Sixteen years ago, I nearly doubled my money in 3 months playing with stock options. It was fantastic! I thought I was the bomdiggity and was about ready to cash out my original investment until BAM! I found out what an "expiration date" was. I was buying options that were days away from expiring...a really risky move that worked really well until it didn't. SOOOOOOooooo, I figured I would educate my fellow Hivians on what an option is, or at least tell you what I've learned. Of course this is not financial advice...go find someone who earns money to give financial advice (I don't mean from upvotes) if you want advice to follow...I'm just the guy sitting at the end of the bar telling you what I've learned for myself and my advice could be crap...so take it for that and no need to get litigious when you try to use my thoughts and lose your life's savings...consider yourself warned! Now to the fun part!
Lessons Learned
Options:
Strike Price: means the price of the stock/asset you'll have to pay to buy the underlying asset/stock. If Acme stock is at $20 and the strike price for the option is $25, then if you were to exercise the option, you'd buy/sell at $25 per share.
Contract: In the stock market, a contract is 100 shares. This means you'll pay 100 times whatever the option's price is to buy the option. 1 contract is 100x. 2 contracts is 200x...
Call Option: the option/ability to "buy" at the strike price.
Put Option: the option/ability to "sell" at the strike price.
Expiration date: the last day you can exercise the option.
Exercise an option: this means you are forcing the person who wrote the contract to fulfill the bargain. For instance, if I have the right to buy one contract of Acme shares at the $10/share strike price, at any time before the end of the market day of the expiration date, I can tell the option writer that when I give them $10*100=$1000, that person has to hand over the ownership of 100 shares, even if the shares are now worth $20 each. If the option was a put option, I'm forcing the person to buy 100 shares from me at the strike price. This means I have to buy 100 shares at the current price and sell them to the Put Option writer for the strike price.
Option fee: the price I pay per share to buy the contract. Example: If the option fee is $1.00, I will pay the contract writer $100 for 1 contract (because one contract is for 100 share increments). If I wanted to buy 20 contracts, I would pay $2000.
Expired Contract: you can no longer exercise the option and your option fee is gone forever...how I lost my money 16 years ago.
In the money: This is when the strike price for the option is lower than the underlying stock price for a call option or higher than the underlying stock price for a put option. For instance, if Acme stock is at $20 today and I have a put option that gives me the right to sell it at $25/share, I'm in the money. I could buy at $20 and sell at $25 and make $5/share. If I have a put option at $15/share, I'm not in the money because if I exercised the option, I'd be selling 100 shares at $15 share after buying them at $20 a share...that's bad for business.
Writing an option: When you agree to buy or sell stock at a certain strike price. Companies do this all the time...but you have to be smart about it! You can lose your tail! For instance, if I say I want to write a put option, I'm telling you that for a fee, I will buy 100 shares at a strike price, but I'll charge a fee for that option. Ex. I'm willing to buy Acme at $20 a share in 6 months if you'll pay me $1/share now. If you took me up on that, regardless of the price, I would be on the hook to pay $2000 if you exercised that option. I would get paid $100 for that option. If you exercise it, I have to pay $2k, if you don't, I get to keep the $100 option fee. If the stock price is at $30, the writer may think they're offering a sure bet for themselves...no one in their right mind would buy 100 shares at $30 and sell them to exercise the option at $20/share for a put option; however, let's say you bought that option at $1/share and the stock dropped from $30 to $19. The option fee would jump to more than $2/share. You could sell the option to someone else, getting $200 for the option you paid $100 for, or you could exercise the option by buying 100 shares at $19 and selling them to the option writer for $20/share. This would make you break even. When you write a call option, you're locking in 100 shares you own so that the optionee can buy those shares from you. When you write a put option, you're locking the $$ to buy 100 shares that the strike price.
Breakeven price: The price the underlying stock price has to hit for your investment to net a $0 gain/loss. Anything above it for a call option earns you money and anything below the breakeven price for a put option earns you money...and vice versa.
Ok, so now that I've told you this, in case you didn't know already, you'll hopefully understand my story from here on out. Options are extremely risky and you can lose all your money, like I did the first time around.
I enjoy buying stocks and selling them for more than what I paid for them...just like everyone else. I was very hesitant to get back into buying and selling options. On a day when a stock I own goes up 1%, the call options could go up 5-10% in value...sometimes more depending on the stock. The reverse is also true. This means you are leveraging your money in a large way. For instance, I have bought $1000 worth of a stock that pays an 8% dividend. I have bought another $1000 in option fees for call options on the same stock. In one day, today, my stock went up 2.12%. That's a great day! I made $21! For my options, though, they went up 7%, 18%, and 19%! (I have call options at different strike prices) In options, my $1000 worth of option fees is now up in value to about $1150. You are not required to exercise options. You can resell them for a different option fee...which is what I do.
Most of my options I buy with expiration dates that are in Jan 2023. That means I have a LOT of time for them to go up or down between now and then. That also means I have time to wait if they go down. It also means when they go up, I can cash out quickly and record a high return on my investment. Just as they can go up 10-20% in a day, they can drop just as fast! I had some call options on United Airlines for instance, that I bought at option fee that was too high. The price dropped day after day after day. The option fee is now 33% of what I paid for it. The only thing going for me is that I still have several months for the underlying stock price to go back up...but if it doesn't, I'll either lose my whole fee, or I'll sell it for a great loss.
Some options, like AMC have a huge difference between their underlying stock's price and the breakeven prices. This is most likely due to the volatility in the underlying stock. I like to think of the breakeven price as the price the majority of investors think the underlying stock price will be by the expiration date. So if AMC is selling for $40/share and the investors who write options think it'll be worth $20 in a year, they'll write a put option to buy AMC at $40/share for the option fee of $20/share. This way, when you force them to buy the stock, they've already received $2000 from you for the right to do that. That's a volatile stock!
I have shares in a company where the strike price for a call option is $15 and the fee is $1.80/share, but the underlying stock price is $16.80, with the expiration date in Jan 2023. This means if I think this stock will go up even a penny, I'll be in the money. I bought a couple of these ;) When the price of the stock went to $17 (20 cents in one day), the option fee followed it to be $2/share for the option fee. So instead of spending $180 on 12 shares, I spent $180 on the option to buy 100 shares. At $17/share, the 12 shares would have only earned me $2.40. The option earned me $20 on the same money.
If I taught you something, comment below! If you have more you can teach me, write a comment below!
Don't forget to follow me and upvote...this post alone could make you a millionaire or broke as a joke :) At least you'll get a curation reward lol
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