Replies to post #141723 on InterDigital Inc (IDCC)

[ed_ferrari]

song -- you are correct that buying calls and selling puts are 2 ways to bet on IDCC's share price going up. If you sell puts, you are taking a chance that you will be forced to buy shares at whatever strike price the contract is for. For example, if you sold puts with a strike price of 20, and if IDCC's share price goes down to 18, the person who bought the puts would be able to sell you shares at $20. If, however, IDCC's share price stays above $20, you get to pocket the premium since the puts will expire worthless. So the advantages are that if the share price goes up, you get free money via the premiums, and you potentially get to pick up shares at a lower price if the share price drops a reasonable amount. The disadvantage is that if the share price drops alot, you have to pay a higher price for the shares.

With calls, you also specify a price at which you are willing to buy the shares at, assuming the share price will be much higher than the strike price. So if you buy calls with a strike price of 20, and the share price goes up to 30, you can buy the shares for 20. However, if the share price drops below 20, you will end up eating the premium. The advantage to buying calls is that your profit potential is infinite. The disadvantage is obviously that if the share price doesn't rise, you end up throwing money away.

[Ghors]

Songioan re Options:

Buying a call: You pay them for the right to buy the stock at a price. The closer to the strike price and the farther out the strike date, the more it will cost you. If the stock goes up as you have guessed, then your option becomes more valuable, but it must go up considerably more than you paid for the option to warrant the risk. For Instance, if you buy a June 25 IDCC call, it will cost you about $3.50. So IDCC must go well above $28.50 for you to make money. Hence, to me you are gambling on a big rise. BTW, my broker continues to tell me that 80% or more options expire worthless. The only down side is you lose your $3.50.

Selling a put: To me this is a bullish move if you believe the stock won't tumble. Instead of paying someone else, they will pay you. If the stock goes up, they lose and you get to keep their money. If the stock goes below the strike price, you buy the stock, but the real price is the strike price minus what you got for the put. Also, unless there is a significant drop below the strike price you can roll it out and usually make more money. The true risk in selling puts, is that you are exposed to losing big money if the stock dives for some reason. Ex. You sell an x company June 22 1/2 put for $2.50. Then, something bad happens and the stock goes to $15.00. At that point you are obligated to buy the stock at $22.50. Hence, you are down $5.00. The good news is that if you have the credit ability to hold (no margin call), then eventually if the stock goes back up you can ride it out.

One last simple rule I learned. Only sell puts after a large drop in a strikes price. Selling them when a stock is rapidly rising can kill you in a reversal.

One last thought for the squimish after a large rise. You can take money off the table by selling a call. Some experts consider this the only safe options play. What they mean is that if the stocks continue to rise, you may lose potential money, but never real money as when they take it away from you, you get the strike price and the option money both.
Of course, this is not a bullish move since you are betting against you stock not rising very much. So if you believe your company has risen in price and will be flat for some period of time, sell the call.


IMO Ghors