Options Cheat Sheet

A stock OPTION is a contract that gives you the right—but not the
obligation—to buy or sell shares of an underlying stock before a
certain date, called an EXPIRATION DATE (or EXPIRY).

What are Options? The Options Cheat Sheet

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The Benefits
of an Option

Lower Upfront Cost Get exposure to lots of shares of a stock with a much smaller initial investment

Insurance
If you have an existing stock position, options can provide insurance if the trade moves against you

New Income Streams Create a steady income stream based on assets you already own

Profit in Any Market You can use options to profit when the market is moving up, down or sideways

The Two
Basic Options

CALL: Pick UP and call

Call options are for when you’re expecting a stock’s value to go UP.

A call is the right to buy a stock at a predetermined price (the strike price) on or before the expiration date.

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Useful for:

  1. ✱ Profiting from a stock’s gain without paying full price for the stock
  2. ✱ Limiting your downside risk to the premium paid for the option
PUT: Put DOWN the phone

Put options are for when you’re expecting a stock’s value to go DOWN.

A put is the right to sell a stock at a predetermined price (the strike price) on or before the expiration date.

Useful for:

  1. ✱ Profiting when a stock loses value
  2. ✱ Hedging against losses in an existing position
Example Options Trade:
THE BASIC CALL

Conditions:

  1. ✱ XYZ is currently trading at 50, but you think it’ll go to 60 by December
  2. ✱ You want a small cash outlay versus buying the stock
  3. ✱ You want leveraged profits with limited downside risk

Maximum Risk: Premium Paid
Upside: Unlimited
Breakeven Price = Long Call Strike Price + Premium Paid

Example Options Trade:
THE BASIC PUT

Conditions:

  1. ✱ You’re bearish on stock ZYX
  2. ✱ ZYX is currently trading at 40, but you think it’ll go to 30 by December
  3. ✱ You want to short the stock, but would prefer a lower risk if the trade goes against you

Maximum Risk: Premium Paid
Upside: Unlimited
Breakeven Price = Long Put Stock Price – Premium Paid

XYZ

December 50 Call Option Premium: $4.50
1 Contract (the right to buy 100 shares of XYZ at
$50/each) = $450 Total Investment

ZYX

December 40 Put Option Premium: $3.00
1 Contract (the right to sell 100 shares of ZYX at
$40/each) = $300 Total Investment

The Greeks

“The Greeks” are five common ways to measure the factors that affect the price of an options contract. They can be used as a quick way to gauge how factors like stock price, volatility, and the passing of time will affect the value of an option.

  1. DELTA
  2. SENSITIVITY TO STOCK PRICE Measure the options price change for every $1 increase in the underlying stock price.

  3. GAMMA
  4. SENSITIVITY TO DELTA Measures rate of change in Delta for every $1 increase in the underlying stock price.

  5. VEGA
  6. SENSITIVITY TO STOCK VOLATILITY Measures the options price change for every 1% increase in volatility.

  7. THETA
  8. SENSITIVITY TO TIME DECAY Measures the decrease in options price for every day that passes, assuming steady price and volatility.

  9. RHO
  10. SENSITIVITY TO INTEREST RATES Measures the change in options price for every 1% increase in interest rates.

See also  https://research.investors.com/stock-quotes/nasdaq-liberty-latin-am-cl-a-lila.htm

Facts about Options

Trading an option requires two
parties, a BUYER and a SELLER
(or WRITER). The Buyer holds
the option to exercise the
contract and can do so before
it the expiration date, while
The Seller holds the obligation
to fulfill the contract if it is
exercised.

Options are a derivative, which means you’re not trading
the asset itself, but simply a contract based on the asset.
Since you do not have to buy the underlying asset, options
have a lower upfront cost than stocks.

The per-share price of an
options contract is called
the premium.

1 OPTIONS CONTRACT GRANTS THE
RIGHT TO BUY OR SELL 100 SHARES
OF A STOCK.

Expiration dates are listed in the form of
month and year (e.g. March 2020), and
always expire on the third Friday of
that month.

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For more, go to investors.com/gettingstarted

View more information: https://get.investors.com/infographics/options-cheat-sheet/

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