Options trading

“call options” and “put options” for retail traders are bets on the direction of the asset price.

They purchase a “call option” if they believe the price will increase

They purchase a “put option” if they believe the price will decrease.

(Please do not do this. You will lose your money. It will gradually become a generous contribution to a hedge fund manager’s whine collection)

You have learned in school, on television, or YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading

Abstract subjects
Small intro

I also want to announce I “might” start a blog to independently write articles and maybe write daily or weekly newsletters.

You can subscribe and I will most likely post there more in-depth analyses, articles, and newsletters. I write these articles mainly because it forces me to study more. Explaining subjects to others is a great way to get a deeper understanding.

Why is it that buying options took away all of my of options?

Derivatives

Linear vs. Non-linear payoff

Buying an asset

Linear/delta one payoff.

Shorting an asset

short-selling

FTX 10% Fee Discount

https://ftx.com/#a=1847531

(source CME group)
The strike price (source CME group)
Call option (right to buy) — Put option (right to sell): (source CME group)

Call options

A call option buyer will profit if the asset price rises above the “strike price.”

A call option buyer will lose his money if the asset price at expiry is below the “strike price.”

A call option buyer will break even if the asset price at expiry is equal to the “strike price.”

Lose money if buying a stock and the price goes down
Profit $50 per share
$5 * 100 = $500

The appeal of options is the “leverage” they provide. Since 1 option contract controls 100 shares of the underlying asset, buying a call option contract exposes the gains and losses of 100 shares at a fraction of the price of 100 shares.

Strike price + the premium

Put options

 $5 * 100 shares = $500 
PNL put option
strike price - premium = $295
$300 $5
Put option vs. call option — payoff mirrored image

In the Money (ITM), Out of the Money (OTM), & At the Money (ATM) — Moneyness

“At the money” (ATM)
“At the money” (ATM) Both a Put and a Call option
“Out of the money” call option
“Out the money” (OTM) Call option
“Out of the money” put option contract
“In the money” put option
For upside "strike prices":calls options are "Out of the money" options
Put options are "In the money" options
Call option “in the money” (ITM)

Options maturity (American & European)

European Style vs. American Style (source CME group)
Exercised at expiration vs. Exercised Before the expiration (source CME group)

Settlement procedure (Physical — cash settlement)

Sign up on Deribit and receive 10% discount on fees for trading futures & options: https://www.deribit.com/reg-572.9826

Deribit offers European-style cash-settled options.

Options Pricing

Disclaimer: The BlackScholes model assumes that the underlying asset will follow a lognormal distribution. The BlackScholes model doesn’t take into account the possibility of a stock split or a merger. These events can also affect an option’s premium.

Option pricing graph
Current cash price + Costs of buying now — Benefits of buying now.

If you want more info about the “forward price,” I have a separate blog: https://publish.obsidian.md/rnr/2+forward+pricing/forward+price

Implied volatility (input of BlackScholes model)

Therefore, even though “implied volatility” (IV) is used as an input in the Black-Scholes model, it is ultimately an output variable.

Implied volatility video introduction

Options Value

current price - strike price
Intrinsic value “In the money” call option (source CME group)
“Out of the money” call option — No intrinsic value (source CME group)
strike price - spot price 

Time value/Theta

An option contract derives its value from the “intrinsic value” and the “time value.”

Time value, Let’s take an example.

Strike price: $300
Underlying (spot): $400
intrinsic value: underlying - strike
intrinsic value: $400 - $300 = $100

The value of options contracts tends to diminish as they approach expiry, due to the effects of time value decay.

Theta decay

Time value decay is a key consideration when trading options contracts.

Source: CME group
Source CME group
Source: CME group
Source: CME group
“Out the money” (OTM) call option — lack of time value
Call option “In the money” — “Time value.”
“Time value” shrinks/decays closer to expiration and further “in the money.”
The curve above it has very little distance above the hockey stick payoff.
option completely tracks the 45-degree line

“At the money” (ATM) example

“At the money” (ATM) call option contract
Call option “In the money” — “Time value.” (source CME group)
“Time value” shrinks/decays closer to expiration and further “in the money.” (source CME group)
(source CME group)
“Out the money” call option
“At the money” call option
“In the money” (ITM)

Options chain

Sign up on Deribit and receive 10% discount on fees for trading futures & options: https://www.deribit.com/reg-572.9826

Options table (click on image to zoom in)
Bid-Ask for Call options on the left side of the options chain
Bid-ask for Put options on the right side of the options chain
“Implied volatility” — Bid & Ask
Call options SPX500
Put options SPX500
Call options, higher strikes, prices dropping.
30023 − 25000 = 5023
5023 + 1264.90 = 6287.9

Disclaimer: Use limit orders when trading options. Don’t use market orders! The spread can be wide and unfair. Check the implied volatility too before making irrational decisions

ByBit Options (Discount on fees and $100 deposit bonus): https://www.bybit.com/register?affiliate_id=6776&group_id=1653&group_type=1

Delta exchange

If you’re seeking to signup and want a 10% discount

You can use my referral link

https://www.delta.exchange?code=medium

Since I give HXRO exposure, I might as well just put my referral link in

HXRO, if you guys are reading this, for the right price you can call me ;)

Final words, announcements, and more

You have learned in school, on television, or YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading

The tail that wags the dog

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derivatives trader

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