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Definition of an option

An option is the right, but not the obligation, to buy (call option) or sell (put option) a fixed amount of a given stock or a fixed number of commodity contracts, at a specified price, within a specified time period.

An option is contract between 2 parties that give the purchaser the right, but not the obligation to buy or sell an underlying asset at a particular price on or before a particular date.

Stock goes up call goes up, put goes down

Stock goes down put goes up, call goes down

OPTIONS.....debunked

Options are a really powerful tool, a bit like a chain saw. The chainsaw can do in a day what regular tools do in a month. But chainsaws are scary when you use them for the first time, and yes, if you fail to follow the safety guidelines you can cut your leg off.

It's too bloody hard I don't understand it.

In fact I think only 10% of brokers bother to qualify on options. Imagine the advantage you will have if you become one of the 10% rather than the 90%.

Most people buy an options book see the Black Scholes equation on page 1 and go 'bugger this for a game of soldiers". But you don't have to understand how a chain saw actually works to use it; you just need to know how to operate it and the safety instructions. And that is not so hard.

It's too dangerous.

Yes if you do something stupid with a chainsaw it will cut your leg off in half second.....yet other people use chainsaws every day and are still walking around. You can use options in many ways. Some strategies are all about reducing risk.

Buying options is a mugs game 80% expire worthless

This is an urban myth anyway but lets assume the figure is true. A large proportion of options are bought as a hedge by institutions looking to protect your super... they are in fact an insurance policy against the market having a bad fall. Well that is how insurance works when everything is OK you would expect only 20% of holders claim on their insurance. this means the system is healthy and working properly and risk is being managed . So if you bought options to protect your shares against a market fall and they expired because the market rose were you a mug...no. All options tend to change hands many times and at different prices between inception and expiry. Were the guys who bought cheap and sold dear mugs... no.

MADCOW'S Attempt at explaining options in normal language.

The Value of any option is based on three main variables

1) INTRINSIC....The REAL value of the option based on the relationship between the stock price and the strike price. Eg if the stock is at 25c and the option is at 20c strike there is a REAL or intrinsic value of 5c because we can exercise the option, buy shares at 20c, then sell them in the market at 25c. If the stock is at 10c the option has no REAL or intrinsic value it only has some value based on HOPE.

2) TIME....The longer the option has to run the more HOPE you have so the hope value of an option is higher for an option with a longer time to expiry.

3) VOLATILITY.....There is a higher probability that stock that has big swings will move up and trade at a given target than a stock that is very quiet and does nothing. So the HOPE value of an option is higher for volatile stocks. Eg NCP which trades all over the place has a volatility of 40% so the options are much more expensive than TLS whose volatility is around 16%.

The theoretical value of an option is calculated using quite a complex equation the Black Scholes formula using these 3 main inputs and the interest ratewhich is the fourth variable.Dividends payable are also included in the clculation.....sorry you can't make a quick buck by buying a put the day before a stock goes ex dividend.

DO YOU REALLY WANT TO SEE THE FORMULA?

OK click here..but don't blame me if your head explodes

GREEKS...What happens to the option if the variables change

Delta: the degree to which an option price will move given a small change in the underlying stock price. For example, an option with a delta of 0.5 will move half a cent for every full cent movement in the underlying stock.

Or..Bang for your bucks...how zippy it is....

Gamma: It measures how fast the delta changes for small changes in the underlying stock price. ie the delta of the delta.

Vega: The change in option price given a one percentage point change in volatility.

You don't need to know how all the maths works you just download a bit of software that does it for you... and fill in the boxes...eeeeeezy peeeezy.

And they're free

this is what I use it is the business

Learn about Options.

CallWriter.com - R-time covered calls.

Chicago Board Options Exchange - Information, quotes and educational

CNNFN: Commodities - Daily commodities market data.

Daytraders University - Commentary & education

Delta Neutral Trading - Learn to trade futures options like a pro, using Delta Neutral, Calendar Spreads, Option Scale Trading and other Option Secrets Revealed for the First Time.

Futures Industry Institute - An introduction to the markets, including information on contracts, hedging, spreading, an FAQ, and glossary.

INO.com - Big website for futures, options, equities and forex traders.

Optionetics.com Chat, commentary, store and education.

Madcow's Traders Bookshop. All the books you can read on

Madcow's Interesting Product
E Book
	*Option Secrets* Learn to trade options like a pro, using Delta Neutral, Calendar Spreads, Option Scale Trading and other Option Secrets.

Options
William F. Eng

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