Stock Options

Updated: Jan 26

YouTube: https://www.youtube.com/watch?v=RusHhwnUpJg&t=400s


Answers to nine major questions in the process of option operations

Q1, knowing that the stock is going to rise, do not know how to make a profit? How to make more? (direction)


As shown in the figure, we know the fundamentals of Tesla and the upcoming S&P next month. The future prospects are absolutely perfect. Therefore, at this time, many institutions began to buy call options, with a maximum call of more than 100 million US dollars a day.


From 11/25 to 11/27, we can see that tsla has risen by almost 35 dollars.



The exercise price is 580, and the exercise price of the 11/27 expiration option has risen from $4 to $16, a fourfold increase!


The exercise price of 550, the exercise price of the 11/27 expiration option, rose from 18 US dollars to 36 US dollars, only doubled!


The exercise price of 600, the exercise price of the 11/27 expiration option, fell from 2 dollars to 0.01 US dollars, but fell!


Q2, how reasonable is the exercise price? What are ITM, ATM, OTM? (price)


Core factor(itm, atm, otm)


Itm(Real value/in price) Atm(Fair value/Fair price) Otm(Out of value/out of price)

Current stock price


Buy call/buy put, sell call/sell put (call is bullish, put is bearish)

Call option: Strike price <current stock price In the price

Strike price> current stock price Out of the price

Put option: Strike price>existing stock price In the price

Strike price> current stock price Out of the price


Example: Tesla’s exercise date expires on December 4, a call option call 700 with the exercise price of one week


he current price is about 585, but the 700 risk leverage is too large, so the 4.45 margin is basically unrecoverable, because the larger the spread, the greater the risk, so for small retail investors, in a short time You should choose a conservative price, such as choosing 630, and the margin is 15.206!


Take TSLA as an example. Our current price is 585 (spot), and the strike price is 550, 575 (strike), both of which are lower than the current price. This is Itm, an in-the-money call.


ATM is at the money, the same as the current price. (Generally rarely appear)


Otm is an out-of-the-money option, out of the money, also called out-of-the-money price. In the picture, the current price is 585 (spot), and the strike price is 590, 650 (strike), which are all higher than the current price. This is otm , Out-the-money call.

三者之间有什么区别?

The reason why the price of ITM is greater than >ATM is due to the existence of intrinsic value. When the option expires, if the intrinsic value is still there, then ITM options lose only the time value. Take Tesla as an example!


One month later, the call that tsla exercise price is $600, why is it worthless?


Because we know that the meaning of this call is that after buying this contract, you have the right to buy 100 shares of Tesla Inc. (TSLA) at a price of $600 before the expiry date.


But the current Tesla stock price is $585. Assuming that the stock price rises to $620 a month later, we can buy it at a price of $600, so that a share of 20 US dollars will be realized; but the problem is, if the stock price is a month later If there is no more than $600, then this call is a piece of waste paper on the expiry date, and it has no value.


Because call is a right granted to the holder, this right only makes sense on the expiry date after the stock price exceeds the exercise price. If the stock price does not exceed the exercise price, of course you can exercise, but it is meaningless. For example, if the stock price is 590 US dollars a month later, would you buy 100 shares at 600 US dollars? Certainly not. In other words, for out-of-value options, if the expiration date is changed to today, then out-of-value options are worthless pieces of waste paper. Out-of-value options are valuable because they have not yet expired. In the period between the current and the expiration date, stock prices may rise or fall sharply, giving out-of-value options a basis for exercise, such as the example above , The stock price rose to $620 (more than $600) a month later. At this time, the call exercise price of $600 makes sense. Here we introduce an important concept, namely the time value of options. Like out-of-the-money options, the value that the option has not yet expired is the time value.


Real-value options are different. In the above example, a call with an exercise price of $580 a month later will have a stock price of $585. The difference between the stock price and the exercise price is the intrinsic value of the real call option, which is 585-580 = $5. After checking the quotation, we found that the price of this call contract is 10.1 US dollars. That is to say, the price of this call contract is 10.1 US dollars, of which 5 US dollars is the intrinsic value, and the remaining 5.1 US dollars (10.1-5) is the time value. .


Regarding the intrinsic value, you can think about it from another angle. If the date is changed to today, the value that this contract still has is the intrinsic value. In this example, the current stock price is $585, and the call price of $580 should all be The intrinsic value, namely 5 USD, has expired, that is, the last trading day, so the time value is 0. Is there a possibility that the price of this contract is not equal to $5, is it larger or smaller? The answer is, impossible. Because on the expiration date, if the price of the real-value option is not equal to the difference between the stock price and the exercise price, there is an arbitrage opportunity. Once there is an arbitrage opportunity, market participants will arbitrage, so that the option price is equal to the stock price and the exercise price Difference.

Some people say, but I still observe that at the expiration date, the two prices are slightly different and not exactly equal. Why? This is because, first, this market is not a perfect frictionless market, and there are transaction costs; second, there may be a spread between the quotations (bid, ask) of options, so that the transaction price of the option and the stock price There is a slight difference in the difference with the exercise price. Are out-of-the-money options a little safer?

Q3: How long does it take to exercise? How long do you want to buy? (time)


It is also bullish for 600 USD, one is the end date and the other is 12/04, the difference is very big.

We can see from the Tesla diagram that the 600 doomsday call on November 27, 2020 is very dangerous, and the price did not rise to 600 on the 27th. This call is just a piece of waste paper. Seeing the Call on 2020-12-24, although the time to market is satisfied, we see a price increase of call950, the current price is about 585, which is a difference of 365 price, 4.941 margin, and very high leverage! This is the nature of gambling, and the risk is abnormally high. So we should be the safest choice like the first row of December 18, the exercise price is 590 reasonable, because there is one month left on December 18, the price is higher than 700 and 950 It is easy to realize, and the risk is small. As a novice, you should choose this type of time-month-call option with a moderately conservative price!


Q4: What is the time loss? (loss)


The value of options will continue to wear off over time. So some friends will ask whether it is possible to predict how much the value of the option will lose in a day. There is an answer to this question.


Among the five Greek letters of options, there is one Greek letter called Theta. It specifically measures the time change of options and their impact on the value of options. Xiaoxiao would like to share with you how to predict the depletion of the time value of options through the Greek letter Theta of options. The letter Theta is written in Greek as θ. It is used to measure the impact of time changes on the value of options. A popular explanation is how much the value of the option will lose every time time passes.


This Theta value can be seen on the software of the brokerage firm where the option details are displayed. The picture below is the details page of an option of Pinduoduo stock on Futu Niuniu. You can see the Theta value on it. (The position circled by the red box)

The current Theta value of this option is -0.101, which means that other conditions remain the same. The price of this option will drop -0.101 every day. One option corresponds to 100 shares. Holding this call option, according to the current Theta value, will lose 0.101 * 100 = 10.1 US dollars per day. The current price of this option is $7.7. Tomorrow, if other conditions remain the same, the price of this option will become 7.7-0.101 = 7.599 USD. By analogy, as time goes by, the actual value of the option will decrease!


We can also understand the change characteristics of Theta value. As an option buyer, try not to buy options close to the exercise date. Because the time loss is very large.


How do we choose time to avoid time loss? Usually when the option expiration time is about 2 weeks left, you can consider buying deep real-value options. The loss of time value is relatively small. If you want to go long or short by buying options, try to consider buying long-term contracts.

Q5: When to sell (time + loss)

If you are buying a call option CALL, generally you can consider selling it if it rises to the option price or more than 10% of the price before the exercise date! E.g. TeslaTesla.

Suppose we bought a Tesla 590 call option call. If we were conservative before the 18th, we could sell it at a price of 595.9 which is 10% of 590 on his basis!


Do you have a better strategy?


Q6: Why did the underlying stocks rise? Lost options? (lever)


his is combined with out-of-the-money options, which are options purchased by most of us. Take Tesla as an example.

If you assume that you buy a one-month 600 call option, if it does not rise to 600 within a month, it rises to 590, your option is also worthless, but the underlying stock is different, you buy 100 shares, your stock price is from 585 directly rises to 600, then your profit is 1500 (600-585=15*100).


Is that a combination with the stock? Will it be possible to ensure that the option turns a loss into a win.

Q7: How much to stop loss? (lever)


This question must be related to the exercise price and the payment of margin. What is the buyer's tolerance in the option? Let's look at the pictures! That is the break-even point.

In other words, you add your 2 yuan premium, and you are profitable when 49+2 to 51, so you have to stop loss at 49!

Q8: What is the significance of IV? (fluidity)


We must first choose the direction, call or put, this is very important, because you go in the wrong direction, your contract margin will be gone, so how to choose?


We have to look at the implied volatility of IV, implied volatility is high, option price is high. For major good news such as mergers and acquisitions, the future stock price changes will be greater, and the greater the Iv, the greater the option price!


Implied volatility is the value of options, which is more intuitive than price.

The larger the Iv, the higher the option price, and then you can choose the strategy of selling CALL or selling!

The smaller the IV, the lower the option price. At this time, you can choose to buy Call or put, because the cost of option is low!


For exampleTesla, the exercise time, the price is the same

The greater the volatility, the higher the option price, the more likely it is to achieve the price of 700!


Do you think implied volatility has a big impact on option prices?


Which companies have good liquidity?

Good liquidity can be seen in the value of the option, because value represents the flow of cash. Generally speaking, companies with good fundamentals have good liquidity. At the same time, companies with more value have strong liquidity, so in options we should look at companies with more value . Look at the picture below

It means that the current value of TSLA is big, which means the flow is big! It shows that TSLA call options can be considered currently!

So what company has good liquidity? Usually large companies, well-known companies, because their fundamentals are better, such as the familiar MAAGF (Microsoft, Amazon, Apple, Google, Facebook) and new energy vehicles such as Tesla, chip company NVDA, these flows Good sex, don’t buy stocks of companies with little value, because the liquidity is low, because you may not sell it if you buy Call!



Q9: What does the color mean?


Block or Sweep (stop loss or clearance:)

Indicates a larger stop loss or clearance transaction. (Block trades) A block trade is a single large transaction executed on an exchange. (Sweeps trades) Scanning transactions are large-scale transactions that are broken down and executed among multiple exchanges.

Purple font-exceeding of open positions in multiple transactions: indicates that multiple block or sweep transactions have exceeded the open positions of the day.



Yellow font-open position in a single transaction exceeded: it means that a single block transaction or sweep transaction has exceeded the open position of the day.



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To be continued……


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