Stock options can be very complicated and confusing. Trading stock options is kind of like riding a bike, you struggle at first but eventually get the hang of it and learn. I’ve been trading the stock, options, futures and cryptocurrency markets for 4 years. I now only trade options. I like options the best out of them all for a variety of reasons. One of them being leverage. Options give you the ability to turn small amounts of money into large amounts of money relatively quickly. That being said, options are risky. You can lose a lot of money too if you don’t know what you’re doing. If you educate yourself the returns can be very very good. Another reason I love options is because unlike stocks, with options you can make money whether the stock goes up, down, sideways, you name it. You can only make money with stocks if the stock goes up or if you short it, if it goes down. There are unlimited ways to profit with options. You can profit if you think a stock will go up, down, sideways, either way, or even stay between a certain range. Anything you think a stock will do, you can profit off that with options.
When you buy a stock, you are buying shares of stock. When you buy an option, you are buying contracts. Options are also called “derivatives,” know that options and derivatives are the same thing.
There are two different types of options. There are calls and puts. When a stock goes up, calls are going to go up. When a stock goes down, puts are going to go up.
$AAPL moved 4% up in one day, the call options went up from $22 to $179. That’s a 700% move! Since AAPL went up, the put options went down from $968 to $262.
$FICO went down 5%. The put options went up 426%. The calls fell 62%
To recap: calls go up when the stock goes up and puts go up when the stock goes down
Keep in mind that when you buy a stock, you pay the current share price. For example, if $AAPL costs $200 per share, it would cost you $200 to buy one share of AAPL. But, with options everything is multiplied by 100. For example, the $AAPL call options cost 1.85. This would cost you $185 to buy an $AAPL call option, not $1.85. This is because each options contract represents 100 shares of stock.
Each option has a strike price, an expiration date, an option type and it has a price. A call option is going to give you the right but not the obligation to buy a certain stock for a certain price for a certain amount of time. A call option gives you the ability to buy a certain stock. A put option is the exact opposite. A put option gives you the ability to sell a certain stock for a certain price. A put gives you the right but not the obligation to sell a certain stock for a certain price for a certain amount of time.
#1 $AAPL 210 Strike Call Option Expiring August 16th (1.85)
#2 $AAPL 205 Strike Put Option Expiring August 16th (.94)
If you bought example #1 you would have the right but not the obligation to buy 100 shares of $AAPL for $210 each. This right would last until August 16th or until you sell the option. The strike price is 210. The expiration date is August 16th. The option type is a call. The option price is 1.85 ($185).
If you bought example #2 you would have the right but not the obligation to sell 100 shares of $AAPL for $205 each. This right would last until August 16th or until you sell the option. The strike price is 205. The expiration date is August 16th. The option type is a put. The option price is .94 ($94).
All options are priced from two factors: intrinsic and extrinsic value. Intrinsic value is the “real value” of the option. It’s the value of the option if exercised at the current moment. Extrinsic value is the “time value” of the option. All options have intrinsic and extrinsic value. The longer until the option expires (the further out the expiration date is) the more time value the option will cost.
You can learn more in-depth and advanced options trading strategies HERE