Вы находитесь на странице: 1из 8

What Are Options

Presented By
Copyright © Option Genius LLC.

All Rights Reserved

No duplication of transmission of the material included within except with express written permission
from the author.

Be advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the
solicitation of an offer to buy, nor it is it to be construed as a recommendation to buy, hold, or sell any security, stock, or option.

The principals of and those who provide services for Option Genius LLC:

 Are neither Registered Investment Advisors nor are Broker/Dealers and are not acting in any way to influence the purchase
of any security.
 Are not liable for any losses or damages, monetary or otherwise that may result from your reliance on the content of any
written materials or any discussion.
 May own, buy, or sell securities provided in written materials or discussed
 Have not promised that you will earn a profit when or if you purchase/Sell stocks, bonds, or options.
You are urged to consult with your own independent financial advisor and/or broker before making an investment or trading securities.
Past performance may not be indicative of future performance. Securities discussed within are speculative with a high degree of
volatility and risk.

Opinions, analyses and information conveyed whether our own or based on sources believed to be reliable have been communicated
in good faith, but no representation or warranty of any kind, expressed or implied is made including but not limited to any
representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. We do not necessarily
update such opinions, analysis, or information. All information should be independently verified.

Option trading involves substantial risk and is not suitable for all investors. We cannot and will not guarantee that you will not lose
money or that you will make money from the information found on this website and / or affiliated products / services. Past results do
not guarantee future results. You can lose money trading options and the loss can be substantial. Losing trades can occur, have
occurred in the past, and will occur in the future. Don't trade with money you can't afford to lose. Only risk capital should be invested
since it is possible to lose all of your principal. Your use of this website and affiliated products / services is at your own risk. You should
read "Characteristics and Risks of Standardized Options" to further understand the risks of trading options.

U.S. Government Required Disclaimer - Commodity Futures Trading Commission. Forex, Futures and Options trading has large potential
rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and
options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures
or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on
this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE
RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES
NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL
RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN
SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE
NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING
PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF
WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
What Are Options

If you have traded options before and know what they are, then you can skip this
lesson.

This lesson is more for those who have never traded options before.

Hopefully you have traded stocks before and know how they operate, because I
will not be going into that.

Before we get started, I wanted to let you know there is a booklet that you are
required to read before you trade a single option. Your broker will require you to
read it before you start trading. In fact they are required to give you a copy. The
booklet is called Characteristics and Risks of Standardized Options and
Supplements.

This booklet is designed to explain all the risks involved with options trading. It is
pretty technical and you will need to go through it a few times to understand it
but it is well worth the time.

Here is a link to download it. It should also be part of the materials in the Lesson.

http://www.optionsclearing.com/about/publications/character-risks.jsp

There are two types of options.

Call Options and Put Options.

A Call gives one the right but not the obligation, to purchase an underlying
security at a set (strike) price.

A Put gives one the right but not the obligation, to sell an underlying security at a
set (strike) price.

Although options are legal contracts it helps to think of them as something else.
I like to think of an option as a coupon. Let's say you are thinking of buying a
watermelon in the not too distant future. And you think that the price of
watermelons is going to increase. So you want to lock in today's price.

In this case, I agree to sell you a coupon (option) to buy a watermelon from me
for $1.00 which is today's price. But I will charge you 10 cents for this coupon and
it expires in 90 days.

Let's say 89 days go by. Your coupon expires tomorrow. If the price of
watermelons is more than $1.00 and you still want your watermelon you should
use the coupon. If the price of watermelons is below $1, you should forget the
coupon and just buy a watermelon at the market price. This will allow the coupon
to expire worthless and I would make a nice profit of 10 cents.

But what if you didn't want the watermelon but the price went up to $2. You
could either buy the watermelon yourself using the coupon and sell it to someone
else for $2, making you a nice 90 cents profit. (Remember you paid 10 cents for
the coupon.) Or you can sell the coupon to someone else, for $1, also making you
90 cents. Either way you win, and I lose.

It's the same with stocks. Thousands of stocks, indexes, and ETFs have options
available to trade. Options are gaining in popularity because of the immense
leverage. In our example, all you have to invest was 10 cents to control $1 worth
of watermelon.

Let's look at our example above again. You buy an option for 10 cents, and you
later can sell that option for $1 making you 90 cents. That's a 900% return on your
money. If instead you had bought a watermelon at $1 and sold it later at $2, you
would have made $1, or 100% return. 100% is great, but not compared to 900%.

In our example the coupon you bought was a Call option.

If you had thought the price of watermelons was going down, you could have
bought a Put option. Put options gain value when the stock goes down in price.

Call options gain value when the stock goes up in price.

That’s basically all you have to remember.


Calls make money when the underlying stock goes up.

Puts make money when the underlying stock goes down.

Call me UP.

Put me DOWN.

Let’s move on.

When talking about an option there are 3 classifications to be aware of:

In the Money, At the Money, Out of the Money.

In the Money

If a stock is trading at $50 the $45 Call the option is in the money by $5 as it has to
have $5 of intrinsic value.

At the Money

If a stock is trading at $50 the $50 call is trading at the money.

Out of the Money

If a stock is trading at $50 the $55 call is out of the money.

Expiration

As you saw earlier in the Watermelon example, the coupon I sold you was only
good for 90 days.

That is what is known as the expiration date.

All options have an expiration date.


At expiration, the option will stop trading. If the option has any value left it can be
exercised. That is jargon for used. Basically if you use your coupon to buy a
watermelon you are exercising your option.

If the option has no value at expiration, it expires worthless and basically goes
away. Poof like magic.

There are many different expiration cycles to choose from.

The most common are monthly options. There are also weekly options,
quarterlies, and LEAPS.

A LEAP is long term option that expires in January it could be next January, or one
or more years away.

2 Components of Option Value

Intrinsic and time value

Option Value is known as Premium.

Premium is made up of two sources: Intrinsic Value and Time value.

An option has Intrinsic Value only if it is In The Money.

So if the strike price of a Call option is $50 and the stock is trading at $57, the
option has $7 worth of Intrinsic Value.

Options also have Time Value.

Time Value is based on how much time left to expiration. The farther away it is
the more the option buyer will have to pay for the option.

American and European


Most stock and ETF options are American style options. Index options are
European style.

The main difference is that American style can be exercised early. European
options cannot.

A Short History of Options

Let’s talk about why options started trading in the first place.

Options were created as a way to lose money!

Most amateur traders don’t realize this. Options were created as a way to hedge
a position. They were created to act as insurance.

They were first introduced in the commodities space. Imagine you are a wheat
farmer and you need to know what the price of wheat will be when your crop is
ready to sell. Prices fluctuate all the time. As a farmer you could buy Put options
on wheat as a hedge against falling prices. This way even if the price of wheat
drops to zero and your crop is worthless, your Put options will make money and
make up for the loss.

Or take the example of a toy manufacturer. Toys are made of mostly plastic which
is made from oil and gasoline. In order for you to know your costs, you need to
know what the oil and gasoline will cost in the future. If they go up too much your
toys will cost too much to produce and no one will buy them. So what you do is
buy Call options on Oil and Gasoline. That way even if the prices go up, your
options will make money and you can use that money to offset the higher cost of
materials. Since your costs of Oil and Gasoline are known in advance you can price
your product properly.

In both scenarios, you want to lose money on your options! You only wanted
them as insurance. No one ever wants to collect on their insurance, because that
means something bad happened.
Market makers and other traders are happy to sell these options because they
know the odds are on their side and that the options will most likely expire
worthless.

So you see, both sides know that the options will expire. And they are happy with
it.

Options were then introduced on stocks in the hopes of increasing trading and
commissions. Boy did that pay off for the stock exchanges.

But that’s when speculators jumped in and started promoting options as a way to
get rich. And while it is possible to hit a home run with options once in a while,
over the long term, buying options is a losing game.

If you have ever seen an ad or heard someone talking about making 1000 percent
gains they are talking about buying options.

In future lessons you will see why this is a very hard way to get ahead over the
long term.

Summary:

You now have a basic understanding of what an option is.

You know that there are two types of Options: Calls and Puts

You know they all have an expiration date.

You know the price of the option is also called Premium and is made up of
Intrinsic Value and Time Value.

You know how to tell is an option is In the Money, At the Money, or Out of the
Money.

You know the difference between American and European Options

And you had to sit through a brief history lesson on options. 