[EvanRitch]

Hey guys im trying to learn how options work. Im more focused on the call side.

Now I have a few questions. Im looking at my online investing and im looking at a $14 call by April 20th. The ask is $3 what does that mean?

Example if I want 100 shares at $14 on April 20th it will cost me $300 right now? That 300 isn't recovered but if the stock is at $20 then I buy at $14 and sell at $20.

Im just wondering what the $3 means is it for every stock and no matter what that money is gone.

Also lets say I buy the Call Option for $300 and April 20th comes around and I have the option to let my $300 die if the stock is down. Or I can pay my order. DOES my investing account need that 100 shares at $14 in the trading account?

Currently my trading account only has about $50 as everything is already in shares. But would I need to have money sitting there or could I put some in 1 week before the deadline?

Thanks!

Also for more experienced people you can talk about your plans and so on with calls and puts here. Figured this might be good for people learning about the markets.

[BThunderW]

Hey guys im trying to learn how options work. Im more focused on the call side.

Now I have a few questions. Im looking at my online investing and im looking at a $14 call by April 20th. The ask is $3 what does that mean?
It means you'll pay $3/share if you want to buy.

So each contract that consists of 100 shares will cost you (3 * 100) = $300. When you exercise your contract you'll pay $14/share regardless of the actual stock price

Example if I want 100 shares at $14 on April 20th it will cost me $300 right now? That 300 isn't recovered but if the stock is at $20 then I buy at $14 and sell at $20.

Now, don't forget banking fees. In my case $10 for transaction and $1.25 per contract.
So to buy one contract it'd cost (3 * 100) + 1.25 + 10. This gives you an option to buy 100 shares at $14 before April 20th. If you buy two contracts the price would be (2 * ((3*100) + 1.25)) + 10 = $612.50

You also have to consider the bid/ask spread when closing a call as even though the contract price went up you might still sell it at a loss


Im just wondering what the $3 means is it for every stock and no matter what that money is gone.

Also lets say I buy the Call Option for $300 and April 20th comes around and I have the option to let my $300 die if the stock is down. Or I can pay my order. DOES my investing account need that 100 shares at $14 in the trading account?

You'd need available cash or margin to exercise your option to purchase the 100 shares ($1400). But if the price is below the strike price, why would you want to?

Currently my trading account only has about $50 as everything is already in shares. But would I need to have money sitting there or could I put some in 1 week before the deadline?

Thanks!

Also for more experienced people you can talk about your plans and so on with calls and puts here. Figured this might be good for people learning about the markets.

[EvanRitch]

Why would bid ask spread matter if I were selling? Does that mean I'd need takers for the $20 if the stock went that high just like the normal market? Example I call 100 shares at $14 and I sell them for the current price which is 20. But only if there are takers? do the shares just get sold back to the market like a normal stock trade?

I guess it would

And thanks.

Also if I Pay a fee would I pay commission once I sell?

[Tinomane]

Why would bid ask spread matter if I were selling? Does that mean I'd need takers for the $20 if the stock went that high just like the normal market? Example I call 100 shares at $14 and I sell them for the current price which is 20. But only if there are takers? do the shares just get sold back to the market like a normal stock trade?

I guess it would

And thanks.

Also if I Pay a fee would I pay commission once I sell?

Once you exercise your options you basically hold the stock at the strike price you bought it at. You can do what you want with it then just like regular stock trading.

If the bid is $20 and you exercised your calls at $14 your profit is $20-$14-Premium-Commissions.

You will have to pay a commission when you sell.

[janos2808]

You don't necessarily need to have cash in hand to exercise your options. If you buy options that are in the money (such as the $14 options you mentioned), the value of the options will go up $1 for every $1 increase in the price of the stock. So if the stock appreciates, you'll be able to sell your options at a handsome profit.

[BThunderW]

If you sell your options for cash, you won't be able to exercise them

You don't necessarily need to have cash in hand to exercise your options. If you buy options that are in the money (such as the $14 options you mentioned), the value of the options will go up $1 for every $1 increase in the price of the stock. So if the stock appreciates, you'll be able to sell your options at a handsome profit.

[janos2808]

Yes, that is what I meant: you can sell the options instead of exercising them.

[EvanRitch]

So you can exercise them or sell them or let them expire?

Lets try a real time example here so I can learn.

Im looking at $16 call valued at $1.18 by April 20th.

So if I wanted 100 shares it would cost me $118

FROM here can someone explain what happens next.

Example stock goes up can I sell at any time?
stock goes down what should I do?
Is $1.18 on $16 ok? I really believe the US launch and the numbers report will be good. Im sure before April 20th there will be a nice spike so please explain my choices here in this situation!

Thanks and sorry I have read up but sometimes hearing from people directly shows me the exact answer to my question.

[kfh227]

I can explain options in person, but it is hard to explain in a forum. My best advice is read, read, read. It took me 3 months of just reading to understand basic options strategies.

Option time value - Wikipedia, the free encyclopedia

I'll answer a few questions.
Example stock goes up can I sell at any time?
Yes. You can enter/exit an option at any time (unless you try to sell something that is worthless). It is very uncommon to exercise an option. You will almost always just buy/sell options.

stock goes down what should I do?
Loose money I suppose. Options expire eventually. Because of this, it is a gamble.

Is $1.18 on $16 ok?
That's up to you. You need it to go up in the short term to make money. Or it has to break $17.18 prior to expiration.

Take note:
You can easily loose 100% of an investment via options. I tell everyone to limit how much money to throw at options.

[janos2808]

Bear in mind that the $16 call expiring in April was trading at 60 cents last week. If the stock dips again between now and the earnings call, those options may well be 60 cents again. $1.18 is a good price only if you think the stock is not going any lower any time soon. Otherwise, you might want to wait for a better opportunity.

[EvanRitch]

I was thinking to wait for the Galaxy thing and then if the price dips then maybe go in. I think that maybe next monday is a perfect time to get in. After the Galaxy thing clearly the stock will probably drop some. Maybe might take a few days. But once the American release hits then I can see the stock moving up abit. ALSO I expect a Q10 announcement which should push the stock as well. AND I need to get in before earnings call this month as well. So next monday is the perfect time I believe. + Im off that day

[dalinxz]

Also keep in mind that in options, there are many other factors to take into account. Things such as volatility in the stock, decay die to elapsed time and other criterion.

I.e. Share price is $15 and the option expires in 5 days, with a cost of $1 per share per contract, buying 1000 shares or 10 contracts would cost you 1000 assuming the strike price on this was 15 then essentially each day is worth 20 cents roughly assuming 0 volatility. So in 3 days the option would only be worth 40 cents unless there has been price appreciation, or it could be worth even less than 40 cents if there is price depreciation as there is very little time for the price to get back above 15

As a beginner you should play with deep in the money or near the money options, get ones that expire in a year or so this way there is less depreciation on the decay of the option.

Posted via CB10

[EvanRitch]

What about options that expire in a month? If I thought the stock was moving up and could get some options around currrent price? It's not like this stock is some slow moving stock that moves up 5 cents a day. However I do believe it will be trending upwards so a one month span seems ok. ill see how it goes if I find something I like then ill maybe try it out.

In reality you can only lose on the options price correct?

Example if I got options for 1 month from now and bought 100 options at $1 each. Then the most I could lose is $100 correct?

[Zarpan]

What about options that expire in a month? If I thought the stock was moving up and could get some options around currrent price? It's not like this stock is some slow moving stock that moves up 5 cents a day. However I do believe it will be trending upwards so a one month span seems ok. ill see how it goes if I find something I like then ill maybe try it out.

In reality you can only lose on the options price correct?

Example if I got options for 1 month from now and bought 100 options at $1 each. Then the most I could lose is $100 correct?

Each option represents 100 shares, so I'm assuming that you're talking about buying 1 call option @ $1, which would cost $100 + commission.

In the case of buying options, your loss is limited to the value of the option plus commission, which would be $100-ish in this case.

If you write (sell) options though, your loss could be much higher than the initial premium you get for the option.

[EvanRitch]

Can you please explain this "If you write (sell) options though, your loss could be much higher than the initial premium you get for the option."

Sorry i've things mostly figured out just the small things

[Zarpan]

Black Scholes Calculator is a calculator I sometimes use to estimate the future value of options given potential price changes. I've been using a risk-free interest rate of 0.1%.

Right now the April 19th call options with a strike price of $14 sell for about $1.80. You can check that out using the calculator with an implied volatility of 85% and 38 days time.

If the stock price increases to $16 on March 27th (24 days time), with the same volatility, the options will be worth about $2.54 at that time.

If the stock price increases to $17 post-earnings on March 28th, but volatility drops to 65%, the options will be worth about $3.14. If volatility had remained at 85%, they'd be worth about $3.32.

If the stock price decreased to $14 post-earnings on March 28th, those options would be worth $1.19 with a volatility of 85% and $0.91 with a volatility of 65%

Implied volatility is likely to decrease post-earnings as the earnings report is a major area of uncertainty that could cause a major price movement in BlackBerry stock.

Volatility plays a larger factor in the valuation of out of the money options. For example, I've seen Jan 2014 35 call options with implied volatilities ranging from about 59% to 73% over the last couple months. At 59% volatility, that option would be worth $0.26 right now, vs. $0.65 with a 73% implied volatility.

[Zarpan]

Can you please explain this "If you write (sell) options though, your loss could be much higher than the initial premium you get for the option."

Sorry i've things mostly figured out just the small things

If you're writing/selling a call option, you're giving the person the right to buy 100 shares at the strike price. So, if you write an April 19th call option with a strike price of $14 (selling at $1.80), you'd get a premium of $180 for writing that option right now. If the price is below $14 at the end of April 19th (and assuming there's no early exercise of the option), you'd make $180. If the price goes up to $20 though, you'd be forced to sell 100 shares of BlackBerry at $14, leaving you with a $420 loss if you covered then ($600 loss on the sale of shares + $180 gain on the premium).

If you're writing/selling a put option, you're giving the person the right to sell 100 shares at the strike price. So, if you write an April 19th put option with a strike price of $14 (selling at $1.38), you'd get a premium of $138 for writing that option right now. If the price is above $14 at the end of April 19th (and assuming there's no early exercise of the option), you'd make $138. If the price goes down to $10 though, you'd be forced to buy 100 shares of BlackBerry at $14, leaving you with a $262 loss if you then sold the stock ($400 loss on the sale of shares + $138 gain on the premium). There are commissions too of course.

[EvanRitch]

Ok that makes sense.

But if I buy the call option for $14 lets say. If the stock drops to $10 can't I just let the option expire and lose the $180? I dont have to actually take the $10 stock if I dont want to?

[Tinomane]

Ok that makes sense.

But if I buy the call option for $14 lets say. If the stock drops to $10 can't I just let the option expire and lose the $180? I dont have to actually take the $10 stock if I dont want to?

Yup. If your call isn't in the money it won't be exercised, unless for some weird reason you wanted it to. You would just lose the $180 (the premium)

[jojo beaconsfield]

don,t know much about options ,but i,m attending a3 part workshop starting tonite given by td waterhouse here in montreal at the mtl.exchange .check it out if you,re in mtl.to reserve a seat call1-877-839-7787 whatever u do don,t short bb i hate those people

[OMGitworks]

Ok that makes sense.

But if I buy the call option for $14 lets say. If the stock drops to $10 can't I just let the option expire and lose the $180? I dont have to actually take the $10 stock if I dont want to?

Yes, in fact he default position for the brokers I use is that if it is underwater, it is NOT exercised. Good advice given here. I wouldn't underestimate the time value or volatility of options. I use them as a leverage play with limited exposure, a pure gamble limited to the cost of the calls and fees. After that, they offer a great return if you are right.

[EvanRitch]

Well its time to kick myself. Was looking at $16 call for $1.18 not gonna get that price again hahaha. Almost pulled the trigger a few times today but then realized the FEES are $29 same as stock sale. So wanted to figure some numbers before I jumped in. WOW

[angrybear123]

All a beginner needs to know about equity options:
Play with them as a beginner, and you will lose money. I say this with 100% confidence.

Paper/fake trade until you really know what you are doing, until then, stay away from using real $.

That's all I have to add to this thread. But good luck, and let's hope I'm wrong (....I'm not).

[EvanRitch]

Im with CIBC and on my investing account it wont let me buy options. I guess I need to do something through them first?

[EvanRitch]

Ok never mind apparently I would need a margin account for options

Will have to wait for that!