So how does this work exactly?
timcoin
Posts: 674 ✭
I went to cmegroup.com to view the option quotes for gold for April 2011 (follow this link then click the dropdown for April 2011). Does anyone know how this works, exactly? With a strike price of 1800, what has to happen in order to make/lose money? I appreciate the insight. Searched around with google, but could never find an exact answer. Thanks
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In simplest terms, calls are a bet that the price goes up, puts are a bet that the price goes down. For the call buyer to make money, the price has to go up. The next element is time. Options decay in price as time passes. The price would have to move up fast enough to offset any time decay. If held to expiration, gold futures have to exceed 1800 by more than the price of the option for the buyer to make money.
The education website can go into much more detail. A person exclusively buying way out of money options is going to lose most of the time. For the gold Apr 1800s the probability of making money if held to expiration is about 5%, so most surviving option players will tend to trade out before expiration or buy higher probability options, or hedge using more complex strategies. With the low probability of profit, the potential payout can be huge if a person hits it just right, but that is a difficult game. A person that can get both time and price correct with any consistency can make buckets of money in the options markets.
<< <i>http://www.cboe.com/learncenter/
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In simplest terms, calls are a bet that the price goes up, puts are a bet that the price goes down. For the buyer to make money, the price has to go up. The next element is time. Options decay in price as time passes. The price would have to move up fast enough to offset any time decay. If held to expiration, gold futures have to exceed 1800 by more than the price of the option for the buyer to make money.
The education website can go into much more detail. A person exclusively buying way out of money options is going to lose most of the time. For the gold Apr 1800s the probability of making money if held to expiration is about 5%, so most surviving option players will tend to trade out before expiration or buy higher probability options, or hedge using more complex strategies. >>
In other words its simply a casino bet...pure and simple. Nothing changes hands other than cash and signatures. No real items are sold....in fact the items dont even need to EXIST in order to be bet on. When you create a system this corrupt, you had better expect a massive collapse!
<< <i>http://www.cboe.com/learncenter/
link
In simplest terms, calls are a bet that the price goes up, puts are a bet that the price goes down. For the call buyer to make money, the price has to go up. The next element is time. Options decay in price as time passes. The price would have to move up fast enough to offset any time decay. If held to expiration, gold futures have to exceed 1800 by more than the price of the option for the buyer to make money.
The education website can go into much more detail. A person exclusively buying way out of money options is going to lose most of the time. For the gold Apr 1800s the probability of making money if held to expiration is about 5%, so most surviving option players will tend to trade out before expiration or buy higher probability options, or hedge using more complex strategies. With the low probability of profit, the potential payout can be huge if a person hits it just right, but that is a difficult game. A person that can get both time and price correct with any consistency can make buckets of money in the options markets. >>
I appreciate your reply, and I'll review the site you posted as I'm still confused. Just wondering, at a strike price of 1800, if I bought a put based on the current gold price of $1374, and gold closed at the end of April @ $1420, what would take place?
<< <i>
<< <i>http://www.cboe.com/learncenter/
link
In simplest terms, calls are a bet that the price goes up, puts are a bet that the price goes down. For the call buyer to make money, the price has to go up. The next element is time. Options decay in price as time passes. The price would have to move up fast enough to offset any time decay. If held to expiration, gold futures have to exceed 1800 by more than the price of the option for the buyer to make money.
The education website can go into much more detail. A person exclusively buying way out of money options is going to lose most of the time. For the gold Apr 1800s the probability of making money if held to expiration is about 5%, so most surviving option players will tend to trade out before expiration or buy higher probability options, or hedge using more complex strategies. With the low probability of profit, the potential payout can be huge if a person hits it just right, but that is a difficult game. A person that can get both time and price correct with any consistency can make buckets of money in the options markets. >>
I appreciate your reply, and I'll review the site you posted as I'm still confused. Just wondering, at a strike price of 1800, if I bought a put based on the current gold price of $1374, and gold closed at the end of April @ $1420, what would take place? >>
Most players use sophisticated software to do the what-if-scenarios because time and price are major variables. The basic basics are the first sentence in my reply above: calls are a bet that the price goes up, puts are a bet that the price goes down. If you get at least that much the answer to your question becomes obvious. When more complexity is brought in, and there can be a ton of complexity to trading options, the questions and answers become more complicated and less clear.
1 bit of advice: you do not want to do naked option writing. trust me.
Repetition of ignorance is ignorance raised to the power two.
I knew it would happen.
<< <i>I agree with derryb. Don't go there. >>
But it seems like it could be so much fun
Those good old boys in the options world use flash trading programs that are designed to clip guys like you & me right off the starting gun, and it only gets more risky from there.
I knew it would happen.
<< <i>Surely you can find a better way. What about just buying bullion outright? It's probably a good time to buy.
Those good old boys in the options world use flash trading programs that are designed to clip guys like you & me right off the starting gun, and it only gets more risky from there. >>
Fair enough! Glad I asked the question before making a mistake.