Well after almost 7 months of cramming everything stock market related in my head, i woke up one day and decided i havnt punished myself enough, so i started learning about options Man, what a cluster F!... Y'all options traders must go through a lot of Tylenol Its sinking in though... Now i understand the leverage... You buy contracts for pennies on the dollar, but they move step for step with the security... ie if you want a $5 call on a $10 stock, then you gotta pay the difference, otherwise there would be a lot of free money floating around..... But if you bought that same call back when it was 50 cents, then its gonna be a good day Tater! I kinda ran into a wall though... The material ive found kinda has a gap between "options for beginners" and "options for freaking Einstein".......... I have a few "intermediate questions" that i havnt found direct answers to.... Since we have plenty of Einstein's here, i thought i would post em up Ill number the questions so that anyone kind enough can take a stab at one or two or all of em 1) this has nothing to do with the actual trading, but it bothers me cause i dont understand it Why don't exercised options show up on the chart??.... Say you have a $5 call and the stock price moves to $10... if you exercise your contract, shouldnt there be a little dot at $5?....... by my logic, there should be dots all over the chart, im glad theres not, but i wonder why 2) how are contract prices initially set? I understand how they move into and out of the money, but what if the stock price is right on the money?... is there a predetetmined percentage to set that price? 3) does the "3 rule" apply to options? This is the pattern day trading rule that requires 25k to participate.. im a LONG way away from that milestone I dont plan on intraday trading, most of the time its not feasible for me anyway... but if an opertunity presents itself, id like to know the rules before i seize it 4) do you need a margin account to sell contracts?... naked, covered or both? Im not ready to get naked with options, we just met... but what if im holding a stock and want to sell contracts against it? i just have a cash account at this point, so i assume many of those complicated spread strategies will be off limits until i change that 5) whats with the crazy bid/ask on some of these things??... couple times ive seen spreads almost 100% of the contract price, wtf?.... does that mean stay away?? Last but not least 6) How the hell do y'all think so fast??? Im fairly decent at math, but im no human calculator..... by the nature of leverage, options seem to move a lot faster than stocks!... a little penny makes a big difference..... on top of that you got multiple strikes and time frames all moving at different paces..... its a lot more intense than watching a single bar go up n down In all this chaos, how do you calculate risk, chose limits and place stops?..... Do you have a slow motion button?.. Or am i just over complicating things.... as a swing trader, how much of this noise can i filter out?? That's all i can think of for now, but im sure ill have more in the future...... Thanks for reading, and thanks for any advice offered!
geee Jrich it is a bit complicated for my poor English...... If I can say so try to learn one well (stocks or options) JMHO however see if this help http://www.optionstrading.org/introduction/what-is-options-trading/ http://www.tradingacademy.com/lessons/article/what-are-my-options/
Thanks Sheppy I agree, i shouldnt bite off more than i can chew..... but now that i understand what options are, how they work, the good the bad and the ugly... i do think it fits my situation More leverage for my limited capital... long as i dont screw up and wipe myself out Plus i learned that i can not short stocks in a cash account.... but i can buy puts!
you got a good point....... good luck in your option adventure you can always take fishing here a bass fished in the Mediterranean I could pay anything from $40-50 x kilo (even hard to find them) you could make a fortune
If i could get paid to fish, nobody would ever hear from me again! Id be living in a house boat out in the middle of some big lake... And Amazon drones could supply all my beer so id never have to come to shore
I will attempt 1,2 and 5. ----------------------------------------------------- 1) this has nothing to do with the actual trading, but it bothers me cause i dont understand it Why don't exercised options show up on the chart??.... Say you have a $5 call and the stock price moves to $10... if you exercise your contract, shouldnt there be a little dot at $5?....... by my logic, there should be dots all over the chart, im glad theres not, but i wonder why Most options get settled and don't get exercised, however while you hold the $5 call you own the right to buy the stock at $5 from the option (seller) writer and when you exercise you are demanding fulfillment, that is, to purchase the stock for $5 from the option writer (not from the open market). Options are a totally separate market from the underlying; they are derivatives of the underlying stock price, but separate. ----------------------------------------------------- 2) how are contract prices initially set? I understand how they move into and out of the money, but what if the stock price is right on the money?... is there a predetetmined percentage to set that price? I assume you are asking, how options are initially priced when the stock price is right at the "strike price". I assume the options are priced initially the same way as they are throughout the contract life, that is, they are priced when a seller (contract writer) accepts a bid or a buyer accepts an ask. (The seller of an option is also called the "writer" of the contract.) As far as I know, there is no "pre-determined" pricing of any kind....it is a market, an auction. ----------------------------------------------------- 5) whats with the crazy bid/ask on some of these things??... couple times ive seen spreads almost 100% of the contract price, wtf?.... does that mean stay away?? The more liquid markets will have tighter spreads. But even in those, the options far from the money may have wide spreads and they will also show small open interest (few contacts still open).
"5) whats with the crazy bid/ask on some of these things??... couple times ive seen spreads almost 100% of the contract price, wtf?.... does that mean stay away??" Yes, stay far far away from illiquid underlyings. If there is a large spread it either means 1) The market isn't liquid, or 2) The market is closed and there aren't any bids/asks. So, depending on the price of the stock, you want either a 1 cent spread or maybe a 10 cent spread at the highest. If there is 25 cents or more of a spread, you're starting to play with fire. It means it's harder to get in and out of your trade and you're going to pay more to get in and out, thus causing more "Slippage".
Thanks for the answers! So sounds to me like #2 and #5 mean options behave just like stocks...... simple enough #1 makes sense too.. since nothing is bid on, nothing was technically "traded".... ill accept that
I just got answers to #3 and #4 from the TDA help desk yesterday I tried to buy some CHK calls on Monday, as my first real live option trade, and it was rejected....... turns out i have to apply for a tier 2 account (in the process now).... thats a shame, the call i wanted is up 10 cents now Anyway, with a tier 2 cash account i can buy contracts and/or sell covered contracts..... no spreads or nakeds until i upgrade to margin..... fine by me And the pattern day trading rule does indeed apply to options as well
