Up Tank

[NinjaAssassin]

Sure man.

Right now I'm in a few "lotto" plays I'm holding overnight since premiums on AAPL were outrageously high and, for me, there wasn't much going on anyway.

I'm in the following:
5 x PCLN $510 weekly puts @ .10 ($50)
10 x PCLN $630 weekly calls @ .05 ($50)
10 x RIMM $7.50 weekly puts @ .05 ($50)
20 x RIMM $8.00 weekly calls @ .01 ($20)
10 x WYNN $125 weekly calls @ .05 ($50)

They all expire tomorrow and most, if not all, will probably expire worthless.

I played PCLN as a sympathy play because EXPE earnings were released after hours tonight. Earnings were good on EXPE, beating estimates, but my calls might be too far out of the money. I bought RIMM puts when it was at about 7.60, then I bought the calls when it was at 7.75. It will have to go down to about 7.40 or lower for my puts to be profitable or up to about 8.03 or more for my calls to be profitable. Those minimums would yield a very small profit. A bigger move in either direction would be better, but that's why they're lottos. I bought the WYNN calls when it was at ~120 in hopes of a nice big pop in the morning. I'm not counting on it to happen, though (hence, it's a lotto).

My plan is to play AAPL tomorrow. Premiums were through the roof this week in anticipation of earnings and, as it turns out, most of the folks that bought this week and held expecting a monster move in either direction will likely lose their ass. So, since earnings were wishy washy (hit revenues, missed on EPS, beat iPhone sales expectations, missed on iPod, iPad, and Mac sales), I'm hoping to see some massive contract dumpage in the morning. I'm looking for Apple to make a pretty decent downward move and am hoping to catch some out of the money puts on the cheap before it happens. With my luck, I'll get cheap puts and Apple won't do shit, but the goal is to buy some puts maybe $10-$15 out of the money for .20 or less and, after a strong move down, sell those puts when they're a few dollars in the money. (Initiate day dream sequence) If I'm able to by 10 puts at .20, it'll cost me $200. If Apple were to move $10 in the money ($10 below the strike price of my options), the contracts will be worth $10 each - I'll turn $200 into $10,000. But, like I said, with my luck I'll buy $200 worth of puts and that shit will go to $800 tomorrow lol

For those that don't really understand what I'm talking about, here's a "quick" explanation:

Out of the money - contracts with a strike price higher (for calls) or lower (for puts) than the current share price of the underlying equity.

In the money - contract with a strike price lower (for calls) or higher (for puts) than the current share price.

Long - A person goes long when they buy existing options in the market. Going long gives the buyer the right, but not the obligation, to buy (for calls) or sell (for puts) the underlying equity at the contract's strike price.

Short - A person goes short when they write a new contract and sell it in the market. Going short gives the seller the obligation to sell (for calls) or buy (for puts) the underlying equity at the contract's strike price.

Calls - A contract wherein the buyer of the call has the right, but not the obligation, to buy the underlying security at the strike price and the seller of the call has the obligation to sell the underlying security at the strike price.

Puts - A contract wherein the buyer of the put has the right, but not the obligation, to sell the underlying security at the strike price and the seller of the put has the obligation to buy the underlying security at the strike price.

Example:
Apple is trading at $610. NinjaAssassin has 100 shares of Apple, writes a call contract for $620 and sells it in the market. DiamondFire buys that call contract. NinjaAssassin has agreed to sell 100 shares of Apple to DiamondFire for $620 a share should DiamondFire exercise his right to buy at that price. DiamondFire is long 1 call and NinjaAssassin is short 1 call. If, upon expiration, Apple closes below $620, the contract that DiamondFire has purchased expires worthless and is not exercised (who would buy 100 shares of Apple at $620 if it can be bought on the open market for less?). If, upon expiration, Apple closes above $620, the call contract is exercised and DiamondFire must buy 100 shares of Apple at $620 a share (620 * 100 = $62,000) (this is why it's important not to let your options expire in the money - that is, unless you intend to exercise them).

The above example applies to puts as well. NinjaAssassin could have sold one put into the market at a $600 strike price (being short one put) with DiamondFire buying one put (being long one put). Upon expiration, if Apple closed below $600 then DiamondFire's put would be exercised and would sell 100 shares of Apple to NinjaAssassin at $600 (and NinjaAssassin would be obligated to buy 100 shares from DiamondFire at $600 ($600 * 100 = $60,000) even though Apple is trading at a lower price). If Apple closed above $600, the contract would expire worthless.

So...
If Apple opens tomorrow at $610 and you think it's going down to $590, you can buy puts at the $600 strike price. The $600 puts are $10 out of the money. Let's assume the puts were going for $1.00 per contract (each contract controls 100 shares so you must multiply the premium, in this case $1, by 100 to determine how much the contract will cost you). To break even (not considering commissions), Apple would have to drop to $599, $1 in the money. If you only paid $0.60 per contract, Apple would have to fall to $599.40 for you to break even.

(Can you see the correlation there? If not, I'll try to think of a better way to explain this part.)

So, 10 contracts of AAPL $600 puts at $1 would cost you $1000 + commissions (premium of $1 multiplied by 100 (the number of shares in the contract) = $100 multiplied by 10 (the number of contracts) = $1000). If AAPL fell to your target of $590, the contracts you've purchased would have a premium of $10 (making your 10 puts worth a total of $10,000). On the other hand, if AAPL went up to $620, your puts would decrease in value and could potentially become worthless (no bid) - you'd lose 100% of your money.

Now, these numbers are simplistic. There's a little more to the price of a contract than what I've mentioned above. There's time value, intrinsic value, implied volatility (IV), etc. The basic idea is that a contract loses value as it approaches expiration. I can explain a little more on this if anyone would like, but we're approaching the limits of my knowledge and understanding of the subject. Also, this is one of the longest posts I've ever made on the intarwebz.