Long call/put risk

[Martinghoul]

Correct me if i'm wrong, so you're saying that you should hold your position until the expiration date?

Doesn't the $$$ value of your position go down as you near the expiration date??

Examples of SPY: http://prntscr.com/3fzu9j

Yes, the "optionality value" of your position does go down as you get closer to expiry. However, regardless of that, it's almost always greater than 0 and that's what matters.

 

[masudhossain]

Yes, the "optionality value" of your position does go down as you get closer to expiry. However, regardless of that, it's almost always greater than 0 and that's what matters.

Is it common for traders to go 'all in' per trade? By all in, i'm not saying their whole capital, but rather around 5% of their capital...the amount they're willing to lose.


It seems to me from looking at the chances to win and lose, it's better to invest with 5% of your capital per trade, and aim for a 1:3 ratio return.

 

[Martinghoul]

Is it common for traders to go 'all in' per trade? By all in, i'm not saying their whole capital, but rather around 5% of their capital...the amount they're willing to lose.


It seems to me from looking at the chances to win and lose, it's better to invest with 5% of your capital per trade, and aim for a 1:3 ratio return.

Different people do different things. It's impossible to generalize.

 

[Symphox]

Hello community. How are you 🙂

I'm new here and am taking some online courses to learn about options.

I am a bit baffled by one thing at the moment:

How much loss can I get on a Long Call/Put position?

For example: I have a Long Call position of XYZ stock May 80 trading at 4.5 usd (450)


Would this mean that if the underlying stock is going down in price and the XYZ stock falls back to 75.5 (80 - 4.5) I would be out of the position? Aka, I would burn down my Premium which is kind of like default stop loss?

Or, the stock can keep falling further (lets say from 80 to 60) and my premium wouldn't be effected? Just that I would lose it when the option expires or I would lose a whole lot more if I decided to exercise the option for some reason on a such a massive loss.

That being said - If as in this example, my position goes out of the money by a long shot (from 80 to 60) there is always a chance it can go back up to being in the money!! Right?



so If I take 2 month option and the first month is a total failure I can still hope for profit and my loss can only be the premium?

I come from Forex background. And the Stop loss concept is a whole lot simpler there

Thank you

Hey!

Naked options (long calls/puts) move according to a measurement called Delta. If you bought that May 80 call and the stock dropped $4.50, your call value would drop by a percentage of $4.50, a percentage theoretically defined by delta.

To make this more simple lets make a clear example out of your May 80 call. You buy your call for $5.00 ($500 per lot). The underlying stock is priced at 84.00. This means you're call is $4 of INTRINSIC VALUE and 1$ in EXTRINSIC VALUE. The extrinsic value is the amount of money the option costs above the in the money value and is determined by the amount of time left before expiration of the option.

Now lets assume your underlying stock drops to 80$. The details of your option will give you measurements; Delta, Gamma, Theta, Vega.

The delta of your option might be .60 (for examples sake). This would mean that for each $1 the underlying moves, your option will move $.60. Realistically though, options that are in the money will move very close to 1:1 as the ITM deltas are often around 1.0
Delta changes as the price of the underlying changes and scales up to 1.0 as you're underlying becomes more in the money. The delta is theoretical but will give you a good idea of how much your option value might be effected by the change in price of the underlying.

Assuming the underlying is out of the money now, your option still will retain some extrinsic value. The further out of the money it becomes the less demand there will be for the call so that value can drop faster than the theta decay. As time passes and all other things stay the same (including the price of the underlying) the extrinsic value or time premium, will decay according to a measurement called Theta. (-0.05 = 5 cents/day decay)


Check out Investopedia for more on "the Greeks".

 

[Wwill]

Np


Or the stock can keep plummeting, lets say, to 10 dolars a share and I will still be able to keep my position in hopes that it will recover till my contract expires. And as long as I do not exercise the option while it is out of the money I will not obtain this loss. And in case the option expires at the stock being down to 10, I will still lose only the premium I have paid.

The option is not a stop. If you are long option you can keep it until expiration and hope the the underlying will go up (in your case) so the option enters in-the-money area. You will lose the premium only if the option is OTM on expiration. Also if you are long option you are the one and noone else who decides whether to exercise it or not...

 

[No Risk Trader]

If you still an answer after my post let me know. You can do stops in equities.
You asked a clear question, however as noted, an option is not a stop...so remove the analogy from your mind. Your understanding is correct, if if you buy a 2 month Call and the stock drops to 10 or anything, as long as you do not exercise while it is out of the money you will not obtain the actual loss and the option expires...your loss=(out of pocket loss) is only the premium you paid.