Tim, question ... did you use the site I gave you before, to do practice runs?
The reason all the big options platforms have these is because trading options (like math) is a participation sport.
Only experience will really help you to understand all of the ins, outs and ways that you can get absolutely get KILLED trading options (especially if you lose track of a contract).
Here are the big things to watch out for:
Not having a way to get out, and get out quickly, if you need to:
Options are what's called Options are a decaying asset. And that rate of decay accelerates as you get closer to your your expiration date.
So if you’re in a long position (put OR call) and the move you predicted doesn’t happen by the time you thought it would, get out.
HOWEVER, When you sell options without owning them, you’re putting time decay to work for you (If, for example, if time decay erodes the option’s price, and you get to keep the premium received for the sale)
Essentially, don't wait around on profitable trades because you're greedy, or stay way too long in losers because you’re hoping the trade will move back in your favor.
“Liquidity” in the market means there are active buyers and sellers at all times, with heavy competition to fill transactions. This activity drives the bid and ask prices of stocks and options closer together.
As your strike price gets further away from the at-the-money strike and / or the expiration date gets further into the future, options will usually be less and less liquid. SO, of course, the spread between the bid and ask prices will usually be wider.A stock that trades fewer than 1,000,000 shares a day is usually considered illiquid. So options traded on that stock will most likely be illiquid too.
Remember, the greater the volume on an option contract, the closer the bid-ask spread is likely to be. Remember to do the math and make sure the width of the spread isn’t eating up too much of your initial investment. Over the long-haul the numbers can really add up.
If your short option gets way out-of-the-money and you can buy it back to take the risk off the table with a profit, do it.
You might be tempted to buy the long call first and then try to time the sale of the short call with an uptick in the stock price to squeeze another nickel or two out of the second leg. BUT MANY TIMES the market will downtick instead, and you won’t be able to pull off your spread at all. Now you’re stuck with a long call with no way to hedge your risk.
These are a few of the typical beginner mistakes.
BY FAR, the best advice I can give is get that account, practice practice practice ... and when you've been profitable with any predictability at all.... get your feet wet with some money.
And don't start with multiple trades ... even the BEST options traders have lost their shirt that way.
Now, in terms of valuing a contract? (This is from an excellent article on options monster): http://www.optionmonster.com/education/options_basics.php
Option Price and Value
In exchange for the right to buy ("call") or sell ("put") an underlying security on or before the expiration date, the purchaser of an option pays a premium. The price of the contract is known as the debit, and it is the purchaser's maximum risk. On the other side of the trade, the seller of the option receives the premium as a credit to his/her brokerage account, but is obligated to buy (in the case of a short put) or sell (in the instance of a short call) the underlying shares if the purchaser exercises the contract. Brokerages hold cash from the premium as a guarantee against short positions.
The strike price, or exercise price, of an option determines whether that contract is in the money, at the money, or out of the money. If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in the money because the holder of the call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the market. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in the money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive in the market. The converse of in the money is, not surprisingly, out of the money. If the strike price equals the current market price, the option is said to be at the money.
|In the money (ITM)||Strike price < Stock price||Strike price > Stock price|
|At the money (ATM)||Strike price = Stock price||Strike price = Stock price|
|Out of the money (OTM)||Strike price > Stock price||Strike price < Stock price|
Intrinsic Value and Time Value
The premium of an option has two components, intrinsic value and time value.
Intrinsic value describes the amount the stock price is above the strike price (for calls), or below the strike price (for puts). Therefore the amount by which an option is in the money is intrinsic value. It is also the value of the contract at expiration.
Time value is defined as the option premium minus the intrinsic value. It is the amount that you pay for the possibility that it will be worth more in the future. Therefore an at-the money or out-of-the-money option has no intrinsic value and only time value.
|Intrinsic Value = Stock Price - Strike Price||Intrinsic Value = Strike Price - Stock Price|
|Time Value = Option Price - Intrinsic Value||Time Value = Option Price - Intrinsic Value|
Intrinsic value is only affected by moves in the underlying security.
Time value is subject to several factors, primarily time to expiration and implied volatility. Implied volatility is the market's expectation of the future volatility of the underlying stock. It is derived from the option price itself, and represents demand for the option. The higher the implied volatility, the more expectation that the underlying stock will make big moves, increasing the option's chances of being in the money. This also means that the option's premiums (that is, its time value) are higher. However, the value of time decays as expiration nears: time decay increases dramatically in the last 30 days as expiration approaches.
Let's consider an example using Google (GOOG). If GOOG were trading at $500 when you bought a 490 strike call option for $25, then $10 of the option's value would be intrinsic value.
The other $15 would be time value. A 500 call purchased when GOOG is trading for 500 is at the money, but is all time value. It has no intrinsic value.
If the stock were at 500 when you bought a 510 call, the option is again all time value, since it has to rise $10 to be in the money.