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Duritz

Duritz

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OK, so excuse my ignorance here, I'm just trying to work out options as I think I might like them.

So let's start with it simple: I want to buy an option to buy bhp shares, currently their market price is $18.00, and the strike price is - what, is it $18.00 too? Or do they price in potential moves? I think they do, so let's say the strike price is $19.00.

Now I read that you buy shares in 100 share "packs", so one pack (is that the right word?" would be $1900 value, but you only pay the deposit, which is what, 5%? Some other agreed amount?

If the price doesn't get to $19.00 by expiration can you still buy them? Eg if they get to $18.99 you'd be better off buying them than forfeiting your initial stake.

So what's the rules here? And do you pay interest?

How's it all work??
 
In a nutshell you're paying for the option to buy or sell a share at $X amount either at any point during the contract or more commonly at the end of the contract. Options are normally offered in lots of 100 shares as it's not worth the time of options traders to deal in smaller units.

In your example you're effectively locking in an agreed price of $19 per BHP share in the future while the price is currently $18. You're betting that at the end of the contract the price will be worth more than $19 and thus represents good value at this price. In return you're paying a small % for the right to lock the price in now, as the seller would otherwise have no reason to offer a speculative price. If it doesn't reach the agreed price then you can't buy and if it does you're not obliged to do so either.

Options trading can be a great way to back a hunch or build up a portfolio without having to commit the entire balance upfront, in the same way you would take out a mortgage on a house and make interest payments rather than buying outright. You're not as invested and you only stand to lose a nominative amount if something unexpected happens that goes against your prediction. You could also use them as a defensive strategy, effectively paying a small insurance amount to cover your existing share portfolio against unexpected turbulence.

The ASX has a pretty decent beginners guide here which is worth looking into.
 

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iluvparis said:
No

http://www.investopedia.com/articles/optioninvestor/122701.asp

In options terminology, "naked" refers to strategies in which the underlying stock is not owned and options are written against this phantom stock position.
Click to expand...

So if you're really confident something will go down that's potentially a good way to do it. Is the following example accurate?

Say you really like BHP to go down from current price of $20, to $15 or whatever in the next couple of months. So, you open an option with a strike price for the buyer at $22. You collect the premium from them (have no idea how they work that bit out yet), let's say it's $1.50. So, you collect $150 premium for every contract taken out, let's say 10 of them, you collect $1500.

If after the two months -

BHP is < $22: you keep the $1500, option expires.
BHP = $22: you keep the $1500 but have to sell 1000 shares at $22, making a nett loss of $500
BHP > $22: you keep the $1500 but your net loss grows with the price of the share as you have to sell at whatever price it is

Is that right?
 
BHP is < $22: +1500 (they won't exercise as its cheaper for them to buy at market)
BHP = $22: +1500 (you can just buy the shares at market for $2200 and they pay you $2200 for it so its a net result of zero; you still keep the premium)
BHP > $22: +1500 - [1000*(x-22)] where x is the current share price. You will have to buy the 1000 shares at x but sell it to them at $22

*excludes transaction costs

Note your upside is limited to the premiums. If you think it's going down you should BUY the put where the downside payout is (say put with strike @ 18):

BHP<18: 1000(18-x) - 1000p where x is the share price and p is the premium price per option
BHP=>18: -1000p
 
iluvparis said:
BHP is < $22: +1500 (they won't exercise as its cheaper for them to buy at market)
BHP = $22: +1500 (you can just buy the shares at market for $2200 and they pay you $2200 for it so its a net result of zero; you still keep the premium)
BHP > $22: +1500 - [1000*(x-22)] where x is the current share price. You will have to buy the 1000 shares at x but sell it to them at $22

*excludes transaction costs

Note your upside is limited to the premiums. If you think it's going down you should BUY the put where the downside payout is (say put with strike @ 18):

BHP<18: 1000(18-x) - 1000p where x is the share price and p is the premium price per option
BHP=>18: -1000p
Click to expand...

In m example with bhp = 22, don't I buy them at 22 but have to sell them at 20?
 
Duritz said:
In m example with bhp = 22, don't I buy them at 22 but have to sell them at 20?
Click to expand...

Not if the strike prices is $22 - the option holder has to buy them off you at the strike price.
 
iluvparis said:
Not if the strike prices is $22 - the option holder has to buy them off you at the strike price.
Click to expand...

Aaaaahhhh yes of course, of course, OK ta.

The maths of it is pretty easy then, I just need to go through the different angles in my head.
 
Ok so let's say you sell call options on ten different shares. They are all priced at $10.00, conveniently. You collect 50c premium (as a guess). So you collect $50 per stock, $500 total.

In the period half of them go up 10% and half of them go down 10%, which should normally be a nett sum gain of 0, if you owned the shares outright for eg.

So you have to sell five of the stocks to the punters at $10, buying them for $11 value in the meantime. You lose $100 on each of those five stocks, $500 total, wiping out the premiums you collected.

Ok so it's still net gain of $0.

However, aren't the strike prices generally higher than the current? So if you had a strike price of $10.50 in this example you're suddenly well in profit.

Is this right? Are strike prices generally higher?
 
And in my example above if half go up 5% and half down 5% you make money thanks to the premiums.

It seems to me that if you're writing options you're kind of like a bookmaker. All of a sudden the market is in your favour because of the premiums.

If all shares remained what they are at when you start, or no movement at all, you'd collect all the premiums.
 
Duritz said:
Ok so let's say you sell call options on ten different shares. They are all priced at $10.00, conveniently. You collect 50c premium (as a guess). So you collect $50 per stock, $500 total.

In the period half of them go up 10% and half of them go down 10%, which should normally be a nett sum gain of 0, if you owned the shares outright for eg.

So you have to sell five of the stocks to the punters at $10, buying them for $11 value in the meantime. You lose $100 on each of those five stocks, $500 total, wiping out the premiums you collected.

Ok so it's still net gain of $0.

However, aren't the strike prices generally higher than the current? So if you had a strike price of $10.50 in this example you're suddenly well in profit.

Is this right? Are strike prices generally higher?
Click to expand...
No, market makers set strike prices in the money, at the money and out of the money - it's the trader who opens the position that chooses their strike (in theory, in practice Aussie MMs leave large spreads and can be a little slack in setting markets for deeper out of the money strikes).

If you're selling naked calls on 10 series of equities you will either be heavily impacted by transaction fees (brokerage + an option clearing fee) or require larger sell to open positions that will require huge margins - and note many brokers require higher margins than the official ASX margins.

Also note that most brokers won't let a newbie with zero experience write naked calls or any other ETO position without downside/upside protection.
 
Mofra said:
No, market makers set strike prices in the money, at the money and out of the money - it's the trader who opens the position that chooses their strike (in theory, in practice Aussie MMs leave large spreads and can be a little slack in setting markets for deeper out of the money strikes).

If you're selling naked calls on 10 series of equities you will either be heavily impacted by transaction fees (brokerage + an option clearing fee) or require larger sell to open positions that will require huge margins - and note many brokers require higher margins than the official ASX margins.

Also note that most brokers won't let a newbie with zero experience write naked calls or any other ETO position without downside/upside protection.
Click to expand...

OK, well that ****s all that then.
 

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