Options Trading

Options
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date.

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Introduction: Options Basics
Avoiding the Top 10 Mistakes In this article I’ve analyzed ten of the most common option trading mistakes. Options are by nature a more complex investment than simply buying and selling stocks. ... Mistake 1: Starting out by buying out-of-the-money (OTM) call options.

Options: Calls and Puts - CFA Level 1 | InvestUtopedia Okat let's get into the nitty-gritty... the brass-tacks! www.investopedia.com/exam-guide/.../options-calls-puts.asp

There are two main types of options: calls and puts: ... Put options give the holder the right to sell an underlying asset at a specified price (the strike price) at a specified time and date. The seller (or writer) of the put option is obligated to buy the stock at the strike price. But before I get into it lets back track a bit...

Derivatives - Options: Calls and Puts

Given: An option is common form of a derivative. As we have previously mention, it's a contract, or it can be a provision of a contract, that stipulates or gives one party (the option holder) the right, but not the obligation to perform a specified transaction with another party (the option issuer or option writer) according to specified terms. Options can be embedded into many kinds of contracts. For example, a corporation might issue a bond with an option that will allow the company to buy the bonds back in ten years at a set price that includes interest. Standalone options trade on exchanges or OTC. They are linked to a variety of underlying assets. Most exchange-traded options have stocks as their underlying asset but OTC-traded options have a huge variety of underlying assets ( bonds, currencies, commodities, swaps, or baskets of assets etc. ). If, we or they make money we party!

There are two main types of options: calls and puts:

Call options provide the holder the right (but not the obligation) to purchase an underlying asset at a specified price (the strike price), for a certain period of time. If the stock fails to meet the strike price before the expiration date, the option expires and becomes worthless. Investors buy calls when they think the share price of the underlying security will rise or sell a call if they think it will fall. Selling an option is also referred to as ''writing'' an option.

Put options give the holder the right to sell an underlying asset at a specified price (the strike price). The seller (or writer) of the put option is obligated to buy the stock at the strike price. Put options can be exercised at any time before the option expires. Investors buy puts if they think the share price of the underlying stock will fall, or sell one if they think it will rise. Put buyers - those who hold a "long" - put are either speculative buyers looking for leverage or "insurance" buyers who want to protect their long positions in a stock for the period of time covered by the option. Put sellers hold a "short" expecting the market to move upward (or at least stay stable) A worst-case scenario for a put seller is a downward market turn. The maximum profit is limited to the put premium received and is achieved when the price of the underlyer is at or above the option's strike price at expiration. The maximum loss is unlimited for an uncovered put writer.

To obtain these rights, the buyer must pay an option premium (price). This is the amount of cash the buyer pays the seller to obtain the right that the option is granting them. The premium is paid when the contract is initiated.

Read more: Options: Calls and Puts - CFA Level 1 | Investopedia http://www.investopedia.com/exam-guide/cfa-level-1/derivatives/options-calls-puts.asp#ixzz46gaVWUOE

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Let's take an example trade First Week of 2015 December 16th Options Trading for Tesaro (TSRO)

Investors in Tesaro Inc (Symbol: TSRO) saw new options become available this week, for the December 16th expiration. One of the key inputs that goes into the price an option buyer is willing to pay, is the time value, so with 239 days until expiration the newly available contracts represent a potential opportunity for sellers of puts or calls to achieve a higher premium than would be available for the contracts with a closer expiration. At Stock Options Channel , our YieldBoost formula has looked up and down the TSRO options chain for the new December 16th contracts and identified one put and one call contract of particular interest.

The put contract at the $40.00 strike price has a current bid of $7.00. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $40.00, but will also collect the premium, putting the cost basis of the shares at $33.00 (before broker commissions). To an investor already interested in purchasing shares of TSRO, that could represent an attractive alternative to paying $45.38/share today.

Because the $40.00 strike represents an approximate 12% discount to the current trading price of the stock (in other words it is out-of-the-money by that percentage), there is also the possibility that the put contract would expire worthless. The current analytical data (including greeks and implied greeks) suggest the current odds of that happening are 70%. Stock Options Channel will track those odds over time to see how they change, publishing a chart of those numbers on our website under the contract detail page for this contract . Should the contract expire worthless, the premium would represent a 17.50% return on the cash commitment, or 26.72% annualized - at Stock Options Channel we call this the YieldBoost . Below is a chart showing the trailing twelve month trading history for Tesaro Inc, and highlighting in green where the $40.00 strike is located relative to that history:

Turning to the calls side of the option chain, the call contract at the $50.00 strike price has a current bid of $7.60. If an investor was to purchase shares of TSRO stock at the current price level of $45.38/share, and then sell-to-open that call contract as a "covered call," they are committing to sell the stock at $50.00. Considering the call seller will also collect the premium, that would drive a total return (excluding dividends, if any) of 26.93% if the stock gets called away at the December 16th expiration (before broker commissions). Of course, a lot of upside could potentially be left on the table if TSRO shares really soar, which is why looking at the trailing twelve month trading history for Tesaro Inc, as well as studying the business fundamentals becomes important. Below is a chart showing TSRO's trailing twelve month trading history, with the $50.00 strike highlighted in red:

Considering the fact that the $50.00 strike represents an approximate 10% premium to the current trading price of the stock (in other words it is out-of-the-money by that percentage), there is also the possibility that the covered call contract would expire worthless, in which case the investor would keep both their shares of stock and the premium collected. The current analytical data (including greeks and implied greeks ) suggest the current odds of that happening are 44%. On our website under the contract detail page for this contract , Stock Options Channel will track those odds over time to see how they change and publish a chart of those numbers (the trading history of the option contract will also be charted). Should the covered call contract expire worthless, the premium would represent a 16.75% boost of extra return to the investor, or 25.57% annualized, which we refer to as the YieldBoost .

The implied volatility in the put contract example is 80%, while the implied volatility in the call contract example is 75%. Meanwhile, we calculate the actual trailing twelve month volatility (considering the last 252 trading day closing values as well as today's price of $45.38) to be 63%. For more put and call options contract ideas worth looking at, visit StockOptionsChannel.com.

Top Yield: Calls - S&P 500 Option Trades

Read more, to make it clearer here's another case study you can read on your own: http://www.nasdaq.com/article/arnold-van-den-berg-buys-shares-of-helicopter-operating-company-cm610645

How To Trade Options
All investors should have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay.

What’s more, option strategies can help you hedge your portfolio and limit potential downside risk. No investors should be sitting on the sidelines simply because they don’t understand options.

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Master the art of options trading and profit from any market condition. Learn how to trade options using the various option trading strategies.

Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income. We hope you'll find this to be a helpful guide for learning how to trade options. Consider it as an insurance policy that allow you to hedge your bets on the stockmarket.

Options are, indeed, financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you:

* Protect your investments against a decline in market prices
* Increase your income on current or new investments
* Buy an equity at a lower price
* Benefit from an equity price’s rise or fall without owning the equity or selling it outright.

Read more: http://www.nasdaq.com/investing/options-guide/#ixzz46fwY4veO

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For any active investor, trading costs are an important consideration when shopping for the best online brokerage. But price isn’t everything, especially for options investors who rely on the right tools to build, test and track trading strategies and a broker that can quickly execute orders and deliver.

At link provided, is NerdWallet’s roundup of the best brokers for options traders. For even more customized guidance based on your trading activity, and preference, use our free online brokerage comparison tool to find the best account with the features you need at the lowest cost. (Note that investors are required to maintain a higher equity minimum in their account w/margins in order to engage in some options trading strategies that can be rather speculative.)

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