Hey guys,

i have a 100 FG for someone who can help me understand options a little better. I get the general concept but just want to clarify the what actually happens

Ex:
Price of a call = .50 -> 100 shares per contract therefore .50 x 100 = $50
Does it mean that all I need in my account to purchase 1 call option is $50 OR does it mean I need $50 plus something else?

Lets say share prices increases and I have made ~100% gains and I want to sell TODAY though the Call option expires in 1 month
Do I sell my contract (price as of that day) OR do I need to exercise the option to buy 100 shares and then sell the shares after?

Lets say the share plummets and I lose ~90% and the option is expiring TODAY
I can simply not do anything and I lose the initial $50 but nothing else - is this correct? Or, am I obligated to purchase the 100 shares and therefore if the stock price was $1 but now is .10c; I lose .90*100 on top of the $50 fee?

Does the same logic above also apply to puts?

I have been trading stocks for a bit now and would like to understand the mechanics around options. It seems to me that if you have a good idea that there will be an increase, it is worth the risk to but calls (if you only lose the price of the option)
Anything I might be missing / misunderstanding?

Thanks

You only need the price of the call to buy it. If you want to exercise it (which you should basically never do) then you need the full amount you would pay (100x the strike)

If you make gains on a call you can just sell the contract. You should virtually always do this, since the contract is always worth something. The value of the profit if you exercise it right now is the intrinsic value. Ex. If your call is at 35 and the share is 36, then the value is $100 since its 100 shares x $1 difference. An option that is in the money (share price is higher than the strike price) will always be worth more than the intrinsic value.

If an option expires you only lose what you paid. Buying an option always has a maximum risk of what you paid for the option since exercising it is at your discretion. If you sell an option your risk is not always capped, and if you do multi-option strategies that involve buying and selling different strikes or expiration dates this can also be untrue.

This post was edited by Thor123422 on May 14 2021 02:29pm

Thanks for answering
Just to clarify, the maximum I lose even if an option price plummets is what I have paid for the contract. If the ask price is .50, then it would be .50*100 = $50 -> this is what you are saying right?

If the cost of the share today is $1, and the price of the call option is .50, then for me to be in the money, the share price needs to reach at least $1.5 -> this is also correct right?

What if I am in the money but I let me option expire -> what happens?

Last question is, is selling an option contract the same as selling a regular stock? I just set it to sell order at MKT/LIMIT whichever I want? I am guessing that the price changes will be based on the price of the option that I paid, in this case $.50 which goes to for example $.60 and therefore I would set LMT sell at $.60 -> this would result in my profit being $.10 * 100 = $10

Any other advice you might have for option trading?

Thanks! Will send you the FG promised after your response

This post was edited by supmango on May 16 2021 09:04am

Yes. Maximum you will ever lose while buying an option is the price of the option. If an option is exercised is always at the discretion of the buyer. (unless you're trading on margin, in which case your broker probably also has some rights depending on the state of your account)

In the money means the share price is above the strike price. The premium you pay for the contract doesn't factor in.

If it is in the money and the option expires it will depend on your broker's policies. Remember that you can exercise an option at any time, even if it is way out of the money. It just wouldn't be a good idea to exercise. If you don't choose to exercise it will depend on your broker. They could let it expire without exercising, in which case it expires worthless. The broker could automatically execute it for you, in which case you would buy the shares at the strike. They could automatically sell the option, which is obviously preferable to expiring without exercising. Just depends on what your specific broker's policies are.

For covered options: If you sell a contract then it's the same as selling the stock, but your collateral will be locked up. So let's say I sell a put on Blackberry at an $8 strike expiring on June 1st. I would pocket the premium and I can do whatever I want with the premium. But since I could be called on to buy the shares for $800 per 100 shares, then $800 will be locked up in my account and I can't use that money without first buying back the option, or letting the option expire. Similarly, if I have 100 shares of blackberry and I sell a call at $8, I can't sell those 100 shares until I buy back the call contract, but I can do whatever I want with the premium in the mean-time.

For naked options, much riskier: Let's say I sell a call on blackberry expiring June 1st at $8. On June 1st I have the obligation to deliver 100 shares of Blackberry and sell them for $8 each. In this case I don't have any shares of BB in my account. On May 15th Blackberry announces SUPER MEGA ULTRA SECURITY SYSTEM THAT MAKES US FIFTY BILLION DOLLARS A YEAR. Their share price skyrockets to $50. In this case, you are screwed, because you have an obligation to buy 100 shares of blackberry and sell them at $8. A call that you don't own the shares on has unlimited risk, because the stock price can always go up. Puts have a defined risk. The most you can ever lose is 100 times the strike, because you are obligated to buy. So if you sell a put on blackberry at $8 and BB goes backrupt, then the most you will have to pay is $8 times the strike, or $800. Selling puts have a defined risk. Selling calls has an unlimited risk if you don't own the shares.

I don't really care about the fg. These are pretty basic questions. I'd advise you look up some beginner options tutorials on YouTube. There's whole series that will go from basic terminology, all the way to super complicated spreads, so you can get exactly the level of knowledge you want and stop there.

This post was edited by Thor123422 on May 16 2021 09:54am