You are going to learn some things here…
That completely contradict everything you have ever heard about options trading.
I suggest you keep an open mind and by the end of this you eyes will have been opened many many times.
Trading Options…The Basics
First things first.
Equity options represent 100 shares of stock.
Futures options represent one contract.
For stocks, if the option you buy finishes in the money (price of stock above your strike price), you are the proud owner of 100 shares of that stock at the strike price.
For stocks, if the option you sold finished in the money (price of stock below your strike price), you are the proud owner of short 100 shares of stock at the strike price.
In both cases if the option finishes out of the money nothing happens and your options expires worthless.
And the same scenario happens with futures contracts, just one future instead of 100 shares.
Great glad we got that stuff out of the way, you probably already knew that anyway.
Most option trading articles will speak about all of the options greeks…
Go into detail about all of them…
And you walk away with diddly squat…
But not here. There are two options greeks to focus on at all times…
How to Trade Options Greeks…Delta
Your new best friend…
Assuming you want to make money option trading…
But you do!
Every option has an greek associated called delta.
Delta, is the share equivalent of the option, or it’s directional risk.
For example, in Apple we buy a call with a 25 delta…
We now have the synthetic equivalent of 25 shares of Apple.
If Apple goes up $1, we make $25 (25 delta).
If Apple goes down $1, we lose $25 (25 delta).
Delta is the single most important options greek because it tells you exactly what your position is and nothing is unknown.
So the takeaway here…
If you buy a call option, check out it’s delta, that’s how many long shares you have.
If you sell a call option, check out it’s delta, that’s how many short shares you have.
How to Trade Options Greeks…Theta
I have no idea what the so called “experts” in the industry might say about theta so I won’t even bother trying.
Did you know that every single option loses value every single day? Including on weekends?
Well now you do!
Theta is the value that is taken out of the option every single day.
I know what you must be asking yourself?
Wait so if I buy an option, it’s losing value every single day?
You got it! How smart are we?
This is simply something that many many people overlook but it very important when considering risk of a position.
If you buy and option with a theta of 3…yep you guess it…
That option loses $3 every single day, no matter what!
So what is the takeaway…
If you buy a call option, check out it’s theta, that’s how much you are losing in premium each day.
If you sell a call option, check out it’s delta, that’s how much you are gaining in premium each day.
Options Trading…What You Have Just Learned
By reading the paragraphs above not only have you opened your eyes to a much different path in how to trade options…
But you have learned valuable lessons that million and millions of traders have never heard before!
When option trading, understand what your directional risk is, and how much value is being taken out of your option every single day!