCKS?

Thx Peter February 23rd, at pm Hi Joel, It depends on what you define as the ATM strike. February 23rd, at am I just definition reading a book on options and one of the discussion points was that an ATM call will always have a higher premium than a definition at the same strike.

Peter February 23rd, at am Definition Ash, If the option is out-of-the-money then, yes, it will begin to lose value very quickly as expiration approaches.

Ash February 23rd, at am Hi Peter, I have a question on when to close out my position on a call option. Peter February 19th, at pm Hi Rakesh, If you want limited risk and unlimited profit potential then you are best looking at positions like long calllong putlong straddlelong strangle etc - these are strategies where you are option long options.

Rakesh February 19th, at am Hi, Can anybody tell me the statergies that I need to keep in mind before trading in "Options"? Peter February 12th, at pm Hi eh, This strategy is called a short guts and is similar to a short strangle except you are shorting a put with a higher strike price, where a strangle sells the put with a lower strike price.

Peter February 12th, at pm Hi Varun, Do you mean selling a call and a put together at the same strike price i. Varun February 10th, at am Hi, I am new to this and this site has been a big helpI wanted to clarify one thing.

Please do clarify whether this is possible or not danielyee December 22nd, at am Peter If I buy a call e. Peter December 21st, at pm You should be able to see the last price - even if the market is closed. Peter December 18th, at pm Trading. Jorge December 16th, at pm Peter, What if I sell K put on the day of expiration of the contract and the stock does not move significantly in value to exercise the contract for who ever bought it.

Ankur September 29th, at am Thanks Peter. Thanks Peter September 28th, at pm Yes, exactly. Ankur September 28th, at am Hi Peter, Really good information on Options. Thanks Peter September 18th, at pm Risk-free? Me too, please let me know when you find such strategies ; aparna September 18th, at pm I want to learn risk-free option trading in Indian market. Suggest me some website for it. NAGESH September 4th, at am First time I found more information about options.

Peter August 3rd, at pm Both futures and stocks have a delta of 1 so hedging with a future is much the same as hedging with a stock. Peter August 1st, at pm Please see the in-the-money page. Peter May 12th, at pm Hi spinnerrobert, yes, trading can exit an option position at any time prior to the expiraton date.

Peter May 12th, at pm Hi Azaragoza, you can check out my option pricing spreadsheet for the formula. UOG December 13th, at pm Hello, I think your blog is epic. DAJB December 6th, at pm Hi, If one is using trading systems as an aid to decision making, then is there a source to receive streaming real time prices over the internet in a way which could be easily integrated into a system? Thanks, D Peter October 31st, at am Hi Anon, Premium is the price of the option as it is traded in the market.

Anonymous October 29th, at pm I am using Thinkorswim. Kartik October 18th, at am This explaination talks about option in case of expiry but what in case of trade which definition place in between the expiry date. Meghna September 17th, at am Hi Peter, I know that i can reverse the position by selling in the same market.

Peter September 15th, at am Yep, you can just reverse the option position by selling the same option contract in the option market. Meghna September 15th, at am HI, Say if I am buying an in the money European option with an expiry of 4 months and Option the option is deep ITM or OTM during at the end of 2nd month and if i want to crystallize my profits than is there any way out for it?

Peter September 2nd, at pm I use and can recommend Interactive Brokers. NaZZ September 2nd, at am I stay in Thailand in Asiahow can I start to trade because I do not any account with any broker in USA. Peter August 29th, at pm Hi Sam, thanks for the feedback!

Peter August 29th, at am Hi Rajesh, are you located in the US? Dale Brooks August 18th, at pm I am short the hpq jan put, what is a good stategy to limit my risk on the down side?

Brad August 6th, at am I think that the best overbought oversold indicator and a reversal signal is when lets say a stock is in an up trend option for a couple of days in bound-range. Maria May 25th, at am When somebody talks about OTC Commodities: does this only mean Commodities options?

Congratulations Admin December 8th, at am Hi Lisa, Yes, definition sure can trade online. Is this something that I could do online?