Call and put options cheat sheet

This is a relationship between stock, puts and calls which allows to setup bullish positions using puts and vice versa. Often referred to as put call parity. Only basic strategies are listed to keep these tables to a manageable size. Profit and loss of money graph of positions within each row is the same. Theta means position loses money from time passage. Addressing a lot of questions I collected below, in condensed form, some key data about option strategies. The result may not be identical due to interest on cash balances and dividends. Complex, multileg strategies can be analyzed as combinations of basic strategies. Such positions are often called synthetic options positions. Theta means position makes money from time passage.

Vega means position makes money from increased volatility. Gamma means Delta will increase if stock rises. What factors do you take into account? Would a Stock Options cheat sheet be helpful to you? What factors are important to take into account? Not everyone is going to have the same amount of money to start with.

There are thousands of stocks. You decide to create a watch list with options that are liquid. This will determine the position size that you are able to trade with. You need to take a few steps in trading. They enter the stocks in a watch list. Confirming our entry criteria before every trade is extremely important to us at tastytrade. Start by determining your if the stock is liquid and what kind of outlook you have for the price of the underlying stock.

Trading in the stock option market can be challenging and lucrative. First you need to determine which stocks you want to trade, second what trading method are you going to use and third how do you enter the trade and know when to take profits. So if the stock price increases by a given amount, the ITM call would profit more than an ATM or OTM call. If you have achieved 50 percent and you are half to three quarters of the way to expiration, get out and take your profit. If you want to choose your Option method you have a choice from several strategies. Now that you have found the underlying you want to trade you need to consider what method you like to use to enter the trade.

However, since an ITM call has a higher intrinsic value to begin with, you may be able to recoup part of your investment if the stock only declines by a modest amount prior to option expiry. The higher delta of the ITM option also means that it would decline more than an ATM or OTM call if the price of the underlying stock falls. But what if the stock price declines? Of course you can trade with more risk and have better profits. To be a successful trader, you need to know how to identify and invest in any market, and you need to know how to use market analysis tools. Is there a method or criteria where you can determine that you have enough? Let your winners run is an often heard statement in the financial world.

For a better return of investment you can select trades with an undefined risk. Successful traders restrict their attention to a small number of stocks. Some stocks are traded with millions of contracts and others trade only a few. What if the trades turns. Most of the times it means that your risk is 2x Standard Deviation. Today there are thousands different ETFs and stocks traded on the exchanges.

What options do you want to trade? Do you expect the shares to rise, fall, or flat line? What things do you need to consider What factors do you consider when choosing the underlying? Days To Expiration 45 days give enough time to work in our favor. When do you take profit? It is impossible to monitor closely all of them. We look for certain indicators in liquidity, volatility, and probability of profit before entering trades. The amount of money you have is the size of your trading capital. Look also at the article How to select Option Trades.

If the stock falls in a big way, and you get assigned, you can face big losses from having to buy the stock in the open market to sell it to the party exercising the put you sold. In the first instance, your put option acts as an insurance policy to protect your gains. Put options are bets that the price of the underlying asset is going to fall. Naked puts give you the potential for profit if the underlying stock falls. Selling naked put options is similar to buying a call option, because you make money when the underlying stock goes up in price. In the second instance, if your put goes up in value, you can sell it and decrease the paper losses on your stock. When you buy and sell puts, it pays to know the difference between a naked or covered put option. Buying a put option without owning the stock is called buying a naked put.

The common thread here is that they have limited risk and are alternatives for you to consider. This is a useful method to set up before an important announcement such as an earnings or key economic report release. It may be useful with an underlying stock in the former scenario and with an ETF in the latter. IV is high and there are fewer than 30 days to expiration. The two short puts have the same strike price and make up the body. It creates a credit and replaces a short call with unlimited risk. At the same time, the amount risked in the position will be less than owning the stock outright. Buying a put for existing stock or rolling out an option to a later expiration month remains true to that method goal.

Following are ten great trading option strategies. The call premium is a credit that offsets, at least partially, the cost of the put. Time decay helps the trade. The position is created by purchasing the stock and put at the same time, but the key is creating put protection and managing the risk of stock ownership. Again, timing is important in the deployment of this method. Time Value you have.

And I am certainly not making any claims about the profitability of options trading. The entire content of this website is meant for educational purposes only. IBM option quote for IBMEA. By most estimates, there are about 50 questions on options on the Series 7 exam, approximately 35 of which are questions that deal with options strategies. There are two parties in a contract. This investor will sell the contract for its intrinsic value because there is no time value remaining. In a Put spread Subtract the net premium from the Higher strike price.

The seller has the obligation to perform when and if called upon by the buyer; the most the seller can profit is the premium received. This makes the process easier to visualize. This is a reminder that the short straddle investor expects little or no movement. Note that in Figure 1, the buyers of puts are bearish. They are interested in profits from trading the contracts themselves. Write the matrix down on your scratch paper before starting the exam and refer to it frequently to help keep you on track.

This investor has the right to purchase at 50 and the obligation to deliver at 60. At what points will the investor break even? Instead of clearly asking for the two breakeven points, the question may ask: between what two prices will the investor have a loss of money? Spreads may require more steps for a solution, but if you use the shortcuts, solving the problem is much simpler. These terms are critical to answering spread questions. In spread strategies, the investor is a buyer or a seller. Spread strategies seem to be the most difficult for many Series 7 candidates. The problem is that this is only half right.

All four of these steps may not be necessary for each and every options problem. For everything you need to know for the Series 7 exam, see our Free Series 7 Online Study Guide. The investor closes the contract. If only the strike prices are different, it is a price or vertical spread. Breakeven: Since this is a call spread, we will add the net premium to the lower strike price. Subtract the total from the strike price for the breakeven on the put contract side. Tip: notice that in the example, the higher strike price is written above the lower strike price. You can think of an options contract like a car insurance contract: the buyer pays the premium and has the right to exercise; they can lose no more than the premium paid.

The stock must rise to at least 56 for this investor to recover the premium paid. Remember: buyers want to be able to exercise. In cross directly below the matrix so that the vertical bar is exactly below the vertical line dividing buy and sell. If ABC stock does not rise above 50, the contract will expire worthless and the bullish investor loses the entire premium. Primarily they focus on straddle strategies and the fact that there are always two breakeven points. When you determine the position, look at the block in the matrix that illustrates that position and keep your attention on that block alone. In the Series 7 exam, questions about options tend to be one of the biggest challenges for test takers. Tip: The first point of simplification is this: in any question of this nature regarding spreads, the answer will always be widen or narrow.

Questions regarding straddles on the Series 7 tend to be limited in scope. Remember the word contract. How can you arrive at the intrinsic value so not difficult? On the short, or sell side, things are exactly opposite in that you could profit from an increase in the asset underlying a put option if you have shorted a put. The first item on your agenda when you see any multiple options method on the exam is to identify the method. That way, the buying side of the matrix will be directly above the DR and the selling side of the matrix will be exactly above the CR side. This makes it much easier to visualize the movement of the underlying stock between the strike prices.

Be very careful to remember the rights and obligations when solving spread problems. This is because options questions make up a large part of the exam and many candidates have never been exposed to options contracts and strategies. To find the breakeven, add the two premiums and then add the total of the premiums to the strike price for the breakeven on the call contract side. Options contracts questions in the Series 7 exam are numerous, but the scope of the questions is limited. Look at the formulas: simply swap the gains and losses and remember that both parties to the contract break even at the same point. What is the profit or loss of money to the investor? If both the strike price and expirations are different, it is a diagonal spread. Refer again to Figure 1 and remember that whenever the buyer gains a dollar, the seller loses a dollar.

The remaining 15 questions are options markets, rules and suitability questions. So to find that amount, we multiply the breakeven price by 100. Look at Figure 2, the intrinsic value chart. All of these terms refer to the layout of options quotes in the newspapers. Because an option has a definite expiration date, the time value of the contract is often called a wasting asset. Look now at the arrows within the loop on the short straddle; they are coming together. Call buyers are bullish; call sellers are bearish. This is, then, a bull or debit call spread. The problem states that the investor closes the position.

The investor is, in net terms, a buyer of call contracts. Apply these ideas to options contracts. This is where the matrix in Figure 1 becomes a useful tool. Remember when an investor sells or writes an option, they are obligated. Remember: buyers always want the contract to be exercisable. When one party gains a dollar, the other party loses a dollar. These are the essential straddle strategies. Movement above or below the breakeven point will be profit. Look at the matrix: buyers of calls are bullish.

In a Call spread Add the net premium to the Lower strike price. The maximum gains and losses are expressed as dollars. The method laid out above is a call spread. Notice that the arrows in the problem illustrated above match the arrows within the loop for a long straddle. Because you are using the matrix for the initial identification, skip to step four. This is a reminder that the investor who has a long straddle expects volatility. In a straddle, investors are either buying two contracts or selling two contracts. While there are people there who plan to buy or sell a horse, most of the crowd is there to bet on the race. Of course, the investor with a short straddle would like the market price to close at the money to keep all the premiums.

When the buyer has regained all of the premium money spent, the seller has lost the entire premium they received. In a short straddle, everything is reversed. Technically, it is a vertical call spread. Just prior to the close of the market on the final trading day before expiration, XYZ stock is trading at 47. Here, there is one additional qualifier to the complete description of the spread. In one sense, the options exchanges are much like horse racing tracks. One cautionary note: the contract itself is in or out of the money, but this does not necessarily translate into a profit or loss of money for a particular investor.

If an investor, for example, is buying a call and a put on the same stock with the same expiration and the same strike, the method is a straddle. One of the problems that Series 7 candidates report when working on options problems, is that they are not sure of how to approach the questions. Series 7 exam and increase your chances of getting a passing score. Actually, we could have used the matrix to identify the method as a spread. Tip: above 60, the investor has no profit or loss of money. There are other, very frequently reported questions about spreads.

If you look at the matrix and see that the two positions are inside the horizontal loop on the matrix, the method is a spread. We can now call it a debit call spread. Put contracts operate in exactly the opposite direction. The exam will frequently interchange these terms, often in the same question. The investor is anticipating a rising market in the stock. The majority of options investors are not interested in buying or selling stock. For that reason, the buyer and the seller reach the breakeven point at the same time. If the investor is selling a call and selling a put on the same stock with the same expiration and the same strike price, it is a short straddle. Because the investor is long the contract, they have paid a premium.

The strike price, also known as the exercise price, is the amount at which the writer is obligated to buy or sell the commodity should the contract be exercised. Time value therefore plays a critical role in determining the premium, which becomes zero whenever an option expires. Option contracts obligate the writer while simultaneously granting a right to the purchasing investor. In the case of stock options, the writer is obligated to somehow trade 100 shares of the underlying stock. Whether the stock market is going up down or sideways with options you can profit in all market conditions. Options are the most effective way to profit in all three scenarios. Options are a critical piece of investing that allows you to profit in any market condition.

But we all know that stocks also can trade sideways and even decline in value. If you are looking to take your stock trading to the next level then look no further. In this course I take you through the fundamentals of options all the way to proven strategies that the professionals use in a simple not difficult to understand video training format with real life examples. Think about it when you buy stocks you only make money if the stock goes up. This course will no doubt set you up to capitalize on the stock market for years to come. Enter the costless collar. But in the intermediate term, you still see risk to the downside. This type of method combines the best of both worlds: Limited downside and unlimited upside. Meanwhile, you can keep holding your shares to await eventual gains.

The puts will provide a profit, and the calls you sold will expire. You want to protect your investment against a large decline, just in case. The real cost of implementing a protective collar is limited upside. You believe emerging markets will reward investors in the long run. This allows you to choose more advantageous strike prices and be paid more for the calls. Collars can smooth returns, help hedge your portfolio, protect a holding, and allow you to ride out a rough market with more confidence. There is a way to insure your investment and maintain unlimited upside potential on at least some of your shares. In times of uncertainty, buying puts to protect your key holdings makes plenty of sense.

However, when it comes to equities, you can protect your portfolio by purchasing put options. They can also be a prudent way to protect your gains on stocks that have recently leaped in price, nearing your estimate of fair value. Sell Out of the Money Calls: Less likely you will get called out of the stock and benefit from time decay. You just put cash in your account by doing so. Support for the Trade: Gold broke above some key technical levels and yesterday, Ben Bernanke said we are going to get cheap money for at least three more years. Implied Volatility between 25 and 30. Gold spurted and has far more room to run for it is an inflation hedge for many, a fear hedge for those afraid of Europe and fundamental demand for the metal is growing in emerging countries such as China and India. General Motors is in great shape as a company and as a stock to benefit from this boom. Rich Premiums: Look for stocks with high volatility and rich premiums.