In this post i’ll be elaborating on the basics that i’m familiar with when it comes to OPTIONS trading, if you would like to learn the basics of trading in itself check out #rules-to-trading & #introduction-to-trading You can learn more about Options Trading through the lessons via https://start.tastyworks.com/#/login?referralCode=JKCRCZRM89 that are listed on their website. This is a referral link so if you would like to not sign up through me, you can google it as well.Delta, Theta, ITM, OTM, ATM, IV are the main things I focus on when I do options trading. Volume/Open Interest & bid/ask spread. Will go over the basics of each one, but won’t get into too much detail as depending on the scenario things can get complicated and in some cases over my head in the understanding. The idea is to get you INTO options, not scare you away from them with some of the more intricate stuff I haven’t quite learned myself. This will be focusing on the CALL side of things, rather than the PUT but will go over the basics of what a CALL and PUT mean too.
Contract:A contract for puts/calls is generally the equivalent of buying 100 representative shares of said option. CALLS/PUTS are SIGNIFICANTLY cheaper than their stock price simply as you’re buying the hope it goes up or down rather than the actual shares of the company although you can turn OPTIONS into shares if you really wanted to, I personally like buying/selling Intra-day. Strike price is a point at which you can EXERCISE your option and a good means base your risk which i’ll cover below. In the Money is exactly what it sounds like. If you buy a strike that is $50 and the stock price is currently $51 that means you’re IN THE MONEY and generally these option positions are safe but often cost a higher premium due to option expiration mentioned below.. At the money would mean you buy an option strike at the SAME price the stock price is currently. Out of the money means you buy a strike option where you project the price will go. In this case if the stock price was $50 and you bought a $52 strike that’s an out of the money play. The more OTM you buy and the faster it gets to it, you can make a LOT of money this way but these are often significantly riskier plays than need-be
Option expiration is pretty self explanatory, it’s the time-frame of which an option will EXPIRE. If it expires you only keep the “Intrinsic” value in a general call which is generally whatever is ITM Delta:Delta is often associated as the assumed price a particular option will go up per $1 it moves in actual stock price. For example if a stock is $0.50 Delta the assumed value is $50 you’ll make per $1 movement, roughly. Theta is something you are probably not familiar with but VERY important in options trading. As each day passes you get a THETA degradation, closer to expiration of an option this can increase quite DRASTICALLY. Theta when it comes to BUYING calls is a BAD thing. A theta of $0.05 for example would mean a loss of $5 a day no matter what the option does and this will increase to higher amounts closer to the options expiration(edited)
Implied Volatility is an IMPORTANT factor to pay attention to. Comparative to that of LOW float and HIGH float stocks, the more Implied volatility, the more the option will bounce around creating either a big window of reward, or a big risk of loss. Volume/Open Interest are pretty much standard of stocks. VOLUME is amount of contracts done through day. Just keep in mind 100 contracts open is 100×100=10,000 shares. Each contract is 100 shares equivalent so keep that in mind. You might see 1000 contracts and think that’s not much… but on some contracts that’s a LOT of money on just one strike. Open Interest is exactly what it sounds like, it’s the underlying interest in that particular option usually to get in or out at a certain point.
“One must apply to broker for approval to trade options. Most brokers also require that you have a margin account to trade options. Personally, I have both a cash and a margin account in TOS. This gives me more trades per day as PDT does apply in Options Trading. Another thing that is different is that each night all closed positions monies are settled and funds are available for use next morning.” – Chickadee
Additional resources: Tastytrade.com, Optionsalpha.com, TDAmeritrades resource center, and best place for TRIAL and ERROR with paper trading if you don’t want to risk capital is ThinkorSWIM. It’s the only platform i’d recommend for charting on a computer. Tradingview is an OK substitute.
Additional resource for understanding INTRINSIC value: https://www.investopedia.com/terms/i/intrinsicvalue.asp Think of it this way though. If you bought SPY’s 290 put and it goes to 289.20 you have $0.80 in intrinsic value, vice-versa if you do SPY calls and have a 290 that goes to 290.80 you have $0.80 in intrinsic value that way. Playing with intrinsic value can help you to maintain a lot of the premium even if you’re playing with shorter term values.