What is an option play?
Do you need a margin account to participate in options?
How are option bets played? I understand you can win big with a little money invested, and yet you could lose quite a bit quickly as well. Could you give an example how this could occur in both ways?
Thanks in advance.
Options can be confusing to explain, so if I lose you, let me know.
I imagine by "option play", he was referring to the various strategies you can employ with options. There are many different complex strategies.
http://www.investopedia.com/slide-show/options-strategies/ Here's a good resource of some popular ones. I use #1 a lot.
If you're buying options or selling a covered call, you don't need a margin account, but you can buy options on margin. If you're selling options, you'll probably need a margin account.
Example why... Groupon is 7 and some change today. Let's say I
sell a Groupon $9 call that expires in February 2015. Let's say I sell 10 contracts and each contract is worth $0.50. A contract equals 100 shares, so I've sold the right for someone else to buy 1,000 shares of Groupon. 1000 times my $0.50 premium I collect equates to $500. I collected $500 because I don't think Groupon will reach $9 by February and if it doesn't, I keep that premium.
Let's just say, however, Groupon has a monster earnings beat and I wake up to see the price went from $7 to $14 a share. No matter what you keep your premium. So in this scenario you'd be $14 share price minus $9.50 ($9 call price you sold at plus the $0.50 premium you keep). That's 1000 shares times $4.50 or a loss of $4500. Now envision you're dealing with a lot more contracts or a biotech company that just got drug approval and you'll see why margin is necessary if you sell options. If you sell puts, your downside is limited because the stock can only go to $0.
I gave an example earlier in the thread of options contracts I didn't buy for Achillion Pharmaceuticals.
When I saw ACHN, the stock traded a little under $3 a share. There was a contract that expired something like a year from when I saw it and the right to buy if ACHN hit $20 only cost $0.05. It was so cheap because it meant ACHN had to move up more than $17 for the call buyer to even make money, something that didn't seem likely with the temporary setbacks ACHN had.
Things changed for ACHN and not too long ago, that contract traded around $1.20 because the actual stock price was around $15, much closer to $20.
If you spent $500 on those initial calls, you would have had the right to buy 10,000 shares or 1,000 contracts of ACHN at $20. Those same calls a few months ago would have been worth $12,000.
You would have spent $500 and made $11,500.
ACHN hasn't even reached $20. That's the beauty of options. You don't even need the price to get above your call price. You just need volatility and for it to get close enough with some time remaining.
The flip side... those very same contracts that were trading at $1.20 had a value of $0.00 at expiration because the price never got to $20. You can trade out of your contracts at any time. The risk is you can lose your entire investment if the price doesn't get above (for a call) or below (for a put).
I done copped a nice amount of Feb monthly SPY puts right before the close. I expect a good dip soon. @Brady Hoke's Artery thoughts?
