stock option 101 vincent tzeng march 25, 2011. what is “stock option”? a contract or right to...
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Stock Option 101Stock Option 101Stock Option 101Stock Option 101
Vincent TzengVincent TzengMarch 25, 2011March 25, 2011
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What is “stock option”?What is “stock option”?What is “stock option”?What is “stock option”?
A contract or right
to buy or sell a stock
at a certain price
before a certain date
A contract or right
to buy or sell a stock
at a certain price
before a certain date
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Key VariablesKey VariablesKey VariablesKey Variables• Type of options = Call or Put
• Contract price = Striking price
• End of contract date = Expiration Date
• 1 Option Contact is based on 100 shares of the underlying stock
• Price of an option changes all the time
• Type of options = Call or Put
• Contract price = Striking price
• End of contract date = Expiration Date
• 1 Option Contact is based on 100 shares of the underlying stock
• Price of an option changes all the time
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What are “CALLs” & “PUTs” options?What are “CALLs” & “PUTs” options?What are “CALLs” & “PUTs” options?What are “CALLs” & “PUTs” options?
Call = contract to BUY a stock
Put = contract to SELL a stock
There are agreed price, specific time, and an underlying stock involved in all contracts.
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Option Contract Buyer & SellerOption Contract Buyer & SellerOption Contract Buyer & SellerOption Contract Buyer & Seller
Buyer pays a settled price($) to Seller
Buyer gets the RIGHT to buy(call) or sell(put) the stock anytime before the expiration date (Exercise an option)
All options END on the Expiration Date
Seller can end an option by buying back
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Why buy a Call Option?Why buy a Call Option?Why buy a Call Option?Why buy a Call Option? Buyer bets the stock will GO UP substantially before the expiration date.
Buyer hopes to buy the stock at lower than the market price.
Buyers usually are aggressors & big risk takers, looking for “quick $ gain”.
Buyers take risk, and lose “most of the times”
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It is better to SELL call optionsIt is better to SELL call optionsIt is better to SELL call optionsIt is better to SELL call options
Seller receives instant cash
Seller can reduce cost base
Seller continues to collect dividend
It is like selling “time” for cash!
Sellers win “almost all the times!”
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Go Higher
Go Lower
Stay the same
Go Higher
Stock Price may go in 3 WaysStock Price may go in 3 Ways
selling call option reduces your cost base
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Starting stock price
Striking price
Stock$ + option$ received
(1) final stock price on expiration, stock will be called
(2) final price, stock will be called
(3b) final price, still own the stock
(3a) final price, still own the stock
Selle
r’s pro
fit
Selling covered CALL options (own stock)
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Why Buy a PUT Option?Why Buy a PUT Option?Why Buy a PUT Option?Why Buy a PUT Option?
Buyer bets stock price to go lower
Buyer hopes to SELL the stock at a higher than the market price before the expiration date.
Buyer can reduce down side risk of a stock
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Starting stock price
Striking price
Option$ received
(1) final stock price on expiration, you have to buy the stock at striking price.
(2) final price, you have to buy
(3b) final price on expiration date, as if nothing happened
(3a) final price, as if nothing happened
Selle
r’s pro
fit
Selling PUT options
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Let’s look at someLet’s look at some
examples, NVDA, GOOGexamples, NVDA, GOOG
Let’s look at someLet’s look at some
examples, NVDA, GOOGexamples, NVDA, GOOG
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Example : NVDA
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Example : NVDA
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NVDA options w striking price at $20
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NVDA options w expiration date in September
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NVDA options w expiration date in January 2012
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GOOGLE options w expiration date in January 2012
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APPLE options w expiration date in January 2012
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Account Requirement to Trade OptionsAccount Requirement to Trade OptionsAccount Requirement to Trade OptionsAccount Requirement to Trade Options
Need a Margin Account, and brokerage firm’s approval for trading options
Own stock(>100 shs) to sell covered option
IRA or ROTH requires enough cash reserve to sell put options
You can always risk to buy any options
1 contract is based on 100 shares of stock
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SummarySummarySummarySummary Stock option can be a good investment tool.
Conservatively, can add to your asset gain.
Get instant cash while holding on your stock
ROTH is TAX-FREE on option gains.
Do options ONLY on “good” stocks.
Understand consequences before trading.
Do SELLING (covered only), not BUYING!
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Summary Summary (negatives)(negatives)Summary Summary (negatives)(negatives)
May limit your overall gain
Relatively short term (market timing?)
Tie up your stock under option contract
Tie up your cash from selling PUT
Tax issues on regular stock accounts
More complicated trading than stock
“Naked Writing” can lose your shirts!
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WARNING!WARNING!WARNING!WARNING!
SeriousSeriousSeriousSerious
** Option Trading **may NOT be for
Everyone!!!
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ReferencesReferencesReferencesReferences
http://www.tradingonlinemarkets.com/Articles/Options/Stock_Options_Explained.htm
http://www.stockoptionsexplained.com/
http://hubpages.com/hub/Stock_Options_Explained
http://www.investopedia.com/university/options/
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為何不來賣為何不來賣光陰光陰??On selling stock options On selling stock options - Vincent Tzeng 3.25.2011 - Vincent Tzeng 3.25.2011