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Originally Posted by lewdog
Ok Scho and RubberSpong, I'll admit it, I am lost on what you're doing. I do not know relatively anything about stock trading like you're doing.
Some of my dumb questions are things such as, why did Scho put out multiple calls all at .60? What the **** does .60 even mean? Can he have set this to sell once his money doubled or does he have to check the price of the stock all day and sell once it's where he wants? What's your best chance at making even just some money instead of being greedy and risking it all?
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I'll try to cover the very basics of OPTIONS trading.
http://www.investopedia.com/university/options/
An option is a CONTRACT that gives you the right to BUY (a CALL Option) or SELL (a PUT option) 100 shares of stock for a specific target price by a specific target date.
1 contract = 100 shares
The CBOE, known as the Chicago Board of Options, creates contracts for stocks that trade on both the NYSE and NASDAQ. They create MORE options and more strike prices and dates for highly traded stocks with lots of liquidity and much less for lightly traded and low cap stocks. There are no options for pink sheet or illiquid stocks.
Apple (APPL) has a TON of options and strikes and dates whereas a company like Nuance Communications (NUAN) has just a few options and dates.
So let's make a scenario:
You like Google stock but it is too expensive to buy 500 shares. So you believe that Google is going a lot higher in the next 6 months. So you decide you want to buy some options on Google to control shares.
You would then pick a price (known as the STRIKE price) and time frame (known as the EXPIRATION DATE) to decide which option to buy.
In this case you would want a CALL because you think it is going higher. If you felt Google was going to go down a lot, you would buy a PUT instead.
As of today, Google closed at $805.02
You may look at a near term option or a longer term option. The shorter the expiration, the higher the risk and lower the premium. The further out you go the greater the premium. Also, the higher the price the higher the option premium because the stock makes greater daily price moves.
Here is a list of Google options
https://finance.yahoo.com/quote/GOOG/options?p=GOOG
On the left of the page under the word CALLS, you will see a box with dates. Those are the EXPIRATION dates for options and you can change the dates to look further out. The prices all in the FIRST column are the STRIKE price. Starting at the lowest and moving up. You then have a BID and ASK just like stock.
The difference is that when we speak of .70 per contract, it means $70 to control 100 shares. If the price was $3.25, it would be $325 to control 100 shares.
Getting back to Google, if you wanted to buy a $900 STRIKE contract that expires on June 16, 2017 you would pay a price of $8.20 a contract, which equals $820. You would be nearly $100 OUT of the money because Google would need to go over $900 by expiration PLUS the $8.20 of premium you paid for a total of $108.20 move higher for Google.
So (5) contracts to control 500 shares would cost ($820 x 5) + commissions or around $4,150.
Lower price stocks and shorter expirations have much, much less premium EXCEPT when earnings are going to be released and then both the CALLS and PUTS get extra premium built in by the market.
Try reading the first link about option investing to see if you grasp the concept. There are another 50 things to learn about options including NAKED calls or PUTS, COVERED CALL writing against stock you own, and then all kinds of crazy spreads and hedges.
It is all about leverage and risk. You can't lose more than you invest just buying options BUT you can lose a fortune if you write naked options. You would not be allowed to do that at the brokerage firm with your skill level.
Hope that gives you a little start to understand.
