Trading Edge Portfolio 2020: Options Basics
Talk is cheap,
Commencing in 2020, i will be recording and documenting ALL my trade ideas, spanning as diverse a menu of assets as precious metals, cryptocurrencies, stocks, bonds and even options.
Most of you will be familiar with 4 out of the 5 on that list, so in order to make the experience more enjoyable for those who choose to follow along, i will briefly describe what options are for the purposes of my "Trading Edge Portfolio 2020."
Above is an example of what is called an 'Option Chain' (in this case Apple), essentially this is just a collection of all relevant information regarding the option in question (in this case the January 17th 2020 options).
Twin Breeds - Calls and Puts
The first thing you will notice is that there are two 'groups' of options, the top half of the options you see are what's called "Calls" these are options you buy if you are bullish on a stock, because they give you the right to buy stock at a specific price.
The second group of options are called "Puts" these are options you buy if you are bearish on a particular stock, this is because they give you the right to sell stock at a specific price.
So if you hear me say i am buying Call options on AAPL, then it would mean that i am making a bullish bet on AAPL going up in the future. Similarly, if i am buying Put options, then i am betting on the stock going down.
It is also worth noting that each option contract controls 100 shares of the stock, so in order to determine the price to buy 1 contract, you must times the price by 100. E.g. the price (under the price column) is $4.00, then the total cost of one contract is $400 ($4.00 x 100 = $400).
Expiry
The next thing you need to understand about options is "Expiry"
Options are "time sensitive" contracts, what this means is that they are only valid (or have value) for a specified period of time.
Look at the blue writing at the top of the option chain, where it says "AAPL - Jan 17 2020 Call - 34 days remaining."
What that means is that the Apple Call options (bullish bet) expire on the 17th of January 2020, therefore they have 34 days until they expire (no longer exist).
The same goes for the Put options.
Stocks can have a variety of option expiry periods, ranging from a few days out, to a few weeks, to more than a year into the future.
The highest volume and most liquid options tend to be monthly expires, these always expire on the 3rd Friday of the month.
Strike Price
Next we will cover what the "strike price" is, simply put the "strike price" refers to the price at which you will be able to exercise your options contract, in the case of Calls, the price at which you are entitled to buy shares, or in the case of Puts, the price at which you are entitled to sell shares.
The strike price is found along the left hand side, in the 1st column, where it says "Jan'20 C 265," or on the lower option chain (the one which displays the puts) where it says "Jan'20 P 265"
Note the "C" or "P" simply refers to whether the contract is a "Call" or a "Put."
The "265" refers to the strike price, so the "Jan'20 C 265" is a January monthly expiry (expires 3rd Friday of the month i.e. the 17th) and has a strike price of $265. This means that up until the 17th of January, as a holder of the contract, you have the ability to exercise your right to buy shares of Apple for $265, regardless of what the price of the stock is at the time.
Delta
Finally we will touch upon "Delta."
Delta is one of what is called "the Greeks," and refers to the correlation in price of the options contract and the underlying stock.
Delta ranges from -1 to 1, the minus sign simply means that the option is a Put.
A delta of 1 means that for every dollar the underlying stock moves, in this case, every dollar that Apple moves, the option contract will also move up one dollar.
A delta of 0.5 means that the option contract will move roughly $0.50 for every $1.00 the stock moves.
Delta is simply a way of determining the correlation in price that the contract has to the underlying stock or asset.
That covers the basics of options, at least in so far as it relates to being able to follow along with my "Trading Edge Portfolio 2020."
I hope you found it informative, there is a LOT more to options that what is explained here, however this should allow you to follow along with minimal issues. If there are any confusing terms or if you need clarification, feel free to comment below.
- TradingEdge