Options Trading For Dummies
Options Trading For Dummies is a good title for a book (or possibly even Trading Options For Dummies), but the reality is that you don't need it. Everything you need is here in this easy to understand tutorial. Read the first few pages and you should get a good understanding of how options trading works. Even dummies can understand it!
Let's look at some put and call option basics:
One option contract controls 100 shares of stock.
However, options are quoted on a per-share basis so when you see an option price quoted at $1.70 that means it's $170 per option contract (because each contract controls 100 shares).
If you owned 100 shares of stock, you could sell 1 call option against it and receive $170.
If you owned 300 shares of stock, you could sell 3 call options against it (not 300 call options) and receive 3 x $170, or $510.
Likewise, if you own less than 100 shares of stock you can't create a covered call position from it.
Options have 3 characteristics to classify them:
- the stock they are written for
- the expiration date
- the exercise, or strike, price
Monthly options expire on the Saturday after the 3rd Friday of their expiration month. That's just the way the CBOE set it up. The last day they are available for trading is the day before they expire (i.e. they stop trading on the 3rd Friday of their expiration month). By the way, books like Options Trading For Dummies aren't bad if you want something to read when you're not online...
Monthly options expire on the Saturday after the 3rd Friday of their expiration month. That's just the way the CBOE set it up. The last day they are available for trading is the day before they expire (i.e. they stop trading on the 3rd Friday of their expiration month). By the way, books like Options Trading For Dummies aren't bad if you want something to read when you're not online...
Strike prices are normally available in $5 increments, or in $10 increments for high priced stocks, or in $2.50 increments for lower priced stocks. Some wildly popular stocks have strikes in $1 increments. (No need to remember all this; we'll show you all of the available choices in our tables; that's just the kind of top-notch firm we are.)
There are tens of thousands of call options available with different combinations of stock, month, and strike price, but for some stocks, some months, and some strike prices, there are no options available. The Chicago Board Options Exchange (CBOE) decides which options are available, based on popular demand.
Another way to have options trading for dummies explained (when you're done with this tutorial) is to read through our covered call blog.