Question about options contracts
 

One options contract is equal to 100 shares, right?

so if i want to buy a single contract at the asking price of lets say $4.00

do i pay a total of $4.00 or a total of $400 ?


Another question,

if i feel confident a stock is going to go up in value ... for short term profits am i better off on the stock or the options?

from the little bit that i can peice together it looks like the options is a more rewarding buy for the short term, assuming it goes in your favor.

thanks for any help.

you pay 400


Depends on many things, the aim price, the expected time to reach that price, volatility etc etc.

Don't even THINK about trading options if you're still asking such basic questions, my friend. I've seen people lose their life savings playing options. Read a few good books, learn, and only then test the waters :) Just my opinion.

before you drop a cent into options, read this book:

Options as a Strategic Investment by Lawrence G. McMillan.

i can't get onto amazon right now. but get this book. options are REALLY tricky. it's great leverage to make a lot of money, but it's really easy to lose everything.

I read that and might just not be the best book to start with... its like 700 pages isnt it?

it's big, but it's the best overview of the mechanics and concepts of options i've read. right now, i'm still only paper trading. i usually do straddles playing the volatility of certain stocks. i've hit some 500% home runs, and i've had some catastrophic losses. it's deceptively simple.

the purpose of purchasing the options instead of the underlying stock is you have more leverage with your money because it doesn't take as much capital to invest it in options as it does with stock

Be very careful.

Yeah I know, good book. Just dont want to see the guy start his biz making a butterfly or a condor :)

ha! equity oragami. the first few chapters are really good overviews of covered calls, etc. once you have those basics down, you can get into more exotic derivatives. in no time at all, you can start your own Enron :)

:glugglug

im reading through THIS and it seams well written, im understanding it as i go.

lots to learn but it looks very interesting!

as stated above, i also got the feeling like it is deceptively simple ... scary!

It really isnt...

can you not buy/sell your contracts as needed? Or are you limited somehow by date?

if i buy 20 contracts today and take a .10 gain on them, can i dump them tomorrow and collect? or must i wait?

you can dump them anytime before the expiration date

You can dump them anytime you have a buyer before they expire.

you can

you make it sound like this is a task?

you dont even notice the supply/demand factor when dumping stocks, do you feel it with options?

no you don't...it's instant

It's normally not a task if you're trying to dump within the spread.

Options are pretty volitale. There really best used as hedging tools, rather than dabbling as a small investor.

so in the above example the discussed, my contract expired and it did not reach the expected figures.

why do they say im left with my initial cost? Dont you lose everything if the options are worthless?

this is from HERE

to cover losses on a stock your not too sure about? But why buy the stock if you are so unsure?

just asking

that last sentence they wrote is a little confusing. if the option expires worthless, you've lost your entire investment.

it's like insurance.

Because in the previous paragraph they were talking about the paper profits you had made as of May 21. They are saying you lost your paper profits and are back to your original position of owning the contract at an inital cost of $315.

They go on to say that the option being below the strike price at expiration renders it worthless, so you are out you initial investment (cost).

Nah I am refering to say very weathly individuals that have huge positions from companys they have. Options are good tools to hedge away those risks. Infact, many very weatlhy individuals will collar positions to take loans out on principal.

As for your question, the 315 is lost., it is the premium you paid for the contract. Always remember, the amount you pay is not for the stock itself, it is for the premium for the stock at the strike price. The premium will get less and less with all things equal closer to the strike date. One of the premiums factors is time.

So, to break even you always have to have the premium + strike price = current instrument (in this case stock) price.

figured as much

you guys are being super helpful, i appreciate it!

(Additionally)

Options are also sometimes used to hedge postitions while estates are being divided or in similar situations (i.e. legal disputes) where ownership of the stock is in question and cannot therefore be immediately sold.

looks like everything has been answered here..

but just to add my comments - think of options as a form of leverage - they can magnify your gains, but if the option expires out of the money, you end up losing the premium, so while your losses are limited, there is a real possability you'll lose your premium.

Bottom line: If you don't have the money to cover the premium, don't trade options. If you know for sure a stock will go up (usually insider information gives you this edge) then buying options rather than the stock is the way to go

:2 cents:

Oh yeah, there are alot of great things options can do. However, they can eat up a small time investor like us. Because your not buying 7000.00 worth of stock (in this example) but rather 315$ worth of stock on the same underlying asset, you can invest more, for less. But, as any derivative, the swings are fast and hard. a 1% change in the 7000.00 will make a larger change ( i am too drunk to mess with actual numbers) in the 315$.

understood

I think i am going to buy a contract i have been watching and study it for a day or so, see how it acts.

the article i just read was very well written and i understood a lot, the last chapter about pricing the option was very confusing, but i will work on it a bit.

im in one of those "trust me this will be a $20 stock before you know it" situations, and id rather buy a few cheap contracts than dump lots into the stock hoping for the best.

the only problem i see is, i just read in that article that the price increase or decrease expectancy could have been forcasted and written into the contract premium, hence illiminating my profit if it moves as expected.

ill take a shot, im all about hands on and big risk lol

thanks so much for the info guys, really helped out!

very true

if the market expects the stock price to be a certain price at expiry, then this would have already been factored into the option premium.

Try checking the historical volatility & implied volatility figures - these can provide information on market expectation

what chart shows this info?

tyhanks