INTRODUCTION TO OPTIONS

Here is a great link to introduce you to options …. http://www.optionetics.com/education/detail.aspx?id=0
THE 5 GREEKS do not formulate the price of an option but ARE ESTIMATES of the impact to the option price from changes in the market environment. For the beginner, understand the theories of the 5 Greeks, but try to focus primarily on the impact from DELTA and THETA by following on a streamer an underlying stock and one of its options.

DELTA is rate of change in the price of an option for each $1 move in the underlying stock (sensitivity to SPEED)
THETA is rate of change as each calendar day passes (sensitivity to TIME DECAY)
VEGA is rate of change in option for each 1% change in implied volatility (sensitivity to VOLATILITY)
GAMMA is rate of change in delta for each $1 move in underlying (sensitivity to ACCELERATION)
RHO is the rate of change in price of option for each 1% move in interest rates (sensitivity to INTEREST RATES)


POPULAR OPTION STRATEGIES

CALL: A call option is the right, not the obligation, to BUY an asset at a fixed price before a predetermined date with the intention that the underlying stock price will rise before the predetermined expiration date.

PUT: A put option is the right, not the obligation, to SELL an asset at a fixed price before a predetermined date with the intention that the underlying stock price will decline before the predetermined expiration date.

SYNTHETIC CALL: Buy the stock and buy puts one or two strike prices OTM below the price paid for the stock. (one contract for every 100 shares of stock)

COVERED CALL: Buy the stock and sell calls one or two strike prices OTM higher than the price paid for the stock with approximately one month left to expiration. (one contract for every 100 shares of stock)

COLLAR: Buy the stock and buy Long term Equity Anticipation Securities (LEAPs) very close to the stock price and sell LEAP calls above the stock price. LEAPs are long term option expirations at least a year out. (one contract for every 100 shares of stock)

BULL CALL SPREAD: Buy lower strike calls and sell same number of higher strike calls with the same expiration date.

BULL PUT SPREAD: Buy lower strike puts and sell higher strike puts with the same expiration date.

BEAR CALL SPREAD: Buy higher strike calls and sell same number of lower strike calls with the same expiration date.

BEAR PUT SPREAD: Buy higher strike puts and sell lower strike puts with the same expiration date.

STRADDLE: Buying ATM strike puts and buying ATM strike calls with the same expiration date.

STRANGLES: Buying OTM strike puts and buying OTM strike calls with the same expiration date.

BUTTERFLY WITH CALLS: Buy 1 lower strike ITM call, sell 2 middle strike ATM calls, buy 1 higher strike OTM call.

BUTTERFLY WITH PUTS: Buy 1 lower strike OTM put, sell 2 middle strike ATM puts, buy 1 higher strike ITM put.

CONDOR WITH CALLS: Buy 1 lower strike ITM call, sell 1 lower middle strike ITM call, sell 1 higher middle strike OTM call, and buy 1 higher strike OTM call. (The distance between the four adjacent strikes should be equal, with the stock price being somewhere between the two middle strike prices)

CONDOR WITH PUTS: Buy 1 lower strike OTM put, sell 1 lower middle strike OTM put, sell 1 higher middle strike ITM put, and buy 1 higher ITM put. (The distance between the four adjacent strikes should be equal, with the stock price being somewhere between the two middle strike prices)


Option Strategy Notes for Market Behavior

When BUYING options you want to give yourself as much time as possible to be right.

When SELLING options you want as little time as possible to be wrong.

SYNTHETIC CALL insures a stock against falling fast.

COVERED CALL gets some income back while holding a stock over the medium term.

COLLAR is a low risk long term 18+ month strategy to capture a 20% return.

STRADDLE is when you're not sure of the stock direction but the move will be significant.

STRANGLE is cheap alternative to a straddle because OTM options have no intrinsic value.

BUTTERFLIES and CONDORS are for sideways range bound stocks.