Neither BrokerChooser nor any of itsĪffiliates is making any recommendation or soliciting any action based on the material and/or Please note that all the material and information made available by BrokerChooser or any of itsĪffiliates is provided to you for information purposes only. If you are fully aware of the relevant risks. You should engage in any such activity only In this case, his net profit would have been 10 x ($0.50 - $0.10) =$40 minus the commission.īy investing in and/or trading financial instruments, commodities and any other assets, you are taking a However, he's still much better off than if he had bought it at $15 instead of doing the option trade.Īlso note that when Hype first touched $16, Mr Haggle could have closed his trade buy buying for $0.10 one contract of the put he had sold previously. In the example above, this is exactly what happened. In case the stock is under $13 upon expiry, he'll need to buy the stock for $13, irrespective of the actual price. His idea was as follows: he will collect this premium regardless of the price of the stock. So he decided to sell a put option with a strike price of $13 and he collected a premium of $0.50 per option, so $50 for one contract. He thought Hype's business was a good one and he wanted to own the stock eventually but thought the $15 price tag was excessive and was willing to wait for a better price. Mr Haggle was on the other side of Miss Bubbleburster's first trade. However, when the stock price fell to $12 these put options increased in value to $1.65 and she sold them there. If she waited till expiry when the stock hit $10 she could have made a $3 profit on each option. This gave her the option, but not the obligation, to sell the stock at $13. She didn't want to risk shorting the stock, but she wanted to bet on it falling so she bought a put option for $0.50 with a strike price of $13 when the stock was over $15. Miss Bubbleburster on the other hand made a nice profit on Hype's crash. However, he has only lost the premium he paid. Mr Chase waits till expiry and the stock falls further to $10, which means the options in fact expire worthless. A week later, the stock falls to $13 and the options are now worth only $0.20 as there's only a little chance they would expire in the money. Mr Chase's options have also increased in price and now he could sell them for $1.5 ($150 for one contract) but he decides to wait for an even better price. After one week, the stock has risen to $16.
TRADESTATION OPTIONS PLUS
He's buying one contract (10 options) for a total of $90 plus commission. The price of the option is the so-called premium, which is currently $0.90. He's buying the $15 call option, which gives him the right (but not the obligation) to buy the stock at the $15 price until expiry, irrespective of the actual price. He thinks this window will give him enough time to profit if the stock extends its rally. He checks the so-called option chain of the stock and sees that the next option expiry is in 20 days. He doesn't want to miss a potential rally though, so he decides to buy a call option on the stock instead of buying it outright. Mr Chase thinks there might be still some juice left in it, but at the same time, he's afraid of a downward price correction. Mr Chase really likes a recent hot stock called Hype, whose price has gone up from $10 to $14 in a very short time.
Let's have a look at how a handful of traders with different motivations can buy and sell options in the same individual equity.
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