Im trying to understand options trading?

Question

i've been trading stocks for the last 2yrs and now i think its time i find out how options really work

Buy 40 Contract(s) of the 20.00 Call on SOLF (QFG ID) at Market Open price

At a premium of $2.45 per share (100 per contract), the value of of this transaction is estimated at $9,800.00, plus commissions of 89.99, for a total of 9889.99. This value may however change with MarketOpen Price when exchange opens on next business day.

so does this mean my break even point is $22.45?

how do i make money with options... if it goes to $25 what percentage gain would that be?

this is just an example... i will study & use a practice account for the next 6-12 months before i rally take a go at it

Answer 1

<<<does this mean my break even point is $22.45?>>>

Yes, if

(1) you hold the position until expiration and

(2) you ignore commissions.

<<<how do i make money with options... if it goes to $25 what percentage gain would that be?>>>

If you hold it until expiration and the stock is at $25 at expiration your options will be worth $5.00 per share, giving you a profit of $2.55 per share, or a little over 100%.

<<<this is just an example... i will study & use a practice account for the next 6-12 months before i rally take a go at it>>>

You should study and use a practice account, but do not commit yourself to starting at a set time unless you are comfortable that you understand options at that time.

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In my answers I specified "at expiration" because prior to expiration the option premium consists of two parts, the intrinsic value and the extrinisic value.  (The extrinsic value is also sometimes called the time value.) At expiration the extrinsic value will be zero and the exact value of the option is known. Prior to expiration the extrinsic value will be greater than zero, but exactly how much greater depends on the implied volatility of the option. (The implied volatility of the option is essentially the amount of volatility expected in the stock price.) So, prior to expiration your breakeven price will be less than $22.45.

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I strongly encourage you to read at least one or two good books about options as part of your course of study. There are some excellent web resources, such as

http://www.cboe.com/LearnCenter/default....

and

http://www.optionseducation.org/

I suggest you check if you haven't already, but they do not teach you as much as a good book will. They may, however, teach you enough to pick out a good book.