Who uses options ?

Sources said:

EwaDawg said:

Sources said:

godawgst said:

In XOM example when it was at 35 and the option for it was 6.35 or whatever it was, XOM hit 56 last week for a $21.00 gain. Then does that same option for 6.35 also go up 21 so you could have sold it for 27.35 which is a 4 bagger?

There are a lot more factors than that. Options don't work linearly - prices are dictated by something called "greeks", the most significant of which are (1) delta, or the amount the option price moves relative to the underlying stock, and (2) theta, which is the decay rate of the option. There are other greeks that dictate how delta and theta change as price fluctuates, etc. In the example you mentioned, the fact that XOM went up will result in somewhat corresponding movement in the option (as dictated by greeks). The option will increase more significantly (in terms of %) than the stock, but not by the same amount. The price will also be dictated by the remaining term of the option, volatility of XOM, among other things.

Thanks. For the discussion on theta - is that primarily a function of time remaining before the option expires and is therefore fairly linear? I guess my question more precisely is can a portion of the option's price movement be linear?

You didn't mention beta specifically but you mentioned that the volatility of stock price effects the price of the option. Is the term beta relevant to your post or do I need to watch the tutorial again?

Sorry for the low level questions. I understand the reward is getting the pupil to a significantly higher level of understanding.

Yes, theta is generally referred to as the "decay" of an option, but it's not linear. It's non-linear in its decay because the probability of the option being "in the money" at expiry is also non-linear. You can imagine that if I have a $10 call and the price of the stock is $8, I'm much better off if I have more time for that stock to rise beyond $10. Here's a generic example that would highlight a perfectly theoretical decay:



Now, that isn't to say that movement of the price can't be linear as the price of the stock moves, but it would be a coincidence rather than the expectation.

Beta weighting is a measure of a stock's volatility against the rest of the market. That's really of less concern with respect to the option because the option cares only about the underlying stock itself. Beta is useful in measuring your portfolio bias but less so in an isolated case for one asset type. The volatility that is important to options is implied volatility as that measures the likelihood of a move of an underlying asset for a certain amount over a particular amount of time (each option has it's own quantity of IV)

creepycoug said:

USMChawk said:

It’s an interesting discussion but it seems too easy to lose all your money while trying to figure it out.

Hence my original response to Ewa. I know what they are; I don't know how to execute them with my own money, and I don't want to learn the hard way with options.