January Office Hours FAQs: Options Terminology, Fundamentals and Basic Concepts

How do you determine the bid-ask spread when buying or selling options?

The bid is the price at which the market is willing to buy the option, and the ask is the price at which the market is willing to sell the option. As a buyer, you look at the ask price, and as a seller, you look at the bid price. The difference between what you paid and what you sell it for determines your profit or loss.

Do I need to have the shares in my account to exercise a long put contract?

It depends. Your trading firm may require you to have those shares prior to exercising. If you can't buy or borrow the shares, you may not be able to exercise the contract.

Can you get assigned on an out-of-the-money option after market close?

Yes, out-of-the-money options can still be exercised by the buyer if they choose to do so, which means the seller's risk continues until the option fully expires.

How can you manage a collar trade to keep the stock?

You can manage a collar trade by rolling the short call and long put up or out to a different expiration date.

What are the benefits of trading zero DTE options?

Zero DTE options have increased levels of Gamma and Theta, making them highly sensitive to underlying movements and allowing for rapid time decay. However, they have less Vega, meaning they are less affected by changes in implied volatility.

Is it better to sell an in-the-money call or buy a protective put as a hedge against my long stock position?

It depends on your goals. Selling an in-the-money call provides some income and partial protection, while buying a protective put offers more protection but at a cost.

How do you calculate breakevens when you sell or buy the same option on different days with different premiums?

If you're adding to an aggregate position, you can average the premiums. For example, if you paid $3 for the 100 strike call and $1 for another 100 strike call, your average cost is $2 for both calls.

How do you pick a strike price for selling covered calls if you don't want to get called away?

Choose a strike price further out-of-the-money to reduce the likelihood of assignment. However, this will also reduce the premium you collect.

Can you give an example of how to hedge an existing long position in my portfolio?

A few ways to protect are a protective put or a collar. For example, if you own a stock, you can buy a put option to protect against downside risk as the long put acts as an exit price to sell your shares. A collar uses a short upside call combined with a long put. The short call helps to offset the cost of the put while capping the upside exposure on the stock.

Is there a relationship between expected move and gamma exposure in selecting a strike?

Expected move is part of the implied volatility of the option. Gamma exposure is inversely correlated with implied volatility.

What is the difference between an options contract and a futures contract?

An options contract gives the buyer the right but not the obligation to fulfill the terms, while a futures contract creates a binding obligation for both parties unless closed out through a trade. There are also significant cost and risk differences between options and futures.

Why do many options experts have backgrounds in market making?

Market making provides a deep understanding of options through immersion in the trading environment, helping experts develop a comprehensive knowledge of options pricing and risk management.