Lets jump to it!
Options consist of 100 shares. They consist of SHORT and LONG a SHORT Option has positive theta, and a LONG option has negative theta. A long is a BUY, and a short is a SELL. The Option Chain is divided by 100 so (it can fit on the screen) so a 1.23 long call will really cost $123. Like wise when you SELL a CALL at 1.23 you could possibly make $123. What’s a contract? a contract is the number of Short calls Long calls or Short Puts or Long Puts you will buy/sell. The option chain, consists of Out of the money At the money and In the money. EXAMPLE, When you see the option chain find where the stock is currently trading, by scrolling it’ll show a bar most of the time where At the money is. On calls an Out of the money is a higher strike above the stock price, an In the money strike is below the stock strike price. What’s a strike the strike is all the above and below at the money numbers that go up and down 1 dollar, Some stocks its 5 dollars, some its 10.. etc etc. With options you’ll trade 100 shares at a time. Huge leverage right? Yes it’s awesome. Like wise a Put Profits going down, on when the put is long. When it’s short it profits going up. A long Call profits going up, and a short call profits going down. Now there’s intrinsic Value this is very important A Long Call/Put will decrease in Value as it nears exp (expiration) If you sell early it still has Intrinsic Value. A short call/put Increases in Intrinsic value as it nears exp. Now we must learn about the greeks.
Theta
The term “theta” refers to the rate of decline in the value of an option due to the passage of time. It can also be referred to as the time decay of an option. This means an option loses value as time moves closer to its expiration as long as everything is held constant. Theta is generally expressed as a negative number for long positions and as a positive number for short positions. It can be thought of as the amount by which an option’s value declines every day for long positions, and short positions it increases. (Very important)
Delta
What is Delta? Delta is the theoretical estimate of how much an option’s value may change given a $1 move UP or DOWN in the underlying security. The Delta values range from -1 to +1, with 0 representing an option where the premium barely moves relative to price changes in the underlying stock. (Important)
IV
The term implied volatility refers to a metric that captures the market’s view of the likelihood of changes in a given security’s price. Investors can use implied volatility to project future moves and supply and demand, and often employ it to price options contracts. (Important)
Vega
Vega is the measurement of an option’s price sensitivity to changes in the volatility of the asset. Vega represents the amount that an option contract’s price changes in reaction to a 1% change in the implied volatility of the underlying asset. (not much needed)
Rho
Rho is the rate at which the price of a derivatives changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. Rho may also refer to the aggregated risk exposure to interest rate changes that exist for a book of several options positions.
For example, if an option or options portfolio has a rho of 1.0, then for every 1 percentage-point increase in interest rates, the value of the option (or portfolio) increases 1 percent. Options that are most sensitive to changes in interest rates are those that are at-the-money and with the longest time to expiration. (Not much needed)
Gamma
What is Gamma? Gamma represents the rate of change between an option’s Delta and the underlying asset’s price. Higher Gamma values indicate that the Delta could change dramatically with even very small price changes in the underlying stock or fund. (not important)
One more thing….
Basically we use Delta/IV/Theta the most. They are important to pick good long/short option trades. One more thing you need to know is how to enter an option trade. THE ALMIGHTY BID/ASK. It will say bid/ask on the app/website for your broker most of the time. To enter a trade we use the ask price you can type it in so it will get filled. On some brokers you have to try to fill it a few times. When exiting a trade you use the Bid price. Some bid ask are large like on NFLX (netflix) Some are small like on SPY/QQQ. which is only a point. To buy back short positions, (EXIT the trade) it’s the opposite where you buy it back at the ask, and when you short you sell at the BID (Enter)
YOU NEED A MARGIN ACCOUNT AND LEVEL 3 PRIVALEGES
To do the trades I’ve shown you, you’ll need level 3 options trading and a margin account. You’ll need over two thousand in the account to perform the trades, and we want you to hold for a day, unless its going against you. I HIGHLY RECCOMEND Going to TD AMERITRADE AKA Think or swim and Practicing the plays I’ve shown you, I also suggest going to OPTIONSPROFITCALCULATOR.COM TO show you When you should close the trade down. I also think it’s BEST to close down before expiration. Unless you are with Tastyworks where they will exercise your positions unless it’s a naked single long option where you will need the full amount or Put. You don’t want it to go to expiration on those, and I don’t even teach Short Puts Covered Calls Long Calls (single) Long Puts (single). They are too risky. IF YOU HAVE ANY QUESTIONS LOOK INTO OPTIONS MORE. ALSO PRACTICE MAKES PERFECT.
