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PostedbySteveClaussenonMay15,2015

Options101ForStockTraders

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IfyouareanestablishedstocktraderbuthavediscoveredOptionsHouse,youobviouslyare
interestedinlearningmoreaboutoptions.Maybeyouaretiredoflisteningtoyourneighborboast
overcocktailsattheblockpartyabouthowheiskillingittradingoptionsandyouwantinonthe
action.Betteryetmaybeyourmotivationisadesiretoexpandyouroveralltradingskills,using
thesesecuritiestocontrolandmanagetherisksinyourstockportfolio.Youarenotalone.Options
tradinghasexperiencedphenomenalgrowthinthepastdecade,andyetitisstillanareawithinthe
investmentcommunitywhichismisunderstoodandtherebyunderutilized.Socongratulationstoyou
foryourinterestinlearningmore,youarewayaheadoftheinvestingmasses.
BelowisachartoftheannualnumberofoptionscontractstradedintheUnitedStatessincetheir
originallistingontheChicagoBoardOptionsExchange(CBOE)waybackin1973.
Notetheexplosivegrowthsincethemillenniumwiththeexpansionofelectronictrading.Thisnew
tradingtechnology,alongwiththecreationoflowcost,selfdirectedonlineretailbrokerssuchas
OptionsHouse,hasreallyleveledtheplayingfieldforretailinvestorslikeyoutoparticipateand
becomeacriticalmemberoftheoptiontradingmarketplace.

Whyhaveweseenthisimpressivegrowthofoptionstrading?Theyareversatile,financial
instrumentswhichcanbeusedtocreateawiderangeofinvestmentstrategies.Acoupleof
examples:
Optionsmaybeusedtogenerateincomeonstockyoualreadyowninyourportfolio.
Optionsallowownerstoparticipateintheupsanddownsofastockspricewithoutactually
owningthestock.
Optionscanreducethedownsidelossexposurefromamarketselloff.
Itisimportanttorememberthatnothingcomesfreewhenusingoptions.Therearecosts
associatedwithowningoptionsandrisks(whichmaybemuchgreaterthanthepremiumreceived)
associatedwithsellingoptioncontracts.Optionsinvolveriskandarenotsuitableforeveryinvestor.
Priortobuyingorsellinganoption,everybrokerrequiresinvestorstoreadacopyoftheOptions
DisclosureDocument(ODD).Butlearningtheproperuseofoptionsinyouroverallportfoliocan
provideyouwithmoreinvestmentoptionsthansimplybuyingstockandhopingthepricerises.
WhatareOptions?
Optionsarealsoknownasderivativesorderivativeinstruments.Thiscomesfromthefactthatthey

derivetheirvaluefromanotherunderlyingasset.Equityoptionsderivetheirvaluefromthe
underlyingequity(stock)price.Theyaresecuritiesjustlikestockandassuchregulatedintheir
transactionsbytheSecuritiesandExchangeCommission(SEC).Likestockshares,theycanbe
boughtorsold.Unlikestockshares,optionsarecontracts.
Likealegalcontract,theygiverightstotheowner(holder)ofthecontractinexchangefora
premiumpaid.Sellers(writers)ofoptioncontractsreceivethispremiumpaymentinexchangefor
havinganobligationtofulfillthecontractsterms.
Speakingofterms,thereareseveraltermstobecomefamiliarinordertounderstandoptions.
Therearetwotypesofoptioncontracts.Calloptionsandputoptions.
Buyingacalloptiongivestheowner/holdertherightbutnottheobligationtobuytheunderlying
stockatapredeterminedpriceanytimeonorbeforethecontractsexpirationdate.
Sellingacalloptionobligatestheseller/writertosellthestockatapredeterminedpriceanytimeon
orbeforethecontactsexpirationdate.Noticethesellerisobligatedtofulfillthecontracttheholder
hasalltherightstochoosewhethertoexercisetheirpurchasedrights.Theownerofthecalloption
literallyhastherighttoCALLthestockfromtheseller.Thusthenamecalloption.
Ontheputside,theowneroftheputoptionhastherightbutnottheobligationtosellthe
underlyingstockatapredeterminedpriceanytimebeforethecontractexpires.
Sellersofputshavetheobligationtobuythestockatapredeterminedpriceanytimebeforethe
contactexpires.TheowneroftheputoptionliterallyhastherighttoPUTthestocktotheseller.
Thepredeterminedpriceiscalledtheoptionsstrikeprice.Thisisthespecificpriceatwhichthe
optioncontractmaybeexercisedoractedupon.Anoptionsstrikepricerelativetotheunderlying
stockspricedeterminesiftheoptionhasanyrealorintrinsicvalue.Acalloptionwithastrikeprice
lowerthanthestockpricehasintrinsicvalueandisconsideredinthemoney(ITM).Aputoptionwith
astrikepricehigherthanthestockpricehasintrinsicvalueandisconsideredinthemoney.Ifan
optionhasnorealorintrinsicvalueitisconsideredoutofthemoney(OTM).
E.G.Acalloptiononastockwhoselastpriceis52withastrikepriceof45has7dollarsof
real,intrinsicvalue.Therighttobuystockatapriceof45is7dollarsbetterthanbuyingitat
52inthemarket.ThiscallsstrikepriceisITM.
Aputoptionwithastrikepriceof50dollarshasnorealbenefitwiththecurrentstockpricedat
52.Therighttosellthestockat50isnotbetterthansimplysellingthestockinthemarketat
52.ItisanOTMstrikepricefortheput.
Thesecontractsalsohaveanexpirationdate,thedayafterwhichtheoptionexpiresandliterallyno
longerexists.Theholderoftheoptionhastodeterminewhattodowithhiscontractbeforethe
optionexpires.Theycanalwaysselltheirrights(longoptioncontracts)toanotherbuyeratanytime
duringtheoptionsterm,theycanexercisetheirrightsandactuallybuyorselltheunderlyingstock,
ortheycanwalkawayandallowtheircontracttoexpireworthlessiftheoptionisoutofthemoney.
Asawriterofanoption,youhavenocontroloverwhetherornotacontractisexercised.Youare
potentiallyobligatedtofulfillthetermsofthecontractatanytimebeforeexpiration.However,likea
holderofanoption,thewritercanpurchaseanoffsettingcontracttoclosetheobligation.You
simplybuytoclosethesameoptionyouwereshort,fromanotherseller.
Inthetablebelow,youshouldlearnitbackwardsandforwardstoinstinctivelyunderstandwhich
rightsandobligationsyouhave.

Alternatively,lookingatthefourpossibiltiesorcornerstonesofbuyingorsellingputsorbuyingor
sellingcallsyoucanthinkofwhatmarketsentimentyoumaybeexpressingbymemorizingthis
chart.Bullishsentiment,expectingfuturepricestoheadhigher,orbearishsentiment,the
expectationoflowerpricesahead.

Thekeytakeawayfromthisintroductionwastopresentthedefinitionsandtermsusedinoptions
trading.Infuturearticles,wewilldiscusshowtoactuallyusetheselearnings.

Theaboveinform ationis providedbyOMSecurities ,LLCdbaOptions Hous e("Options Hous e")forinform ational

andeducationalpurpos es onlyandis notintendedas tradingorinves tm entadviceorarecom m endationthatany
particulars ecurity,trans action,orinves tm ents trategyis s uitableforanys pecificpers on.Youares olely
res pons ibleforyourinves tm entdecis ions .Com m entaryandopinions expres s edarethos eoftheauthor/s peaker
andnotneces s arilyofOptions Hous e.NeitherOptions Hous enoranyofits em ployees ,officers ,s hareholders or
affiliatedcom panies guaranteetheaccuracyoforendors etheviews oropinions ofgues ts peakers or
com m entators .Projections orotherinform ationregardingthelikelihoodofvarious inves tm entoutcom es are
hypotheticalinnatureandarenotguarantees offutureres ults .Anyexam ples us edthatdis cus s tradingprofits or
los s es m aynottakeintoaccounttradingcom m is s ions orfees .

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Policy|Terms&Conditions,copiesofwhichcanalsobeobtainedbycontactingourCustomerServiceDepartmentat18775983190orcustomerservice@optionshouse.com.Aninvestorshouldunderstandtheseandadditionalrisks
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