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So I’ve been doing my research over the last several months. Still confused with the whole buy to open and sell to open.
Where I stand is I know:
call is your predicting the market price will be higher in the future
Put is your predicting the market price will be lower in the future
So can anyone give me a breakdown of two hypothetical situations:
Your predicting ABC company is going to go lower:
Do you sell to open or buy to open
Do you set strike price higher than market or lower
When do you close the contract
——
Your predicting ABC company to go higher:
Do you buy to open or sell to open
Do you set strike price higher or lower than market price
When do you close contract
Thank you.
You can give a real world example also like maybe a airline. Call and put.
1st you also need to know the difference between selling options (if you own at least 100 shares of stock) and buying options.
It seems to me you are buying options and don't own 100 stock shares, in this case you "buy to open". If you use webull or robinhood you don't even have that "sell to open".
At what strike price (at, in, out of the money) and expiration is a more complicated question.. it depends on your strategy and what options you are buying.
Youtube is you friend on this... tons of videos about options for beginner..
My advice based on personal experience, only invest in options money you have no problem losing. Cuz you could literally lose everything if your options expired out of the money. I just do options for the "fun" of it like gambling or casino. And as they say in casino the house always wins (in this case the one selling options has the advantage).
So I’ve been doing my research over the last several months. Still confused with the whole buy to open and sell to open.
Where I stand is I know:
call is your predicting the market price will be higher in the future
Put is your predicting the market price will be lower in the future
So can anyone give me a breakdown of two hypothetical situations:
Your predicting ABC company is going to go lower:
Do you sell to open or buy to open
Do you set strike price higher than market or lower
When do you close the contract
——
Your predicting ABC company to go higher:
Do you buy to open or sell to open
Do you set strike price higher or lower than market price
When do you close contract
Thank you.
You can give a real world example also like maybe a airline. Call and put.
First, the only trades you should be conducting as a beginner are "Buy to Open" and "Sell to Close" for both Puts and Calls. This means you are going long either a call or put option. Going long means you expect the option (call or put) to increase in value. Although with a call you are betting the underlying stock will rise, and a put you are betting the underlying stock will decline, both are considered long positions. Buy to Open is the action of purchasing a call or put option. Sell to Close is the action of closing your call or put position. This is confusing because "Sell to Close" means you are closing out your position, which is a completely different action than selling a call option. You absolutely want to avoid selling (writing) calls and puts, until you gain experience, as these strategies carry far greater risks. "Sell to Open" would mean you are selling an option, so please avoid this at all costs unless you know what you're doing.
There are two parties to each options transaction. There is the buyer and the seller (writer). The buyer (you) buys either a put or call, and the seller (writer) sells you the call or put. The buyer (you) is betting the call or put option will rise in value, while the seller (writer) is betting the call or put will lose value.
In your first scenario- You Buy to Open. You can select whichever strike price you want. There is no right or wrong answer. However, you should learn to understand In the Money (ITM) versus Out of the Money (OTM) and the differences in premium pricing. The farther In the Money the strike price, the more expensive the premium you pay, and the more intrinsic value the option contains. The farther Out of the Money the strike price, the lesser the odds it will finish In the Money by expiration, and therefore the cheaper the premium. Also, the farther OTM the strike, the greater the percentage gains you will make should the option move ITM eventually, under most circumstances.
You can close the position during regular market hours anytime in between the date of purchase and the expiration date. That said, my advice would be to absolutely avoid holding until expiration, as you may be forced to exercise the option, which can be very costly. It is best to trade premiums only and exit your position in advance of the expiration date.
Under scenario two- the same rules would apply. You buy to open and sell to close. The only difference between buying a call versus a put is that you are betting the underlying stock price goes higher for a call and lower for a put.
One options contract controls 100 shares of the underlying stock. By purchasing a call option for instance, for a small premium you are able to leverage a large position worth the equivalent market value of 100 shares. For a stock like Bank of America (BAC) for instance that trades around $35 per share, by purchasing one call option, you control $3500 worth of stock. The current premium of a BAC At-The-Money call option expiring in June, 2021 ($35 strike price) is $2.71. Your total premium outlay would be $271 ($2.71 X 100 shares) in order to control $3500 worth of stock.
The premiums vary wildly depending on expiration date, strike price, and many other factors. But generally speaking a small amount of capital enables you to control a much larger share value. So by owning the call option you can enjoy the profits of a $3500 position at a cost of only $271. You can multiply this leverage with each additional options contract. If you purchase 5 call options contracts in one trade, for a premium of $1355 you control 500 shares of BAC worth $17,500. And so on and so forth.
The idea is you use a small amount of capital to leverage a much larger position. If the underlying stock moves 10% higher, owning 100 shares of the stock outright would only give you a 10% gain, while the call option may rise many percentage points higher.
Square Inc. (SQ)- you are betting the stock will go higher. Stock currently trades around $230 per share. You purchase one SQ call option with June expiry at-the-money ($230 strike) at a premium of $30.95. Your total purchase price is $3095 ($30.95 X 100). Lets say that after purchasing, SQ stock price moves higher to $260 within the first month. Your call option will most likely profit handsomely. Its hard to say how much or what %, but it will go into the money by $30. Looking at the current options chain, the premium of a $200 strike June call that is $30 in the money is worth $46.90, so if your $260 call follows a similar path, you may profit $1600 by that point. That's roughly a 50% gain. You would then need to close out your position (Sell to Close) in order to lock in those gains.
JP Morgan Chase (JPM)- you are betting the stock will go higher. Stock currently trades around $150 per share. You think it can easily go to $160 per share. You buy one call option expiring in June '21 at a $160 strike price. Current premium is $5.55, meaning you pay $555 for one contract. Lets say that JPM then rises very slowly and gradually during the next few months, but does not quite reach $160. Your call option will decay in value very gradually at first, then at an accelerated rate the closer you get to expiration. You can exit your position (Sell to Close) and cut losses at any point before expiration. If you hold until expiration and JPM stock fails to reach $160 per share, your call option expires worthless.
General Electric (GE)- you bet the stock is overvalued and will go bankrupt by end of year. GE stock currently trades around $13 per share. You buy a GE $5 put option with an expiration of January 2022. The current premium is .07 cents. This means your total capital outlay will be $7 (.07 X 100) to buy one put option. Lets say that your directional bet is right, although GE does not go bankrupt, the stock price declines to $4 per share. Your put option you paid only .07 cents for would be $1.00 in the money, meaning your option's value would increase at least 14-15 times in value. That excludes any extra premium value increase from a sharp rise in implied volatility. Your total investment of $7 would be worth at least $100 minimum, if not much greater.
So I’ve been doing my research over the last several months. Still confused with the whole buy to open and sell to open.
Where I stand is I know:
call is your predicting the market price will be higher in the future
Put is your predicting the market price will be lower in the future
So can anyone give me a breakdown of two hypothetical situations:
Your predicting ABC company is going to go lower:
Do you sell to open or buy to open..BUY A PUT TO OPEN.
Do you set strike price higher than market or lower.. YOUR CHOICE. IT'S SAFER TO BUY YOUR PUT IN THE MONEY - THAT IS, ABOVE THE CURRENT PRICE. THAT WAY, IF YOU LOSE, YOU MAY NOT LOSE ALL YOUR MONEY.
When do you close the contract ... ANY TIME YOU LIKE. SELL TO CLOSE.
——
Your predicting ABC company to go higher:
Do you buy to open or sell to open..BUY TO OPEN THE CALL.
Do you set strike price higher or lower than market price ..YOUR CHOICE. I ALWAYS BUY IN THE MONEY, THAT IS, BELOW CURRENT PRICE. THAT WAY, IF YOU LOSE, YOU MAY NOT LOSE ALL YOUR MONEY.
When do you close contract... ANY TIME YOU LIKE. SELL TO CLOSE.
Thank you.
You can give a real world example also like maybe a airline. Call and put.
AAL. Price today;21$
March 5 20C can be bought for 1.35. So you are betting it will close above 20+1.35=21.35 any time between now and Mar 5.
Mar 5 22P can be bought for 1.49. So you are betting that it will close below 22-1.49=20.50 any time between now and Mar 5.
Since these options are pretty cheap, you may want to buy just one contract - that's 135$ or 149$ just to see how it plays out.
You should know about options levels when you open an options account with a brokerage. There are 4 option levels. What option level will be assigned to you by your broker depends on whether you have options trading experience, a margin account and/or sufficient cash in your account to cover a big loss.
Level 1 just allows you to sell a call (to open) on a stock that you own in your account, (this assumes that the owner of the stock wouldn't mind having his stock "called away" at the strike price). If nothing happens and the option expires, the seller of the call will pocket the premium and keep the stock. Buying a put (to open) on a stock that you own (if you feel that the stock will decline in value and you want to insure against a steep loss by being able to "put" the stock to someone else at a set price). You will loose the premium you paid when you bought the put if your stock doesn't decline to near the strike price and you don't "sell to close."
Level 1 is fine for beginners. There are 4 levels total. But get comfortable with options before you get into complex options strategies, index options and "naked" options.
The OP is a beginner with no experience. I'm guessing their brokerage will give them Level 1 access only. I recommend they stick with buying puts and calls. Trade premiums only. Avoid anything that involves owning or buying back shares of underlying stock. Avoid exercising the options. Close the position well before expiration. This way their max losses are limited to the premium.
A call option contract gives you the right, but not the obligation, to buy 100 shares of underlying stock at the strike price by the expiration date. A put option gives you the right, but not the obligation, to sell 100 shares of the underlying stock at the strike price by the expiration date. However, both instances would involve exercising the option. By trading the premiums only, you get the same profits benefit without the gigantic baggage of having to purchase or short stock.
The OP would execute a Buy to Open order to purchase a call or put. This involves paying a premium for the option at the current market rate. The value of the premium fluctuates constantly during the life of the option. Lets say the call option costs $500. The next day the option's value rises 50% and is now worth $750. The OP may decide to close their position and take profits. They would execute a Sell to Close order. Their net profit would be $250.
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