Quote:
Originally Posted by lewdog
Last question (for tonight) but now I am confused on the terminology and what they mean. Did a screenshot of my scenario on GE when looking up the option chain on TD Ameritrade.
If I wanted to sell a put on GE at $15, would I select the "buy" or "sell" option on this chart (what's the difference?)? What do the bid and ask prices represent in this?
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Okay, let's start here...
Bid = the price you will sell at or, the price the market maker will buy from you...
Ask= the price you will buy at or, the price at which the market maker will sell to you...
When you buy a stock, option, futures contract, etc., you generally buy at the Ask..
When you sell, you sell at the Bid...
So in your example you would "Sell" or "Sell to Open" at .09 which is the Bid.
So, you will be paid 9$ for each contract you sell. Each contract is 100 shares so basically, .09 a share.
To close the position you would Buy or Buy to Cover. Or simply let the option expire worthless if it is out of the money at expiration.
But think about it...you're going to get $9 - Commission...on an option that is 80+ days out....not worth it
Like I said, people love to talk about Options. How great they are, how much money you can make, etc., etc. Especially the dolts on Fast Money on CNBC. But they always talk in gross terms, never in net terms.
If I were you, and you want to get started in options I would stick with either covered call writing or straddles\strangles.
A strangle is when you buy a Call and a Put at the same strike price. What you want is for the stock to move hard in one direction or the other. You're going to lose on one and make money on the other. The goal is to have the winner cover the loss of the loser and then some. But you have to be picky when you buy those.
A straddle is the same but and wider strike prices. So if a stock is at $50 you might buy a $52 Call and a $48 Put thus "straddling" the current price. It's cheaper than a strangle but I think harder to make money.
People fall in love with the fact they can pay a little money for an option contract and potentially make huge money. And you can. Very few are consistently good at it. Most lose a ton more than they win.
Use Options wisely. Buy a stock. If it goes up and you want to lock in some profit, write a Call. If you think the stock will tank cause the market is going down and don't want to sell, buy a Put. You have to recover the price of a Put though if the stock doesn't go down.
Always remember this...
When Buying an option you have to be right, right now. And depending on how out of the money the option is, you have to be right about 3 things..
1. The timing
2. The direction
3. The amount of the movement
So the inverse is true for writing..
You really need to get some books on Options to understand how they work. How time eats at the value of an option...
How volatility effects price...
What Delta is...
But please, if you do anything heed this little tidbit...
If you want to buy an option, buy several months out and close to the current price. Don't try to buy an option 5 points out of the money that expires in 3 weeks....
As a buyer, time is your enemy so you have to buy time...literally
If you want to Write options, write current month options. The closer an option gets to expiration, the faster the time value (Theta) comes out of the option. So use that to your advantage....