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why trade stock options why are stock option trading strategies bullish bearish neutral

maximum profit for trading stock options and stock option trading strategies

risk management and the maximum loss for trading stock options

Bullish Option Graphs

Long Call

Short Call

Covered Call

Call Spread

Put Spread

Neutral Option graphs

Long straddle

Short strangle

long strangle

The Calendar

The Butterfly

Bearish Option Graphs

Long Put

Short Call

Call spread

Put spread

test your option strategy knowledgle and see if you can catch the bullish option trading strategy

What is a stock option contract?

Long and short calls, strangles and straddles,bull and bear spreads, What does it all mean. What are option contracts and why use them??

There are many people who understand the basics of buying and selling stock, but unfortunately know absolutely nothing about the benefits of incorporating options into their trading plan. Although there are plenty of books on stock options, many traders and investors are at a major disadvantage due to their lack of knowledge regarding this incredibly versatile financial instrument.

There is a wealth of opportunity that can only be exploited in the options market. After reading and understanding the information on this website, not only will you be better equipped on the battlefield that is the stock market. You will also carry new tools and information that will give you a major edge over many others involved in the same game.

Pay close attention to the graphs provided. They will give you visual representation in better understand the information provided.

Feel free to skip to the topic of your interest.

~ SECTION 1 ~

Stock option basics

What is a stock option contract?
Where do stock options come from?
When do stock option contracts expire?
Stocks and options. Whats the difference?
Why should I buy or sell stock options?
What are the fees associated with options?
How much money can I make with options?
Which option broker should I choose?
Are all stock and option brokers the same?
The importance of charting.

~SECTION 2~

Bullish stock option trading

strategies

~SECTION 3~

Bearish stock option trading

strategies

~SECTION 4~

Neutral stock option trading

strategies

~SECTION 5~

The Greeks

~SECTION 6~

Stock option pricing models

Black-Scholes option pricing model

Getting Started with Stock Options

Traders and investors buy and sell Stock option contracts for many different reasons ranging from protection and collecting premium, to trading the volatility and price direction of the underlying stock.

There are many different option trading strategies. Which strategy you choose greatly depends on your objective.

Option contracts are representative of 100 shares of the underlying security and expire on the Saturday after the 3rd Friday of the month, also known as expiration Friday.

When a stock (equity) option contract expires, it can expire one of several ways; In-The-Money, At-The-Money or Out-Of-The-Money are the primary ways that an option contract can expire. These terms refer to the moneyness of an option contract and are the most important concept regarding the value of stock options once they have expired.

Stock option contracts have two different values that make-up its price during their life-span; Intrinsic and extrinsic value.

Intrinsic value is the true value of an option contract. The underlying asset price, subtracted by the option contracts strike price equals the options contracts intrinsic value.

The extrinsic value of an option, is the premium of an option contract that is due to the following:

- Time left until expiration: (options decay with time, known as time decay. Option contracts decay more quickly as they near their expiration date. (Time decay is measured through the Greek theta).

- Implied volatility: (Implied volatility (IV) is what the market forecasts the volatility of the underlying will be in the future. Past price action on the underlying asset is not a factor in figuring the implied volatility of an option contract. Implied volatility is calculated using the most current option prices in the market. Current prices are used due to the fact that many market participants look at current events to forcast future market action). Historical data is integral to technical analysis, as well as studying the nature of price movement regarding a security.

In-The-Money options expire with Intrinsic value (true value) therefore they do not expire worthless. It is very important to understand that prior to an option contracts expiration, there are several factors that effect the premium (price) of equity (stock) options.

Out-Of-The-Money option contracts expire worthless because they have no intrinsic value and have lost all of their extrinsic value as well.

At-The-Money option contracts are just as good as expiring worthless because they have no intrinsic value. The term At-The-Money simply means that the underlying stock price is at the strike price of the stock option.

The below illustration shows the difference between In-The-Money, At-The-Money-and Out-Of-The-Money for a long call option strategy. It is very important to understand that these terms vary depending on the option strategy in question. For example, the long put option strategy is the complete opposite of the illustration below.

The moneyness of a long call:

in-the-money, at-the-money and out-of-the-money for a long call stock option tradin strategy

Traders and investors use stock options very differently. An investor might use a stock option contract in order to protect an underlying stock position, such as a long put. This particular investor is using the long put as a type of insurance policy on his or her long stock position. If the stock price falls under the long put option strike price; minus the cost of the put; the investor has nothing to worry about because the long put is place protecting the investor from a hard sell off in the stock.

A trader might not own the underlying stock at all. She or he just might think that a particular stock will fall in price and purchases a put in order to capitalize from a stock's sell off, without having to assume a short stock position. As you are starting to see there are stock options can be extremely flexible financial instruments. We have not even begun to scratch the surface.

Stock options are a type of derivative because they derive from the underlying security, such as a stock. One major difference between stocks and options is regarding ownership. When you purchase 100 shares of company stock, you are said to own a part of that particular company and can enjoy all the benefits that come along with stock ownership, such as voting rights.

If you purchase 1 call stock option contract (representative of 100 shares of the underlying stock), you don't actually own anything. In essence what you are buying is the right to own 100 shares of the stock, if you choose to exercise your right to buy. This may seem confusing at first, but it will make more sense as we go along.

Remember, the option price fluctuates with the stock price. There are ways to gauge how the option price will change as the stock price changes, but this is a more complex topic. Visit the section on the Stock Option Greeks for more information regarding equity option pricing. The book Trading Option Greeks by Dan Passarelli and William J. Brodsky is a very popular and well written books regarding the subject. But for now just wrap your head around the following example that illustrates how stock options work, as well as their power and flexibility. ~

Imagine that you want a pricey collectors item, but can't afford it at the present time. Right now the item is worth $4,500 retail. Since you can afford to pay 4,500 to purchase the item outright, you decide to buy the 'option to buy' the collectors item. This hypothetical 'collectors item option contract' costs only $450. That's 90% off the retail price. The benefit of doing this is, if item increases in value, so does your option on the item. If the item decreases in value, most likely so will the option on the item. Although you don't actually own the item, the option contract allowed you to participate in any increase or decrease in the value of the collectors item as if you actually owned it, and for a fraction of the cost it would be to actually buy the item. Welcome to the world of stock options.

This is an extremely simplified example of the trader mentality behind stock options. Please keep in mind that There are very many reasons why a trader or investor would buy or sell options. The above example should at least give you a basic idea of how stock options behave.

At this point just understand that the option price is directly related to the underlying stock price.

Traders and investors use stock options in very many different ways. Many advanced stock option strategies are implemented in order to not only participate in price fluctuations of the underlying asset, but they also place trades that capitalize off of the increase and decreases in volatility of the underlying as well.

One must also consider the impact that commissions have on their trading activities. Not all brokers are created equal. It is very important to do your due diligence when selecting a broker. Every broker charges a different commission in order to stay competitive in the market.

Some brokers offer discounts based on how many trades are executed in a give period of time. You might also have to pay additional fees depending on which services you take advantage of offered by your broker.

You should choose a stock and option broker based on your individual needs. Everyone is different. Choose the broker that coincides with your specific needs. You can never do enough research. It will save you a lot of money in the long run if you DO NOT! cut any corners.

In order to be a successful trader you must learn as much as possible about, not only risk management, but also charting techniques. This is critical to being able to study price movement and spot trends and it will allow you to make better informed entry and exit decisions.

There are several different kinds of charts such as:

- (OHLC) Open High Low Close

- (HLC) High Low Close

- Bar Charts

- Mountain Charts

- Logarithmic Charts

- Dot Charts

- Candle Stick Charts

(OHLC) charts are popular because they show a brief overview of a particular stocks price action.

Many other successful traders and investors choose to use Candle Stick charting because they allow a more in depth, visual representation of price movement.

For many traders and investors, Candle Stick charting is an integral part of their trading plan but can come across as complex at first.

High Profit Candlestick Patterns and Profitable Candlestick Trading are both great resources regarding the subject of charting.

With proper study and dedication, trading stock options can yield substantial profits, but without proper risk management you can destroy your trading account. Risk management is the most important aspect to any trading plan.

Many traders and investors do not respect this fact when starting out. The result is a broke trading account and loss of confidence.

Start out small and go from there. If you can't make money with a few hundred dollars, what makes you think you can make thousands.

Do not expose yourself to unnecessary risk when beginning. There is no shame in paper trading for a while until you get the hang of it and learn about the different order types and option strategies.

There really is no end to the amount of information available to serious traders. All you have to do is buckle down and treat trading options as a craft.

Believe it or not, risk management really is the key that will keep you in it for the long run.

Refer to the book Derivatives: Markets, Valuation, and Risk Management written by Robert E. Whaley. It will become very clear that RISK MANAGEMENT!! is just as important as the option strategies themselves.

It is also very important to understand that stock options are not investments. Many traders and investor new to the options market are late to grasp this very important concept. Options are deteriorating assets.

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