[quote author="graphrix" date=1221644401][quote author="CalGal" date=1221633811]Graph, can you dummy down an option order placement so I can understand what you did.
If possible, can you give me one example of the option order and what you hope happens with that order.
Thanks!
My husband said he won't help me because he said I won't let him live it down if something turns the wrong way (he's probably right). 8-/</blockquote>
Not a problem... er... well... I will do my best to make it all make sense, but no promises.
Options are essentially a bet, a bet where you can lose all your investment, unlike stocks where you lose only the difference in price from what you bought it at. I will stick with buying options vs. writing options since the game will only allow you to buy them and not write them. When you write options you can lose even more than your "investment" money.
Options are a contract, a right (call) to buy, or (put) to sell a stock. One contract is for the right of 100 shares of the stock. So a contract for the $27.50 strike BAC OCTOBER puts was trading at a price of $1.50, but one contract would cost $150.00. I bought 10 contracts (hopefully) costing me $1500.00.
Lets first discuss trading options, then at a later time I will explain exercising them. A put is a bet the stock will go down, and a call is a bet the stock will go up. So if BAC drops in price, in theory, the value of my put contracts should go up. Lets say BAC drops pretty hard tomorrow and the $27.50 October puts now trade at $2.00. If I sold my contracts for $2.00, I would have sold them for $2000.00, making me a gross profit of $500.00. If BAC runs up tomorrow, and my puts go to $1.00, then I would lose $500.00 if I sold them. Now, if I got greedy or thought that BAC was going to still go down I could wait for another day to see where my puts are trading at and sell them at a later time. If it never goes down and as time passes, then the value of the contract erodes, and this is what is know as time decay. So if BAC stayed at the same price as it is today, the puts would go down in value by the expiration date of October 17th (third Friday of the month). If they were trading at $0.08, then I would just let them expire and lose my $1500.00 plus the commission of the buying trade.
All a call is, is the opposite and hoping it will go up and not down.
I hope that helps, and feel free to ask more questions. It took me about a year of studying before I felt comfortable trading options. So you get a free crash course in a sense if you trade them.</blockquote>
FWIW, the Options Industry Council (OIC) has free online learning and occasional free in person classes with free materials on beginner and advanced options trading topics. I've done both the online and in person classes and found them to be very helpful. I highly recommend them although I'm not very adventurous so stick mostly to covered calls which are not in this market. You can get more info on their site at www.optionseducation.org.
If you are wondering why these classes are free they explain it saying they try to encourage individual investors to trade in options as it adds liquidity to the market, yati, yati. I only know I haven't been harassed by them into paying for anything.