>>>>>>>>>> For More Free Videos Click Here <<<<<<<<<
Sometimes it pays, if you’re trying to trade an option that has an extremely wide bid.
Let me pull one up that does have an extremely wide bid. Here’s a stock I’ve been following for a while. It’s EDU. It’s a new Oriental education and technology company. What they do is they train kids in China. It’s kind of like a private school, a private tutoring company, for Chinese children, to help them better in school.
Of course, the Chinese are very aware and concerned about the education of their children. They put a lot of money into the education of their children. They feel it’s the best way for them to advance.
This company is taking advantage of that trend in China. I’ve been watching this stock for quite a while. It’s one of my favorites. The bid and ask on these can be quite large. In this case, let’s take a look at the June 80 calls. The bid is $1.70. The ask is $1.85. Even though we’re on the weekend, normally, the bid and ask price are at least ten cents apart. Normally, this is $1.75 to $1.85, during market hours.
Instead of paying $1.85 for that, you could put in an order to buy it at $1.80, which is the mid-price – saving yourself five cents. Now, on a single lot of this call option, that won’t save you a lot of money. But if you were to do larger numbers, the savings could be significant. On a 10-lot order, the savings would be about $50. On a one lot order, the savings is $5. $5 is still $5.
If you can get it at the mid-price, I would submit it. If I were to purchase this option, I would go in at the mid-price, and see if I could get it for $1.80, instead of paying the natural price of $1.85.
You can also look at these prices as being either retail prices and wholesale prices. I look at the mid-price as wholesale prices, and the natural price is really the retail price of that option. If you didn’t know anything, and you didn’t do this training, then you would always pay the natural price, or the retail price for those options.
Are you going to get the mid-price all the time? No. You may not get it even 20% or 30% of the time. But the times that you do get it, if you get it 20% of the time, it’s going to save you a lot of money on the options that you’re purchasing over time. It’s always worth trying to get the mid-price on any option.
Let’s move on. That’s a very short example of how a single option is priced, how orders are entered, what they mean, and how you profit from them. Remember, if the underlying stock here – in this case, EDU – goes up, this option will increase in value.
Let’s say it goes up $5. It’s currently at $75. If it goes up $5, what will happen to the price of this option? What will happen is – if it goes up $5, it’s currently at $80. Then that $1.85 option will $5 further into the money, and it will be worth approximately $4.10, because it’s approximately $5. Right now, the stock is $75, and the 75 calls are at $4.10. If it moves up $5, then that call will now also be worth $4.10. That call – the 75 call – will move up, and it will be worth $7.30.
That’s why people buy call options, because they believe that if the stock will go up in price, they will profit from it.
Why do we do spreads instead of buying single calls, then? Or single puts? The reason is that our risk is a lot less. For example, if we were to purchase this call option for $1.85, if the stock moves against us, and the stock actually moves down, instead of moving up – let’s say it moves down $5. What happens to our call option? Now it’s only worth 70 cents. We’ve lost almost $1.05 of the option price. That’s almost 50% of the option price.
Normally, what we like to do is create what we call spreads. A simple spread order is simply the purchase of one option – what we need to do here, in order for me to show you this, we need to select the advanced order tab, from “Single Order,” to “Blast All.” Just so we can show all of the options that we’re purchasing.
Let me show you what happens when you have it on “Single Order.” We can buy that, and let’s say we want to sell this one. It just changed it. We didn’t get both of the orders in there. We need to change this to “Blast All.” What we’re going to do, is we’re going to create a very simple vertical spread. A vertical spread – let’s say we take the 75 call. We buy that, and in order to protect our investment, we want to sell an option at a strike price just higher than that.
This is called a vertical spread. We’re buying one option. We’re selling another. That will protect us from a downturn in the market. What will happen is, if the price of the underlying stock goes up, this option that we purchased, the 75 call, in this case, will increase in value greater than the one that we sold. In this case, the June 80 call.
We sell the June 80 call, and we’ll make money on the June 80 call, if the market goes down. It will help protect the price that we paid for the 75 call. We’ll still lose money on this position, but we won’t lose as much as if we had just purchased the 75 call alone.
If the market goes up, in the direction we anticipated, than the 75 call will increase in value, greater than the money that we’ve lost on the 80 call that we sold.