Use a call or a put option, strike price?

Question

Hi, I am trying to learn about trading standard options- calls/puts. I am unsure of which ot use in what situation. I want to use options to catch daily swings.

Example:
I wanted to buy an option on Google when it hit around 500 a share the other day because I knew it was going to drop. I just joined Tradeking.com to use for options. I could choose a call or put and at several different strike prices.

Which should I have used and at what strike price if I was shooting for a downturn in the stock price?

Answer 1

Buy a call when you are expecting a stock to go up. A call is an option to buy.

Buy a put when you expect the stock to go down. A put is an option to sell.

The strike price determines the 'sales price'

If you expect goog to bounce, you would by a call for Dec, Jan, Feb, whenever for a strike price of 500. Dec call would cost you $8 per share (you need to buy in contracts consisting of 100 shares to trade options). If goog goes past $508 in a true options trade, you profit every cent after that. You could essentially trade the option when it got close to 500 if there was enough time for the option to have value.

If you are expecting goog to continue the downward trend, you would buy a put. The $480 strike for goog Dec option is trading at $7.40. You essentially have the option to sell goog at $480, so if goog goes down past 472.60 you make money for every cent after that. Also with the call option, you could just sell your option with more value if the stock starts going down and you still have the intrinsic (time sensitive) value left on the option.

Good luck.

Answer 2

The first answer was good. Choosing the strike price hard. How much of a bounce or a dip you expecting/hoping helps guide you.

A VERY advanced strategy is selling calls/puts naked. (without covering stock). Ignore this until you have a couple of years of options experience.

Try a basic book on the level of "options for dummies". Options trading has a steep learning curve, but it's worthwhile.

Trying to use options to catch daily swings is risky. Start by learning with longer term options, then progress as you learn.

Good trading!!!

Answer 3

If you have never traded options before, please don't try to get rich quick the first time you trade. I suggest learning covered calls mixed with some good technical analysis. I put a tutorial on my blog here:

http://gmoolah.blogspot.com/2006/11/creating-investment-cashflow-part-i.html

This is a slow growth approach to options with little risk, and even less than buying stocks only. But, you can't use this method on Google unless you have enough for 100 shares.

Options are really risky. I have traded them for years and it ain't easy. Using covered calls get's you use to pricing and price decay issues without risk, then you can graduate.

I also liked 'Options made Easy'. I forget the author but it's pretty good book on strategies.

Answer 4

Basically, you need to understand the issue of Options Moneyness before you are even ready to buy your first option. Moneyness explains the relationship of different strike prices versus the spot price of the stock. Basically, the more out of the money, the higher the leverage and the higher the risk of total loss. The more in the money, the lower the leverage and the lower the risk of total loss. It is this variability of leverage through different strike prices that makes options trading unique versus futures trading. I would recommend you make a thorough study of this issue through the below free resources: