Ladies and gentlemen, welcome to the road to degeneracy. Without having to reinvent the wheel, and then writing a book about reinventing the wheel, i'll just sprinkle some starter yeast and, like a beautiful acid trip, we'll see where it takes us....
Why options trading
Leverage. You can control a lot more stock for $.
Flexibility. You can play any sentiment - bullish, bearish, neutral - and you can pick and choose the risk-reward! Instead of just choosing a safe vs risky stock, for any given stock, you can choose how much you want to lever its movement.
Engagement. Options have an element of time expiration in their construction, which obliges you to stay in (somewhat) active and engaged in the market.
What are options
These are contracts that grants the contract holder the right (but not the obligation) to buy or sell 100 units of stock at an agreed price, before a certain date.
It has these elements: Strike price, Expiration date
Call option - contract holder can buy ABC stock from contract seller. option buyer "calls" the shares away from sellers' account
Put option - contract holder can sell ABC stock to contract seller. option buyer "puts" the shares in sellers' account.
Options are tradeable instruments like units of stocks. For our practical purposes, we don't really worry about the above (yet). We buy when cheap and sell when high. Or sell when high and buy when cheap.
How do you price options? (i.e. what is cheap?)
If you're a nerd, you'd invoke the Black-Scholes equation. If, like me, you failed 9th grade trig, you can think of it in more simple abstract terms:
options premium = Intrinsic Value + Extrinsic Value = (Strike$-Stock$)+(Volatility*Time)
Take Apple, which is 135$ right now. How much would you pay to have the right to purchase shares of Apple for $130/share at anytime....
before the end of the week?