Trading options for dummies

trading options for dummies Welcome to Options for Dummies. Have you ever been curious about options? Heard people talk about how much money they made playing with options? You want to get in on the action and become an options trader yourself but not sure how to get started? I'm sure there are plenty of options tutorial web sites out there which explain options to you but you may not understand it because they don't give enough examples or explain it in clear plain english.

Other Helpful Websites. Here are some websites you can visit to lookup specific terms andor do research on a stock. Trading Options For Dummies Cheat Sheet.

Trading options is a bit different from trading stocks, but they both require research and study. If you’re going to trade options, it’s important that you know order types, how to read changes in the market with charts, how to recognize how stock changes affect indexes and options, and how indexes are built. A variety of order types are available to you when trading stocks some guarantee execution, others guarantee price. This brief list describes popular types of trading orders and some of the trading terminology you need to know.

Market order A market order is one that guarantees execution at the current market for the order given its priority in the trading queue (a. k.a., trading book) and the depth of the market. Limit order A limit order is one that guarantees price, but not execution. When placing a limit on an order, it will be treated like a market order if When buying, your limit is at or above the current market ask price and there are sufficient contracts to satisfy your order (for example, limit to buy at $2.50 when the asking price is $2.50 or lower). When selling, your limit is at or below the current market bid price and there are sufficient contracts to satisfy your order (for example, limit to buy at $2.50 when the asking price is $2.50 or higher).

Stop order A stop order, also referred to as a stop-loss order , is your risk management tool for trading with discipline. A stop is used to trigger a market order if the option price trades or moves to a certain level the stop. The stop represents a price less favorable than the current market and is typically used to minimize losses for an existing position.

Stop-limit order A stop-limit order is similar to a regular stop order, but it triggers a limit order instead of market order. While this may sound really appealing, you’re kind of asking a lot in terms of the specific market movement that needs to take place. It may prevent you from exiting an order you need to exit, subjecting you to additional risk. If the stop gets reached, the market is going against you. Duration The two primary periods of time your order will be in place are.

The current trading session or following session if the market is closed. Until the order is cancelled by you, or the broker clears the order (possibly in 60 days — check with your broker) Cancel or change If you want to cancel an active order, you do so by submitting a cancel order. Once the instructions are completed, you receive a report notifying you that the order was successfully canceled.

It’s possible for the order to already have been executed, in which case you receive a report indicating that you were too late to cancel, filled with the execution details. Needless to say, you can’t cancel a market order. Changing an order is a little different than canceling one because you can change an order one of two ways Cancel the original order, wait for the report confirming the cancellation, and then enter a new order.

Submit a cancelchange or replace order, which replaces the existing order with the revised qualifiers unless the original order was already executed. If that happens, the replacement order is canceled. Charts Used for Tracking Investments. Price data is used in charts to give you a view of market trading activity for a certain period. The following list gives you the lowdown on some of the chart types you might encounter while you track your investments Line chart This chart uses price versus time.

Single price data points for each period are connected using a line. This chart typically uses closing value. Line charts provide great “big picture” information for price movement and trends by filtering out the noise from the period’s range data.

One advantage to line charts is that more minor moves are filtered out. A disadvantage to line charts is that they provide no information about the strength of trading during the day or whether gaps occurred from one period to the next. Open-High-Low-Close (OHLC) bar chart This chart uses price versus time. The period’s trading range (low to high) is displayed as a vertical line with opening prices displayed as a horizontal tab on the left side of the range bar and closing prices as a horizontal tab on the right side of the range bar. A total of four price points are used to construct each bar.

OHLC charts provide information about both trading period strength and price gaps. Using a daily chart as a point of reference, a relatively long vertical bar tells you the price range was pretty big for the day. Candlestick chart This chart uses price versus time, similar to an OHLC chart with the price range between the open and the close for the period highlighted by a thickened bar. Patterns unique to this chart can enhance daily analysis. Candlestick charts have distinct pattern interpretations regarding the battle between bulls and bears that are best applied to a daily chart.

They also incorporate inter-period data to display price ranges and gaps. How Financial Indexes Are Constructed. To help understand financial index changes, you should know how indexes are built.

Indexes are not created equal (well . . . one is). Financial indexes are constructed in three different ways Price-weighted Favors higher-priced stocks. Market cap-weighted Favors higher-cap stocks. Equal dollar-weighted Each stock has same impact.

How Changing Stock Affects Indexes. A financial index is a measuring tool of prices for groups of stocks, bonds, or commodities. A change in one stock translates into index changes. Some examples are When a high-priced stock declines in a price-weighted index, it leads to bigger moves down in an index when compared to declines in a lower-priced stock. The Dow is an example of a price-weighted index that is affected more by Boeing (trading near $100) than Pfizer (trading near $25). A market-cap weighted index, such as the S&P 500, is impacted more by higher market capitalization stocks regardless of price.

Even though Microsoft may only be trading at $30 per share, its market cap is huge — about $290 billion. When it moves up or down it creates a greater change in the S&P 500 than, say, Amgen, which trades at $55 per share, but only has a market cap of approximately $64 billion. All of the stocks in an equal-dollar weighted index should have the same impact on the index value.

In order to keep the index balanced, a quarterly adjustment of the stocks is required. This prevents a stock that has seen large gains over the last three months from having too much weight on the index. options+trading+basics. Narrow Your Search. Tech Industry (110) Tech Culture (56) Internet (51) Computers (34) Mobile (26) Security (10) Phones (8) Software (8) Applications (5) Audio (4) Auto Tech (4) Gadgets (4) Gaming (4) Operating Systems (4) Sci-Tech (4) Online shoppers are liking those speedy checkout options.

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Another type of security, known as options, presents a world of opportunity to sophisticated investors who understand both the practical uses and inherent risks associated with this asset class. The power of options lies in their versatility, and their ability to interact with traditional assets such as individual stocks. They enable you to adapt or adjust your position according to many market situations that may arise. For example, options can be used as an effective hedge against a declining stock market to limit downside losses. Options can be put to use for speculative purposes or to be exceedingly conservative, as you want. Using options is therefore best described as part of a larger strategy of investing. This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital. Options belong to the larger group of securities known as derivatives. This word has come to be associated with excessive risk taking and having the ability crash economies. That perception, however, is broadly overblown. All “derivative” means is that its price is dependent on, or derived from the price of something else. Put this way, wine is a derivative of grapes ketchup is a derivative of tomatoes. Options are derivatives of financial securities – their value depends on the price of some other asset. That is all derivative means, and there are many different types of securities that fall under the name derivatives, including futures, forwards, swaps (of which there are many types), and mortgage backed securities. In the 2008 crisis, it was mortgage backed securities and a particular type of swap that caused trouble. Options were largely blameless. (See also 10 Options Strategies To Know . ) Properly knowing how options work, and how to use them appropriately can give you a real advantage in the market. If the speculative nature of options doesn't fit your style, no problem – you can use options without speculating. Even if you decide never to use options, however, it is important to understand how companies that you are investing in use them. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another. This tutorial will introduce you to the fundamentals of options. Keep in mind that most options traders have many years of experience, so don't expect to be an expert immediately after reading this tutorial. If you aren't familiar with how the stock market works, you might want to check out the Stock Basics tutorial first. Basic Options - What is an option? In this options tutorial article, we'll discuss the very basics of Option Contracts. That is, what is an option? how to trade options? and how do you profit from an option? Option Characteristics. An option contract is based on some underlying stock like IBM. An option contract will always have an expiration date. An option contract will always have what's called a Strike Price. An option contract can be one of two types Call or Put. Lets talk about each bullet in more detail. I mentioned that an option is simply a contract, but a contract to do what? It is a contract which gives the buyer the right to trade the underlying stock. One option contract is good for 100 shares of that underlying stock. So buying an IBM option will give you some right to trade 100 physical shares of IBM. Since the expiration date is in the future you cannot say with any certainty, but you could make an educated guess. If you think IBM will be above $105share, you want to buy a Call Option. Why? Because a Call Option will give you the right to buy 100 shares of IBM at $105share. Now imagine IBM does really well and on May 15, it is trading at $110share. If you exercise your right, you will buy 100 shares at $105 and sell 100 shares at $110. You've just made a $500 profit. The difference between $110 and $105 multiplied by 100 shares. Remember that buying the option contract gives you that right. Which means the person selling you the contract is actually giving you that right. When you exercise the Call Option you are actually buying those 100 shares from that person at the strike price of $105 and selling those same 100 shares on the market at $110. If it were a Put Option, you are buying 100 shares from the market at $100 and selling those 100 shares to that person at the strike price of $105. In both scenarios you are buying low and selling high! For example, say the price of the IBM $100 May contract is $4.30. If the current date is April 20 you still have 4 weeks until expiration plus the current market price is $102.31. That means approximately $2.31 of the option is intrinsic while $1.99 is the time value. For a Put Option, obviously the Intrinsic Value would be based on how much lower the market price is relative to the strike price. Options Trading for Dummies. Trading stock options is a way to get into stock investing without huge amounts of money while at the same time limiting your risk of losing money. Trading options has its own vocabulary and procedures. While much of it may be counterintuitive, there are similarities between stock options and buying insurance to protect an asset, such as your car. Understanding the Options Vocabulary. An option represents a choice an investor has when dealing with stocks, equities, exchange traded funds and other similar products. The option itself is a contract for 100 shares with a predetermined price, called the strike price, and an expiration date. There are two basic types of options, referred to as calls and puts, synonymous with buying and selling. An easy way to remember these is to think of buying as "calling in" and selling as "putting out." The buyer of an option purchases the right to buy or sell 100 shares at the strike price, for a premium. The seller, called the writer in options terms, is obligated to sell or buy if the buyer exercises the option. How Options Limit Risk. The buyer of an option has the right, but not the obligation, to buy or sell under terms of the option contract. Consider car insurance for a moment. You purchase insurance for a fraction of the cash value of your car, in case you have an accident and have to repair or replace your car. Your insurance premium gives you assurance that you are not risking the total value of your car. Purchasing an option contract is similar. The buyer predicts a stock will gain or lose value by a future date, and purchases an option where the strike price is lower or higher than the stock's predicted value. If the buyer is wrong, he lets the option expire, forfeiting only the stock option premium -- not the loss of value for those 100 shares. Making Money With Call Options. When the value of a stock rises above the strike price of a call option before it expires, the buyer could exercise the option and purchase the shares. However, now the option has a value of its own, and this is typically how options trading makes money. The buyer may now sell his contract to someone who wants to purchase that stock cheaper than the current market rate, which the option writer is obligated to provide. The value of that sale depends on the difference between strike price and current value, and the time remaining on the option. As long as the buyer recoups the option premium, a profit is realized. Making Money With Put Options. The buyer of a put option wants the value of a stock to fall below the strike price. In this case, the writer is obligated to buy 100 shares at the buyer's option for a price which is now higher than the market. That option contract becomes attractive to holders of the falling stock. The buyer earns a profit by selling the put option for an amount exceeding the option premium. Trading Options For Dummies, 2nd Edition. Thinking about trading options, but not sure where to start? This new edition of Trading Options For Dummies starts you at the beginning, explaining the common types of options available for trading and helps you choose the right ones for your investing needs. You'll find out how to weigh option costs and benefits, combine options to reduce risk, build a strategy that allows you to gain no matter the market conditions, broaden your retirement portfolio with index, equity, and ETF options, and so much more. Options are contracts giving the purchaser the right to buy or sell a security, such as stocks, at a fixed price within a specific period of time. Because options cost less than stock, they are a versatile trading instrument, while providing a high leverage approach to trading that can limit the overall risk of a trade or provide additional income. If you're an investor with some general knowledge of trading but want a better understanding of risk factors, new techniques, and an overall improved profit outcome, Trading Options For Dummies is for you. Helps you determine and manage your risk, guard your assets using options, protect your rights, and satisfy your contract obligations Provides expert insight on combining options to limit your position risk Offers step-by-step instruction on ways to capitalize on sideways movements Covers what you need to know about options contract specifications and mechanics. Trading options can be a great way to manage your risk, and this hands-on, friendly guide gives you the trusted and expert help you need to succeed. Part I Getting Started 7. Chapter 1 Options Trading and the Individual Investor 9. Chapter 2 Introducing Options 19. Chapter 3 Trading Places Where the Action Happens 33. Chapter 4 Option Risks and Rewards 51. Part II Evaluating Markets, Sectors, and Strategies 67. Chapter 5 Analyzing Mood Swings in the Market 69. Chapter 6 Sector Analysis Technical and Fundamental 91. Chapter 7 Practicing Before You Swing 117. Chapter 8 Designing A Killer Trading Plan 135. Part III What Every Trader Needs to Know About Options 151. Chapter 9 Getting to Know Different Option Styles 153. Chapter 10 Protecting Your Portfolio with Options 175. Chapter 11 Increasing Profit Potential and Decreasing Risk 195. Chapter 12 Combination Strategies Spreads and Other Wild Things 215. Chapter 13 ETFs, Options, and Other Sneaky Tricks 229. Part IV Advanced Strategies for Options Traders 253. Chapter 14 Making Money without Worrying About the Market&rsquos Direction 255. Chapter 15 Letting Volatility Lead You to Trading Opportunities 275. Chapter 16 Trading Profitably When Markets Move Sideways 305. Part V The Part of Tens 333. Chapter 17 Ten Top Option Strategies 335. Chapter 18 Ten Do&rsquos and Don&rsquots in Options Trading 349. Trading Options For Dummies, 3rd Edition. Tried-and-true trading options for any market. Looking to diversify? Trading Options For Dummies, 3rd Edition, covers the common types of options available and helps investors to choose the right ones for their investing needs. Discover how to weigh option costs and benefits and understand the hills and valleys of the options landscape so you come out on top. This bestselling guide is your trusted advisor for managing risks, delivering profits, and navigating a variety of market conditions. You'll find important coverage on new software tools, brokerage houses, and even binary options. Inside … Increase your profit potential while reducing risk of losses Earn in rising, falling, or sideways markets Design strategies to profit from future events Determine and manage your risk. Options Basics What Are Options? Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. People somewhat familiar with derivatives may not see an obvious difference between this definition and what a future or forward contract does. The answer is that futures or forwards confer both the right and obligation to buy or sell at some point in the future. For example, somebody short a futures contract for cattle is obliged to deliver physical cows to a buyer unless they close out their positions before expiration. An options contract does not carry the same obligation, which is precisely why it is called an “option.” A call option might be thought of as a deposit for a future purpose. For example, a land developer may want the right to purchase a vacant lot in the future, but will only want to exercise that right if certain zoning laws are put into place. The developer can buy a call option from the landowner to buy the lot at say $250,000 at any point in the next 3 years. Of course, the landowner will not grant such an option for free, the developer needs to contribute a down payment to lock in that right. With respect to options, this cost is known as the premium, and is the price of the options contract. In this example, the premium might be $6,000 that the developer pays the landowner. Two years have passed, and now the zoning has been approved the developer exercises his option and buys the land for $250,000 – even though the market value of that plot has doubled. In an alternative scenario, the zoning approval doesn’t come through until year 4, one year past the expiration of this option. Now the developer must pay market price. In either case, the landowner keeps the $6,000. A put option, on the other hand, might be thought of as an insurance policy. Our land developer owns a large portfolio of blue chip stocks and is worried that there might be a recession within the next two years. He wants to be sure that if a bear market hits, his portfolio won’t lose more than 10% of its value. If the S&P 500 is currently trading at 2500, he can purchase a put option giving him the right to sell the index at 2250 at any point in the next two years. If in six months time the market crashes by 20%, 500 points in his portfolio, he has made 250 points by being able to sell the index at 2250 when it is trading at 2000 – a combined loss of just 10%. In fact, even if the market drops to zero, he will still only lose 10% given his put option. Again, purchasing the option will carry a cost (its premium) and if the market doesn’t drop during that period the premium is lost. These examples demonstrate a couple of very important points. First, when you buy an option, you have a right but not an obligation to do something with it. You can always let the expiration date go by, at which point the option becomes worthless. If this happens, however, you lose 100% of your investment, which is the money you used to pay for the option premium. Second, an option is merely a contract that deals with an underlying asset. For this reason, options are derivatives. In this tutorial, the underlying asset will typically be a stock or stock index, but options are actively traded on all sorts of financial securities such as bonds, foreign currencies, commodities, and even other derivatives. Buying and Selling Calls and Puts Four Cardinal Coordinates. Owning a call option gives you a long position in the market, and therefore the seller of a call option is a short position. Owning a put option gives you a short position in the market, and selling a put is a long position. Keeping these four straight is crucial as they relate to the four things you can do with options buy calls sell calls buy puts and sell puts. People who buy options are called holders and those who sell options are called writers of options. Here is the important distinction between buyers and sellers Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose. This limits the risk of buyers of options, so that the most they can ever lose is the premium of their options. Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell. It also implies that option sellers have unlimited risk , meaning that they can lose much more than the price of the options premium. Don't worry if this seems confusing – it is. For this reason we are going to look at options primarily from the point of view of the buyer. At this point, it is sufficient to understand that there are two sides of an options contract. To understand options, you'll also have to first know the terminology associated with the options market. The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. In our example above, the strike price for the S&P 500 put option was 2250. The expiration date, or expiry of an option is the exact date that the contract terminates. An option that is traded on a national options exchange such as the Chicago Board Options Exchange (CBOE) is known as a listed option. These have fixed strike prices and expiration dates. Each listed option represents 100 shares of company stock (known as a contract). For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value. An option is out-of-the-money if the price of the underlying remains below the strike price (for a call), or above the strike price (for a put). An option is at-the-money when the price of the underlying is on or very close to the strike price. As mentioned above, the total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility. Because of all these factors, determining the premium of an option is complicated and largely beyond the scope of this tutorial, although we will discuss it briefly. Although employee stock options aren't available for just anyone to trade, this type of option could, in a way, be classified as a type of call option. Many companies use stock options as a way to attract and to keep talented employees, especially management. They are similar to regular stock options in that the holder has the right but not the obligation to purchase company stock. The contract, however, exists only between the holder and the company and cannot typically be exchanged with anybody else, whereas a normal option is a contract between two parties that are completely unrelated to the company and can be traded freely. Trading Options For Dummies. Thinking of trading options, but not sure where to start? Trading Options For Dummies starts you from the beginning with clear, step-by-step advice on how to use top option strategies to reduce your risk while boosting your income and enlarging your retirement portfolio with index, equity, and ETF options. This plain-English guide explains the common types of options and helps you choose the right ones for your investing needs. You find out how to weigh option costs and benefits, combine options to reduce risk, and build a strategy that allows you to gain no matter what the market may bring. You’ll learn the basics of market and sector analysis and what to look for when trying out a new option strategy. You’ll also find what you need to know about options contract specifications and mechanics. Discover how to Understand option contracts and orders Determine and manage your risk Guard your assets using options Trade options on securities exchanges Protect your rights and satisfy your contract obligations Target sectors using technical analysis Minimize potential losses and optimize rewards Map out your plan of attack Limit your downside when trading the trend Combine options to limit your position risk Benefit from exchange traded funds Key in on volatility for trading opportunities Capitalize on sideways movements. Trading options is serious business. Trading Options For Dummies gives you the expert help you need to succeed.