Track 'n Trade Futures End of Day Options
Buying a Call
In this Track 'n Trade Pro Options trading training video, I want to simply just show you how to buy a Call option.
Now, let's say we're looking at this Gold December 2003 contract, and it's coming down off of this really nice high. We're anticipating a reversal, we're looking at our Mac-D and it's telling us that there's a potential reversal happening here possibly soon. We rotate over and look at our stochastics, they too are down in the oversold region, telling us that there's a possible reversal coming.
We look at our OSV indicator, which is our call indicator. It's telling us- or our strike indicator for our option and it's telling us the prices of options are coming back into fair market value. Of course the zero line is where our fair market value is. Down in the lower zone, that's telling us prices of our options are undervalued. Of course, up in the higher zone, this is telling us options are over-valued. We decide that we want to go ahead and buy a call option.
The way we do that is we simply click on the Call Option Order button up here in the top right hand corner. When we click down on our mouse button, we can then drag the order tool between the different strike prices. As you drag them, you'll notice that the numbers change. The top number is the strike price, so right now we're looking at a 330.00 Call. The value of that, if you were to buy a 330.00 Call would cost you $1,350.00. As you move it up, you can see that the Call value changes. We're now looking at a 335.00 Call and the value is $1,300.00. Now, we're a a 340.00 Call the value is $1,020.00.
The further away from the "at the money location" of the underlying futures, the less expensive that option is going to become. But the further the option underlying futures market has to move, before that option becomes valuable. There we have a 350.00 Call, a value of $800.00. The 355.00 Call at a value of $1,000.00. There's a 360.00 Call valued today at $600.00.
Let's come down here and maybe pop out 1, 2, maybe 3 strike prices outside of the money. We're at a 340.00 Call valued at $1,020.00. We release our mouse button, it gives us our options order dialogue box. It comes up and says buy 1 340.00 Call. It says brokerage fee for this trade- and we're going to put in there $40.00, saying that it's a in there that we have a $20.00 round turn. We pay $40.00 for our option. That would be an $80.00 round turn, what we want to do $20.00 in, $20.00 out. We go ahead and we hit Okay to confirm. Now, this is coming up and we saying that we have insufficient funds in our account. So if you receive this dialogue box, this means you have not opened up your account yet. This says would you like to open up an account, make a deposit? We say Yes.
We are a time machine, so let's say on April 1, we opened up our trading account with $5,000.00. We hit Okay. Now, we have in our account $5,000.00, and we have just placed an order to purchase (1) 340.00 Call at a value of $1,020.00; today's value is $1,020.00. We give this order to our broker. Of course, we're an End-Of-Day application, so first thing tomorrow morning, our broker or the software is going to simulate placing this order.
This is not a Live order, it does not go to the floor, this is just a simulation. We step our market forward, and of course the software simulates placing that order and fills it at $1,130.00 is the value on the close.
So let's look over here in our accounting package, it says Open Option Profit and Loss. That is the value of our option currently at the end of today's day: $1,130.00. Well, this morning we were able to get this purchased at $1,020.00. So on the open of the day, we purchased the option the 340.00 Call at $1,020.00. Throughout the day, the market traded the value of that Call became $1,130.00. We paid a commission of $20.00 for it. That leaves us a profit of $90.00.
Now, what we do is we just advance the market forward one day at a time. Each day our options value will be calculated and profits will be added over to our accounting window.
As the market moves in our favor or against us, we will see the different values. Now, we're right at zero. We paid $1,020.00 for it, we paid $20.00 commission and today's value of that option is $1,040.00, so we're at a break even point.
As we move that market forward that option either accumulates profits or losses... and you watch as we move that market forward, how our profits are accumulating. Now, we're in the money, that means that the underlying futures contract has met the equal price of the strike value. That means that we're now in the money. If we were to exercise our Call option, we would then be long 1 futures contract at 340.00.
You see the value of that option is now up to $3,600.00. We have a profit, because we paid $1,020.00 for it and $20.00 commission, plus the value of the option is $3,600.00. We now have an option subtotal of $2,560.00 profit.
Step it forward, now if we're getting nervous, maybe that option- we're afraid that market is going to turn around and start coming down, which would then decrease the value of our option. So we want to liquidate or exit out of our long option Call position. What we want to do is we grab the Call button position one more time, we click on it, we drag it down to the same strike price, okay. We need to drag it down to the same strike price, and then when we let go of it, we're at a 340.00 Call. We release the mouse button. Now, we want to sell (1) 340.00 Call. The value is $3,350.00, this is going to cost us $20.00 to do this. We hit Okay. The next day we step that market forward.. and we were able to sell that option and we came out with a profit of $2,310.00.
That's how you buy a Call option and then liquidate a Call option in Track 'n Trade Pro.