Uncovered Options Trading System
Options are contracts between two parties in which one party has the right and the other party has the obligation to buy or sell a specified amount of assets at a specified price. Basically the options allow to secure the future price of the assets.
It is difficult to say when the options started to trade first, however, from the history we mention that Romans and Phoenicians used similar contracts in shipping. The history also mention Thales - the mathematician and philosopher in ancient Greece - who secured the future price of the oil and later when the olive price went up, sold them at higher price.
In Europe the options started to attract tulip dealers in early 1600s who wanted to secure the reasonable price in the future. However, very soon the options started to attract speculators.
In North America the options appeared in early 19th century, basically at the same time when stocks started to trade. However at that time options were not traded on the Exchanges and it was up to an options buyer to find an options seller. In majority cases it was done through newspaper advertising.
1848 is considered an official year when options started to trade. On this year Thomas Dyer opened Chicago Board of Trade (CBOT) and became the first precedent CBOT. Later the Kansas City Board of Trade, the Minneapolis Grain Exchange, and the New York Cotton Exchange started to trade.
In 1934 (after the big depression) the options trading lay under the supervision of Securities and Exchange Commission (SEC).
At that time options trading was not very popular and by 1968 the annual trading options volume still did not exceeded 300K contracts.
The big jump in options trading comes to 1968 the year when the Chicago Board Options Exchange (CBOE) was opened for options trading. It was the first U.S. options exchange. On April 26, 1968 - first day of trading on CBOE - only 911 options contracts were traded, yet, in a few years, in early 70's the daily volume already exceeded 200,000 contracts by the end of 1974. One of the reasons of such volume growth was new laws that gave right to banks and insurance companies to include options in their portfolios.
Staring from 1975 the other exchanges started to trade listed options: the American Stock Exchange (AMEX), the Pacific Stock Exchange (PSE) and the Philadelphia Stock Exchange (PHE).
Another important stem that attracted new investors into options trading was in 1977 when put options started to trade - by that time only call options were traded on the market. The put options were issued only on 5 stocks. The puts were enthusiastically accepted by traders and already in 1979 the annual options traded volume hit 35.4 million contracts.
The big interest in options pushed Exchanges to start trading options on indexes and in 1983 the first options on the indexes were launched by CBOE. On March 11, 1983 - S&P 100 (OEX) option and on July 1 1983 - the S&P 500 Index (SPX) options trading were launched. Later in 1997 the DJX options were added to the list of index options.
In 1985 the NASDAQ Stock Exchange and NYSE (New York Stock Exchange) started to list the equity options.
The interest in options trading was growing and in 1999 alone, the CBOE doubled. Almost 60 million open options contracts were by the end of 1999.
A trader interested in options could find a various number of offered options - equities options, index options, currency options, futures options. The great leverage and liquidity, growing number of online options brokerage companies and trading platforms attracts more and more investors.
Options trading has become one of the most popular trading vehicles on the stock market that gives great leverage without margin requirements. The same as with stock trading, in options trading we have two sides - the options seller and options buyer. The difference is that in case of the options, the options buyer by purchasing an options contract receives not a share of the company but the right (not the obligation) to buy or sell a certain amount of an underlying security. This right may be exercises within specified time period and at specified price.
There are two types of options: options puts and options calls. Options calls gives the right to buy a security at specified price within a specified timeframe and options puts give the right to sell an underlying security at a specified price within a specified frame.
In simple words, a trader who bought QQQ options calls with $50.00 strike price that expires in December has the right to buy the QQQ stock at $50.00 per share no matter how high above $50.00 the QQQ stock runs. An options trader who purchased QQQ puts at $50.00 strike price with December expiration has the right to sell the QQQ stock at $50.00 no matter how deep the market drops. In both cases an options buyer has the right to sell or buy an underlying security only until December (the expiration date of the purchased options).
On the other side we have an options seller who has the obligation to buy or sell an underlying security at a specified price (strike price) and within a specified period (until expiration date). It depends on an options buyer entirely whether or not to exercise options.
There are no margin requirements to buy options. No matter where the underlying security runs, an options buyer will never be a subject to margin calls.
An options buyer pays premium to an options seller for bought options. Until the expiration date, an options buyer can sell the bought options or exercise them. If none of this happened, the paid premium for options will be completely lost. In this case an options buyer looses 100% of the invested funds - maximum that could be lost by an options buyer.
An options seller is the subject of margin requirements and as a rule in order to sell options, a trader should have specified amount of funds. An options seller receives premium for the sold options that could be kept as a profit in case if the sold options expire worthless. At the same time an options seller faces a risk of unlimited losses when not just a received premium could be lost but much more.
Options trading delivers great leverage. Each options contract corresponds to 100 shares of the underlying security. If a trader buys 10 QQQQ options contracts at $2,000 per contract, he/she has to pay $2,000 for them:
10 contracts * 100 shares per contract * $2.00 = $2,000.00
In this case, by paying $2,000 only an options buyer manages portfolio of 1,000 QQQ shares. If at that time QQQQ shares cost $50.00 per share then a trader manages $50,000 portfolio and may receive profit or suffer losses equivalent to the investor who buys or sells 1,000 QQQQ shares. The only difference is that an option buyer has to exercise his right until options expiration (within specified period of time).
Some summary points:
Naked options trading is very risky - many people lose money trading them. It is recommended contacting your broker or investment professional to find out about trading risk and margin requirements before getting involved into trading uncovered options.