Trading Options For Dummies. Duarte MD Joe

your rights as an option buyer.

      ✔ Expiration date: The date the option and your rights disappear.

      ✔ Option package: The number of shares and the name of the underlying security that you can call away or put to someone.

      ✔ Market quote: The most current price of a security that is being bid on by buyers and offered by sellers of options.

      ✔ Multiplier: The number used to determine the value of the option and how much money you pay when you call away or put options to someone.

      ✔ Premium: The total value of the option you buy or sell. The premium is based on the market quote for the option and its multiplier.

      

Option rights don’t last forever, so it’s important to keep track of how much time you’ve got left in a position before it expires. To figure out how much time you’ve got until the expiration date, identify the expiration date and determine the number of days or months away that date is.

Making Sense of Options Mechanics

      Good decisions are only as good as the information you have and how well you understand it. So, whether you trade options without ever considering owning the underlying stock or otherwise, you will need the best data possible in order to assess their value and develop your strategies. Just as important is knowing the basic structure of how options quotes work and how the expiration cycle operates. This section is about deciphering the information you will require to understand your rights and obligations when trading options.

      

You can gather option market information online, often free of charge, if you are willing to deal with delayed data – typically lagging by 15–20 minutes. A good premium charting service, or your broker’s online trading platform, will usually have excellent real-time data at your finger tips as well. Yahoo! Finance (www.finance.yahoo.com) is a good free site for all kinds of quotes and financial information. You can also find excellent options information at Optionetics (www.optionetics.com).

       Identifying options

      Although not all stocks have options, those that do feature multiple strike prices and expiration dates. The list of options for a stock is also known as the option chain. When you look through a stock’s option chain you see all the calls and puts available, along with specific data for each listing, including the following:

      ✔ Open interest: The number of existing contracts for this option

      ✔ Market quotes: May be delayed or in real time, depending on your data source

      ✔ Recent trading levels: Current or delayed

      Option symbols have been standardized and radically changed since the first edition of this book. The old “root” nomenclature methodology that made it difficult to sometimes identify options for Nasdaq listed stocks with four letter symbols was replaced by the new Options Clearing Corporation (OCC) system. The new symbol system is much easier to decipher and has several components:

      ✔ The underlying stock or ETF’s symbol

      ✔ The expiration date, expressed in six digits using the mmddyy format

      ✔ The option type, P for put, C for call

      ✔ The strike price × 1000

      Mini options are a different type of option. These options are based on smaller amounts of the underlying. They afford you rights and obligations for 10 shares of stock instead of the standard 100 shares feature the number 7 at the end of the symbol to distinguish them from standard listed options. Mini options are aimed at investors who have smaller positions but who want to reduce their risks based on the smaller number of shares in their possession.

      Here is an example of the symbol for an Apple Inc. (Nasdaq: AAPL) 76.43 call option that expires on June 13, 2014:

      AAPL061314C00076.430

      For a mini option of the same underlying stock, expiration date, and striking price, the symbol would be:

      AAPL7061314C00076.430

       Turning with the expiration cycle

There are three expiration cycles, as listed in Table 2-1. All options feature at least four expiration dates throughout the year based on one of these cycles. Some listed options, such as those linked to important index tracking ETFs, have expiration dates every month. Long-term options (Long-term Equity Anticipation securities, or LEAPs) also have monthly expiration dates.

Table 2-1 Option Expirations by Cycle

      

Expiration dates are important because as time passes and expiration nears, options lose value. So, in order to manage positions in the best fashion, knowledge of the expiration dates is central.

      All options have at least four monthly expiration dates available at all times. Each option features at least the current month and the following month expiration dates. For example, an option that runs with the January cycle also has a February expiration date while the next expiration will be in April, its normal cycle month. This option would also have July available, making four months of expiration dates available for trading. When January expires, February is the near month, so March options become available, along with April and July options. When February expires, October options then come online making four months of expiration dates and rounding out the cycle. The cycle repeats as the near month expires.

      

When you add LEAPs and mini options to the mix, the number of expiration dates can become confusing. Before you trade, make sure you are very clear on what you are trading and how much time the option has before it expires. Also pay attention to whether you have the type of option, call or put, that you suits your trading objective.

      Option strike prices are generally available in increments of 0.50, $1, $2.50, and can be as high as $10, depending on the price of the underlying stock. There are exceptions to this general tendency, which becomes especially noticeable after pricey stocks split. That was the case with Apple in June 2014, which is why the strike price in the earlier example was peculiar. Most of the time, this is not the case.

       Options expiration is decision time

      If you have an open option position, you should have a good idea about what you will do with it well before it expires. Here are your choices:

      ✔ Taking advantage of your rights as a contract holder: This means you are exercising the option. It requires contacting your broker and submitting the exercise instructions. Chapter 9 covers this in detail.

      ✔ Trading out of the option: This means submitting to your broker the instructions required to exit the position.

      

Option expiration dates fall on Saturday. Because there is no trading on Saturday, you must deliver your instructions or exit the position on the last trading day before expiration, usually a Friday. This is weird and can cost you money. But rejoice. As of February 2015, a transition to Friday expirations begins.

      Here are some key details about expiration dates and how to handle them:

      ✔ Know your last trading day: There is no stock market trading on Saturday, which has been the traditional last trading day. This won’t as be meaningful for options expirations after February 2015, though, when Saturday expirations begin to phase out. Some options, depending on their own particular properties and issue dates, retain the Saturday last trading day date. But over time,