[Lauren]

Can someone explain options calls/puts to me like I’m 2 years old? … 25 YO who would like to learn.

I know that essentially you are betting the company stock will go up or down in value. But I don’t understand how one chooses how long to go out for an option, or which options to choose?

What are tax implications, are they different than regular investing?

I saw a lengthy conversation on another post about this, but it was a bit above my wheelhouse.

[Eric]

Seems like you need to learn when and how to use Google search.

[Christopher]

You are about to learn how to lose your money. Playing with fire.

[Michael]

Yes. The buyer of a call option has the right,but not the obligation to buy 100 shares of the underlying stock (or 1 futures contract) at the call option strike price.

The writer of call options has the obligation to sell/short 100 shares of the underlying stock(or 1 futures contract) at the call option strike price ONLY if the buyer of the call option exercises.
A long put (put buyer) has the right,but not the obligation,to short 100 shares of the underlying stock(or short 1 futures contract) at the strike price.

A short put, the writer or seller of a put option has the obligation to buy 100 shares of the underlying stock or to go long the corresponding futures contract at the short put option strike price.

One option =100 shares of the corresponding stock or one futures contract at the option’s strike price

The closer the option strike price to the market price of the underlying,the higher the delta and beta.

An in the money call option has a strike price that trades below the market price of the corresponding stock or futures contract.

An at the money call or put has a strike price that is trading at the current market price of the corresponding stock or futures contract.

An in the money put option has a strike price that trades above the market price of the corresponding stock or futures contract.

An out of the money call option has a strike price that trades above the corresponding stock share price or futures contract price.

An out of the put option has a strike price that trades below the current market price of the corresponding stock or futures contract.

Anyways, options etfs are my bread and butter now versus directly trading options for retail investors,which I did professionally from 2004 to 2009 or 2010

[Bethany]

I only trade options on stocks I know very well. I look at the bollinger bands and read all that I can to understand a particular company.

The YouTube Channel “Trading with Ashley” is a great resource for beginners.

It’s risky, but really not gambling. However, it’s more complicated than anyone can explain comment.

[Rakesh]

Not a financial advice, do your own research.
Before you go into Options trading, I would advise that you read up on the basics. There is a lot involved in Options trading vs stock trading.

Options are contracts which let you buy or sell at a predetermined price for the duration when you buy call or put.

Conversely, when you sell call or put, you are under the obligation to sell or buy the stocks at the price during the timeframe.

Options also deal with significantly more money than stocks because of either leverage or collateral, which is what makes them attractive, but also quite risky.

[Jim]

it was a bit above my wheelhouse
Probably best to keep it that way and invest in something that is the S&P 500 or even broader index mutual fund.

[Curtis]

It’s a contract option to buy a stock at a certain price, but you only make $ if it hits that price, if it doesn’t the contract and your $ expire worthless..

the real money is made by owning stocks for the long term and making additional income by selling a call options against your stock to someone else making additional portfolio income but you must have at least 100 shares of a company..

Become an investor first, playing options is not a get rich quick scheme

[Stan]

The Basics of Calls and Puts:
1. Call Options = Bet that the stock will go up. You’re saying, “Hey, I think the stock is going to be worth more in the future, so I’m going to make a deal now to buy it at today’s price.”

• Example: You think a stock at $50 today will go up to $60. You buy a call option to lock in the right to buy it for $50 later.

2. Put Options = Bet that the stock will go down. You’re saying, “I think the stock is going to lose value, so I’m going to make a deal to sell it at today’s price.”

• Example: You think a stock at $50 will drop to $40. You buy a put option to lock in the right to sell it for $50 later.

How Do You Choose How Long to Go Out For an Option?

• Expiration Date: Options have an expiration date—this is the deadline by which you must use the option (buy or sell at the agreed price).

• Short-term options: Expire within a few days or weeks. These are for people who expect a stock to move quickly.

• Long-term options: Expire months or even years in the future (called LEAPS—Long-Term Equity Anticipation Securities). These are for people who think a stock will move but want more time.

How long you go out for depends on how sure you are about the stock moving and how much time you think you need. If you’re betting on quick movements, go short-term. If you think a stock will change over time, go long-term.

Choosing the Right Option:
• Strike Price: This is the price at which you’ll be able to buy (call) or sell (put) the stock. For example, if the stock is at $50 and you buy a call option at $55, you’ll only make money if the stock goes above $55.

• In-the-money: The stock is already at a price where you’d make money if you exercised the option right now.
• Out-of-the-money: The stock isn’t at the price that would make you money yet.

• At-the-money: The stock is right at the strike price.

• Premium: The amount you pay for the option. The more likely the stock is to move (based on the current price, volatility, and time), the higher the premium.

Tax Implications of Options:
Options are taxed differently than regular stock. It depends on how long you hold them:

• Short-term capital gains: If you buy and sell options within a year, any profits are taxed as short-term gains, meaning they’re taxed at the same rate as your income (which can be higher than long-term capital gains rates).

• Long-term capital gains: If you hold options for more than a year before selling them, they could be taxed at the lower long-term capital gains rate. However, for most options, this doesn’t happen often since most traders buy and sell within shorter timeframes.
• Tax Treatment of Options:

• If you exercise an option (use your right to buy or sell the stock), it can trigger taxes depending on the situation.

• Selling options (like writing options) has its own set of rules.

• Options expiring worthless: If the option expires and you don’t use it (it’s “out of the money”), you lose the premium you paid, which can be written off as a capital loss.

Is It Like Regular Investing?
• Regular stock investing: When you buy stocks, you own them, and you hope their value goes up over time.

• Options: You don’t own the stock unless you exercise the option. Instead, you’re buying the right to buy or sell the stock at a specific price by a certain date. It’s more of a bet on the direction and timing of the stock’s movement.

In Summary:
• Call: Bet that a stock goes up.

• Put: Bet that a stock goes down.

• Expiration Date: Choose based on how quickly you think the stock will move.

• Strike Price: The price at which you can buy or sell the stock, which should be chosen based on how much you think the stock will move.

• Taxes: Can vary depending on if you hold the option long or short-term. Short-term gains are taxed higher.

Options are like a shortcut to betting on a stock’s price without owning it, but they come with their own risks

[D’Angela]

If you don’t really understand. And definitely take time to learn. But I would recommend you PUT your money in a full market index fund.

[Brian]

SPX options cash settled and taxed as long term cap gains. Time and volatility is the premium you pay for an option.

Can be a great way to leverage money but generally higher risk of losing money

[Shawn]

There is a lot to understand. I prefer to sell options rather than buy them because most options expire worthless.

[Tom]

What they do is pretty easy. Actually trading them, especially for profit, takes some training (I did find a course – more a team – that does it and does it well so I trade options every week).

An option gives the buyer the right, but not the obligation, to either buy stock (call) or sell stock (put) to the seller of the option at a set price by a set expiration date.

In exchange for this “option”, the buyer pays a premium that’s based on the difference between the agreed upon price (the strike price) and the price of the underlying stock when the option is sold.

An option also has time value (i.e. the closer to expiration, the less time value it has) and this is also factored into the premium.

Quick example: I own 100 shares of some stock (let’s say the ticker symbol is XYZ) and decide to sell a Call using those shares a collateral (each option contract cover 100 shares of the underlying stock).

XYZ (the stock) is currently trading at $10 so I sell a call to you at the $11 strike price and you pay $1.20 per share (or $120 total). The call expires in 5 days.

If XYZ closes below $11, the call expires worthless, I keep the premium, and you’re out $100.

But if XYZ closes at $11.50, you can exercise the option, I have to sell you the stock for $11 a share, and you can turn around and sell it for $11.50 a share.

Yes, you’ve still lost money (since you only made $50 on the subsequent sale) so it does get to be a bit tricky (which is why you really need good training before you do this).

Same deal with a Put. XYZ is selling at $10 but I want to buy it at $9 so I sell a Put with a $9 strike price. You own 100 shares of XYZ and decide you want some “insurance” in case the price drops so you buy my Put.

(In reality, all sales and purchases go to a clearing house so you’re not buying directly from anybody. But the example still works if you think of it this way.)

Expiration Day comes and XYZ is trading at $8.50 so you decide to exercise the option and I have to buy your XYZ shares for $9, 50 cents lower than what I could buy it for on the open market.

There are a million reasons for buying and selling Calls and Puts. I do it for income and the system I learned has a lot of nuance that I can’t cover here.

Again, if you want to do it, I strongly recommend getting some good training on it, like I did.

[Steve]

I would check YouTube. There are some good videos that explain how it all works and start from beginner to advanced strategies.

There are also ETFs that trade options, so you can give up a bit in management fees to pay someone to do it for you.

[Author]

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