Option prices change very drastically compared to the underlying stock, though, so a $1 movement in the stock might mean a $75 (this number would be capped at $100, which is 100 delta) movement in the option contract, which might have only cost $500 to enter in the first place. Options are worth more in periods of high volatility, vega describes how much more.

Timmy asks you if you want to buy the train now, and you say, "No Timmy. Press question mark to learn the rest of the keyboard shortcuts. ELI5: What is trading Options with stocks? Options are worth more in periods of high volatility, vega describes how much more. For example, the time sensitivity greek, Theta, can be used to know the potential gain/loss in one day.

So, by friday, if the stock has moved from $1.00/share to more than $1.06, and if you are able to find someone willing to purchase the shares you will have made money. But Timmy is locked with you, so now you sell the train for $7, keep the $2 and give Timmy his $5. If you're trading options, it's pretty much identical to trading stocks at the ELI5 level (not at all at the ELI a finance major level). As you probably know, an option is the right but not obligation to buy or sell something at a -fixed time and price.


The idea is to have an option that's "in the money" when the exercise date comes, ie; the contract allows you to buy shares of XYZ at $100/sh when on that date it's trading at $110/sh., meaning instant $10/sh in gains. Their value is determined by what the strike price is relative to the underlying stock, the expected movement in that stock, and how long before the contact expires. All questions go in Monday Morning catch-all threads.

i have virtually no knowledge in the field and am trying to teach myself how to trade. that is the simplest explanation i can think of, but do not let the simplicity fool you- it is substantially more complicated than that. The common way to start with options trading is to buy options. A put option is "the right to sell a certain stock at a certain price before a certain date". This will give you an idea of the most important factors in the option price. You made $1.50 this time (2-0.50) but remember you only invested $0.50. The largest profits come when you buy very cheap options that are likely to expire worthless and a large price move makes them very expensive. When posts like these start appearing, the top is in. This means, you can expand our investment, and invest on 10 more items and make $1.50 from each. So for a $1 move in the stock price, the option's price will move by delta (.5=$0.5). You don't know if it will be any good. The option represents 100 underlying shares of a stock, and the only money that changes hands is the "option" to buy/sell those 100 shares to the counterparty, so the prices are very small compared to 100 * share price. If you buy a put, you are … What is it?

It is now worth $4.50. Your BFF Timmy has a cool Thomas train. If the GE stock indeed goes over $33, then you might exercise your option and realize the profit or you wait few more weeks till 3rd friday of March, anticipating it to go up. Not necessarily true. There's something called Put option as well, where you anticipate the price of a stock going down. The position value had gone up around $3,500 but I could have easily lost a lot had the market moved hard. The forum’s 600,000 members dub satirical options-trade commentary over scenes from TV shows like It’s Always Sunny in Philadelphia and rant about a … Options are insanely complicated; theres some shit that you can do with options that robinhood cant protect you from or that they havent accounted for. Edit: Don't explain like I'm actually 5.

Each of the Greeks describes the relationship between an option and some other variable (usually a characteristic of the underlying). Press question mark to learn the rest of the keyboard shortcuts. One downside is that options tend to be less liquid than their underlying securities. It is basically the sensitivity of the price of the option. Press question mark to learn the rest of the keyboard shortcuts. Not enough hedging? And keep the money I gave you."

You invested only 0.50 cents but your gross profit was same as it would have been had you invested $5. Each time an option trades hands the two parties to the trade are making effective bets about the direction of all the variables used to price options (the most important is volatility) and at least one side has an understanding of how the second order changes will affect these, my advice would be, don't try to trade them if you aren't in the information holding side of the trade). In some ways, for long calls, delta can be seen as the likelihood the option finishes in the money. Imagine a new toy comes out for $100.

Not trying to scare you, I’m just making you aware of the implications as i understand them; by all means someone correct me if im wrong. Piggy backing on this to say that 85% of all options contracts expire worthless. There's two ways to make money. here is my understanding: a share in a stock is partial ownership in a company. I left some S&P future contracts open on the market overnight by mistake around 2005 or so and the next morning realized I never closed my positions (I wrote a program to do auto-trading).

If you're looking for an ELI5 explanation and want to get started options trading, you may as well just Venmo me the money you were going to trade with. Sort by. A great book for this topic is Hull, John C. - Options, Futures and other derivative securities and Hull, John C. - Risk Management and Financial Institutions. if however the stock succeeds and you are not able to find a person to purchase them and you are not able to pay for it, you TECHNICALLY are on the hook to buy 100 shares of stock at $1.05 a share. For this we’ll say your premium is $0.01 / share.

How do they calculate the profit they're getting by buying/selling them before the maturity date, and how do they bring in such large profits? Profits = Sale Price - Purchase Price, but those prices can be estimated by models such as Black-Scholes. when its at $500 a share, thats $50,000. You can pay $5 now to get the option to buy the toy at $100 (you could just buy the toy for $100, but then you'd be stuck with it whether it's good or bad). Don't Panic! The option represents 100 underlying shares of a stock, and the only money that changes hands is the "option" to buy/sell those 100 shares to the counterparty, so the prices are very small compared to 100 * share price. Cookies help us deliver our Services. All the kids in the neighborhood wants his train and are willing to give them their lunch money.

So you buy Timmy's train for $5. This change of the change becomes very important when prices move by larger amounts. You will lose 0.50 if you. Like anything, you try to buy cheaper than you sell. Because they describe changes a basic understanding of calculus is useful (the Greeks are all partial derivatives of the Black-Scholes valuation model).
Stuff can hold your hand and make it easier but it is you on the hook for it at the end of the day. It's only appropriate for relatively small moves in the stock price (as we'll see next). Since you own the stock and sold the call against that we call it a covered call.

Protip: you're not going to make money doing anything in which you have the proficiency of a 5-year-old. This thread is archived. No Personal Finance, Homework, Personal blogs, or Career-related posts. Rho measures the sensitivity of the option's price to interest rates. Explain Like I'm Five is the best forum and archive on the internet for layperson-friendly explanations.

Thanks! I get the concept of options in general and what they represent, but I'm interested in how people trade them. When the stock youre buying is $1... who cares. You let the OPTION expire and Timmy keeps your 50 cents.

You then tell Timmy that you will give him 50 cents if he holds the train for you and sells it to you for $5 whenever you ask for it, until next month. This practice is referred as to "make the portfolio (greek letter) neutral", which means that it'll not be affected, in theory, by the specific sensitivities. Options magnify returns in either direction because they are leveraged instruments.

Would you buy the train now? Explain Like I'm Five is the best forum and archive on the internet for layperson-friendly explanations. You can buy this right from or sell it to someone else.

A general overview of what and why you do it.

What this means is until 3rd Friday of March (this is the general expiration date) you have the option to purchase the GE share for $33 (strike price). Looks like you're using new Reddit on an old browser. You would calculate your profit like any other investment: price sold - price purchased. Press J to jump to the feed. Most option trading involves selling option protection (accpeting occasional large losses for small gains, thus the nickname picking up nickels in front of a steamroller), so understanding vega is very important to monitor.


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