I want to walk you through some must-know basics to get started trading options.
But what are options?
An options contract is an opportunity, not an obligation, for the buyer to buy or sell the underlying asset.
I, and many traders, will buy and sell calls and puts rather than trading the underlying stock.
The reason why traders will buy and sell options rather than stock is twofold: limited risk and maximum potential for profit.
Options are generally a fraction of the stock price but they have the leverage to control 100 shares of stock each.
So people can buy and sell options to exercise the stock purchases and sales, or they can buy and sell them without touching the stock at all.
There are two different types of options:
A call is the option to buy a stock (100 shares) at a certain price (strike price) on or before a specific date (expiration date).
And a put is the option to sell a stock (100 shares) at a certain price (strike price) on or before a specific date (expiration date).
We also use different terms to describe how these options’ stock prices relate to the strike prices that someone can purchase.
For both calls and puts:
If the strike price is the same as the stock price, the option is At-the-Money (ATM).
If the strike price is less than the stock price, the call is In-the-Money (ITM)…
And if the strike price is greater than the stock price, the call is Out-of-the-Money (OTM).
For puts, it’s the opposite:
If the strike price is less than the stock price, the put is Out-of-the-Money (OTM).
And if the strike price is greater than the stock price, the call is In-the-Money (ITM).
Traders can profit on options by taking advantage of these two VALUE FACTORS based on time and price proximity…
- Time Value is the value of an option based on the duration of time until the option expires. As an option gets closer to expiration, the time value approaches zero.
There are exceptions to this rule, but generally traders who don’t want to exercise their stock option and instead want to profit from the option sale itself, need to make sure to sell the option BEFORE the expiration date so that the option doesn’t lose value with time decay (also known as Theta).
- Intrinsic Value is the value of an option based on the proximity of the strike price to the stock price.
- If an option is OTM, it has no intrinsic value.
- If an option is ITM, the intrinsic value is the difference between the stock price and strike price.
Either way, you want your option to be ITM.
When you’re buying a call, it’s the option to BUY the stock. So you want the strike price to be cheaper than the stock price. That way, you’re buying it for cheaper.
When you’re buying a put, it’s the option to SELL the stock. So you want the strike price to be more expensive than the stock price. That way, you’re selling it for more money
Here’s how traders took advantage of time value recently in the Profit Revolution:
Traders made a quick 27% in two days on CVS Health Corp (NYSE:CVS) on some October 28, 2022 $92 calls.
And they made 50% overnight on some $7 Luminar Technologies Inc (NASDAQ:LAZR) puts.
If you want to be in the room during our next live session…
Join the Profit Revolution right here or call 877-848-3418 to sign up.
Until next time,
October 13 2022