This document may help you if you know NOTHING about Stock Options. It is not advice, so don’t blame me if you do any of this or use any of it and loose you butt… however… if you wind up making big money, feel free to shower me with you gratitude.
This is simply an explanation of Stock Options based on Robinhood’s interface (what most people like me are probably using).
I am not going to go into the details of what each thing actually means since that just causes more confusion. This is some main points stated in a way so you can understand things generally.
Stock Option ‘Calls’ (let’s not even bother with ‘Puts’) are simply ways to make money (or lose it). You don’t have to buy actual stock to buy Options but the Options revolve around stocks. Heres one of those areas where I will leave out the how and why junk. Just go with me here…
In Robinhood you have to ask to be able to trade Options. No biggie, it takes 2 seconds. Once you do that a new button shows up when you are a stock page called Buy Options. When you open that page up you will see a list of ‘Strike Prices’, the length of time you have to make/lose money on the Contract, and the cost (that’s all you need to pay attention to at this point).
- Cost: Let’s start here. The price to ‘get into this Option’ represents one ‘Contract’. In actuality one ‘Contract’ is 100 shares of the stock you are looking at. So when you pick an Option to get into, you will default (and you see as default) one Contract, you can simply add more depending on what you want to spend. So, if a Contract is .50, the total you pay is 100x .50 (which is $50).
- Length of Contract: This is IMPORTANT, don’t f this up… you need to choose the amount of time you have for the stock to make money. If you pick 1 day (the default) you will have till end of trading day (30 min before actually) to sell it. If it looses all its value you get nothing. If it has value at the end of the time and you didn’t sell it yourself, Robinhood will automatically sell it for you. Stocks all share the same contract lengths (with the exception of funds which can expire every day of the week). Longer Contracts cost more but give a stock more time to increase in value (or lose it!).
- Strike Price: This is where the rubber meets the road. This concept is the most difficult to grasp so pay attention… The point of Options is GUESSING… let’s just be honest…. GUESSING what a stock is going to do next (go up or down). So a stock has a current price. There are Strike Prices above this current value and below this current value. A Call (which is what we are talking about here) is the hope that a stock will increase in value.
You pick a Strike Price to define how much of a return you may get when that stock goes up. If you pick a Strike Price that is lower than the current market value… you are already doing well and will quickly gain some profits (as long as the stock moves up). This type of Strike Price is a lot more expensive than the other kind since it already has an intrinsic value. Now, if you pick a Strike Price that is higher than the current stock value you will take a little longer to gain value (as long as the stock moves up) but your returns can be a heck of a lot more!
That’s it. Remember this is gambling… pure and simple… always remember that.
Sure there is a bazzillion more nuances to this and I left out the why and what and who gives a crap, but as far as buying options, that’s all you need to know for the basics.
Here are some of the details (and tips) that you can look into once you grasp the main concept.
- You can search online for options calculators to see what you could make on a live stock.
- When you go to pick a Contract there is something called Open Interest, you need to make sure this number is not zero. Open Interest is how many contracts are out there to buy. The more the better. Also the more the better on the metric called Volume. This is what has been traded on these Contracts so far. Follow the crowd!
- Go ask ChatGPT for explanations on everything you see on the contracts page. It does a pretty good job of explaining it.
- Start out small and expect to lose it. Use your first few trades as learning experiences, keep it under $100 bucks or something.
- If you trade (buy then sell) within a day you will get a day-trading strike against you. No biggie, but if you have too many of those they will stop you until you pay or deposit big bucks.
- The value of a Contract will rise and fall with the stock value but it will fall all on it’s own due to ‘time decay’. That means if a stock didn’t change value at all the Contract will eventually shrink down to zero before the end of the Contract.
- Keep your risks and profits small, set goals and stick to them: “I will sell if I lose 20% of my value” or “I will sell if I make 50% profit”… and stick to it.
- Funds that are basically built to buy/sell options (that I use anyway) are QQQ and SPY. Funds are like stocks made up of other stocks.
Besides Calls there are Puts, that is where you are betting on the fall of stock prices. That’s a whole other kettle of fish but you can make just as much money if you are lucky. I’d rather not though… I can hardly wrap my head around this Call thing…