SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

10 Basic Facts About Options Trading


Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 10 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

1. Right to BUY or SELL

 

Options give you the right to buy or sell an underlying security at specific price. You can buy and sell options on a variety of different underlying assets including stocks, futures, indices, commodities, Forex, Bonds etc. Today most assets have options.

puts_options.png

 

2. Two Types of Options

 

There are two types of Options: Calls and Puts.

  • Call Option gives you the right to buy the underlying asset.
  • Put Option gives you the right to sell the underlying asset.

Generally speaking, you buy Call Option because you have Bullish Outlook and you buy Put Option when you have bearish outlook.

 

Though there are only two types of options, when you factor in other characteristics of options, there are endless trading possibilities.

 

3. Options Symbols

 

The OCC option symbol consists of 4 parts:

  • Root symbol of the underlying stock or ETF, padded with spaces to 6 characters
  • Expiration date, 6 digits in the format yymmdd
  • Option type, either P or C, for put or call
  • Strike price, as the price x 1000, front padded with 0s to 8 digits

Examples:

  • SPX 141122P00019500: This symbol represents a put on SPX, expiring on 11/22/2014, with a strike price of $19.50.
  • LAMR 150117C00052500: This symbol represents a call on LAMR, expiring on 1/17/2015, with a strike price of $52.50.

symbols.PNG

 

4. Buying an Option

 

If you buy an option, you are not obligated to buy the underlying instrument; you simply have the right to exercise the option. When you buy a Call Option, you have the right to BUY stocks at your option’s strike price.

 

Similarly, when you buy a Put Option, you have the right to SELL stocks at your Option’s price.

 

5. Selling an Option

 

If you sell a Call Option, you are obligated to deliver the underlying asset at the strike price at which the Call Option was sold if the buyer exercises his or her right to take delivery. If you sell a Put Option, you have to buy the underlying if exercised.

 

Generally speaking, if you don’t take any action, your friendly broker will most likely do it for you if your Options are eligible for exercise.

 

If you are not a member yet, you can join our forum discussions for answers to all your options questions.

 

6.Options have Limited Life

 

Options are good for a specified period of time after which they expire and the option holder loses the right to buy or sell the underlying instrument at the specified price. This specified period is called “Expiration”.

 

Options are available for variety of expiration timings such as Weekly, Monthly, Quarterly and much longer durations (known as LEAPs).

 

7. The Option Premium

 

The price reflects a variety of factors including the option’s volatility, time left until expiration, and the price of the underlying asset. There are several Options Pricing Models that you can use to calculate theoretical Option Price by modeling various parameters.

 

There is no fixed price for an Options. It is dynamic and will keep on changing with respect to time to expiration and other variables.

 

8. The Strike Price

 

You can choose any price at which you would like to buy or sell underlying instrument. These prices are called Strike Price and Options are available in several Strike Prices at, far or near the current market price of the underlying instrument.

 

9. Buying Means Debit

 

Options when BOUGHT are purchased at a DEBIT to the buyer. That is, the money is debited from your brokerage account. It’s exactly like Buying a stock.

 

10. Selling Means Credit

 

You can sell an Option, without owning the shares. Options when SOLD are sold at a CREDIT to the seller. Money is added to the brokerage account. You can’t withdraw this money until the trade has been closed. Usually, this money is used to offset the margin required for selling the options.

 

Related Articles:

 

Want to join our winning team?

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Option Equivalence

    Some option positions are equivalent – that means identical profit/loss profiles – to others. Others are not. A few days ago I had an inquiry from a person trading options in a restricted account (e.g. an IRA that did not allow marginable trades or short options positions):

    By cwelsh,

    • 0 comments
    • 67 views
  • Investment Ideas for Conservative Investors

    Investors with low willingness or need to take risks often look to bank and/or life insurance company fixed-rate products to increase potential returns instead of leaving their money in conventional checking or savings accounts. Some of these product types are CD’s, structured notes, fixed annuities and fixed indexed annuities.

    By Jesse,

    • 0 comments
    • 152 views
  • iVolatility Tools: Advanced Ranker

    Here is one of the analytical tools that allows us to claim "In options we are Big Data!" For those who want to find the movers and shakers, Advanced Ranker does the job. The Advanced Ranker combines an easy to use interface with a powerful sorting logic built on IVR and IVP.

    By Levi Ioffe,

    • 0 comments
    • 132 views
  • Two Pre-earnings Momentum Trades With a Technical Trigger in Alphabet

    Both option trading backtest approaches rely on the fact that there has been a bullish momentum pattern in Alphabet stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. 

    By Ophir Gottlieb,

    • 0 comments
    • 298 views
  • Flaws in Implied Volatility

    A technical study of chart patterns, focusing on historical volatility of the underlying, reveals that depending on implied volatility is a flawed idea. Traders should remember that options are derivatives, meaning their premium value is derived from historical volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 381 views
  • 7 Trading Cliches For Novice Traders

    Trading is a tough business. There is no easy money in the stock market, but there are a lot of folks who will easily take your money. What is important to know that no matter how experienced you are, mistakes will be part of the trading process. This article should help you to avoid some of those mistakes.

    By Kim,

    • 0 comments
    • 347 views
  • Iron Condor vs. Iron Butterfly

    Iron Condor and Iron Butterfly are both very popular strategies. Both of them are usually used as non-directional strategies (although butterflied can be used as a directional trade as well). Both trades are vega negative and gamma negative, but there are also few important differences between those two strategies.

    By Kim,

    • 0 comments
    • 349 views
  • Leveraged Anchor: A Three Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for three months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 10 comments
    • 1,058 views
  • How a Fund is Developed

    Many individuals are curious as to the testing process for a new fund.  With the plethora of funds continually being developed, having some insight into this process can be helpful for investors.  At the very least, it can provide a series of questions which should be asked in conducting due diligence on fund managers.

    By cwelsh,

    • 0 comments
    • 284 views
  • Why Dow Points Are Meaningless

    A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.” These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear.

    By Kim,

    • 0 comments
    • 315 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs