No lack of OPTIONS

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aliassmith
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Postby aliassmith » Fri Feb 22, 2013 1:08 am

Jalarupa wrote:This video helped me

http://www.youtube.com/watch?v=8El1iKy25u8

Thanks for the video I'll take a look at it.
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aliassmith
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Postby aliassmith » Fri Feb 22, 2013 1:24 am

aliassmith wrote:
lazygeorge wrote:Aliassmith can you give an illustrated example please :)

For example a chart showing a hypothetical strike that would be " in the bottom 25% of the momo candle"

And a hypothetical " FOTM strike price" (how far out of the money?)

Sorry for this but like they say...a chart is worth more than a thousand words...or something like that :)


I hope this pic is worth at least 100 words. Anyway I can't give exact number because you will need to figure out which ones to get based on your needs and value at the time. You may pay $6 for the long call and get a premium of $2 for your Short call https://www.tradeking.com/education/opt ... short-call


So now price of the underlying moves in your favor your long call is ITM and your short call is OTM. You add a long call that is FOTM with a DELTA of. 25 to..40 at this point you are trying to leg into a butterfly.
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lazygeorge
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Postby lazygeorge » Fri Feb 22, 2013 1:43 am

"So now price of the underlying moves in your favor your long call is ITM and your short call is OTM. You add a long call that is FOTM with a DELTA of. 25 to..40 at this point you are trying to leg into a butterfly."

That delta you talk about is .25 to .40 or 25 to 40 as in whole numbers...sorry if its a silly question...

aliassmith
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Postby aliassmith » Fri Feb 22, 2013 4:30 am

lazygeorge wrote:"So now price of the underlying moves in your favor your long call is ITM and your short call is OTM. You add a long call that is FOTM with a DELTA of. 25 to..40 at this point you are trying to leg into a butterfly."

That delta you talk about is .25 to .40 or 25 to 40 as in whole numbers...sorry if its a silly question...


Delta as in 25% to 40% or 20 to 40 cents on the dollar
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aliassmith
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Postby aliassmith » Fri Feb 22, 2013 10:56 pm

aliassmith wrote:
aliassmith wrote:
lazygeorge wrote:Aliassmith can you give an illustrated example please :)

For example a chart showing a hypothetical strike that would be " in the bottom 25% of the momo candle"

And a hypothetical " FOTM strike price" (how far out of the money?)

Sorry for this but like they say...a chart is worth more than a thousand words...or something like that :)


I hope this pic is worth at least 100 words. Anyway I can't give exact number because you will need to figure out which ones to get based on your needs and value at the time. You may pay $6 for the long call and get a premium of $2 for your Short call https://www.tradeking.com/education/opt ... short-call


So now price of the underlying moves in your favor your long call is ITM and your short call is OTM. You add a long call that is FOTM with a DELTA of. 25 to..40 at this point you are trying to leg into a butterfly.

To finish the butterfly you wait until your new long call is ATM/ITM then sell a call at the same strike price you did previously. This will lock in profit.
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Postby aliassmith » Fri Feb 22, 2013 11:16 pm

lazygeorge wrote:"wide Index Strangles"

I suppose aliassmith will eventually get round to explaining these...its all a bit alien to me when you go beyond talking about CALLS and PUTS :)


I am not sure what that woman is trading, but a long strangle is useful when you think price is at a place it will leave soon, either long or short. Tight range days, inside bars, zlines come to mind. http://www.theoptionsguide.com/long-strangle.aspx

Maybe the lady is selling strangles with strike prices very far apart and collecting premiums 95% of the time. http://www.theoptionsguide.com/short-strangle.aspx
Last edited by aliassmith on Sat Feb 23, 2013 12:25 am, edited 1 time in total.
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Postby PebbleTrader » Fri Feb 22, 2013 11:42 pm

The Call Option

The buyer (owner) of a call option has the right to purchase 100 shares
of stock at the strike price designated in the contract. This right to purchase
can be exercised anytime before the contract expires. Typically,
the time frame of the option extends through the third Friday of the
expiration month stipulated in the contract.

The seller (writer) of a call option has the obligation to supply 100 shares
of stock for purchase at the strike price, if so requested by the owner of
the option. This obligation to supply the stock may be required at any
time before the contract expires. As a practical matter, if the stock price
is below the strike price, the stock is almost never "called" away from the
seller. Even when the stock price goes above the strike price, the assignment
of a call rarely happens until near the expiration date.
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Postby PebbleTrader » Fri Feb 22, 2013 11:45 pm

BUYING A CALL OPTION

The motivation to buy a call option could be based on your expectation
that the price of XYZ stock will soon rise above its current level. Let's
set up a possible trade, clarify its risk, and examine some possible outcomes resulting from the trade:

- Trade. In early February, with XYZ trading at $49, you decide
to buy one call contract to benefit from the expected rise in the
stock price. To allow a reasonable amount of time for XYZ to
advance, you select a contract with an April expiration. You also
select a strike price of $50. Option prices are quoted on a pershare
basis, and let's suppose that this call option costs $2 per
share. Because the option covers 100 shares of stock, this means
you pay $200 to own this particular call contract.

In the jargon of options, you are "long one XYZ Apr 50 call."
Now you have the right to purchase 100 shares of XYZ stock at
$50 per share anytime before the close of trading on the third
Friday of April.

This right to purchase XYZ stock for $50 per share does not
look so good at the moment, because the stock is priced in the
market at only $49. Indeed, why have you paid $2 per share for
something that presently has no intrinsic value? Because the
expression "time is money" is most appropriate as it applies to
options. You paid $2 per share as a cheap way to participate in
the movement of the price of XYZ stock until the call expires in
two months.

- Risk. Your risk on this trade is limited to the $200 paid for one
call contract.
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Postby PebbleTrader » Fri Feb 22, 2013 11:49 pm

- Outcome. Let's examine a few scenarios to see how this trade
might work out:

1. Suppose your faith in XYZ stock is validated as its price
reaches $54 by the end of March. Now your right to purchase
XYZ at $50 looks good, and you decide it is time to
take your profit. Should you call your broker and tell him to
exercise your right to purchase this stock at $50? No, because
you will do much better if you just sell the option. The
option you bought for $2 is likely to now be worth $5.50. So,
the contract for which you paid $200 can now be sold for
$550, giving you a nice $350 profit. That represents a
175 percent profit on the option, whereas the stock price has
risen only 15 percent.

Why is this option worth $5.50 when its intrinsic value is
only $4 (54 ? 50 = 4)? Again, because "time is money," and
the person who buys your call option is paying the extra
$1.50 per share over its intrinsic value in hopes that XYZ
stock will go even higher before the April expiration.

Let's see why selling the option is more profitable than
exercising it. If you had exercised your option to buy XYZ
stock at $50 and then immediately sold the stock at $54,
that would be a $400 gain on the stock, less the $200 cost
of the option for a net profit of only $200. So, exercising the
option yields only a 100 percent profit as compared with
the 175 percent profit received from selling the option. Also,
selling the option avoids any issue about having enough
cash in your brokerage account to take ownership of the
stock.

2. In contrast to the happy Scenario 1, let's see what happens in
the unfortunate case when XYZ is under $50 when the April
options expiration date arrives. If you remained stubbornly
optimistic until the end, you would have seen the value of
your option diminish until it expired worthless. In this
worst-case situation, you would lose all of the $200 that you
originally paid for the option. Usually, there is no need to
incur such a complete loss. If XYZ is still around $49 in early
April with only a couple of weeks left until expiration, you
might conclude that the chance for success looks remote.
Then sell your option for whatever value remains. Suppose
that you could sell the option for $1 per share and thereby
close the trade for a 50 percent loss. The decision to limit
your loss on a long option trade to 50 percent is a reasonable
exit strategy.
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Postby PebbleTrader » Fri Feb 22, 2013 11:54 pm

SELLING A CALL OPTION

Suppose that you own 100 shares of ZYX stock, which at the current
price of $67 is above where you bought it, but now seems to be stalled.
It would be nice to make a bit more money on this stock, and you
would be quite happy to part with it at $70 per share. This could be
your motivation to sell a call. Selling a call would immediately bring
some cash into your brokerage account, and if ultimately you are
required to give up your stock for $70 per share, that is an additional
gain. Let?s set up a possible trade, clarify its risk, and examine some possible outcomes resulting from the trade:

- Trade. In early February, you decide to sell one call contract on
ZYX. You pick the $70 strike price and a March expiration. The
March option is selected so as to have an early resolution as to
whether your stock will be retained or sold. Suppose that you
are able to sell the March call for $2 per share. Because the
contract covers 100 shares of stock, that brings in $200, which
is yours to keep.

In the jargon of options, you are "short one ZYX Mar 70 call."
Also, this particular combination of owning a stock and selling
a call is referred to as a covered call position. You now have the obligation
to give up your stock at $70 a share if someone exercises that right
against you before the close of trading on the third Friday of March. Does
this mean your stock will be called away as soon as its price is a penny
over $70? No, because under most circumstances you only need
worry about losing your stock within a few days of the expiration
date.Why? As illustrated previously, until near the expiration
date, the owner of the option will always profit more by
selling it than by exercising it. Of course, as the expiration date
is reached with ZYX above $70, someone is ultimately going to
exercise their option and call away your stock.

- Risk. Your risk here is the usual risk of owning a stock, because
its price could drop significantly. To a small degree, this risk is
offset by the decrease in value of the short call.
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