0 commentsTime to get back into the market, so I had Casey give me a crash course in option trading just now. He uses AmeritradeAmeritrade bought out Datek a year ago, so I guess I have an account with them somewhere? Hmmm for options trading, but it wasn't easy getting those privileges. Options are a much riskier to trade than equities, and it's hard to justify giving that access to an undergraduate student without a full time job.
Say stock X is priced today at $25. I buy a contract that says, I can buy the stock at *anytime* in the next two years for $20. That's a call contract for American style options. Say the stock drops to $15- then the option is totally worthless.
There are two types of options:
PUT- selling shares of a stock // stock goes down, more value here
CALL- buying shares of a stock // stock goes up, more value here because you're buying the shares cheaper than the market
So how do they come up with pricing structures for options?
I can't believe you guys don't do this in business school. Basically, there are two things that determine the price for options:
- Price of underlying equity, commodity, etc
- Time-lapse on the option
Personally, I buy options for January 2006, which are more expensive than options for January 2005, because there's more time value in that extra year (since the stock will have the opportunity to fluctuate in price). Only 40% of those people who trade options actually make any money.