Bought Call Option

Posted on February 18th, 2010 admin No Comments

A bought call option purchase is also known as a long call option, which is a bullish or very bullish position. It gives the holder the right, but not the obligation, to buy the underlying asset at the exercise price on or before a specific period of time. The risk for the holder is limited to the premium paid for the option. The reward is unlimited. The bought call strategy benefits from an increase in the price of the underlying asset.

Buying calls is a bullish strategy that can be used as an alternative to the outright purchase of the underlying asset, giving you the benefits of limited risk and increased leverage. To profit from bought calls you are looking for a break out with a very bullish move. One way to identify this move is by using technical analysis.

If a call is in-the-money you can exercise your right to buy the shares at the strike price. The reason for exercising would be to hold the shares instead of closing the option and locking in the intrinsic value at expiry. Most option holders will close the position instead of exercising their right to buy the shares. An alternative strategy for buying shares is to sell put options.

Summary:

Market Outlook Bullish
Risk Premium Paid
Potential Reward Unlimited
Premium Paid at purchase, no margin calls
Time Decay (Theta) Negative
Volatility (Vega) Positive


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Option Trading: Delta

Posted on February 17th, 2010 admin No Comments

Delta is the amount an option price will move either up or down for a given change in the underlying share price. A deep out-of-the-money call option has a delta of 0, while an at-the-money call has a delta of approximately 0.5 and a deep in-the-money call has a delta of 1. This is the same with a put option but the values are negative.

This diagram shows that as the bought call option moves to at-the-money the delta accelerates compared to when the option is deep in or out of the money.

For example if I had a bought call option with a delta of 0.6, for every $1 increase in share price the option premium should increase approximately 60 cents. This is a guide only as the delta is not constant; it varies when the share price moves as demonstrated above.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Why Trade Options?

Posted on February 15th, 2010 admin No Comments

Leverage

Options are an investment product used for its leveraged nature. Many traders turn to options because they can start investing with just a fraction of the money that would be required to trade the underlying asset. Trading in options can allow you to benefit from a change in the price of the share without having to pay the full price of the share. The option premium you initially pay is your maximum risk. A bought call option also has potential unlimited returns. The risk vs. reward characteristic of buying options is the primary reason traders use options.

Flexibility

Options can be used for a number of different objectives. Portfolio managers use options to insure or hedge their portfolios. Traders use options to take advantage of market conditions that can not be traded with just the underlying share. If you can accurately analyse the direction of the underlying share, there is an option strategy that you can use to make a profit. These strategies can profit whether the underlying shares goes up, down or sideways. This is exactly what this seminar series will teach and is the reason I trade options.

Share Portfolio Management

Options can allow you to build and manage a diversified share portfolio. You can use options to either buy or sell shares. If a sold put is exercised you are obligated to buy shares. Additional income can be generated by selling calls. If a sold call is exercised you are obligated to sell the shares at the exercise price. Options can also be used as a form of risk management. Bought put options allow you to hedge against a possible fall in the value of shares you hold. This can be considered similar to taking out insurance against a fall in the share price.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Options Pay-off Diagram

Posted on February 12th, 2010 admin No Comments

Pay-off diagrams are essential to demonstrate how the different strategies alter the profit and loss diagrams. The profit and loss is shown on the y-axis and the share price on x-axis. Below is an example of a call option, it shows that as the share price increases the profit also increases. An option can be in-the-money, at-the-money or out-of-the-money. A bought call option is deemed in-the-money when the share price is greater than the strike price (C). In-the-money options have the most expensive option premium. An option is at-the-money when the strike price is the same as the share price (B). An option is out-of-the-money when the strike price is greater than the share price (A). Out-of-the-money options are the cheapest and hold the least option premium.

Figure 1 – Option Pay-off Diagram

To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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