Merry Christmas 🎄 . I’ll have a longer, flushed-out article released before the end of the year. Until then, here’s a nice little primer on options. Of course, this isn’t financial advice. It’s purely educational and my attempt to simplify how this crap works, because it goes over way too many people’s heads and can be a pain in the ass. So, allow me to be your Preparation H 😎.
It can be tricky at first but once you get it down it becomes really easy.
Remember:
Call Up 📞 ⬆️ 💰 📈
If you buy a Call option, you want the price to go up.
If you buy a Call option, you want the price to go up. You have the right to buy the security at a lower price than what the market price is at that time (assuming it’s in the money).
Put Down ☎️ ⬇️ 💰 📉
If you buy a Put option, you want the price to go down. You have the right to sell the security at a higher price than what the market price is at that time (assuming it’s in the money).
It’s simple, really. It’s just lingo.
The person who buys a contract (the now owner, not to be confused with the writer/seller) can sell the contract for a higher premium (say it goes up a lot).
If you’re a writer of an option you want it to expire out of the money, which means you just pocket the premium and nothing else happens.
Q: Wait, they can sell the contract, or sell the put? Because put implies selling. Can you just sell any option contract that you buy in general? Regardless is it’s a put or call?
A: Yeah you can sell the option (contract) after you buy it regardless if it’s a call or put
That’s why it’s called an option. You don’t have to execute the contract…
So if you bought a June 1 ABC Call 15
What that means is:
you bought an ABC call option with a strike at $15
And it’s in the money at $20
You don’t have to execute you can just sell the option (for its premium).
Because with the option, you have the RIGHT to buy 100 shares at $15 even though they’re worth $20.
Or you could just sell it to someone else which closes your position. That’s how you trade options. You’re just basically trading premiums.
So in our example:
The Intrinsic Value is 5
The Premium is 7
The Time Value is 2
As a writer/seller of an options contract, here’s how you profit…
So if the premium is 7, and the contract gives the person the right to buy 100 shares at $15,
And I wanna sell and profit from premiums,
I’d profit $700 if I sold one contract.
Why? The premium is what the option is worth on the secondary market
And each option is always x100
So it’s the premium x 100 x number of contracts.
But if YOU, dear reader, wrote the contract (I bought it and paid you the premium)…
and all of the sudden I’m in the money but don’t feel like actually buying the shares (if it was a call) I can just sell the option all together.
Opened the position by buying
Closed the position by selling
Or you can close the position by execution
In summary:
Right. So correct me if I’m wrong.
As the writer and seller of the contract I wrote, if I write the call option at $15
and the market price is $20
And the buyer of the contract has the right to buy the 100 shares at $15 and executes on it
I THEN am obligated to go BUY those 100 shares at the market price of $20 (because the call option is in the money for the buyer of the option),
And once I’ve bought those shares for $20, I HAVE to sell them at $15, because that’s what the contract says…
So I as the seller would be uber-screwed and in debt.
THATS’s why I want the contract to expire…or at least be AT or OUT of the money…
To be continued (?). Until then,
Keep the change, ya filthy animals. 🦌
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God Bless Everyone 🍗
~ Mr. Pseu