Wednesday, November 16, 2016

Options!


     I am in an investment club in school. Through investopedia, we use a simulator and have $100,000 of fake, no risk dollars to play with. It provides a great, great learning opportunity. I can kind of play with the things I have been writing about to see if I'm right, wrong, or on the right track with no risk of losing any real dollars. What I am thinking about now is learning about options. I firmly believe that the easiest and best way to learn how to trade options is to trade options. If I were to just go on my brokerage account and buy some contracts I'm 95% certain I would screw it up. With a simulator you can see what works, what doesn't, and HOW they work. 




     That's the important part. Learning. It has taken me a long time to understand how they work and the verbiage that go along with them. For
example: buying a call, buying a put, selling a call, selling a put, calls, puts, straddle, bullish spread, collar. How many of those do you even know? Cuz I only REALLY know like 4, maybe 5. For those of you that don't know, let me TRY and explain some things.


     Buying a call. The first thing to know about options is that you buy contracts in lots of 100. So one contract equals 100 shares of the stock. Buying a call give you the right, NOT the obligation to exercise the option. If you went to buy a call, you would believe that the stock price is going to go up. So let's say Chipotle is sitting at 390 and theres a hammer and think it will go up. So you go out and buy a call option with a strike price of 400. Let's say the contract expires on November 18th and it's at 420. In this example...Strike Price: The strike price is 400. That means that when you exercise the contract (which you would in this case) that you would have the right to buy the 100 shares of Chipotle, values at 420, at the price of 400.  Exercise: To go through with the contract. As in buying the shares from the option. When you buy a call, you don't need to exercise. You could just let it expire and you would just lose the money you pad to buy the option contract and that's it. 


     I feel like I ran in a couple circles there. It makes sense to me because I was writing it and know what I am trying to say. If you go to investopedia you can search for more information there. It's my favorite site to go to when I don't know something and want to learn. One of your biggest assets in life is knowledge. Knowledge is power. Go learn it! I'm not a good enough teacher. Just go ahead and google the different strategies and then go find somewhere to test them! 

     Back to what I was originally saying....the investment game for my investment club at school. I saw that Chipotle was at the hammer position on the chart and thought, "hmmm, that may go up." So I went ahead and bought a call with a strike price of $400.00. I bought 5 contracts and paid something like $1,000 dollars for them. The other day when Chipotle hit $418.00, I could have sold the contracts for a 900% profit. They were worth something like $9,000 or $10,000 dollars! Bonehead move was that I didn't do that. I waited because I
was confident the price would continue to rise and it didn't and I only made about $2,500 on it. Still a great deal, but could have been better. Oh, another key word to know is in the money. Since I bought the call at $400, in the money would be anytime you'd want to exercise the option. So anything above $400 in this situation would be in the money. Options can be an amazing way to earn a lot of money. But they are also very risky. 


     All I am doing is buying and selling the contracts. For every contract there is a date in which they expire. At that time, if you haven't sold the contract to another person, then you would have buy the amount of shares in the options. Since options are sold in lots of 100, it would depend on how many options you bought. So if you got 5 and you forget to do anything with them, you could have to buy 500 shares worth of whatever security you bought the contracts for. Kind of confusing way to explain it, so I would recommend looking for a simpler one elsewhere. I did my best, but I know my best is not the greatest. Know your limits. 


   


5 comments:

  1. I only got through the first few paragraphs. I can concur based off that. My experience in the options game was thrilling, but deflating. I felt like the manic-depressive fluctuation of that market blew up in my face everyday and it's because of my lack in research of the time decay effect. I'm interested to see how your club set up an account that everyone could join to trade in. I want to do this as part of my YouTube channel, have a segment that includes the stock picks we made Saturday and how we end up week to week.

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    1. So first off you can set up a game on investopedia.com and allow options trading. It's really fun. That's where I do it with my club. Actually just yesterday I used the straddle strategy on $PANW. Palo Alto Networks. They released earnings after market close yesterday. So I bought a call at $162 and I bought a put at $160. They ended up opening down about 15% or so. I made about $14,000 on the put options and lost the $4,500 on the amount I paid for the calls. So I netted about $13,000 from that. Very easy to see. I'd be interested in your youtube channel though. That would be pretty cool! If you have any other questions let me know. I can try and answer them the best I can. Thank you for reading.

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    2. Thanks for your help on the investopedia. Hope I can figure out to setup a community game. The time decay is the hardest aspect for me to grasp. If the stock doesn't go above or below those covers you get screwed. You know more about that?

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    3. I tried starting my own investopedia game. You're more than welcome to use that one in your channel. I have instructions in this article on how to get to the game. I don't think anyone has joined yet and I haven't been making any moves either. But let me know if you have any other questions or need any help or whatever. Thanks for the link as well.

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  2. https://youtu.be/zh8NaVDHH5Q

    Here is a link to the YouTube

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