Wallstwise.com
Established 2002

772-202-7502

Contact >>

Trading options, calls and puts, is very rewarding, but can be disastrous without a coach.

enroll here

blog youtube twitter lindedin

Welcome

 Home
 About WSW
 Blog
 Coach's Bio
 Contact

 Disclaimer
 Services
 Guarantee
 Testimonials

Overview

 Books of interest
 Curriculum
 Money Management
 New Students
 Overview of Trading
 Routine
 
4 Step Trading

Technical

 
Charting
 
Chart Checklist
 Off-Chart Checklist
 Options
 Scanning
 Setups

 Trading Room

Fundamental

 
Environment
 Fear and Greed
 Fundamentals
 Futures
 Sector Rotation
 Stock Research


How To:

 
Start Trading
 
Contact
 See Risk/Reward 
 Enter Trade Orders
 Find Useful Links
 Paper Trade
 Start Your Training
 
Short stocks 
      Although options are not for everyone, it is something you'll want to be familiar with to take advantage of market swings.  The following is certainly not all there is to know regarding options, but I have found that this diagram of the relationships of purchased options (long) and 'sold' options (short or "writing") should help you grasp the fundamentals. 

     Read the Current Options Disclosure Document (PDF format), your broker will provide you with one of these online or physically mail it to you.  Here's one trick to learning options, learn the language and terminology of options first...the rest will follow.  Options Glossary  Options do involve risk, but then so does the entire market.
 

Trading the Stock Market training programs available here.

     A call or put option is a contract.  There are two sides to options contracts, the buyer of a contract (going long) and the seller of that same contract (going short).  Contracts provide rights and obligations to the buyers and sellers.  When I buy/long a contract, say the IBM October 80 Call, and you sell/short the same contract we share this same contract though on opposite sides.  I need the stock price to go up to make money on my option because I am Long; you need the price to go down to make money on your option because you are Short (just like shorting a stock).  The operative word here is that we share this same contract though on opposite sides.  Whatever the price of the option is, it is the same for both of us, one of us is profitable and one of us is not.  Trading options is a zero-sum game.

     The blocks below are shown in two colors where the similar colors (top/bottom and diagonally) indicate that if you buy a put or sell a call you are on what is called the "same side of the market" in that you are bearish.  Conversely, if you buy a call or sell a put, you are on the same side of the market, namely bullish.  The difference besides direction?  One is a debit trade, i.e.,  when you buy the option it is money out of pocket; one is a credit trade, i.e.,  when you short/write the option it is money in your pocket.  Basically this means you pay now (debit) or pay later (credit) when closing the transaction...trader's choice according to your strategy.

Today's options action in real time

Options Calculator
options time decay
   
    The four boxes below constitute four individual strategies.  These same four are the basis, when used in various combinations, that can develop into 28 other strategies!  Powerful little things these options. Most traders get along with knowing about four or so strategies and stick with them.

B
U
Y
I
N
G

C
A
L
L
S

To go "long" or buy a Call is for BULLS

I have the right, not the obligation, to BUY a stock at a specific price at some date in the future.

Strike Price = Price I may BUY the stock at.

Premium = Price I will pay for the option contract.

I need the price of the stock to go up for my option to make money.   Why?  Think about what you own.
You own the right to buy the stk at a lower price than where it is trading, therefore your option increases in value.

Order Entry:  "Buy to open"
Order Exit:    "Sell to close"

A long call is a debit transaction (money-out-of-pocket).

A long call is a bullish strategy.

At any one time my option is one of the following:
ITM : In The Money if stock price is above the strike price.
ATM
:
At The Money if the stock price is same as the strike price.
OTM
: Out of The Money if stock price is below the strike price)

The most you can lose is the price you paid.

Things you must know to select an option:  Delta, Gamma, Intrinsic/Extrinsic Value, Theoretical Value, Historical Volatility and Implied Volatility (see the websites mentioned above.)

Things that affect option price: Time, Stock Price, Strike Price, Intrinsic Value, Volatility & to a lesser degree Interest rates and dividends.

To go "Long" or buy a Put is for BEARS

I have the right, not the obligation, to SELL a stock at a specific price at some date in the future.

Strike Price = Price I may SELL  the stock at.

Premium = Price I will pay for the option contract.

I need the price of the stock to go down for my option to make money.  Why?  Think about what you own.
You own the right to sell the stk at a higher price than where it is trading, therefore your option increases in value.

Order Entry:  "Buy to open"
Order Exit:    "Sell to close"

A long put is a debit transaction (money-out-of-pocket)

A long put is a bearish strategy.

At any one time my option is one of the following:
ITM : In The Money if stock price is below the strike price.
ATM
: At The Money if stock price is same as the strike price.
OTM : Out of The Money if stock price is above the strike price.

The most you can lose is the price you paid.

Things you must know to select an option:  Delta, Gamma, Intrinsic/Extrinsic Value, Theoretical Value, Historical Volatility and Implied Volatility (see the websites mentioned above.)

Things that affect option price:  Time, Stock Price, Strike Price, Intrinsic Value, Volatility & to a lesser degree Interest rates and dividends.

 

B
U
Y
I
N
G

P
U
T
S

Stock price
must
go
up.


up arrow

Stock price
must
go
up.

Stock price must
go down.


down arrow

Stock price must
go down.

 What do you notice about the direction of the arrows in the SIMILAR COLOR BOXES, TOP & BOTTOM AS WELL AS DIAGONALLY? Do you see where if you buy a put or sell a call you are on the same side of the market, i.e. bullish or bearish?  Also notice where if you buy a call or short a put you are on the same side of the market.  That is, besides obligations and rights, besides whether you're bullish or bearish, the big difference between these two strategies is that one is a debit (money out of pocket) and the other a credit (money in your pocket) transaction.  Review and appreciate the differences, shown in blue, in the language between calls and puts and between whether you are a buyer or a writer.  These four boxes literally represent four individual strategies as well as the basis for many more advanced strategies... but it all starts with these individual strategies.stock trading

W
R
I
T
I
N
G

C
A
L
L
S

To "Short" or "write" a call is for BEARS

I have the
obligation, if exercised, to SELL a stock at a specific price at some time in the future.

Strike Price = Price I must sell the stock at if exercised.

Premium = Price I will receive for writing the option

Order Entry:  "Sell to open"
Order Exit:    "Buy to close"

I need the price of the stock to go down for my option to make money.  Why down?  Because I am short the call option, the other side of the “long” call shown above.  If the price of the stock went down wouldn't the price of the long call option go down and isn't that how you make money when you short a security, i.e., selling high and buying low?

A short call is a bearish strategy.

A short call is a credit transaction (money-in-your-pocket)

ITM, ATM & OTM:  Definitions will be the same as above for the short call option.  The call, whether it is long or short, still maintains the same properties.

A 'naked' or uncovered short call where you do not own the stock can mean unlimited loss.

Things you must know to select an option:  Delta, Gamma, Intrinsic/Extrinsic Value, Theoretical Value, Historical Volatility and Implied Volatility (see the websites mentioned above.)

Things that affect option price:  Time, Stock Price, Strike Price, Intrinsic Value, Volatility & to a lesser degree Interest rates and dividends.

To "Short" or "write" a put is for BULLS

I have the obligation, if exercised, to BUY a stock at a specific price at some time in the future.

Strike Price
= Price I must buy the stock at if exercised.


Premium
= Price I will
receive for writing the option.

Order Entry:  "Sell to open"
Order Exit:    "Buy to close"

I need the price of the stock to go up for my option to make money.  Why up?  Because I am short the put option, the other side of the "long" put shown above.  If the price of the stock went up wouldn't the price of the long put option go down and isn't that how you make money when you short a security, i.e., selling high and buying low?

A short put is a bullish strategy.

A short put is a credit transaction (money-in-your-pocket)

ITM, ATM & OTM:  Definitions will be the same as above for the short put option.  The put, whether it is long or short, still maintains the same properties.

A 'naked' or uncovered short put where you do not own the stock can mean steep losses.

Things you must know to select an option:  Delta, Gamma, Intrinsic/Extrinsic Value, Theoretical Value, Historical Volatility and Implied Volatility (see the websites mentioned above.)

Things that affect option price:  Time, Stock Price, Strike Price, Intrinsic Value, Volatility & to a lesser degree Interest rates and dividends.

W
R
I
T
I
N
G

P
U
T
S

Stock price
must
go down.


down arrow

Stock price must
go down.

Stock price must
go
up.


up arrow

Stock price must
go
up.


Plug in some numbers:     

  • If I buy a call because I'm bullish for $1.00, say the IBM October $80 Call...it cost me $100 (option prices are multiplied by 100).

  • If you sold/wrote/shorted that same call for $1.00 because you're bearish, you received $100 in your account, immediately.  We are in the same contract but on different sides of the trade. (No, you can't get that $100 just yet until you close out that position or whatever its value at the time of closing.)
  • If the stock goes up one point ($1.00) lets assume my option (the one I bought and thus the one you sold) goes up .75 cents or $75.00.

    My option is then worth $175.  Your option, the one you sold to me, is ALSO WORTH THE SAME $175.  Why?  Because it's the same contract. You are on one side of the trade, and I have the other side.  The difference is, since you shorted (sold) the option you needed the stock price to go down, but in this example the stock is going up, you have to buy back your option in order to stop losing money and I have to sell my option to capture my gain.  Understand? No? That's why you need a coach!

   On the other hand, let's say the stock goes down $1.00, my option goes down .75 and is worth $25 and so your option is worth the same $25.  The difference is, I sell mine at a $75 loss and you buy your option back at $25 to capture your gain of $75 (just as you would if you were short a stock).  

     Though I trust everything mentioned herein to be accurate I am not responsible for any errors or omissions or for any losses incurred if you have not adequately researched all there is to know about option trading. Contact your investment professional.  Option trading is not for everyone and there is risk associated with option trading. Read the Current Options Disclosure Document (PDF format). Educate yourself about options and their many uses and you can hedge your trades, generate more income from your stocks or just speculate. 

     

stock trading

(Top of page)   

    © 2013 copyright all rights reserved