Showing posts with label Options. Show all posts
Showing posts with label Options. Show all posts

Saturday, 19 April 2014

NYSE&NASDAQ: What is buy to open, buy to close, sell to open and sell to close?

When you are on your first time to trade options, you may be baffled by the choice of transactions:

buy to open (BTO), sell to close (STC), sell to open (STO), buy to close (BTC)

First time seeing this: what the heck are these? How come buying something can close something (buy to close)? How come selling something is to open something (sell to open)?

In stock transactions, there is only buy and sell, which is already self-explaining. But for options, because you have the right to buy or sell, every time when you want to OPEN a position, you need to choose if you were to OPEN a BUY or SELL position, i.e. buy/sell refers to the transaction you would like to make, whereas open/close refers to your position, whether you would like to open or close your position.

Assuming that currently you do not hold any open position (i.e. do not hold any options):

i) when you want to buy a call or put options, you choose BUY TO OPEN. When your transaction is matched, then you will have an open position. This open position will then required to be closed on or before expiration, e.g. if you wish to close earlier, then you choose SELL TO CLOSE, since you are SELLING your options and at the same time CLOSING the position.

ii) when you are selling a call or put options, you choose SELL TO OPEN. Then you will have a some kind of equivalent "short" position, e.g. when you sell 10 contracts, you will have -10 contracts for that options. You will then require to CLOSE the position by BUYING back, i.e. BUY TO CLOSE.

In short, if you were to commence a new trade, and you wish to be the buyer, then you choose BUY TO OPEN. Otherwise, if you want to be a seller, then you choose SELL TO OPEN. 

Hope this thread will clear the doubts of many options beginners, as I was also confused by these terms at first.

Thursday, 3 April 2014

NYSE&NASDAQ: March options virtual trades

Mar 14 options virtual trades, expired 21 March 2014.

Mar14 virtual trade

1. BAC, return of 33% while the mother share rose 1.2% in that particular period. (magnified power of options, just like call warrants)

2. JPMorgan Chase Co. (NYSE: JPM), advanced US 3++ in 1 week, or 5.93%. I bought the option at $0.98 and it ended up with $3.60. A return of 267% in 1 week time, not bad right? This is the kind of return in US markets.

3. TSLA, a recently hot stock in NASDAQ, where the call option is out-of-money @ strike price of 250, i.e. options expired worthless. A loss of 100% of the capital. 

Not too bad when you are a buyer and you bought at the right trend - unlimited profit and a limited loss of 100%. In real trade I would chose those expire at least 2 months later, so that the price fluctuation will be lower. Still a lot to learn for this financial derivatives.

Friday, 14 February 2014

NYSE: Selling call options: some basic stuffs

This time is the seller of call options. Selling options will always earn you premium, as you get the chance to be the "insurance company", as if collecting premium from buyers who wish to protect their shares. 
Case 1: Out of money

Buy: AMD JanWk5 3.5
Strike price = $ 3.5
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.02*1000 = $ 20 + ($ 15.35 brokerage)
AMD cloased at 31 Jan 2014 = $ 3.43

AMD @ 30 Jan 2014 = $ 3.45. It has little chance to close above $ 3.50, hence the premium is very small. At the expired day, AMD closed below strike price, so premium was collected free by call seller.

Case 2: In the money

Buy: AMD JanWk5 3
Strike price = $ 3.5
Expired date = 31 Jan 2014
Cost: 0.13/options = 045*1000 = $ 450 + ($ 15.35 brokerage)

Call options is in the money at the expired date, i.e. call options will be exercised. I am required to sell the share @ $ 3 to the call options buyer. If I will to buy back immediately, this will cause me a loss of $ (3-3.43) = - $ 0.43 / share. But I collected premium from selling the call. So is a different story.

Based on yesterday closed price of $ 3.70, if I buy back to close my position, my net loss will be:

+ $ 450 - $ 3000 + $ 3700 = - $ 250.

There is something known as Sell Covered Call, which is pretty common in options. Covered here means that you own the mother share, and at the same time, selling call options to earn premium. If the shares go down, the premium collected will be yours. If the share rises, you still earn from having the upside of the mother share. This looks to be a good deal, although still need some time to have a deeper look on it.

Wednesday, 12 February 2014

NYSE: Buying call options: basic things to know

2 cases of call options are considered:

1. in the money: A call options is in the money when share price > strike price (opposite to put)
2. out of money: A call options is out of money when share price < strike price

Case 1: Out of money

Buy: BAC JanWk5 17
 (NYSE: BAC, Bank of America Corp)
Strike price = $ 17
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.06*1000 = $ 60 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 16.75

BAC price at 30 Jan 2014 = $ 16.93. As a call options buyer, I anticipate the share price to be higher than $ 17 on the expired date. This did not happen, so my premium is collected by the seller. The call options expires worthless.

Case 2: In the money

Buy: BAC JanWk5 16
Strike price = $ 16
Cost: 0.13/options = 0.87*1000 = $ 870 + ($ 15.35 brokerage)

This call options is most probably to be in the money, as BAC share price is higher than the strike price. Essentially, I paid a premium of  $ (16 + 0.87 - 16.81) / $ 16.81 = 0.4% as compared to buying the mother share directly. This is very much similar to buying call warrants, however, call warrants in Malaysia are all cash settlements, i.e. does not have the option to convert to mother share. 

Note: $ 16.81 is BAC opening price on 30 Jan 2014.

On 31 Jan 2014, this call options was exercised, so I can buy BAC mother share @ $ 16. 

BAC closed @ $ 16.72 on 10 Feb 2014. If I sell the mother share yesterday @ $ 16.71, I would make a profit of 0.71/share from the mother share = $ 710.

Then my net profit is
 = - $ 870 (call options) - 16000 (stock assignment @  $ 16/share) + 16710 + (brokerage)
= - $ 150

If I wouldn't want to incur any loss, I can hold BAC to wait the share price to go up until it breaks even my cost.

Friday, 7 February 2014

NASDAQ: Buying put options, what should you know?

I traded put options to see what happens to the contract when it expire either:

1. in the money: A put options is in the money when share price < strike price (opposite to call)
2. out of money: A put options is out of money when share price > strike price

Case 1: Out of money

Buy: MSFT JanWk5 36 Put
 (NASDAQ: MSFT, Microsoft Corp, everybody knows what this company does)
Strike price = $ 36
Expired date = 31 Jan 2014
Cost: 0.13/options = 0.13*1000 = $ 130 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 37.84

At the expired date, MSFT stayed at $37.84, which is higher than the strike price, meaning that the options is out of money, i.e. worthless. It was brought to close automatically (zero cost).

As a put options buyer, I anticipate the share price to drop from $ 36.86 (30 Jan 2014) to $ 36, i.e. a fall of 2.3% in 1 day, which is rather a slim chance. The premium is collected free by the seller. Nobody will exercise his right in this case, as it would mean to selling the share @ $ 36 and then buy back @ current market price of $ 37.84, such a stupid action isn't it? 

MSFT options

Case 2: In the money

Buy: MSFT JanWk5 38 Put
Strike price = $ 38
Cost: 0.13/options = 1.59*1000 = $ 1590 + ($ 15.35 brokerage)
MSFT cloased at 31 Jan 2014 = $ 37.84

On 31 Jan 2014, MSFT share price is $ 37.84 < strike price $ 38, i.e the options is in the money, it will be exercised automatically. Hence, I can sell MSFT @ $ 38 to put options seller. But I don't have any MSFT share in my portfolio, this means that I will have to "short sell" MSFT to the seller, causing me to "earn" $ 38*1000 = $ 38.000 by selling the shares.

I need to buy back the share to close my position. At this time, MSFT share is trading at $ 37.84, which means that I earn a difference of $ 160 immediately. But then in purchasing the put options already cost me $ 1590, which means that I actually incur a loss of $ -1590 +  160 + (brokerage) = -$ 1430. As a put options of strike price @ $ 38 is highly possible to be in the money during expiry, which is why the price is so high. Being a put options buyer, I expect the share to go down, but MSFT is going the opposite direction against my prediction. In short, as long as your put options is in the money, you will be required to sell the share at the strike price.

Yesterday, MSFT closed at $ 36.18, due to bad market sentiment few days ago. This means that I will make a profit of $ (38 - 36.18)*1000 = $ 1820 if I close my position yesterday.

Net profit = $ -1590 + 1820 + (brokerage) = $ 230.

This is not surprising, a put options buyer will always benefit from a loss in share price.  Not a bad return in such a short time if the direction anticipated is correct right?

Wednesday, 29 January 2014

Put options fundamentals: part 2 (end)

21 Jan 2014 is the fiscal date for AMD, announcing the financial results for Q4 2013. US companies are given one month to announce financial results, while Malaysia companies are given 2 months. The environment in Malaysia is really "senang" (relax), typical Malaysian style, I like it.

For the year 2013, AMD suffers a net loss of 83M or loss per share of $0.11. Refer to NYSE Press Release for details.

On 22 Jan 2014, AMD gap down with huge volume, after announcing a worse-than-expected financial results. Oh, this is the same as in Malaysia too. Gap down after a bad financial result, as what happended to ZHULIAN recently.

AMD chart
AMD Chart

AMD put options Jan wk 4 2014
AMD Put Option @  $4, Jan wk 4 2014

Put options has opposite trend against the mother share. As AMD price goes down, put options will have a higher value, and vice versa, as shown in the above figure.

24 Jan 2014 is the expiration day for this option. Both NYSE and NASDAQ suffered losses of about 2%, quite a huge loss in single day. AMD closed at $3.47, well below the strike price of $4. Since the price is below the strike price, put options buyer will definitely exercise his/her rights to sell
the share @ $4 to me. (e.g. imagine you hold an insurance policy (options buyer), that accident happens to you some day (touch wood), for sure you will claim from the insurance company (options seller))

put options exercised

Last row shows my sell transaction, that the premium I gained.
2nd row shows that AMD share was assigned to me @ $4/share. I have to buy it at this price. Since the mother share is trading @ $3.47, this means that I incur a loss of 0.53*1000 = 530 IMMEDIATELY.
1st row is to close my options position.

This means that my net loss in this trade is: 190-530 = -$340

If, say, I do not want to hold AMD share. I can opt to buy the put options to close my position. The put options closed at $ 0.56 on 24 Jan 2016. This means that I have to pay 0.56*1000 = 560 to buy back the put options.

In this case, my net loss is 190 - 560 = -$370

Is almost LPPL (i.e. almost the same). Of course, seeing that AMD plunged few days before the expiry date, I could have bought the put options to close my positions way earlier, to limit my loss. Another choice is to hold AMD until it recovers. But the catch for this is that my money will be locked in the share. Whatever decisions to make is dependent heavily on the capital, and this must be determined before executing the transaction.  

Sunday, 26 January 2014

Put options fundamentals: part 1

In options, you have the choice to be the buyer or seller. I believe this is exactly how this financial derivative obtained its name, because you have the choice to opt.

There are lots of internationally well-known companies listed on US market, e.g. AMD. I like this company, because I did my industrial attachment there. AMD (NYSE: AMD), microchips manufacturers, Intel's competitors. Without AMD, computer markets will be monopolized by one company, and we will not have affordable computers to use.

Call is the financial term meaning "going up", i.e. when you buy call warrant, you expect the share price to go up. Put is the opposite of call. One will buy put options if he/she thinks that the share price will fall below a specified price in a particular time frame. When one sells put option, he/she think the other way round, i.e. the price wouldn't fall below the strike price. 

I sold AMD put options on 17 Jan 2014.

Options sold: 1000
Price: $0.19/option
Strike price = $ 4 (strike price = exercise price in Malaysia)
Expire on: 24 Jan 2014

Note: AMD closed at $ 4.18 as at 17 Jan 2014. This price is above the strike price, i.e. the put options should have zero value if AMD stays above $4 at 24 Jan 2014. The premium (i.e. $0.19/option) is due to the buyer thinks that in 1 week time, AMD could potentially fall below $4. Being the options seller, I think that AMD wouldn't fall below $4 in 1 week time. 

This contract implies that:

1. I will get a premium of $ 0.19*1000 = $190
   Total sell = 0.19*1000 = $ 190
   Brokerage fee = $ 15.36
   Net premium gain = 190 - 15.36 = $ 174.64
   N.B.: In selling put options, a portion of your capital will be locked, to ensure that you have the money to purchase the mother share should the option buyer exercise his/her rights.

2. If, until 24 Jan 2014, AMD stays above S4, then the premium I got from selling the put options will be my free money. Put options buyer paid $190 to protect his/herself until 24 Jan 2014. Options buyer pay a premium to protect the mother share from falling. This is analogous to insurance, where you (options buyer) pay a premium to the insurance company (options seller). If nothing happen to you (i.e. stock price did not fall below the strike price), the premium will be free money to the seller. If something happens to you (i.e. stock price falls below the strike price), you can exercise your right to claim from the insurance company (i.e. seller).

3. Should AMD go below $4 before 24 Jan 2014, say $3.5, then the put options buyer can exercise his/her rights to buy the share at $3.5/share, and sell it at $4/share. But at that time AMD is trading at $3.5, who will pay $4 to buy the share? The put options seller. This is the obligations tied to the options seller, i.e. in this case, the "insurance" works, the buyer can claim money from the insurance company (options seller)

[to be continued]

Thursday, 23 January 2014

NYSE: from options to mother share

Few months ago I did some virtual trades on options. One of the trade, due to a lower share price than the strike price, I was forced to buy the mother share at a higher price, the share is Bank of America Corp (BAC). See options exercised. But even if I have the mother share, incurring a loss at the time of conversion, I can hold the share until it is over my option strike price, i.e. purchase price of $15.

Now, BAC is trading at $17/share. This means that if I hold the share until now I can still earn money from this.


The above trade is virtual money. So i can "sai lang" as I like. Note that 1 contract in options = 100 shares. And the ratio to mother share is 1:1. So if I sell 5 contracts, then I have 500 shares of BAC options.

In selling options, you must be prepared to hold the mother share, if the buyer exercises his/her rights. For a good stock, I don't really mind holding it. However, one catch for this is your money will be locked when you sell options. But just like this case, even tough the options was being exercised, I can hold the mother share until the price has gone up, e.g. $17 in this case, not a bad return for 4 months.

Appendix:  BAC chart from yahoo finance

Monday, 12 August 2013

NYSE: Options being excercised

Options exercised后,买 put option 权利把 options 变成母股。这样只要目前股价 < strike price,都是值得的。

BAC put options

比如上面,我8月2了 put options,premium 130左右。但是的 put options strike price 是 15,可是上个星期到期日时候 BAC (Bank of America Corporation) 股价才 14.45。BAC Share Price.意思就是 put options 的 buyer 可以用 14.45 股票,然后用 15 我。必须以 strike price 股票。所以户口出现 500 unit  BAC 母股。

当然,立刻母股价差。算上卖 premium的,还是不过,手上握有 BAC 母股,随时可以翻盘。

Friday, 9 August 2013

NYSE: Options 学习中

刚刚把上个星期卖得put options close 掉了。

Put options MSFT

8月5日我做seller,卖 MSFT 的 put options。MSFT,就是 Microsoft。当天的 MSFT 母股是大约是 31.80.

我这个 options 到期日是8月16日,strike price 31.意思就是股价跌过31,我亏钱。当天我的卖价是0.17. 买掉后,我会得到premium,从买家手上拿到的premium。

刚刚看到MSFT涨了,我卖掉的put options就跌了。因为我之前卖掉,所以理论上我必须买回来close position。如果不买也可以等到到期自动close。但是万一到期MSFT母股有什么三长两短我就必须用更高的价钱买回我的options。只要当时的价钱高过0.17(我的卖家),我就是亏钱。


事实上,MSFT 昨天的股价波动很大:(资料来源:Yahoo Finance

MSFT Aug 2013

昨天的股价曾经下探 USD 31,也就是我options 的 strike price。所以昨天我打开虚拟账户的时候户口是大亏的,因为昨天options的价钱最高来到0.34:

MSFT Options Aug13

最后第二根红蜡烛,就是2013年8月7日的。中间来到0.34的高价,超过我卖价的一倍。如果那时候我买回来 buy to close, 立刻亏50%。还好MSFT的股价昨天闭市收盘高,所以昨天的options闭市时0.12。今天开始options直接下探0.08,我就close position了。


Wednesday, 7 August 2013

NYSE: Options 基本研究


Options,中文选择权。东西2学过。过后不了了之。最近大马货币实在担心。继续存在马币,到时候1nasi lemak,的,RM 1那种,不要RM 10 那么难听,RM 5不知道得到吗?

选择权,或者期权,就是可以选择的。可以选择买卖。这里来个最简单的介绍。选择权可以买可以卖。就是说你可以做散户,也可以做庄家。Call warrant你只可以买而已,卖的call warrant的人都是银行来的,银行做庄。

Options 这种金融衍生产品当然是美国开始的。美国最厉害这种东西了。Options 分 call 和 put。和马股的 call 和 put warrant意思一样。买call就是看涨,买put就是看跌。你可以 buy call/buy put/sell call/sell put,任你玩。

在马来西亚买家卖家叫 buy sell。在美国叫 bid ask。我还是喜欢马来西亚的叫法。

来个超级菜鸟的 sell option 虚拟交易:

sell put option AAPL

2013年8月1日我sell AAPL 的put option。AAPL,大家都知道的APPLE,在美国NASDAQ交易。卖价0.72.Strike price (exercise price)是 USD 450. 

这种情况,就如call warrant,会有2个case:

1.options到期前,AAPl股价跌过 450
那么put option buyer可以用跌过450的股价买股票(i.e. market price at that time),然后用450的价钱卖给我。

2.到期时股价超过 450,那么options buyer不会exercise 那个options,所以我所卖掉的 premium就是白赚。

图中的options到期日是8月2日。当天AAPl闭市462.见 YAHOO Finance

超过我的strike price。所以我卖掉option的钱是白赚的。当然,系统会自动帮我close position(buy to close)。