Options - how do they work?

[Nifty]

Say there is an option 08 and you buy it. What is the deal?

 

[BIG BWACULL]

Say there is an option 08 and you buy it. What is the deal?

I think this means they expire in 2008

 

[BlingBling]

Nifty, I think you are going have to give us some more info..

 

[shaunm]

Hi,
I have been buying shares for a while now but have not looked into buying options in the listed company. How does it work and what should I look for?

Thanks

 

[SevenFX]

Prob worth closing this thread & following one of WayneL threads which he has written a few on Options from memory....???

Here's One.
https://www.aussiestockforums.com/forums/showthread.php?t=4416&highlight=options

p.s The search & advanced search gets great results even from few years back.
Cheers
SevenFX

 

[The Mint Man]

Hi,
I have been buying shares for a while now but have not looked into buying options in the listed company. How does it work and what should I look for?

Thanks

If your fairly new to the market and only ever bought and sold shares then its probably worth doing a fair whack of research into.
In this environment options are not something you want to mess with because if you think shares have been volitile lately then you aint seen nothing!!!. Another thing to keep in mind is that options, unlike shares, trade within a fixed period.
I'm fairly new to options too and at the moment I'm only interested in selling covered calls. This (to me) is the least risky and most rewarding stratergy ATM. Providing you pick good stocks to hold in the first place of course

Like I said DYOR.

Cheers

 

[Buffettology]

Yes, WayneL is the master on options!

But, I agree with the Mint Man, its something you have to do a LOT of research into! You cannot just find out from a forum.

But I also agree with the Mint Man, covered calls are probably the best for the value investor, though naked put options arent that risky either (despite their reputation and higher level required on your options account). Credit spreads are not very risky at all either.

Normal stock purchases are a LOT more risky than any of these strategies (no idea then, why naked put options are classed as so risky?). Stupid.

 

[wayneL]

Yes, WayneL is the master on options!

But, I agree with the Mint Man, its something you have to do a LOT of research into! You cannot just find out from a forum.

But I also agree with the Mint Man, covered calls are probably the best for the value investor, though naked put options arent that risky either (despite their reputation and higher level required on your options account). Credit spreads are not very risky at all either.

Normal stock purchases are a LOT more risky than any of these strategies (no idea then, why naked put options are classed as so risky?). Stupid.

Don't forget sails and magdoran (and probably a few other quiet ones).

Re the naked put question. 'zactly Buffett.

Yes they are less risky than straight shares, on an equal face value basis. But people can get themselves into trouble and here's how they do it.

Say a share is trading at $30. The trader notices some juicy premium on offer and sells $25 puts. OK, providing the trader doesn't mind ending up with the contracted number of shares, so far so good. Let's work on 1000 shares and $25,000 face value for the example.

What some traders will do is, thinking that the share will never get down to $25 in 30 days, sell say, 100 US contracts (10,000 shares) to leverage the premium they are going to collect.

Suddenly we have a face value of $250,000.

You don't have to use too much imagination to know what could happen, even with blue chips.

But this is not the option's fault, it is not intrinsically risky. It's the traders fault and a matter of position sizing. Remember that a naked put is the synthetic equal of the covered call and so the risk/reward is exactly the same. So all the naked put trader need ask him/herself is whether they would enter a 100 contract buy/write as per the above example.

Let's look at that. The same trader would have to buy 10,000 shares @ $30 before being able to sell the calls... I don't think so.

Brokerages can counter this risk with newer traders by insisting on higher margin or cash coverage where cash available is equivalent to the value of the identical covered call position.

But as most brokerages (even those dealing in options) actually know very little about them and so perpetuate the myths.

*tip* synthetics are a great tool for learning and understanding any option strategy. Look at the synthetic equivalent to see what you might not otherwise see.

 

[peter2]

Shaunm: To which option type are you referring?

I lifted this from the ASX website:

What is the difference between a company option and an exchange traded option?

Company options are issued by companies for the purpose of raising funds. They give shareholders an opportunity to buy new shares at a fixed price on or before a predetermined date. This gives the company the ability to raise funds for future projects. The exercise of company issued options results in an increase in the company's capital.

Exchange traded options are traded over existing shares. Their exercise results in a transfer of ownership of the underlying shares, and not in an increase in the company's capital. The company is not a party to the contracts traded.

 

[shaunm]

Thanks for the replies people.

I was referring to company options, and how to value them against share price etc.

The other options like "puts" and "calls" I aint going near in this market.

Cheers

 

[Buffettology]

Don't forget sails and magdoran (and probably a few other quiet ones).

But this is not the option's fault, it is not intrinsically risky.

But as most brokerages (even those dealing in options) actually know very little about them and so perpetuate the myths.

*tip* synthetics are a great tool for learning and understanding any option strategy. Look at the synthetic equivalent to see what you might not otherwise see.

Yes, sorry Sails! Only entering this world, so havent as of yet met magdoran.

Exactly, only a stupid trader would enter into a deal he could not afford if he was exercised hoping to just collect premiums!

I also read most brokers dont understand naked put options and perpetuate the myths! Pretty scary to think most brokers dont even understand such a simple concept! I think most people hear the words "options" and just freak out!? You think? Seems to be like that when I ask most of my buddies who buy shares if they know anything about them.

What are synthetics?

 

[sails]

Synthetic equivalents are simply using various combinations to create the same type of position.

eg. using normal Aus option contract size and all other things being equal:
1 long put + 1000 shares = 1 long call (same option strikes)
(long put + shares may appear cheaper than a long call - this is mostly caused by cost of carry (interest). Also one has to understand how dividends and the like affect these synthetic relationships - this is where it can get a bit tricky.

A covered call is synthetically the same as a short put at the same strikes, for the same period of time and under normal conditions. They both produce similar losses if the market goes down; similar profits if the market stays neutral to bullish.

Charles Cottle ebooks are what really opened my eyes to the value of understanding synthetics - especially for more complex option trading.

It's often interesting to see people who are comfortable trading covered calls - often with their shares heavily leveraged on margin, but are adamant they would never trade a short puts!

But they are taking on similar risks and rewards. If they are paying huge interest for their leveraged shares, this actually makes it a worse strategy to the short put.

Suggest doing a search on Magdoran's posts on options. He has done several very detailed posts which may be helpful to you. I have a busy life apart from trading, so my posts are a bit infrequent!

 

[Buffettology]

Thx Sails.

 

[sydants]

How do Options work?

Im just new to trading and was just wondering how options work. Say if i bought some options in a company would i be able to excersise them into ordinary shares as soon as i bought them or whats the procedure for that?
Thanks guys

 

[builder2818]

Re: How do Options work?

Im just new to trading and was just wondering how options work. Say if i bought some options in a company would i be able to excersise them into ordinary shares as soon as i bought them or whats the procedure for that?
Thanks guys

You could exercise them as soon as you bought them but that would be pointless. You would be paying for the option, the brokerage for buying it and then the brokerage to exercise the option and buy the stock. You would just be better off buying the stock outright.

You don't have to exercise them but if your analysis is correct and the stock moves in the direction that you hold a long option position over, you can then just sell the option back to the market. There's a little bit more to it than that but that's the basics behind it.

 

[wayneL]

Re: How do Options work?

You could exercise them as soon as you bought them but that would be pointless. You would be paying for the option, the brokerage for buying it and then the brokerage to exercise the option and buy the stock. You would just be better off buying the stock outright.

You don't have to exercise them but if your analysis is correct and the stock moves in the direction that you hold a long option position over, you can then just sell the option back to the market. There's a little bit more to it than that but that's the basics behind it.

Yes.

If there is any extrinsic value in the option and you exercise, you will immediately lose that value.

If you own a call option with remaining extrinsic value and you want the shares now, you are better off selling the option and buying the shares, rather than exercising the option.

 

[stefan_invester]

has anyone heard of Binary options before?
and how they work does anyone know?
thanks

 

[mazzatelli]

has anyone heard of Binary options before?
and how they work does anyone know?
thanks

Yes, there are many sub-classes of them.
Generally discontinuous payoff, touch/no touch markets, otc.
They are harder to price and model, especially near the barrier strikes.

Don't touch them, unless you know what you are doing.

 

[ROE]

has anyone heard of Binary options before?
and how they work does anyone know?
thanks

Stay with ETO, they guarantee someone on the other side will honour the contract
because they have margin on your balls and the price is a little more transparent

going into options without a market marker holding the other side by the balls with their collateral someone can just decided to reneged on the deal and you left with nothing..

 

[ROE]

Re: How do Options work?

You could exercise them as soon as you bought them but that would be pointless. You would be paying for the option, the brokerage for buying it and then the brokerage to exercise the option and buy the stock. You would just be better off buying the stock outright.

You don't have to exercise them but if your analysis is correct and the stock moves in the direction that you hold a long option position over, you can then just sell the option back to the market. There's a little bit more to it than that but that's the basics behind it.

oh I think he mean the company issue options, not ETO that how I read it...
he now want to convert to shares.

If that the case I think you contact the company, filled in some form with a cheque
and they issues you the shares.. I never deal with company issue options, mainly ETO.