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I'm a total newbie to trading. At present, my experience consists of trading a few stocks/funds directly with my local bank.

I recently downloaded a Demo Account trading app and created a demo account to play around to get more insight behind stock trading.

I then bought 10 AMZN apr13'17 CALL Options with a strike of 897.5. The price of the underlying (amazon stock) was 890 at that time, so the option was out of money.

I placed a bid at 4.04 where the ask price was 8.00 and Last Exch 6.66.

Minutes later I sold the position for 7.89 and made $3,850 profit. I know that this is only a simulation but have been told, that it's fairly realistic.

How would this trade behave IRL? Wouldn't I be able to buy at this low price or wouldn't I be able to sell?

edit: I just noticed that the amazon stock now went up to 899. So I guess it was a combination of this and the delayed market data from the demo account?

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In real life, you'd see spreads like

AMZN 04/13/2017 910.00 C 4.90 +1.67 Bid: 4.75 Ask: 5.20

(with AMZN @ $897 right now)

and the fill you'd get on the buy side would be closer to the ask. i.e. I'd offer $5.00 and hope that it filled.

Filling a $4 bid when ask is $8 isn't likely unless the stock blipped down enough for your price to fill.

Options are a lot like day trading, in most cases. Most members here will agree that day trading isn't investing, it's gambling. Long term, the S&P has been up 10%/yr. But any given day, the noise of the market is a 50/50 zero sum game. Most long term stock 'investors' do well. Those who get in and out, not so much.

There are aspects to options that are appealing. As you've seen, the return can be high, even IRL, but your loss can be 100% as well. Let me share with you a blurred line - I wrote "Betting on Apple at 9 to 2" in which I described an option strategy that ran 2 years and would return $10,000 on a $2200 bet. A similar bet that ended a year ago yielded a 100% loss. I don't post there very often, as I keep that trading to a minimum.

There are warnings for those who want to start trading options -

  1. continue to trade in a simulated account
  2. develop a strategy that can be quantified and understood by a spouse or friend
  3. when you start to use real money, start small, and only bet what you can afford to lose.
  4. remember, you can be right in the direction, and even expected magnitude, but the market may decide to tank, taking your stock down along with every other one. Look at how Brexix impacted the market. Had your options expired during that mess, you'd have lost out.
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How would this trade behave IRL?

I don't know how the simulation handles limit orders and bid/ask spreads to know it's feasible, but buying at 4.04 when the current ask is 8.00 seems unlikely. That would mean that all other sell orders between 8.00 and 4.04 were fulfilled, which means that there were very few sellers or that sell pressure spiked, both of which seem unlikely.

In reality, it seems more likely that your order would have sat there until the ask dropped to $4.04 (if it ever did), and then you'd have to wait until the bid rose to $7.89 in order to sell them at that price.

However, that kind of swing in option prices in not unrealistic. Options near at-the-money tend to move in price at about 50% of the change in the underlying, so if amazon suddenly dropped by $5, the option price could drop by $2.60 (from 6.66 to $4.04), and then rise back to $7.89 if the price rose $8 (which would be 1% swing and not unheard of intra-day).

But it sounds like you got very lucky (or the simulation doesn't handle option trading realistically) - I've traded options in the past and have had some breaks similar to yours. I've also had bad breaks where I lost my entire investment (the options expire out-of-the money). So it should be a very limited part of your portfolio, and probably only used for risk management (e.g. buying put options to lock in some gains but keeping some upside potential).

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