Friday, April 29, 2011 7:03:15 PM
It contains a chapter on the dangers of options (large spread, low liquidity in some case, the risk if not covered, etc). You should also understand the nature of the Puts, Calls and Buying or Selling (short) them.
PPHM at this moment has low liquidity. As you may see for JUN 18 series there are only 7 contracts (that's for 700 shares) in the open interest. (1 contract = 100 PPHM options). As an example: If you invest $1000 in buying calls JUN @2.5 with Ask 0.40 and assuming you pay the Ask, you can buy 25 contracts (2500 PPHM options) + commission. You do that if you think PPHM will be priced higher then 2.5+0.40+commission on JUN 18. If it is you made money, if it is not you lost your $1000.
If you buy PPHM calls you buy the RIGHT for a given premium (Bid) to buy the PPHM shares for a fixed price (the strike price) at the last at a fixed date (the expiration date). You may exercise along the road because PPHM is a US style option, that means that as a buyer you don't need to wait for the expiration date. If you short (sell) a call you receive a premium for selling the OBLIGATION to deliver the PPHM shares a a fixed price (the strike price) until a target date (the expiration date). Your broker will want you to buy the PPHM shares as well (the cover). If the price is higher then the strike price the call is said to be ITM (in the money) and the call buyer will want the shares to be delivered at the strike price and can, if wanted, sell them immediately at market price to realize profit. If the market price is below the strike price then the buyer simply lost his money and the seller does not need to deliver the shares (the cover) and could possible sell another call.
With a Put the principle is the same but the RIGHT to buy becomes the RIGHT to deliver at the strike price. And for the seller the OBLIGATION to deliver becomes the OBLIGATION to buy the shares at the strike price. Short (sold) Put will have to be covered by cash in your account so that the broker can fulfill the obligation if the market price of PPHM shares is below the strike price.
This was in a nut shell. there is much more to know and therefor if it is your first time option trading make sure you get well informed because while the leverage of options can be big and appeal to greed their potential to loose 100% (when on the Buy side) is less obvious and therefor does not play on fear in the same extend often leading to people loosing a lot of money.
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