Are you one of those options trading for dummies students? To really learn options trading you’ll need to grasp the underlying meaning of what an option contract really is. In fact, even if you are options trading for dummies, options are one of the earliest known trading tools that were as common as business itself in the Roman era for example. If you think about it, you’ve probably traded an “option” yourself once or twice before, perhaps without realizing it.
Even if you are at an options trading for dummies level, you may have actually traded an option before.
It actually happened to me because when I was 15 years old, I had an option to buy my brothers Ford Mustang when I was old enough. Here is how that option worked. One of my brothers, only a few years older than I was driving me around in his (new to him) dark red, 2 door Ford Mustang. I can’t remember the year of the car, but it looked exactly like something I would love to drive. My brother knew I liked the car too, and for some reason during that ride he said I could buy it from him when I turned 16 and got my licence.
Options trading for dummies – My first options trade.
Really? That was maybe only 8 or 9 months away, so I asked him if he was serious about it. He said yes, because he had his sights set on bigger and better things at the time. Youthful confidence, but the offer sounded good to me. So the big question was how much would I have to pay. He shot out a number which I thought was pretty decent, considering he paid more than the $1,200 offer he gave me.
But here was the kicker. My brother said I had to be the one to keep our room clean until he moved out, whether I buy the car or not. You see we shared a bedroom and I hardly ever cleaned anything up, to his utter aggravation. I easily agreed, and hence there was a premium.
This “option” contract can be summed up as such -
We had the property – a Ford Mustang.
We agreed on a timeline – 9 Months.
We agreed on a price – $1,200
And finally, we agreed on a premium – my cleaning labor, unreliable as it was.
Now if we look at the equities and options market, it rather much works the same.
Property – one share of Apple stock.
Timeline – when the option expires – this is normally 1 to 9 months in the future.
The price of the stock, let’s say $375 – this is otherwise known as the strike price.
The premium – which is what you pay to own the option. The premium expires worthless if you do not exercise it.
For all of you options trading for dummies people, if you own a call option, you generally want the underlying property to increase in value during your option period. One night at home with both of my older brothers, we stumbled on a late night old movie called Bullitt, where in it the actor Steve McQueen drove an awesome, dark green Mustang. All three of us were glued to the screen when Steve drove that car – it was just the coolest car movie we ever watched together. Each time it was on the screen, I could the value of my Mustang rise right there in the room. In fact, it felt like I could have sold my “option” to my other brother for a handsome profit during that movie. So theoretically, I could have made a profit on my option, without ever taking delivery of the underlying option. In fact, 99% of all market option trading is done without ever having the intention of owning the stock. Still fell like you are options trading for dummies? Don’t be, becuase this website can help you with that.
This option trade example is actually quite representative of a real options trade on the exchange but by comparison an exchange traded option is simply much more regulated. So as far as options trading for dummies, you should understand a lot more already.