Finance

Options Trading 101 – Yelp Call Options

Options Trading 101 – Yelp Call Options

Options trading is not for everyone. The risk can be daunting. As your stress level rises, making a correct choice can be exhilarating. Without knowledge about options trading, though, you will never be able to make money. I am an options trader and have been for over 7 years. I will be sharing examples of how much a person can potentially make by trading options. 

On my first installment of Options Trading 101, I will write about Yelp Call Options. Now we all know Yelp, right? Yelp is a company that gathers people’s reviews, and they are headquartered in San Francisco, CA. Being a public company, you can buy/trade shares or options.

If you read my article GrubHub is Buying Yelp’s Food Delivery Service earlier today, then you would have kept up with some trending news. In this fast-paced world, informing yourself with current events is a must. Not only is it important to be more knowledgeable about various subjects. As a trader, learning about a specific situation might help you make a split second decision that would either make you money or lose the trade in its entirety.

Today, to recap, Yelp’s food delivery company they purchased for $134 Million, Eat24, was bought out by GrubHub for $288 Million. Not a bad profit for Yelp, right? Well, the market thought so. Their stock price rose more than 27%. You might think that this was a huge profit for a person who bought shares in the company, yes? Well, objectively it is a nice sum. Realistically though, you could have made way more money by buying call options.

Most options trading choices are made week by week, month by month, or year by year. This means that you can purchase an option that lasts only for one week (extremely risky) all the way to two years (least risky). Now, buying shares of a company will not have a deadline. This difference is a big deal. The only ways you will truly lose an investment is if you sell at a loss or if the company goes bankrupt. With options, you are choosing to believe that a stock price will get to a certain value before your deadline happens. Of course, you can sell prior to the deadline. You might choose to do that if you made some money or if you got worried about the risk you’ve taken. But, for the risk of options trading you make, the profit can be huge.

Getting back to my Yelp example. The stock price yesterday (August 3rd, 2017) was $31.37. As the share price climbed to $40.05 on August 4th, 2017, a person could have made a 27% profit. This is all nice and good, but when you will see what that same person could have made trading options, it will blow your mind. 

Let me choose a conservative options trade that one could have made. Because I will take an option example of August 18th, 2017 expiration, it will shock you how much one could have potentially made. On August 3rd, the $33 call options of Yelp cost $1.60. This means that you would need $160 to purchase one option. One option is an equivalent to 100 shares. By buying 1 option on August 3rd ($160 value), you believed that Yelp was undervalued at $31.37 and that it would go above 33 by August 18th (options trading expiration date). Your payed option price at $1.60 would need to be added to the call price you purchased (33 calls) to even your money. This means by August 18th, you would need Yelp to go to $34.60 to even out this trade. Now keep in mind, if the stock goes higher before, you will sell and make a profit.

Due to the purchase by GrubHub that we discussed earlier, Yelp shot up to $40.05. So the same options you bought at $1.60 are now priced at $7.06. That is a staggering 341% profit. So, if you spent $160 for 1 option on August 3rd, today on August 4th those same options would be worth $706. Remember that 27%? You forgot about that, right? If you bought 1 share of Yelp at $31.37 and then sold it for 40.05, your profit would have been a little above $8. You waited to receive a 27% profit only to make 8 bucks, without the broker fees? I don’t know about you, but making $556 sounds way better. Remember, the risk is daunting, but the reward is huge. Like anything in life, studying about options trading is a tough subject. The paycheck, though, could be worth it.

Check out my article about investing. It is a must before options trading.

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