#OPTIONS TRADING FOR DUMMIES PDF HOW TO#

Our dollar-value return was much lower with the option, but we put considerably less money at risk, less than 1% of the cost for 100 shares at market. Now, say we had bought 100 shares of Coca-Cola outright at $48 and sold at $55. You could also sell your options at expiration for $5, or $500 ($55 share price minus $50 strike price), which would be a 233% return on your $150 investment.

That’s $5 above our strike price, so we could exercise our option here and buy 100 shares at a $5 discount per share. Say we buy in for $1.50 now and at the November 20 expiration date, Coca-Cola is sitting at $55. Here’s how things might work with our Coca-Cola play. Options are essentially a tool to magnify movements in the stock market.įor example, if the value of an option’s underlying shares moves just 5% to 10%, the options associated with it could move as much as 50% to 100% or sometimes even more. The option only costing $150 is a pretty great bargain by comparison. To buy 100 shares of Coca-Cola stock without options, you would have to lay out $4,800. The actual price is $1.50 multiplied by 100, or $150. That means $1.50 is the per-share premium. These options are currently listed at $1.50.Įach option contract represents 100 shares of its underlying stock. Simple enough, but now we have to discuss one of the details about options that confuses many new investors. So, putting it all together, this call is a bet that Coca-Cola’s share price will exceed $50 by the expiration date on November 20, 2020. The “50” number is the strike price, and the “D20” at the end indicates that this expires on the 20th day of the month. From the “20,” you know it expires in 2020, and the “K” that follows means it’s a call that expires in November (see the chart below). It’s followed by Coca-Cola’s symbol, as that’s the underlying asset. The “O” just means that this is an option. Right off the bat, you can tell this is a Coca-Cola option. Let’s take a closer look at a call option listing from the Chicago Board Options Exchange, or CBOE, Bryan’s preferred format… (O: KO 20K50D20).

More often than not, we simply buy the option (or set up an option strategy), watch the price of its underlying asset rise or fall, then get out before it expires. That’s right, we never have to own a single share of stock to make huge gains from options. It’s a bet that the price of the underlying stock will sink below the option’s strike price and the contracts will give their owner the ability to sell at a premium.īut here’s the trick: We rarely exercise the right to buy or sell shares in The War Room, and when we do, it’s usually part of a larger strategy. When that happens, those calls are referred to as “in the money.” If a call option’s strike price is above the price of its underlying security, it’s referred to as “out of the money.”Ī put option is a contract that gives its holder the right – but again, not the obligation – to sell shares at a predetermined strike price. It’s essentially a bet that the price of the underlying stock will rise above the option’s strike price by expiration, and the contracts will give their owner the ability to buy at a discount. Options come in two varieties, calls and puts.Ĭall options are contracts that give their holder the right – but not the obligation – to buy shares at a certain price. It gives its holder the right – but not the obligation – to buy or sell 100 shares on a designated date and at a specified price called the strike price.

#OPTIONS TRADING FOR DUMMIES PDF HOW TO#

In this guide, you’ll learn everything you need to know, from understanding what an options contract is to how to place a trade… What Are Options? Options are a great way to leverage the market and amplify the moves of stock prices fivefold, tenfold or even more, no matter which way they move. They can move down just as quickly as they shoot up, so you shouldn’t bet your retirement on a single play.īut in reality, their volatility is their strength. That’s why they have their scary reputation. However, they are more volatile than stocks. But they offer the opportunity for bigger, faster gains and the ability to put far less money at risk. What you’ll find is that options are no harder to effectively use than stocks. And you’ll be ready to dive headfirst into The War Room.

By the time you’re finished reading this guide, you’ll be well on your way to being an options trading pro. If you’re completely mystified by options and have no idea where to begin, start here. Options sound scary to many, but they’re just as easy to understand and use as stock or bonds…Įven if you’ve never invested in anything in your entire life.

Options trading for dummies pdf