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Watch BIDU for AH's reporting on the 14th. I am considering doing a PUT on that one if the "Price is Right". This stock has tendencies to go down after earnings announcements. Also, look for a reentry (Call order Mar07) after the earnings....according to Cramer.
Let me clarify a Feb07 35 Put option.
Also, on ASF. After you get out of the PUT look for a entry into a Mar07 30 Call entry. Maybe around 30-31 range. Good luck I am looking for a Doji to form on Wednesday and then hopefully it will start a reversal. Could get another double or more on that one. Remember nothing is certain and trade it your own risk, but this is my opinion.
Watch for a PUT on ASF tomorrow. It should move up a little to around 34.25 or so, but I believe you will see it finish out around 31. May be a quick double on that one. Look for entry around 1.20-1.40. JMHO
Been trading this morning. GOOG was an excellent PUT and then CALL when it got around 455-456 range. Good luck today AAPL got an upgrade so there will be no drop IMO. A 85 Call may not be to bad on that one if you like risk.
Morning everyone....watching AAPL and GOOG this morning. Also, earnings are coming out this morning on the following.
Administaff Inc ASF 2/12 B 0.44 0.39
Albany Molecular Resh AMRI 2/12 B 0.04 -0.01
American Finl Group I AFG 2/12 B 0.81 0.74
American Ld Lease Inc ANL 2/12 B 0.46 0.45
Beasley Broadcast Gro BBGI 2/12 B 0.08 0.06
Boardwalk Pipeline Pa BWP 2/12 B 0.48 0.52
Brown & Brown Inc BRO 2/12 B 0.27 0.25
Chattem Inc CHTT 2/12 B 0.37 0.43
Chemtura Corp CEM 2/12 B 0.05 0.04
China Bak Battery Inc CBAK 2/12 B 0.13 0.14
Ecolab Inc ECL 2/12 B 0.34 0.27
Holly Corp HOC 2/12 B 0.83 0.66
Jacada Ltd JCDA 2/12 B n/a -0.02
Lance Inc LNCE 2/12 B 0.18 0.13
Max Re Capital Ltd Ha MXRE 2/12 B 0.91 -0.13
Nam Tai Electrs Inc NTE 2/12 B 0.28 0.33
Shanda Interactive En SNDA 2/12 B 0.23 -0.94
Statoil Asa STO 2/12 B 0.60 0.59
Transdigm Group Inc TDG 2/12 B 0.44 0.25
United Fire & Cas Co UFCS 2/12 B 0.84 -2.49
Valspar Corp VAL 2/12 B 0.26 0.23
Then during trading hours are the following:
Arch Chemicals Inc ARJ 2/12 D -0.09 0.21
Banco Bradesco S A BBD 2/12 D 0.84 0.64
Brush Engineered Matl BW 2/12 D 0.41 0.21
Cna Finl Corp CNA 2/12 D 1.01 -0.74
Crawford & Co CRDB 2/12 D 0.00 0.12
Fording Cdn Coal Tr FDG 2/12 D 0.81 1.41
Loews Corp CG 2/12 D 1.14 1.11
Lo-Jack Corp LOJN 2/12 D 0.24 0.25
Mercury Genl Corp New MCY 2/12 D 1.17 0.83
Misonix Inc MSON 2/12 D -0.12 -0.07
Monolithic Pwr Sys In MPWRE 2/12 D 0.06 0.15
Pacific Internet Ltd PCNTF 2/12 D 0.13 0.19
Priceline Com Inc PCLN 2/12 D 0.41 0.28
Radyne Corp RADN 2/12 D 0.21 0.24
Sensient Technologies SXT 2/12 D 0.30 0.24
Sys SYS 2/12 D n/a 0.02
And then after hours is:
Advanced Photonix Inc API 2/12 A n/a 0.01
Arch Cap Group Ltd ACGL 2/12 A 2.43 1.89
Black Box Corp Del BBOX 2/12 A 0.76 0.75
Blue Nile Inc NILE 2/12 A 0.31 0.29
Bois D Arc Energy Inc BDE 2/12 A 0.19 0.16
Cephalon Inc CEPH 2/12 A 0.91 0.71
Charles Riv Labs Intl CRL 2/12 A 0.58 0.59
Compass Minerals Intl CMP 2/12 A 0.84 1.05
Comstock Res Inc CRK 2/12 A 0.42 0.82
Cross Ctry Healthcare CCRN 2/12 A 0.19 0.18
Developers Diversifie DDR 2/12 A 0.81 0.74
First Advantage Corp FADV 2/12 A 0.22 0.20
Forward Air Corp FWRD 2/12 A 0.44 0.41
Health Care Ppty Invs HCP 2/12 A 0.43 0.48
Himax Technologies In HIMX 2/12 A 0.11 n/a
Hub Group Inc HUBG 2/12 A 0.32 0.25
Interactive Intellige ININ 2/12 A 0.09 0.10
Irobot Corp IRBT 2/12 A -0.08 0.00
Lincare Hldgs Inc LNCR 2/12 A 0.58 0.54
Matrixx Initiatives I MTXX 2/12 A -0.11 0.16
Monolithic Sys Techno MOSY 2/12 A 0.04 -0.04
Netsol Technologies I NTWK 2/12 A 0.00 0.01
Telefonos De Mexico S TMX 2/12 A 0.68 0.66
Ultra Clean Hldgs Inc UCTT 2/12 A 0.27 0.04
Ultrapar Participacoe UGP 2/12 A 0.39 0.23
Veeco Instrs Inc Del VECO 2/12 A 0.21 0.22
Waste Connections Inc WCN 2/12 A 0.44 0.42
Yum Brands Inc YUM 2/12 A 0.79 0.77
Here is what caused all the drama on Friday.
Posted by: dexprs
In reply to: Dimension who wrote msg# 30161 Date: 2/9/2007 1:31:19 PM
Post #
Perhaps: "William Poole, president of the Federal Reserve Bank of St. Louis, estimated that growth in U.S. gross domestic product this year will run at about a 3% clip. Poole also said he hopes core inflation will settle below 2%..
Poole's remarks left investors unsettled, sending Treasurys lower and likely placing limits on the stock market's potential gains, according to Charles Campbell, senior trader at Miller Tabak.
"His remarks may put a lid on how high we can go," Campbell said.
At midday, Cleveland Fed chief Sandra Pianalto and Dallas Fed chief Richard Fisher also are scheduled to make speeches about the outlook for the economy."
Today was so weak I anticipate that it may try to bounce a little on Monday but overall I think it will be another down day. I expect that AAPL will reach 81 or less on Monday and GOOG may drop back to 455 or so. Good luck all on Monday and look for an exit early if the market allows it. Then get your PUT's in. This is for the Tech sector only.
AAPL, RIMM, SNDK, GOOG, and ATI....they all follow suit. It could get ugly.
WOW!! The Tech sector got killed today. I hope Monday is a little better.
me too lol~
I am watching all of them.
GOOG, RIMM and AAPL are great for big moves and option trades...
also a good one some time back was SNDK, had great luck with that one~
I think AAPL needs a break for part of the day today at least. May see it dip into the 84's
Morning folks keep an eye on GOOG, AAPL, and RIMM. Also, watch the NDX it is a good indicator on the strength of the techs.
Everything was following suit today. RIMM, AAPL, and GOOG were all looking strong. I am watching how GOOG opens tomorrow...if it opens low I think it will run most of the day. If it opens really high it may drop shortly after open (NOTE: it will rebound once it tanks IMO). If it opens near today's close it could go either way. Let's see what happens.
For those reading these messages I am only trading in and out of GOOG daily at this point. It has been easy money so far. I watch the 15 minute and 30 minute RSI(2), Fast STO, and candlestick charts to predict a peak and a trough. Also, if you have multiple screens, which at this time I don't, you can watch AAPL, RIMM, and NDX. They all seem to be following one another.
Charting is sometimes decieving and I had a 12K swing today in my account, but I did still come out ahead. So make sure if you do these high risk options you take your heart medicine.
No problem take your time.
I bookmarked it and will come back when I have time and study all your & lobsters posts.
Nice board ced.
There is so much information that you can learn on options. You can hedge, leverage, and all the other things mentioned that SL and myself have posted. However, try not to get to overwhelmed with all the different terms. If you learn calls and puts, which is fairly straight forward then you can make lots of money just doing that. Make sure you understand the strike price and expiration date. If you let your options expire and you are in-the-money by at least 5 cents then you have to purchase the shares. (You can make a phone call to your broker Friday before 4:15 Eastern time and tell them you don't want the option to execute, but then you lose everything you put into it.)
For example say you purchase the 85 Call contracts on AAPL for 2 dollars per share. So that would be 200 dollars per 100 shares plus fees and commision. Say you put 5000 dollars into this call option and it expires on Feb 17th. So 5000/200 = 25 contracts or 2500 shares. If you let the contract expire in-the-money then you have to purchase 2500 shares of AAPL for 85 dollars per share. 2500*85 = 212,500 dollars. So your account automatically on Monday Feb. 19th purchases 2500 shares of AAPL for you. When you open your account on Monday you will see a margin call for 207,500 dollars assuming you only had 5000 dollars in your account. This is not always bad as long as the stock does not drop more then 2 dollars, but for every dollar it moves after the shares have been purchased you lose or gain 2500 dollars. If it drops more then 2 dollars then you actually owe more then you have. This is why it is important to sell your shares before expiration if you are in-the-money unless you have the cash to cover your shares.
Calls and Puts Screen
Straddles Screen
Strangles Screen
Collars Screen
Greeks Screen
Diagonal Spreads Screen
Calendar Spreads Screen
Vertical Spreads Screen
Married Puts Screen
Buy-Writes Screen
These are all the different options you have when you are trading options. Look at the drop down menu. I will post the different screens for each of those.
I have some screen shots of my Etrade account and how all that shows up.
IBD: How to invest in options: Strategies
Additional strategies involving the use of options
Options are very flexible tools for a wide range of strategies. Below is a brief introduction to some of the more common strategies involving a combination of options contracts.
- Debit or Credit Spread: A spread is a transaction in which one simultaneously buys one option and sells another option, with different terms, on the same underlying security. In a call spread, the options are calls. The basic idea behind spreading is that the investor is using the sale of one call to reduce the risk of buying the other call. This strategy would be most useful if the investor was expecting a move in the stock but not a dramatic one. Spreads must generally be done in a margin account.
When a spread order is entered, the options being bought and sold must be specified as well as the price to be executed and whether that price is a debit or credit.
- Calendar Spread: A calendar spread, also frequently known as a time spread, involves the sale of one option and the simultaneous purchase of a more distant option, both with the same strike price. The neutral philosophy for using calendar spreads is that time will erode more quickly on the near term options. If this happens, the spread will widen and a profit may result at near-term expiration.
- Straddle Buying: A straddle purchase consists of buying both a put and a call with the same terms. The purchase allows the buyer to make large potential profits if the stock moves far enough in either direction. The magnitude of the expected move must be enough to effectively pay the cost of both premiums and earn profits. This strategy would be particularly attractive when option premiums are low (implied volatility is relatively low). The buyer has a predetermined maximum loss, equal to the amount of his initial investment.
- Straddle Selling: The sale of a straddle involves selling both a put and a call with the same terms. As with any type of option sale, the straddle sale may either be covered or uncovered. Both uses are fairly common. The covered sale of a straddle is very similar to the covered call writing strategy and would generally appeal to the same type of investor. The investor must be aware that while the call side of the straddle is covered, the put is not covered and the investor must be willing to buy the stock at the lower price if exercised upon. The uncovered straddle write is attractive to the more aggressive investor who is interested in selling large amounts of time premium in hopes of collecting larger profits if the underlying stock remains fairly stable. In this strategy the investors risk is not defined and therefore theoretically unlimited.
- Naked Put Writing: Some investors who wish to accumulate a stock at prices lower than today’s market may find writing naked puts useful. In this strategy the investor will sell naked puts to collect option premium and feel fully comfortable if exercised upon and forced to buy the stock lower. If the stock never drops to the options strike price, the investor was still able to collect and keep the option premium received.
Here is an excellent link to get started on options. Definitions are in blue and it gives you lots of information.
http://www.investopedia.com/university/options/default.asp
IBD: Puts & Calls
Put Buying
A put option gives the holder the right, but not the obligation, to sell the underlying security at the strike price at any time until the expiration date of the option. If an investor wishes to capitalize on an expected drop in a stock’s price he must either sell the stock short or buy a put option on the stock. The put buyer has limited profit potential just like the short seller (as prices cannot drop below zero), but his losses are limited to the amount of his initial investment (premium), something that cannot be said for the short seller.
1) Buying puts to profit from downward price movements:
Buying an XYZ July 50 put option gives you the right to sell 100 shares of XYZ common stock at $50 per share at any time before the option expires in July. The right to sell stock at a fixed price becomes more valuable as the price of the underlying stock decreases. Assume that the price of the underlying shares was $50 at the time you bought your option and the premium you paid was 3 ½ (or $350). If the price of XYZ stock drops to $45 before your option expires and the premium rises to 5 ½, you can sell your option for $550, collecting a $200 profit.
The profitability of similar examples will depend on how the time remaining until expiration affects the premium. Remember, time value declines sharply as an option nears its expiration date.
If the price of XYZ instead rose to $55 and the option premium fell to 7/8, you could sell your option premium to partially offset the premium you paid. Otherwise, the option would expire worthless and your loss would be the total amount of the premium paid.
This strategy allows you to benefit from a downward price movement while limiting losses to the premium paid.
Selling Calls
As a call writer, you obligate yourself to sell, at the strike price, the underlying shares of stock upon being assigned an exercise notice. For assuming this obligation, you are paid a premium at the time you sell the call.
Covered Call Writing
The most common strategy is writing calls against a long position in the underlying stock, referred to as covered call writing. Investors write covered calls primarily for the following reasons:
- to realize additional return on their underlying stock by earning premium income; and
- to gain some protection (limited to the amount of the premium) from a decline in the stock price.
- Covered call writing is considered to be a more conservative strategy than outright stock ownership because the investor’s downside risk is slightly offset by the premium he receives for selling the call.
As a covered call writer, you own the underlying stock but are willing to forsake price increases in excess of the option strike price in return for the premium. You should be prepared to deliver the necessary shares of the underlying stock (if assigned) at any time during the life of the option. Of course, you may cancel your obligation at any time prior to being assigned an exercise notice by executing a closing transaction, that is, buying a call in the same series.
A covered call writer’s potential profits and losses are influenced by the strike price of the call he chooses to sell. In all cases, the writer’s maximum net gain (i.e., including the gain or loss on the long stock from the date the option was written) will be realized if the stock price is at or above the strike price of the option at expiration or at assignment. Assuming the stock purchase price is equal to the stock’s current price: 1)If he writes an at-the-money call (strike price equal to the current price of the long stock), his maximum net gain is the premium he receives for selling the option; 2) If he writes an in-the-money call (strike price less than the current price of the long stock), his maximum net gain is the premium minus the difference between the stock purchase price and the strike price; 3) If he writes and out-of-the-money call (strike price greater than the current price of the stock), his maximum net gain is the premium plus the difference between the strike price and the stock purchase price should the stock price increase above the strike price.
If the writer is assigned, his profit or loss is determined by the amount of the premium plus the difference, if any, between the strike price and the original stock price. If the stock price rises above the strike price of the option and the writer has his stock called away from him (i.e., is assigned), he forgoes the opportunity to profit from further increases in the stock price. If, however, the stock price decreases, his potential or loss on the stock position may be substantial; the hedging benefit is limited only to the amount of the premium income received.
Assume you write an XYZ July 50 call at a premium of 4 covered by 100 shares of xyz stock which you bought at $50 per share. The premium you receive helps to fulfill one of your objectives as a call writer: additional income from your investments. In this example, a $4 per share premium represents an 8% yield on your $50 per share stock investment.
If the stock price subsequently declines to $40, your long stock position will decrease in value by $1000. This unrealized loss will be partially offset by the $400 in premium you receive for writing the call. In other words, if you actually sell the stock at $40, your loss will be only $600.
On the other hand, if the stock price rises to $60 and you are assigned, you must sell your 100 shares of stock for $5000. By writing a call option, you have forgone the opportunity to profit from an increase in value of your stock position in excess of the strike price of your option. The $400 in premium you keep, however, results in a net selling price of $5400. The $6 per share difference between this net selling price ($54) and the current market value ($60) of the stock represents the “opportunity cost” of writing this call option.
Of course, you are not limited to writing an option with a strike price equal to the price at which you bought the stock. You might choose a strike price that is below the current market price of your stock (and in-the-money option). Since the option buyer is already getting part of the desired benefit, appreciation above the strike price, he will be willing to pay a larger premium, which will provide you with a greater measure of downside protection. However, you will also have assumed a greater chance that the call will be exercised.
On the other hand, you could opt for writing a call option with a strike price that is above the current market price of your stock (an out-of-the-money option). Since this lowers the buyer’s chances of benefiting from the investment, your premium will be lower, as will the chances that your stock will be called away from you.
In short, the writer of a covered call option, in return for the premium he receives, forgoes the opportunity to benefit from an increase in the stock price which exceeds the strike price of his option, but continues to bear the risk of a sharp decline in the value of his stock which will only be partially offset by the premium received for selling the option.
Uncovered Call Writing
A call option writer is uncovered if he does not own the shares of the underlying security represented by the option. As an uncovered call writer, your objective is to realize income from the writing transaction without committing capital to the ownership of the underlying shares of stock. An uncovered option is also referred to as a naked option. An uncovered call writer must deposit and maintain sufficient margin with his broker to assure that the stock can be purchased for delivery if and when he is assigned.
Writing uncovered calls can be profitable during periods of declining or generally stable stock prices, but investors considering this strategy should recognize the significant risks involved:
If the market price of the stock rises sharply, the calls could be exercised. To satisfy your delivery obligation, you may have to acquire stock in the market for more than the option’s strike price. This could result in substantial loss.
The risk of writing uncovered calls is similar to that of selling stock short, although, as an option writer, your risk is cushioned somewhat by the premium received.
As an example, if you write an XYZ July 65 call for a premium of 6, you will receive $600 in premium income. If the stock price remains at or below $65, you will not be assigned on your option and, because you have no stock position, the price decline has no effect on your $600 profit. On the other hand, if the stock price subsequently climbs to $75 per share, you likely will be assigned and will have to cover your position at a loss of $400 ($1000 loss on covering the call assignment offset by $600 in premium income).
As with any option transaction, an uncovered writer may cancel his obligation at any time prior to being assigned by executing a closing purchase transaction. An uncovered call writer also can mitigate his risk at any time during the life of the option by purchasing the underlying shares of stock, thereby becoming a covered writer.
LEAPS
LEAPS are Long-term Equity Anticipation Securities. A LEAP is nothing more than a listed option that is issued with two or more years remaining until expiration.
Many of the strategies involving LEAPS are similar to those used for shorter-term options but special considerations apply. Generally, the longer term the option, the less rapid the decay of option premium. This is a good thing for an investor with an intermediate to longer-term focus. Many shorter-term options favor the seller as their premiums erode making it necessary for the buyer to not only be right, but to be right, now. That coupled with a generally larger spread (percentage between bid and offer) and typically higher commission leave the buyer of short-term options sometimes playing against the odds. The fact that the option premium in LEAPS will tend to erode more slowly, therefore, will tend to favor the buyer and be less advantageous to the seller, for instance, a covered writer.
LEAPS will also be much more responsive to changes in dividends and interest rates than shorter-term options. A well-laid plan can be spoiled by the effect of a meaningful change in interest rates which is certainly conceivable over a two or three year period. Therefore, it is important to recognize that many of the variables used to price options can either be magnified in the case of LEAPS or can change considerably over the course of two or three years, and dramatically change the way the market prices of LEAPS.
LEAPS will become regular option contracts when they become 9-month options.
Straddle
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In finance, a straddle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on the magnitude of price movement in the underlying security, regardless of the direction of price movement
Long Straddle
A long straddle involves going long (i.e. buying) both a call option and a put option on some stock, interest rate, index or other underlying. The two options are typically bought at the same strike price and expire at the same time. The owner of a long straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile, but does not know in which direction it is going to move.
For example, company XYZ is set to release its quarterly financial results in two weeks. A trader believes that the release of these results will cause a large movement in the price of XYZ's stock, but the trader does not know whether the results will be positive or negative, and so does not know in which direction the price will move. The trader can enter into a long straddle, where a profit will be realized no matter which way the price of XYZ stock moves, so long as the magnitude of the movement is sufficiently large in either direction.
Short Straddle
Conversely a short straddle is, in a contrasting position, i.e. going short (selling) both options. The investor makes a profit if the underlying price is close to the strike at expiry. Thus, the investor thinks the markets are unlikely to move much between purchase and expiry of the options. A short straddle position is highly risky, because the potential loss is unlimited, whereas profitability is limited to the premium gained by the initial sale of the options. The Collar is a more conservative "opposite" that limits gains and losses.
Strangles
A strangle is an options strategy similar to a straddle, but with different strike prices on the call and put options. This is used to bias the profitability of the strategy towards one particular direction of price movement in the underlying, while still offering some (reduced) protection against a movement in the other direction.
For example, the trader in the example above might enter into a strangle if he believes that XYZ's financial statement will probably be positive, but he is not certain and still wants to hedge some of the risk of a negative statement (and is willing to pay for this privilege.)
Nick Leeson and the Barings Bank collapse
Nick Leeson took short straddle positions when chasing losses he had run up for his employer, Barings Bank. He had initially invested in futures on the Nikkei 225 stock index. Following a dramatic fall in the market, largely due to the Kobe earthquake, Leeson lost millions. He tried to re-coup these losses by investing in the higher risk, but potentially more rewarding, straddles. He bet that the Nikkei would stabilise and stay in a range around 19,000. His bet failed and losses escalated to $1.4bn, causing the bankruptcy of Barings.
Thanks for posting some info on options. I need to do a little more studing into Straddles and Strangles. At this point I don't know how they work. Also, I need to look into Net Credits and Net Debits.
IBD: Options Basics
Puts and Calls
Options come in two types, puts and calls. A call option gives the holder the right, not the obligation, to buy 100 shares of the underlying security at a fixed price for a fixed period of time. A put option gives the holder the right, not the obligation, to sell 100 shares of the underlying security for a fixed price for a fixed period of time. If the option is not exercised or sold by expiration, it becomes worthless.
The Four Specifications of an Options Contract
There are four specifications that describe an options contract. They are: the type (put or call), the underlying security, the expiration date, and the striking price. As an example, and option referred to as an “XYZ Jan 40 call” is an option to buy 100 shares of XYZ stock for $40 per share. This option expires on the Saturday after the third Friday in January. The price is quoted on a per-share basis. This means that an option priced at $4 would cost the investor $400 (4 * 100) plus commissions.
The Value of Options
An option is a derivative security. Its value is determined by the underlying stock and will fluctuate as the underlying stock rises and falls. As time passes the options price, the premium, erodes until it ultimately expires worthless. That is why options are referred to as a “wasting asset”. Fortunately, your option can be exercised, invoking the right expressed by the contract, or it can be sold to claim its value.
Options Relative to Price
There are three different terms for describing where an option is trading in relation to the price of the underlying stock. A call option is said to be out-of-the-money if the stock is selling below the strike price of the option. The call option would be in-the-money if the stock were trading above the strike price. An option is at-the-money if the stock price and the strike price are the same.
The intrinsic value of a call option is the amount by which the stock price exceeds the strike price. If the stock price is below the strike, there is no intrinsic value. The time value of an option is the amount by which the option premium itself exceeds the options intrinsic value. Intrinsic value plus time value = the options premium. As an example: Suppose the XYZ Jul 50 Calls are trading at 4 while XYZ is trading at 52. The options intrinsic value is 2 and the time value is 2. An investor is, in effect, paying 2 to see what happens between now and when the option expires in July.
An option normally has the largest amount of time value when the stock price is equal to the strike price. As an option gets further in or out-of-the-money the time value will erode.
Factors influencing the price of an option
There are four major factors that determine the price of an option, and two that contribute to a lesser amount:
The price of the underlying stock.
The strike price of the option itself.
The time remaining until expiration.
The volatility of the underlying stock.
And to a lesser extent:
The current risk free interest rate (usually the 90 day T-bill)
Dividend rate of the underlying stock.
Probably the most important influence on the options price is the stock price and its relation to the strike price. Options very far in or out-of-the-money may have markedly less time value and sell closer to their intrinsic value.
Another important determinant of an option’s premium is the time remaining until expiration. Option time value erodes dramatically as an option approaches its expiration. The rate of decay is related to the square root of the time remaining. Thus a 3-month option decays at twice the rate of a 9-month option (square root of 9=3).
The volatility of the underlying security is another important component of an options price. Volatile stocks make for higher options prices. There are two different kinds of volatility. There is historical volatility and there is implied volatility. Historical volatility estimates volatility based on past price activity. Implied volatility starts with the option price as a given and works backwards to ascertain the theoretical value of volatility equal to the market price minus any intrinsic value. It measures the amount of volatility the market is pricing into the option.
The dividend rate and the 90 day T-bill rate have to do with the cost to carry the contract.
IBD: How to Invest in Options:
Course IV -- How To Invest In Options
Introduction
An option is a derivative security. Its value is determined by the underlying issue, which for our purposes, we’ll assume is either common stock or an index (a widely followed basket of stocks).
Benefits of Exchange-traded Options
Although the history of options extends several centuries, it was not until 1973 that standardized, exchange-listed and government-regulated options became available. In only a few years, these options virtually displaced the limited trading in over-the-counter options and became an indispensable tool for the securities industry.
Orderly, efficient and liquid markets
Standardized option contracts provide orderly, efficient, and liquid option markets. Except under special circumstances, all stock option contracts are for 100 shares of the underlying security. The strike price of an option is the specified share price at which the shares of stock will be bought or sold if the holder exercises his option. Strike prices are listed in increments of 2 ½, 5, or 10 points, depending on the market price of the underlying security, and only strike prices a few levels above and below the current market price are traded. At any given time a particular option can be bought with one of four expiration dates. As a result of this standardization, option prices can be obtained quickly and easily at any time during trading hours. Additionally, closing option prices (premiums) for exchange-traded options are published daily in IBD as well as many other newspapers. Option prices are set by buyers and sellers on the exchange floor where all trading is conducted in the open, competitive manner of an auction market.
Flexibility
Options are an extremely versatile investment tool. Because of their unique risk/reward structure, options can be used in many combinations with other option contracts and/or other financial instruments to create either a hedged or speculative position. Some basic strategies will be described in options strategies.
Leverage
A stock option allows you to fix the price, for a specific period of time, at which you can purchase or sell 100 shares of stock for a premium, which is only a percentage of what you would pay to own the stock outright. That leverage means that by using options you may be able to increase your potential benefit from a stock’s price movements.
For example, to own 100 shares of a stock trading at $50 per share would cost $5000. On the other hand, owning a $5 call option with a strike price of 50 would give you the right to buy 100 shares of the same stock at any time during the life of the option and would cost only $500. Remember that premiums are quoted on a per share basis; thus a $5 premium represents a premium of $5 * 100, or $500, per option contract. Let’s assume that one month after the option was purchased, the stock price has risen to $55. The gain on the stock investment is $500, or 10%. However, for the same $5 increase in the stock price, the call option premium might increase to $7, for a return of $200, or 40%. Although the dollar amount gained on the stock investment is greater that the option investment, the percentage return is much greater with options than with stock. Leverage also has downside implications. If the stock does not rise as anticipated or falls during the life of the option, leverage will magnify the investment’s percentage loss. For instance, if in the above example the stock had instead fallen to $40, the loss on the stock investment would be $1000 or (20%). For this 10% decrease in stock price, the call option premium might decrease to $2 resulting in a loss of $300 (60%). You should take note, however, that as an option buyer, the most you can lose is the premium amount you paid for the option.
Limited Risk for Buyer
Unlike other investments where risks may have no limit, options offer a known risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires worthless if the conditions for profitable exercise or sale of the contract are not met by the expiration date. An uncovered option seller, on the other hand, may face unlimited risk.
Guaranteed Contract Performance
The Options Clearing Corporation (OCC) guarantees that the terms of an option contract will be honored.
Prior to the existence of options exchanges and OCC, an option holder who wanted to exercise an option depended on the ethical and financial integrity of the writer or his brokerage firm for performance. Furthermore, there was no convenient means of closing out one’s position prior to the expiration of the contract.
OCC, as the common clearing entity for all SEC-regulated option transactions, resolves these difficulties. Once OCC is satisfied that there are matching orders from a buyer and seller, it severs the link between the parties. In effect, OCC becomes the buyer to the seller and the seller to the buyer, thereby guaranteeing contract performance. As a result, the seller can buy back the same option he has written, closing out the initial transaction and terminating his obligation to deliver the underlying stock or exercise value of the option to the OCC, and this will in no way affect the right of the original buyer to sell, hold or exercise his option. All premium and settlement payments are made to and paid by the OCC.
Further details of Options Trading
Options expire on the Saturday following the third Friday of the expiration month, although the third Friday is the last day of trading.
Option trades have a one-day settlement. The trade settles on the next business day after the trade. Purchases must be paid for in full, and the proceeds from sales are credited to accounts on the settlement day. Some brokerage firms require settlement on the same day as the trade, when trade occurs on the last trading day of an expiration series.
Options are opened for trading in rotation. When the underlying stock opens for trading on any exchange, regional or national, the options on that stock then go into opening rotation on the corresponding option exchange. The rotation system also applies if the underlying stock halts trading and then reopens during a trading day; options on that stock reopen via a rotation.
When the underlying stock splits or pays a stock dividend, terms of its options are adjusted. Such an adjustment may result in fractional striking prices and in options for other than 100 shares per contract.
GOOG was my winner today. Before close I done a PUT order on it for tomorrow, but I am a little worried that tomorrow could turn out to be an up day.
More info on RIMM.....the 135 Feb07 PUT option looks good for tomorrow if it gaps up a little. IMO it is ready to consolidate a bit. May hit 130 before moving back up. Could be an easy double. RSI is super high, TopBB is right on the price, and it formed a spinning top. Buy at your own risk.
If your new to options read up on how to trade options and make sure you understand that Time Value of Money is always working against you. I always thought that you could do a PUT and a CALL before earnings and hedge on certain stocks that tank hard or run hard on earnings, but that doesn't always work. The one thing to consider if you want to do that is do it on stocks that release close to expiration. This way you basically get the actual change in value instead of a small portion of it. For example I done a 35 PUT option on SNDK right before earnings and it tank to 38 but the option actually went down in price because everyone anticipated over the next few days that it would go back up.
SNDK - This one should fill the gap back over 42 but from there it is anyone's guess. This one does not have much strength and may stay in the downward trend after the gap is filled. Something good needs to happen with this one to break the resistance.
AAPL - My thought on this one for tomorrow is that it bounced off the 100 MA and may start trending back up. It could go above 85 tomorrow, but it has formed a spinning top and IMO it will go back down tomorrow after open. Maybe back to the 83 range. Cramer seems to think it will move down to close to 80 before moving back up.
GOOG - Looking at the 470 PUT option for this one tomorrow. My entry point is when the stock gets around 475. My thoughts is the stock will gap up tomorrow at open and then drop back into the 460's. There is some support around the 100 MA in the 65 or so range. Cramer thinks it will drop to 450 or so before trending back up. We will see the 200 MA is in the 430 range.
Hey folks welcome to High Risk Options board. Good luck and I hope you make tons of money investing in options.
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