So I've been doing some research on options. Running through all the gain and loss porn on Reddit. I would only be doing basic calls and puts

I'm still having a hard time understanding the concept.

So say there are stocks I want to buy, but don't necessarily want to own them.

I know I need to pick a strike price. Then they are sold in 100 share lots.

So say with a basic call. I pick a strike price I like, 3-4 months out. I am required to pay the ask price for someone to sell to me.

Do I have this correct that I can control 100 shares for just the ask price? Until such time as it is assigned I don't necessarily have to have the cash? Do I have it correct I can close it out at anytime with only my payment for the ask being risked?

Am I trying to make money on the share price of the stock, or the idea that ideally the ask will increase due to stock price increasing, and this I can sell my option?

If you buy options, you pay the premium. If you sell options, you receive the premium.

If you buy a call, you have the right but not the obligation to buy the underlying (the stock shares) at the strike price. You exercise the option if you want to buy the stocks shares, typically at expiration (European option) but could be any time before expiration (American option) or other variations.  If you exercise the option and buy the stock, then you own the stock.  Otherwise you don't own the stock.  

You can go as far as you want down the rabbit hole with options, but that's the 2 minute flyby.  

So for simplicity. Say I buy a call on a stock, $1.00 premium, currently trading at $5.00, I buy 10 strike. Expires in 30 days.

On day 15, the stock price doubles to $20. At that point, I can then exercise the buy (if I have sufficient money to buy 100 shares, at $10), and have the shares immediately for $10.00 plus $1 premium=$11, which I could sell for whatever the market bid is.
Likewise say the premium is now $7.50. Can I sell my right to buy the shares for that amount?

What happens if it reaches day 30, and the share price is now $5.00. Does my option auto kick in and buy at $10 per share, unless I cancel it first?

lets make it a little simpler.

per your example.
I buy 1 call option, with a premium of 1 dollar. for a strike price of say 10 dollars at 30 days out.
the stock is at 5 dollars a share.

you spend 100 dollars (100 times the premium, as it is an option on 100 shares).

15 days later the stock jumps to 10 dollars a share.
The call option you purchased now jumps to say a 5 dollar premium.


At this point you can sell your call options, for a profit. so you would sell the 1 option for 500 vs the 100 you paid.

Or you have to wait another 15 days to exercise the option to purchase the 100 shares at 5 dollars.
Assuming in those 15 days it stays 10 dollars, you can then sell the shares at a profit of 400, since you spent 100 on the premium and the diff of 500 to 1000 less the premium is 400.
Basically the same as if you had sold the call.

now if the stock drops to say 2 dollars,
you can chose to exercise the option.
This would put you 400 in the negative. 100 for the premium, and spending 500 on something worth 200 dollars.

you could sell the call options at a loss. Say they are now worth 25 cents. you would sell for 25 dollars and be down 75 dollars.

or you could let them expire worthless. and be out 100 bucks. assuming they weren't worthless already. as sometimes when they are that far out of the money, they aren't worth anything, or there are no takers.

be careful as I have lost a lot of money trading options, and I chose to give it up for that reason. too many unknowns.

A response to OP: a wall of text

Another response to OP: "Let's make this simpler!" then a whole bunch more paragraphs of a wall of text

Welcome to options

OP, what are you trying to do with options that you can't do with a simpler instrument? What is your goal?

I've answered your questions inline, but my overall advice is, don't invest or trade something you don't understand or are not comfortable with.

So I have a suspicion that a stock/sector is going to go crazy in the next 6 months (According to news).

One of the best plays issues a k1, I really don't prefer a k1.
2nd, the stock price is in the almost hundreds.

I "can" afford to buy 100 shares, but its not smart to do so.

My thought/understanding on options is I can lock in at current prices and see if my speculation will pay off. 2nd, I can avoid a k1, and #3 I can basically lock in 100 shares without having to devote that much capital in my portfolio to do so.

Options don't really "lock you in" on a stock price, and the reason is volatility is a part of how an option is valued. If a stock is trading very choppy, or expected to, the option will have more volatility priced in, and it will be more expensive. Conversely if the stock trading action is very boring and muted, the volatility is low, and the option will be less expensive.

An option can increase in price, or decrease in price, without the underlying stock moving hardly at al, purely based on expected volatility. So if you are buying calls or buying puts, it's smart to consider how choppy the stock has been relative to the past. To really be objective about this, you'd have to do some quantitative analysis on historical and current option prices relative to historical and current volatility, as well as "forward" volatility.

That's a whole lot of words to say it's typically cheaper to buy options when the trading action is calm and muted, rather than buying into a frenzied, frothy market.

Options trading is hard, and it's easy to lose lots of money. If you want to play around with it, try trading options in a fake money account. Some brokerages allow you to setup a fake account with paper/monopoly money and trade that for practice.

For taxes, options are typically treated like short term gains/loss (unless you're in the unusual position of owning or selling a "leap" or far-dated option). You're right that you'd avoid the tax nonsense involved with K1s, but you should also be aware that option prices adjust on dividend dates. Mr. Market will reprice options each time a dividend occurs, because for example owning a call on a stock that will pay a $2.00 dividend per share if you own it tomorrow is more valuable than an option on a stock that will pay $2.00 per share on a stock that you own 90 days from now.

Don't invest or speculate into anything until you fully understand it and can explain your choices to your spouse/friend/family - i.e. its not nebulous hope.

Thanks for the advice and help all. I decided to skip the wallstreetbets style trading, and just hold shares. Guess I'll learn what K1 fuckery is about like next year.

To be down and dirty:

- Call options are contracts where a party has the option to buy from another (the selling party has no optionality and would be required to sell at the buyers discretion only)
- Put options are contracts where the selling party is in control instead of the buyer

Options have an agreed upon price and option date. One options contract will govern 100 shares.

Conceptually the benefit of options are twofold 1. You can magnify returns and 2. Similar to 1, you can get similar $ returns to owning an item while using less money to it. The issue is you can lose a lot just like you can win a lot.

Here are two scenarios that could motivate a call option:

“I want to buy $200k of Tesla stock. I think Tesla stock is going to the roof and I’ll be rich. I need to invest immediately, but I can’t, and I need one year to sell my house and get the money. I will buy call options to purchase $200k of Tesla’s stock at today’s stock price, so that as I wait if the stock goes up I don’t lose out. I’ll pay a premium (amount like $10k) to reserve my place in line to buy shares at todays price later.” Fast forward: The stock goes up by 50% but that’s okay. I put down my $200k and the option is worth $100k now. Together, I can now get my shares for $300k that was once $200k. The option locked my price in by moving in value just like the stock (even though it was cheaper to get into than the stock).

“I want to buy $4 million of Tesla stock. I want to bet the farm. I don’t have $4 million, but I want to make money like I did have $4 million and get rich quick. I will buy call options that govern $4 million of stock. I’ll pay $200k for this as a premium to reserve my place in line to buy $4 million worth at todays share price a year later.” Fast forward one year: the stock goes up by 50%, so the brokerage house delivers to you $2 million. They buy $6 million of stock for you at the $4 million price then sell it right away leaving you with the profit.”

Suggestion - I suggest avoiding options. It’s not illustrated above but there are many dangers. Options can wipe people out.

Thanks for the detailed reply. So I see about losing your ass, curious as to how that can happen with long call options? If at the worst I can lose is either the premium I paid, or if I am an epic dumbass the premium and the price being underwater if I exercise an option to buy with a stock under the price I locked it, at the time of expiry?

Buy a long call that expires two weeks from now and is 10% out of the money.

Stock drops 5% over the next two days. Your long call drops to nearly zero in value (80-90% loss). So you place the bet again - buy a long call four weeks out, 5% out of the money. Stock grinds and grinds in a channel with low volatility. Value of call collapses 80% in a few days.

It's easy to get sucked into gambling on options, and the psychological effects of seeing 50-90% value drops in a single day when you're used to seeing 0.5% to 2% moves in a single day cannot be discounted. You have to get used to it and numb to it before your decision making improves and becomes less emotional. A part of that is having a well defined entry and exit strategy for your trade, a well defined stop-loss exit plan, and knowing the "span" risk of your portfolio.

I sold a covered MVIS call at $25 strike for $135, 1/19/24 .  No idea what I was doing, and sold it by accident at that date.  Looks like I'm a long option trader at this point....  Hoping it drops so I can buy to cover and close it.  Oh well, this is my play account with $$ I can afford to lose....

No harm in playing with options, just remember option contracts are bought and sold in 100 share increments, don't play with money you can't afford to lose.

If you just want to learn about options and how they work, I cannot think of a WORSE place to learn than reddit lol.

There are a number of really good books that cover the subject, most of them are pretty academic and mostly teach about european options because the math is easier.  American options have early exercise which complicates the math.

td ameritrade has a pretty good educational series on options, as does schwab both of those are far better than f*&^ing reddit

also, you can pick up a copy of the study guide for the series-7, that has options in it, or the study guide for a series-4 exam, skip the supervisory stuff

I have only been playing with options a little bit.  These two sites offer a ton of free videos with information on trading options.

www.tastytrade.com

www.optionalpha.com

I would highly recommend spending a few hours getting the basic strategies down before trading live money.   If you want to jump in and trade, then only "go long" on the puts or calls as it has limited risk and plenty of upside potential.  

May all your trades be in the green for 2022!

KW3

@orion251

You should be hoping it goes up.

The delta on the equity is 1.00.

The delta on that far out of the money call is much less than that.

If the stock goes up, you can sell the option and the stock together as a unit (sell 1 contract and sell 100 shares at the same time in the same trade). You'll "lose" money on the short call position, but make money overall.

Gotta say I'm very thankful I am watching wsb loss pron from the sidelines, right about now...