How to Trade Put and Call Options

by Ryan on October 30, 2014


How to trade put and call options is not all that difficult, nor are they the most volatile or riskiest of investments, once you understand the basics. To explain how to trade a call option let’s look at the below example.

ABC Paper Company

On June 1, the stock of ABC Paper Company is $67. There is a July 70 call with a cost of $3.15. This means the expiration of the call is the third Friday in the month. The strike price is $70. The total cost for 100 is $315. Do not worry about commissions for right now. Remember when you by a stock option you are purchasing 100 shares. The price of the underlying security must rise to $70 and then go above $70 to be worth anything. The breakeven for this option is $73.15. Since the price of the stock is $67, your option is currently at a loss and you have paid $315.
A week later, the price of ABC Paper Company rises to $78. The options contract worth $825 (8.25×100). Subtract that from what you paid for the contract (8.25-3.25) and you have a profit of $510. Not bad for one week! At this point you can close your position and take your profits or continue to hold the options if you think the price will continue to go up. Doing this runs the risk of losing your profits if not your entire original investment.

In reality, the majority of options are never exercised nor are they considered a high risk investment. In our modest example you could make money by exercising at $70 then selling the stock at $78 to make an $8 per share profit. Another strategy is to keep the stock to buy it at a discount at the present value. There are many who still choose to close out their position and take profits this way. This means holders are selling their options on the market and the writes repurchase buy them back and hold till the close. According to the Chicago Board of Options Exchange (CBOE) 10 percent of all options are exercised. This leaves 60 percent to be traded and 10 percent that expire worth nothing.

We should now look at how to price options. Looking at our above example the premium when from $3.15 to $8.25. This is an example of intrinsic value and time value. The premium is its intrinsic value added to its time value. The intrinsic value is how long the option is in the money. For a call option this is the time when the price of the stock is equal to the strike price. The time value is the possibility to increase the value of the option. In real life, the life of the trader who trades daily, options always trade above the intrinsic value. That is the reality of trading. Today’s example featured numbers we picked at random to demonstrate how to trade an options contract.


Funera expensesWhen homeowners are considering listing their homes for sale they often work on improving the condition of the properties to yield the highest resale value possible. Sometime sellers hire home inspectors to evaluate their properties to ensure no major surprises hinder their return on investment (ROI). Before selling, owners might remodel an outdated bathroom, upgrade the back deck or refinish their hardwoods. While all of these home improvements should theoretically increase selling prices, some upgrades are more cost effective for the seller.

The priority for home sellers is to appeal to the widest audience of home buyers. Therefore, sellers should avoid style-specific remodels; stay neutral. Also, sellers should limit upgrades that require a great deal of upkeep or specialized equipment such as a swimming pool, plush garden or home theatre. These features may seriously entice a handful of home shoppers, but likely deter a larger number who don’t want to dedicate the time or extra funds for maintenance. Financially-minded buyers calculate the expensive costs of buying a home, including standard maintenance costs of 1 to 4 percent of the value of the home each year.

Whether homeowners are considering upgrades to enjoy themselves while keeping ROI in mind, or they’re looking to spruce up a property for resale, they should consider these four home improvements to entice buyers.

1. Wood Deck Addition
The addition of a wood deck is the most cost-effect home upgrade in 2014, according to Remodeling 2014 Cost vs. Value Report. Homeowners who install 16 by 20-foot pressure-treated wood decks spend an average cost of $9,539. These upgrades increase home resale values by $$8,334. Therefore, this midrange upgrade has an ROI of 87.4 percent. Decks are a great use of yards, making them ideal for entertaining guests, barbequing or reading outside. The addition of a wood deck in good condition helps home shoppers visualize their future lifestyles on the property.

2. Attic Bedroom Conversion
Home buyers are always on the hunt for the most bang for their buck, and usable square footage is certainly a benefit. Homeowners who refinish their attics to include a bedroom with bathroom and proper insulation recoup 84.3 percent of their costs. These remodels typically cost 49,438 with resale value increases of $41,656. Although the attic remodel cost is expensive, the added bedroom is a majorly trending draw for homebuyers and the ROI is impressive.

3. Minor Kitchen Remodel
Kitchen upgrades are always appealing since they are notoriously expensive home improvement projects. One way to attract buyers is to complete a minor kitchen upgrade. Minor upgrades include making improvements to the existing layout of the space, salvaging wherever possible. Replace cabinet fronts, drawers and hardware. Purchase new appliances, repaint the walls and replace countertops and flooring. Trending 2014 kitchen upgrades include dark countertops, glass-front cabinets, open shelving and wide-plank hardwood floors. The average cost of a minor kitchen remodel is $18,856 with resale value increase of $15,585. This upgrade is less expensive than the attic bedroom, but still a sizeable investment with an 82.7 percent return.

4. Basement Remodel
Homeowners who are interested investing a great deal of money upfront for increased resale value should consider remodeling their basements. A basement remodel including a 20 by 30-foot entertainment area with a full bathroom, wet bar, proper insulation and lighting has an ROI of 77.6 percent. The remodel costs $62,834 on average, but increases home resale values by $48,777. Basement remodels increase usable square footage, and are especially appealing to buyers with growing families.

Some inexpensive updates buyers can make are replacements which have remarkably high ROI. Sellers who replace their entry doors with steel doors yield 96.6 percent ROI. Additionally, motorized, steel garage door replacements have 83.7 percent returns. Wood and vinyl window replacements and vinyl siding replacements all have ROIs above 78 percent.
Current homeowners who are looking to make upgrades, or considering selling should evaluate how much they’re willing to invest and the potential ROI for improvements. One of these four projects is sure to entice numerous buyers with high returns for the seller.

A Guest Post
By Tali Wee of Zillow


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