teachme wrote:I think it is easier with equities. In options, one has to care about timing (because of the expiration date), volatility as well as the underlying asset. Even then, the correlation between the underlying asset and the option is not perfect (that's Delta, right? Thank you). In equities, one only has to care about the underlying asset. So much easier.
I do respect people who can make a success out of options because it is much more challenging. May I ask you what characteristics about options that attract you so much to them? Or is it because you are one person who loves a challenge because it is more satisfying?
Although I use options, I do not consider myself to be an options trader as I am interested more in the underlying asset instead of the option. I use options to generate additional returns on my cash, stock and futures positions.
There are 2 scenarios which I encounter very often.
1. Suppose I want to buy shares in American Express Company (AXP). AXP is trading at 35 now. I would like to buy at 34, and I have $34. So, I sell a one month put option on AXP with a strike price of 34. Suppose the premium I get for selling the put option is $1.
At the end of 1 month, if AXP is trading higher than $34, the option will expire worthless. I will earn $1, and it is about a 3% return on my initial capital of $34. If at the end of one month, AXP is trading at $30, then the put option will be exercised, and the AXP shares will be sold to me at $34. The $1 I received as premium will mean I have effectively bought AXP at $33.
2. Suppose I have AXP shares and AXP is trading at 35 now. I would like to sell at 37. So I sell a one month call option on AXP with a strike price of 37. Suppose the premium I get for selling the call option is $1.
At the end of 1 month, if AXP is trading lower than $37, the option will expire worthless. I will earn $1, and I am still holding on to AXP. If at the end of one month, AXP is trading at $40, then the call option will be exercised, and the AXP shares will be bought from me at $37. The $1 I received as premium will mean I have effectively sold AXP at $38.