How options are priced – Premium / Credit / Debit

When you’re looking at  options prices you’ll see most of them in cents and a few in dollars.

Amazon example below:

You can see a price of \$8.60. The actual buying power reduced would be \$88,500. This is because the contract controls 100 shares at the strike price of \$885. The beak even would be the strike price of \$885 – the credit of \$8.60 leaving the break even floor at \$876.40

The current price is \$894.88. This means there is a \$18.48 distance between the current price and the beak even, about a 2% move – the option above is for 13 days.

The same option 41 days out pays \$25.45 or a credit of \$2,545 – you can see how theta has changed the price.

Most people including my self don’t have \$88,500 buying power to be reduced in a single trade. In this case you can employ verticals

Here is an example of a set of 41 day options with a 5 strike width.

You can see we’re now collecting \$1.45 or \$145 in credit and our buying power is reduced by our max risk which calculated by taking the width of the strikes \$5 minus the credit received \$1.45 – Total max risk would be \$3.55 or \$355

Now you can see how you can trade higher priced stocks and not have to put up \$88k. The break even on this trade is the strike on the put you sold minus the premium collected. In this case \$860 – \$1.45 = \$858.55

That is a \$36.33 difference from the current price of \$894.88 and it would require a 4% down in price to breach the break even. If the price remains above the break even of \$858.55 or rises even more this trade is a winner.

I prefer to manage winners at 50% so I would manage this trade around \$75.