Can someone explain the Option Chain of AMD for me?
"When you buy a put option, you're buying the right to sell stock at the ""strike"" price. To understand why you have to pay separately for that, consider the other side of the transaction. If I agree to trade stock for money at above market rates, I need to make up the difference somewhere or face bankruptcy.  That risk of loss is what the option price is about. You might assume that means the market expects the price of AMD to fall to 8.01 from it's current price of 8.06 by the option expiration date. But that would also mean call options below the market price is worthless. But that's not quite true; people who price options need to factor in volatility, since things change with time. The price MIGHT fall, and traders need to account for that risk. So 1.99 roughly represents the probability of AMD rising to 10. There's probably some technical analysis one can do to the chain, but I don't see any abnormality of AMD here." The buyer pays $1.99/share for the option of selling a share of AMD to the seller for $10 which is currently $1.94 higher than the price of $8.06/share.  If you bought the put and immediately exercised it, you would come out of the deal losing $.05/share. "The current price is $8.05. If you want the right to sell it to someone (put it to the buyer) for $10, you have to pay $2. Since you're looking at an expiration that's so close, the ""in the money"" value is nearly the same as what it trades for. The JAN 2013 sells for nearly $3."
"As I stated in my comment, options are futures, but with the twist that you're allowed to say no to the agreed-on transaction; if the market offers you a better deal on whatever you had contracted to buy or sell, you have the option of simply letting it expire. Options therefore are the insurance policy of the free market. You negotiate a future price (actually you usually take what you can get if you're an individual investor; the institutional fund managers get to negotiate because they're moving billions around every day), then you pay the other guy up front for the right of refusal later. How much you pay depends on how likely the person giving you this option is to have to make good on it; if your position looks like a sure thing, an option's going to be very expensive (and if it's such a sure thing, you should just make your move on the spot market; it's thus useful to track futures prices to see where the various big players are predicting that your portfolio will move). A put option, which is an option for you to sell something at a future price, is a hedge against loss of value of your portfolio. You can take one out on any single item in your portfolio, or against a portion or even your entire portfolio. If the stock loses value such that the contract price is better than the market price as of the delivery date of the contract, you execute the option; otherwise, you let it expire. A call option, which is an option to buy something at a future price, is a hedge against rising costs. The rough analog is a ""pre-order"" in retail (but more like a ""holding fee""). They're unusual in portfolio management but can be useful when moving money around in more complex ways. Basically, if you need to guarantee that you will not pay more than a certain per-share price to buy something in the future, you buy a call option. If the spot price as of the delivery date is less than the contract price, you buy from the market and ignore the contract, while if prices have soared, you exercise it and get the lower contract price. Stock options, offered as benefits in many companies, are a specific form of call option with very generous terms for whomever holds them. A swaption, basically a put and a call rolled into one, allows you to trade something for something else. Call it the free market's ""exchange policy"". For a price, if a security you currently hold loses value, you can exchange it for something else that you predicted would become more valuable at the same time. One example might be airline stocks and crude oil; when crude spikes, airline stocks generally suffer, and you can take advantage of this, if it happens, with a swaption to sell your airline stocks for crude oil certificates. There are many such closely-related inverse positions in the market, such as between various currencies, between stocks and commodities (gold is inversely related to pretty much everything else), and even straight-up cash-for-bad-debt arrangements (credit-default swaps, which we heard so much about in 2008)." "The other two folks here are right with the math and such, so I'll just throw some intuition out there for you.  The basis for this valuation model is really just tacking the Gordon growth model (which is really just a form of valuing a perpetuity) onto a couple of finite discounted cash flows. So that ending part is the Gordon growth model *at the future point* discounted back to the present.  The Gordon growth model uses a ""next period"" dividend for the very simple reason that it's the next one you'd get if you bought the stock.  Is that explanation clear enough, or were some of these points not adequately explained in your class? I'll help a bit more, if I can." "I think it's apt to remind that there's no shortcuts, if someone thinks about doing FX  fx: - negative sum game (big spread or commissions) - chaos theory description is apt - hard to understand costs (options are insurance and for every trade there is equivalent option position - so unless you understand how those are priced, there's a good chance you're getting a ""sh1tty deal"" as that Goldman guy famously said) - averaging can help if timing is bad but you could be just getting deeper into the ""deal"" I just mentioned and giving a smarter counterparty your money could backfire as it's the ""ammo"" they can use to defend their position.  This doesn't apply to your small hedge/trade? Well that's what I thought not long ago too! That's why I mentioned chaos theory. If you can find a party to hedge with that is not hedging with someone who eventually ends up hedging with JPM/Goldman/name any ""0 losing days a year"" ""bank"".. Then you may have a point. And contrary to what many may still think, all of the above applies to everything you can think of that has to do with money. All the billions with 0-losing days need to come from somewhere and it's definitely not coming just from couple FX punters." "Great answer by @duffbeer. Only thing to add is that the option itself becomes a tradeable asset. Here's my go at filling out the answer from @duffbeer. ""Hey kid... So you have this brand-new video game Manic Mazes that you paid $50 for on Jan 1st that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game to me for $40 in two months."" Kid says ""Ok!"", sends $3 to Mr Game Broker who sends our kid a piece of paper saying: The holder of this piece of paper can sell the game Manic Mazes to Mr Game Broker for $40 on March 1st. .... One month later .... News comes out that Manic Mazes is full of bugs, and the price in the shops is heavily discounted to $30. Mr Options Trader realizes that our kid holds a contract written by Mr Game Broker which effectively allows our kid to sell the game at $10 over the price of the new game, so maybe about $15 over the price in the second-hand market (which he reckons might be about $25 on March 1st). He calls up our kid. ""Hey kid, you know that Put option that Mr Game Broker sold to you you a month ago, wanna sell it to me for $13?"" (He wants to get it a couple of bucks cheaper than his $15 fair valuation.) Kid thinks:  hmmm ... that would be a $10 net profit for me on that Put Option, but I wouldn't be able to sell the game for $40 next month, I'd likely only get something like $25 for it. So I would kind-of be getting $10 now rather than potentially getting $12 in a month. Note: The $12 is because there could be $15 from exercising the put option (selling for $40 a game worth only $25 in the second-hand market) minus the original cost of $3 for the Put option. Kid likes the idea and replies: ""Done!"". Next day kid sends the Put option contract to Mr Options Trader and receives $13 in return. Our kid bought the Put option and later sold it for a profit, and all of this happened before the option reached its expiry date." From what I read, if the monthly average of the stock falls below 1 dollar, it can be delisted from the NYSE, which of course means you lose everything.  I've been playing this same stock on a day by day basis.  Twice I've finished up 15% on the day, with AMR, but  I don't plan on being able to do this for much longer though.  I dumped it all today just in case they decide to remove it this weekend. The price doesn't have to drop 5% in one go to activate your order. The trailing aspect simply means your sell trigger price will increase if the current value increases (it will never decrease). "A straddle is an options strategy in which one ""buys"" or ""sells"" options of the same maturity (expiry date) that allow the ""buyer"" or ""seller"" to profit based on how much the price of the underlying security moves, regardless of the direction of price movement. IE: A long straddle would be: You buy a call and a put at the same strike price and the same expiration date. Your profit would be if the underlying asset(the stock) moves far enough down or up(higher then the premiums you paid for the put + call options) (In case, one waits till expiry) Profit = Expiry Level - Strike Price - (Premium Paid for Bought Options) Straddle" I am going to. Like I said I have not traded options much in general, but I can see a lot of potential in derivatives in general, and it makes me kind of grin. In the case of commodities, the advantages are really apparent. The only problem I see with stock options is that they expire, and thus if you are more long term bull on a stock, it would be harder. But for things like commodities, that are shorter term any ways and require margin, it makes a lot of sense IMO. I could see how you could gain a larger diversification through options (being able to bet on Russell 2000, S&amp;P, etc. ) or esoteric markets (electricity).   I will look up that book that you mentioned. Thanks man. "Well, they don't have to enter a market order. I was just saying that for your benefit.   In practice what will really happen is they'll say to themselves   ""I want ABC for no more than 70.00""  The current bid is at 69.60 They'll use a limit order on 10,000 shares. If anyone offers them more than 70.00 the computer program they're using will not accept.  However, the shares won't be bought all at once. A limit order for 10,000 shares will be spit into 1,000 shares at 69.70 and 10,000 for 69.65  The HFT can then make a reasonable guess someone is buying in bulk. So then the HFT sends out a sell order saying ""10 shares at 70.10"". The guy doesn't want that so they do it over again at 70.09  Eventually they notice when the guy accepts at 70.00  So now they knew this guy is willing to pay that. Then HFT buys all the shares they can. ALL SHARES, not just the amount the guy wants. They buy it all at 69.95, which is higher than the 69.70 the guy just paid or whatever.  They then sell it all back to the guy at 70.00  The guy has no choice because all the shares are now gone. He has to pay his highest price.   Once the guy gets his order the HFT just dumps the rest of the shares back at the price they bought them at.  edit: Another way to pull this off is to just literally build your own exchange. Then you can do all of this without any clever tricks. You can just outright give yourself preference over everyone else because you can truly decide what order the trades are being executed." Short answer: Liquidity. Well, you have to see it from an exchange's point of view.  Every contract they put up is a liability to them.  You have to allocate resources for the order book, the matching engine, the clearing, etc.  But only if the contract is actually trading they start earning (the big) money. Now for every new expiry they engage a long term commitment and it might take years for an option chain to be widely accepted (and hence before they're profitable).  Compare the volumes and open interests of big chains versus the weeklies and you'll find that weeklies can still be considered illiquid compared to their monthly cousins. Having said that, like many things, this is just a question of demand.  If there's a strong urge to trade July weeklies one day, there will be an option chain.  But, personally I think, as long as there are the summer doldrums there will be no rush to ask for Jul and Aug chains. So in a sense, I can think of the employees / option-holders as another investor?   That makes sense - but many of the examples I'm finding online are still confusing me. Based on the example above, it seems like option-holders would be paying the same exercise price as the VC. Per [Andreesen Horowitz](https://a16z.com/2016/08/24/options-ownership/) this seems uncommon:   &gt; The exercise price of employee options — the price per share needed to actually own the shares — is often less than the original issue price paid by the most recent investor, who holds preferred stock.    In reality, would option-holders receive, say, 40% (using example above) for their $6m in exercise value due to receiving common stock, with the founder being diluted to even further? I haven't followed the stock in about 6  years. Back when I followed it, because of the concentration in Ohio, at least back then, Ohio sports teams performance drove the profitablity of the chains. I remember the implied vol of the options spiking, along with MSG, for The Decision because LeBron would drive people to bdubs. I was merely trying to be helpful - Conceptually, you have dump this idea that something is skewed. It isn't. Firm A sold for $500 (equity value aka purchase price to shareholders) + debt (zero) - cash (50) for 450.  Enterprise value is the cash free, debt free sale price.  The implied ev multiple is 4.5x on A - that is the answer. The other business sold for a higher multiple of 5x.  If you would pile on more cash onto A, the purchase price would increase, but the EV wouldn't.      The idea is to think hard about the difference between equity value and enterprise value when examining a transaction. "First lets understand what convexity means: Convexity -  convexity refers to non-linearities in a financial model. In other   words, if the price of an underlying variable changes, the price of an   output does not change linearly, but depends on the second derivative   (or, loosely speaking, higher-order terms) of the modeling function.   Geometrically, the model is no longer flat but curved, and the degree   of curvature is called the convexity. Okay so for us idiots this means: if the price of ABC (we will call P) is determined by X and Y. Then if X decreases by 5 then the value of P might not necessarily decrease by 5 but instead is also dependent on Y (wtf$%#! is Y?, who cares, its not important for us to know, we can understand what convexity is without knowing the math behind it). So if we chart this the line would look like a curve. (clearly this is an over simplification of the math involved but it gives us an idea) So now in terms of options, convexity is also known as gamma, it will probably be easier to talk about gamma instead of using a confusing word like convexity(gamma is the convexity of options). So lets define Gamma: Gamma - The rate of change for delta with respect to the underlying asset's price. So the gamma of an option indicates how the delta of an option will change relative to a 1 point move in the underlying asset. In other words, the Gamma shows the option delta's sensitivity to market price changes. or Gamma shows how volatile an option is relative to movements in the underlying asset. So the answer is: If we are long gamma (convexity of an option) it simply means we are betting on higher volatility in the underlying asset(in your case the VIX). Really that simple? Well kinda, to fully understand how this works you really need to understand the math behind it. But yes being long gamma means being long volatility. An example of being ""long gamma"" is a ""long straddle"" Side Note: I personally do trade the VIX and it can be very volatile, you can make or lose lots of money very quickly trading VIX options. Some resources: What does it mean to be ""long gamma"" in options trading? Convexity(finance) Long Gamma – How to Make a Long Gamma Position Work for You Delta - Investopedia Straddles & Strangles - further reading if your interested. Carry(investment) - even more reading." Think of it this way, if you traveled back through time one month - with perfect knowledge of AAPL's stock price over that period - which happens to peak viciously then return to its old price at the end of the period - wouldn't you pay more for an American option? Another way to think about options is as an insurance policy.  Wouldn't you pay more for a policy that covered fire and earthquake losses as opposed to just losses from earthquakes? Lastly - and perhaps most directly - one of the more common reasons people exercise (as opposed to sell) an American option before expiration is if an unexpected dividend (larger than remaining time value of the option) was just announced that's going to be paid before the option contract expires.  Because only actual stockholders get the dividends, not options holders.  A holder of an American option has the ability to exercise in time to grab that dividend - a European option holder doesn't have that ability. Less flexibility (what you're paying for really) = lower option premium.