Repetitive patterns and other patterns - page 12
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That's the question. Using options has no effect on "guessing" (if I understand correctly), and you can also limit the loss with a stoploss, so what's the difference then?
Those who know options, explain it "on your fingers" with an example. From general phrases it is difficult to grasp the meaning of this operation. What is the "buzz" in it?
The buzz for the buyer is that he does not risk more than the amount of the premium and the broker's commission before the expiry. That is, his stop-loss seems to have been triggered from the moment he bought the option, but all is not yet lost, because the price can go in his favour before the expiry. And the seller's high is that he gets the premium, but he takes the full risk. It seems that he has already got the money, but there is no guarantee that the price will go in favor of the seller and he will not have to compensate for losses several times higher than the premium.
In addition, there are many other subtleties, for example the step change in the second price of the option between the time of sale and expiration, which allows you, depending on this price + the market price of the instrument, to resell your rights and obligations on the exchange to someone else.
It cannot be explained on the fingers, and there are no analogues in other types of trading.
knowledgeable like FAQ, but on my fingers: an option is not a purchase/sale of currency, but the right to buy currency at a specified price, i.e. you can buy and you can decline at the expiry of the option, but some kind of collateral takes place, if at the expiry of the option there are conditions unfavourable to the seller, an option consideration will be received, this seems like a sensible example described:
http://www.optionlaboratory.ru/news/chto_takoe_opcionnyj_kontrakt/2011-02-26-6
There's a ton of information on options right now.
In a nutshell - an option is the right (but not the obligation) to perform a trade at the right (favourable, better) price.
At the agreed time (expiration date) - European (vanilla) options,
At any time before the agreed time (expiration date) - American options.
Or resell your right at the market price before the expiration time (expiry).
There's a ton of information on options right now.
In a nutshell, an option is the right (but not the obligation) to perform a trade at the right (favourable, better) price.
It must be clarified that the right only applies to the buyer of an option before expiry. For the seller of an option, from the time of sale, there is only an obligation to exercise the right of the buyer at the first expression of will by the buyer before expiry. If you don't clarify this, you get a load of misinformation.
Those who know options, explain it "on your fingers" with an example. From general phrases it is difficult to grasp the meaning of this operation. What is their "buzz"?
Bottom line on the fingers! If I say anything wrong, please correct me.
An option is the right to buy(Call options) \sell (Put options) shares. The value of this right is about 5% (depending on the expiration date) of the value of the stock.
For example, the value of the shares in company XXX is $100. And you expect the price to rise or fall by $15 to $115 or $85 respectively.
Then for 5% ($5) you can buy from the seller of the option the right to buy/sell the stock. And if your prediction comes true, you earn profit of $15 (stock price difference) - $5 (option value) = $10/share.
Further description for Call options...
Normally, options are not exercisable (meaning you don't have to buy the stock and the seller just compensates you for the difference in the stock price, like in the example above). But you can also request that the shares themselves be sold to you at the stated price, in which case you have to pay the agreed amount to the seller, albeit below the market price (at $100 rather than $115). There are options which can be exercised before expiration. For instance, it would be beneficial for you to exercise an option when the stock price rises to $120 instead of waiting until the option expires because the price might go down later and you already have more profit than you bargained for.
If the price went up not by $15, but by only $3, then there's no point in exercising your options because if you do, you'll lose $2 (the market price of the stock doesn't cover the premium) + $5 (the premium) = $7 loss. And since you have a right (option), unlike in futures where you have an obligation, you can refuse to exercise the options (buy the stock) and only lose your $5 loss.
Options don't have a stop loss! You only risk the premium paid up front to the seller. But this option is only if you bought the option, and if you sold it, you have a liability (FULL)!
The appeal of options is that for 100$ you can buy only 1 share, and then sell it and earn the difference, then for the same amount you can buy 20 shares (or rather stock options). The profit will be 20 times bigger, but the loss will also be bigger. You can also sell options and make $5 each on unrealised forecasts per share.
Moreover, if you bought an option (Call or Put), then your loss will be limited to the premium of the option (5$ per share), but if you sold the option - then your loss will be unlimited (depending on the price of the stock)! And the important thing is that if you sold Put stock options that nobody wants - you're bankrupt! ))))
Put options are the same, only - it's the right to sell the stock at an agreed price and not the current price, if it's profitable. Therefore, options are complex instruments, for which it is important to know not only the direction of the share price (up or down), but also the value (the magnitude of the price movement) and the expiration date.
The point is on your fingers! If I say something wrong, please correct me.
1) An option is the right to buy(Call options) \sell (Put options) shares. The value of this right is around 5% (depending on expiry date) of the value of the stock.
2) Options do not have a stop loss! You only risk the premium paid up front to the seller. But this option is only if you bought the option, and if you sold it, you have a liability (FULL)!
1) The value of the "right" depends on the strike and the number of days to expiry (as well as historical volatility, risk-free rate, etc.). The option can be worth hundreds or thousands of times less than the underlying asset (the BA), or it can be worth more than the BA.
2) Stops are there - like anywhere else in the stock markets (I understand that MT4 has corrupted everybody, and by a stop they mean a 100% obligation of the broker to execute it, but in the stock markets this cannot always be achieved) - we put a stop order and it either triggers or it does not.
Options should be approached wisely, but there is nothing to be afraid of. The worst thing is if the trader will only buy options (and will not sell, because all the forums told him it is scary - the risks are unlimited, etc.). In reality - almost no one trades pure options. Look at the list of basic option strategies, which is not very complete. Almost everywhere both sell and buy options.
For those who are scared and uninterested, they can use options to create a "leverage" effect (it is not always possible). For example, buy BA is equivalent to buy Call BA + sell Put BA. That is, a long BA position is equivalent to buying calls and selling puts (with the same strikes and expiry dates). "The catch is that buying a call and selling a put can require a smaller amount of collateral, which is true for many exchange-traded instruments.
All in all, options are a very interesting instrument. They are really complicated, but once you get the hang of it, everything quickly falls into place
primer:
If the price went up by only $3, instead of $15, then there's no point in exercising your options because if you exercise your options, you'll lose $2 (the market price of the stock does not cover the premium) +$5 (the premium) =$7 in losses. And because you have a right (the option), as opposed to futures, where you have an obligation, you can refuse to exercise the options (buy the stock) and only lose your $5.
Why wouldn't it make sense? Where did you get your $7 loss from? The market price of the stock is $103, the call option gives you the right to buy it for $100. If you exercise the option, in which case the writer of the option will either return the difference between the market price and the option price, i.e. $3 per option, or sell the stock at $100, which can be resold on the exchange for $103. The loss would be $2 per option: $5 - $3 = $2 . And if not exercised, the loss would be for the entire premium, i.e. $5 per option.
That's the beauty of buyers of options, the loss of the option premium is the maximum and can only happen if the price goes against the grain and does not return before expiration. If the price goes against the wool, the buyer can either make a profit or partially cover the cost of the premium.
Thank you for your answer. Can you elaborate on the bankruptcy?
If I sold a put option on a stock, I got the premium. Right? If no one wants the shares, then so what? So I keep them. Why am I bankrupt?
A request to the moderators:
Create a separate topic on options and move the option-related posts from this thread there. Talking about options in this thread is off-topic.
When you sell options, the buyer of them gets the right, in this case, to sell you shares (a Put option). You sell Put options in the expectation that the share price will not fall below the value of the premium and the options will not be exercised. Then the profit for the sold options (5% premium - see note notused, above post) does indeed remain with you.
But if the market for the shares in question has crashed, i.e. their value has fallen so low that it obscures your premium and in addition everyone is just selling them because nobody wants them, THEN the owner of the Put options has the right to sell you those shares at the previously negotiated price. I'll continue with my conditional example with $100 shares of company XXX. Let's say they have fallen to $70. Then not only are you already at a loss: the difference in the share price of $30 - $5 (your premium) = -$25 per share, you will also have to buy the shares themselves for $100 per share (you as the options seller have an obligation to do it to their buyer), which you can hardly afford. That is, you'll end up with a loss of $25 per share on your balance sheet, but with zero available funds (you'll pay for the shares) and nobody needs the stock on your balance sheet. You are therefore bankrupt!
To the top post.... until you try it, you won't understand....
Thanks notused for the additions, I was just trying to explain with conditional examples to make it clear without unnecessary details....
I will only add:
To point 1) : there are many factors considered in the value of options on different models, but the principle is that:
The probability that the share price will rise by e.g. $5 in a one-month period is greater than the probability of the same share price rising (by $5) but in 1 day. Therefore, options expiring in a month (using the example of a 100$ share expiration date) would be worth about $5 per option, while options on the same stock but only expiring in 1 day would be worth a penny (0.01 - 0.25$). I'm taking the numbers here from the background, but as notused correctly pointed out, they are calculated by certain models.
to point 2) I really misspoke. classic stops exist everywhere. i was there trying to compare the liability of options (when buying) on premium and forex's on margin call (accounts).