Options Trading

The first—and perhaps biggest—challenge of options trading is understanding what an option is.

An option is a contract giving you the right, but not the obligation, to buy or sell a specific security at a specific price over a specific period of time. After that period of time has elapsed (known as “expiration day”), the option ceases to exist.

A call option gives you the right to buy the security. 

A put option gives you the right to sell the security.

There are numerous types of options trades. Depending on which method you choose, options trading can be used to hedge a portfolio, create yield or gain significant market exposure and returns with little capital risk.

Options contracts typically represent 100 shares of the underlying stock. So, if you exercise a call, you’re buying 100 shares of the underlying stock; if you exercise a put, you are selling the underlying at a stated price—known as the “strike price.” 

Other terms to remember that can help you understand options trading:

Options Premium: This is also known as the options “price.” The potential loss for the holder of an option is limited to the premium paid for the contract. On the other hand, the initial premium can offset the potential loss for the seller of the option.

Time Decay: All options are wasting assets whose time value erodes by expiration—and that erosion is called “time decay.” The more time remaining until expiration day, the higher the premium will be. That’s because the longer an option’s lifetime, the greater the possibility that the underlying share price will move to make the option in-the-money.

Implied Volatility: If the market becomes volatile, or if volatility is expected, implied volatility will rise, thereby increasing options prices. Conversely, low market volatility lowers options prices. The VIX – a.k.a. the investor “fear gauge”—is the best way to measure near-term volatility in the S&P 500. It represents the market’s volatility expectations over the next 30 days.

Still confused? Let our options trading expert Jacob Mintz explain more about options basics, and his own personal options strategies. Jacob runs two options services for Cabot Investing Advice: Cabot Options Trader, catered to options trading beginners, and Cabot Options Trader Pro, for more experienced options traders. 

Jacob carefully assesses the risk and reward of each one of his options trades. When he buys options, he risks pennies to make dollars. When he sells options, he does so with very defined risk to avoid big losses. Sometimes Jacob uses conservative options strategies to hit singles; other times he uses more aggressive strategies to try to hit home runs.

There is great mystery that surrounds options trading. Some investors avoid it altogether because they think it’s too confusing or too risky. But it’s easier to comprehend than you think. And once you get the hang of options trading, the risks can be easily minimized.

If done right, options trading can be simple and – more importantly – lucrative. 

Analysts Center

Our analysts regularly share content from their premium advisories. See a sampling of our analysts’ unique takes on current market conditions and how they impact a wide range of investments.


Time Decay

The market will be closed on Monday in celebration of Labor Day, so if the market does not make a big move tomorrow, the price of options will get hit extremely hard. Why do options lose significant amounts of value ahead of a long weekend?»

Abbott Laboratories (ABT) Buy-Write

I often get asked, “How do you choose which call to sell when executing a Buy-Write?” Another question I often get is about volatility. Here are answers, using ABT.»

Earnings Season Options

The biggest companies due to report during earnings season, including notes on volatility/price of options and recent order flow.»

Market Update: Micron Technology (MU)

Micron Technology (MU) is a stock that we have traded in the past, and it's held by many top hedge funds. The company reported earnings last night, and option activity in the stock has been interesting lately.»

Options Liquidity and Width: InvenSense (INVN)

Option liquidity is a major issue in a stock like INVN versus GE. On average, GE trades close to 100,000 options per day. INVN on the other hand, only trades a couple thousand contracts a day. The time until expiration is another key component to the option width.»

Facebook (FB) Buy-Writes

This morning I went back and looked at how a simple buy-write strategy would have performed in FB if executed the same way each month. The strategy would be to buy the stock and sell a call several dollars out of the money each month once the call initially sold had expired.»

Put-Write Strategy

A Put-Write strategy is used when a rise in the price of the underlying asset is expected, or a significant decline is not expected. »

CSX Options—Bull Risk Reversal

Bull risk reversals are the trade of choice for hedge funds that want to put on huge bullish positions these days. However, the trades are extremely bullish, and if the trade goes wrong, it can go bad in a big way. »

Take Advantage of Volatility Using Options - Michael Kors (KORS) and Workday (WDAY)

While I don’t like putting on bullish positions in the hours, or even days, after such a dramatic selloff, there are many ways you can take advantage of this volatility using options. »

Options Traders React to Airline Stocks Sell Off

Yesterday the airline sector fell dramatically after American Airlines (AAL) CEO said that airlines are expanding capacity too quickly. Get the options perspective from Jacob Mintz.»

Stock Picks

Tesla Motors

If you’re not on board the stock, there’s no rush. Wait for a better entry point in a more constructive market.

Church

Church & Dwight owns the Arm & Hammer, OxiClean and Trojan brands, as well as some smaller, faster-growing brands. But even after a 35% climb in 18 months, Church & Dwight still looks strong and poised for further gains.

Restoration Hardware

Restoration Hardware (RH) has been on my watch list for a long time. Believe it or not, I’ve been watching the stock for about a year—it was my Top Pick at the 2014 Cabot Investors Conference, nearly one year ago—and now, after a ton of starts and stops, shares look poised to get going.

Cabot Wealth Advisory

How to Make Money in Any Market

By Nancy Zambell on September 02, 2015

While none of us claim to be market predictors, we’ve all been investing for many years, and have lived—and profited—through lots of market cycles. Consequently, we’ve learned that money can be made in good and bad markets, and most certainly, during periods of volatility.Read More >

Apple vs. Tesla

By Timothy Lutts on September 01, 2015

Back on July 27, in a column titled “Sell Apple,” I told you that Apple, the world’s most loved and most highly valued company, was likely past its point of peak perception. I suggested that even though the company would continue to grow, its stock would suffer as investors slowly sold and went searching for the next Apple. (Precedents include both IBM and Microsoft.) Since that day, of course, the broad market has fallen apart, and it’s enlightening to see how certain stocks have behaved since then.Read More >

Market Shocks (and Aftershocks)

By Paul Goodwin on August 28, 2015

In the stock market, September is usually a time of increased purpose, as the giants of Wall Street return from their summer vacations (after Labor Day), tanned, re-energized and ready to grapple with the market and its challenges.Read More >