Let me take you on an adventure of how the 230 Calls options on Tesla traded today, tommorow and possibly all week. If you read the entire contents of this blog the concept of option trading might start to sink in. How do you buy an option to go up or down? A "Call" contract means you want it to go up and a "Put" contract means you want it to go down. It's a contract for a limited period of time on 100 shares of a stock. You don't own the stock. You share in the profits if the stock moves in the direction you thought it would over over a predetermined period of time. Here is a printout of one series of Calls and this time the stock we are looking at is Tesla. They are Call options that expire at 3:00 p.m. this Friday with a $230.00 striking price. What's a striking price mean? It's the break even price a buyer picks and in the case it's $230.00. The difference on the upside between what the stock is trading for at 3:00 p.m. on Friday and the price of $230.00 is what the contract will be worth. Here is an example. If the stock is trading a $235.00 on Friday at 3:00 p.m. the $230.00 Call option will be worth $5.00. Alteratively if the stock is trading at $240.00 this Friday at 3:00 p.m. the contract will be worth $10.00. If you bought one option contract today you could turn around and sell it in two minutes, two hours or two days. A sell ticket once your in can be sold at anytime during trading hours in a blink of an eye. That is if you are willing to make it a "market order". What's a market order? Look at the printout below and find where it says "bid-and-ask". If your selling and want to dump your position as quickly as you can you will get the bid price. If your buying in a hurry the reverse happens. You will get in on the ask side. When you placing your order they give you a choice of going in "at market" or you pick the specific price you want. Look at this current Tesla situation.
What we are looking at is how a bet on a Tesla Call looks like on a day the stock is going down. It's down 40.12% just in one day. Ouch. The Call options dropped because the stock was down $3.51 on the day. Also look at the spread between the "Bid" and the "Ask". Now for some "time-out" to explain the premise of what we are doing. We are "betting" for lack of a better word on this stock going up in value. If we bought in at the end of the close today how much would it cost you to get it? Good question. Had you bought in today in the last few seconds of trading it would have cost you $375.00 U.S. plus a small commission. What that means is that the stock has to trade up to $233.75 by Friday at 3:00 p.m. just to break even. Anything above that becomes your profit. If it goes to $240.00 for example your profit would be $625.00 (240 minus the 230 striking price equal 10 minus the $375.00 cost you paid to get in). It's quite a gamble but the stock is "Tesla". It has a wide following and is much lower in price from where in was three years ago. News on what is happening within the company and within the industry has a wide following. This months thinking's centre around how the Chinese electrication evolution is light years ahead of what is happening in North America. Now look at the price of these Tesla Calls on Tuesday morning at 9:39:09 a.m. Can you see how Telsa is up $5.18. How does this increase in the stocks price influence the value of the Calls? Well the Call option which we are watching closed at $385.00 and it is now worth $639.00
. Get out. Take your profit of $6.39 minus $3.85 ($254.00 U.S.) and call it a day. That's a successfull buy on Monday close and sell out on Tuesday morning trade.*** If you didn't get out here is how the same Calls closed out the day. Take your profits if you have any, on Tuesday's Call options that expire at the end of the week.
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