Hello World,
Welcome to Elite Options Trader. In this blog I will "attempt" to enlighten, learn and most importantly earn. Those who are new, curious or serious about making money trading stock and options will find this intro helpful and educational. For those more seasoned stock and options traders I am looking to learn, share and discuss potential trading ideas.
Before we begin to dive into the diabolical world of derivatives, deltas and decay I feel obligated to provide a background about myself. I have been investing and trading for over 20 years. I bought my first stock Electronic Arts for $17.50 a share back when Lakers vs Celtics was their hottest game!
As the years went on I continued to moderately invest in stocks but with very little enthusiasm until I was introduced to options by a co-worker. My first trade was a call option on NVLS, a semi-conductor equipment maker.
Looking back I had not a clue what the hell I was doing but made a modest 50% profit in 4 days and life became very different! For those new to options it is very important to understand a few things.
Options are contracts that allow you the right, but not the obligation, to buy [call] or sell [put] 100 shares of stock at a certain price [strike price] for a limited amount of time [expiration date]
WHAT ARE CALLS AND PUTS?
Let's say marijuana grower Canopy Growth Company is trading at $16 a share and you think it will increase in value over the next few weeks/months but do not want or have $1600 to purchase 100 shares. A call option literally gives you the right to buy them for a specific price and time.
On the contrary, if you believe the price of CGC will decrease over the next few weeks/months a put options allows you to sell for a specific price and time.
STRIKE PRICE
There are 3 type of strike prices
- In the money- the option has intrinsic value
- Out of the money-has no intrinsic value
- At the money-same price as open market
One of the major differences between stock and options is with stocks you can hold them as long as the company remains publicly traded. Options always have an expiration date.
The expiration of an option always occur on a Friday but the actual date varies according to when they are purchased. You can buy options that expire in a few days, weeks, months, years or even hours!
THE GREEKS
A few other options terms that you want to get familiar with are known as the "greeks"
Delta- A mathematical formula that predicts the amount the option will move in relation to the stock price. For example if you have a 50 delta for every $1 move in the stock your option will increase[call] or decrease [put] by 50 cents.
Gamma- A mathematical formula that determines the increase or decrease of the delta.
Theta- Last but certainly not least is the mathematical formula which measures time decay. This is very important because the closer to expiration the higher the theta becomes!
MAKING MONEY WITH OPTIONS
Options can be a rewarding, self-fulfilling roller coaster ride if you treat them like a thrill ride or lottery ticket. I choose to look for opportunities that offer great risk to reward ratio and a catalyst to support the technicals.
Most options trades are placed for speculation, to hedge other positions, or to generate income. The example above describes someone who is looking to profit by getting a contract for a low price and selling it much higher before expiration. Hedge funds, investment banks and even individual companies use these contracts to lock in a certain price or to protect them against downside risk from existing portfolio positions. The person or company selling the options collects a premium instantly for writing the contract.
I do not want to overwhelm anyone on the first blog but stay tuned because the information and resources provided here will be valuable. Subscribe and tell a friend! Leave comments and suggestions as well because my goal is to learn, educate and increase our net worth!!!
