You are here: Educational Videos » Options Plug-in » Place Options Orders
Track 'n Trade Options
Track 'n Trade Futures Live - How To Place Options Orders
Video Transcript
In this video we’re going to demonstrate, within Track ‘n Trade, how to place, and track, Put and Call option orders, and continue our discussion of terminology using examples, which should help make it much easier to understand how you can begin trading with options.
You’ll notice within Track ‘n Trade we have a dedicated Options Trading Tab, this tab is similar to our standard trading tab, but removes the tic-by-tic chart, and adds a table of puts and call strike prices for select options.
We can customize this table to provide just the information we want to see displayed, through these radio button controls. In this example, I’m going to select OTM, which stands for Out of the Money, which will give me a list of all the put options that are out of the money, or are trading below the current market price, and all of the call options that are out of the money, and currently trading above the current market price.
We also have a drop down window, which sorts all the available options by days until expiration. Here’s where we choose how much extrinsic value we would like to purchase, the longer the amount of time to expiration, the more money we’ll have to pay for the option, since this time value is considered opportunity value, or, in other words, how much time do we have for our option to become more valuable than it is today.
Within Track ‘n Trade, we highlight in bold, the contract months with the highest volume and open interest, we recommend you stick to these contract months.
Notice that we list, in this table, the strike price of the option, whether it’s a put or a call, the premium, the theoretical value of the option, which is a very unique number, as it tells us what the option’s value should be, based on the Black and Scholes options value model.
Think of the theoretical value as the Kelly Blue Book of options. If the current option is trading above the theoretical value, you’re paying a premium for the option, if it’s trading below the theoretical value, you’re getting a discount.
You can then see I have listed Volume, Open Interest, Implied Volatility, and the list goes on, as this table is customizable as to which columns of information you would like to include.
One of the most unique feature about the Track ‘n Trade options trade tab is our ability to drag ‘n drop our options orders directly on the chart, just as we do our individual contract orders.
By selecting the buy call, sell call, buy put, or sell put buttons, we can select our desired option, and then drag it on the chart and base our option pricing on areas of market support and resistance, and build a strategy that’s based around your current technical analysis of the market, allowing for a complete visualization of each leg of your option strategy, giving a much more robust strategy than what might otherwise be accomplished through traditional mathematical theoretical option modeling.
Let’s first, in this example, buy a call option, and then we can talk about some of the terms we learned earlier, and how they apply to this trading example.
To buy a call, simply click the Buy Call button within Track ‘n Trade, and slide your mouse cursor above and below the current market price.
Remember, when buying an option, we have the right, but not the obligation to purchase the underlying commodity at a pre-specified price, and that pre-specified price is known as the strike price…
When placing an order, notice how each order jumps between strike prices, and allows you to quickly review the pertinent details needed to make your option trading decisions, including premium, theoretical value, the spread, expiration date, and more.
If we slide the call option to a price above the current market price, we’re placing a buy call order that is out of the money, and has no intrinsic value, only extrinsic, or time value.
So in other words, the premium of the option, which is how much we must pay to purchase the option, is only made up of opportunity value, which is the amount of time left for the option to become profitable.
If we slide our call option order to the current market price, this option would be considered at the money, but the premium, although higher, still has little or no intrinsic value.
But, if we slide our call option order below the current trading price, our call is considered in the money, the options premium significantly increases, but that’s because it now has both intrinsic value, as well as extrinsic value.
Intrinsic value is the value difference from the strike price to the current market price, and the extrinsic value is the value of time, which you see displayed here as a purple vertical line, indicating the options expiration date, or the amount of time our option has left to either increase, or decrease in value.
You see, if the market continues to rise, the premium of the option will continue to increase, but if the market starts to fall, the premium of the option will decrease. Again, as mentioned before, it’s the premium of the option that we’re trading, the increase and decrease in option premium value is our profit and loss.
Let’s next, buy a put option.
When buying a put option, the premium value will increase if the underlying market falls in price, which is just the opposite of our call, the call option premium value increased when the underlying market price increased.
When trading options, we’re really just trading the increase and decrease of the options premium. We’ll generally liquidate our position prior to expiration. Unless of course the option value becomes worthless, by dropping all the way to zero, then there would be no reason to liquidate.
Many options houses will charge the entire commission, both sides of the trade, at options entry--therefore collecting both sides of their commission, even when options expire worthless, and you never execute an exit.
Track ‘n Trade does not do that. We only charge half the commission on entry, and the other half on exit, therefore if your option expires worthless, we don’t add insult to injury by charging you an exit commission on a worthless option.
Again, by sliding the put option order above the current market price, we’re moving into extrinsic and intrinsic combined territory, if we slide it as close to the market price as possible, this is at the money, and if we drop it below the current market price, this is out of the money.
Once we’ve chosen an option that we’re interested in, we release the mouse button, which automatically pulls up our order ticket box where we can confirm our purchase.