options are basically bets that a stock will be a certain price at a certain date...instead of buying the shares, you're buying the right to own those shares at the strike price at a certain date.
it'll basically allow you to trade a stock with potentially less downside than if you actually owned shares of the stock
Right. You are purchasing the
right to buy a stock at a certain price point by a certain date. It's much cheaper, and allows you to trade big ticket stocks that you might normally shy away from, like Google and Amazon. If you buy 1 call option of a stock, you are saying, "I have the right to purchase 100 shares of this stock at so-and-so price by such-and-such date, no matter what the current value of the stock is."
As an example, on Tuesday(1/3) I looked at Ford's chart (F) and liked what I was seeing for a continuation to the upside for the next day. It was trading at about 12.60 at the time. So, instead of purchasing 2,500 shares of the company, which would've cost about $31,500, I purchased 25 call options at the $13 strike for Jan 20th. They were trading for 10 cents. That means, for every call option I purchase of Ford, I have the right to buy 100 shares of the company at 13 bucks, no matter what price it is at. So, I essentially bought the right to purchase 2,500 shares of Ford for 13 bucks a piece. This trade cost me 250 bucks.
Options math(buy):
1 call option = 100 shares
option pricing = .10 cents
100 * .10 = $10
25 call options = 2,500 shares
option pricing = .10 cents
2,500 * .10 = $250
Notice the difference in the amount of money I had to have in order to trade?
$31,500 for 2,500 shares
vs
$250 for the right to purchase 2,500 shares at $13 a piece by Jan. 20th.
Anyway, the next day(1/4) Ford went up to as high as 13.27.
Suddenly, the call options I purchased were very attractive. I essentially could exercise those options and purchase 2,500 shares of the stock at 13 bucks, even thought it was trading at 13.27 (this is why directors in companies will take stock options at crazy low prices compared to the company's stock price).
So, I sold my 25 call options of Ford for .23 cents an option.
Options math(sell):
25 call options = 2,500 shares
option pricing = .23 cents
2,500 * .23 = $575
My purchase of $250 ended up being worth $575 = about 130% gain overnight.
Options can be very powerful if used correctly.
