option help

[ninner]

hey there i bought some POT march 10 125 puts at 13.20 a couple of weeks ago....and wondering when would be a good time to sell...personally i think POT is down the A leg of an ABC down which will probably take it to around 90 bucks ...however, it did go quite over bought back in early 08 if u look at the monthly so it could go quite abit oversold and with the dollar rallying...i believe the dollar could go to btw 85 and 90 bucks...commodities are going to take ahit....any suggestions???

thanks

Travis

[steelman]

hey there i bought some POT march 10 125 puts at 13.20 a couple of weeks ago....and wondering when would be a good time to sell...personally i think POT is down the A leg of an ABC down which will probably take it to around 90 bucks ...however, it did go quite over bought back in early 08 if u look at the monthly so it could go quite abit oversold and with the dollar rallying...i believe the dollar could go to btw 85 and 90 bucks...commodities are going to take ahit....any suggestions???

thanks

Travis

POT has a nice uptrending chart over the last 3 months. Looking at the 1 year chart, it really doesn't move too far from it's 30day MA before bouncing back. If tomorrow is an up day in the market, it should bounce above it's 30day MA and there has been a huge spike in volume over the last 2 trading days. I would think it would hit $125 by March.

I am very new to options, if you buy a call, do you have to sell once it gets to $125 or do you hold till expiration and see where the stock price is? Then if it's $125 or over do you automatically get paid? Anyway, good luck with the trade!
Steel

[gogi]

If you buy a call with a strike price of $125, you need the price to go as high as possible above $125. You don't really make any money until the price goes above $125 PLUS whatever you paid for the option. So if you paid $5.00 you would really like the price to go above $130 which would be your break even point.

Generally, I don't think many people let their options go to expiration. Most sell the option if it is above $125 (in the money) prior to expiration I think.

If your stock ends up at $124.99 on the date of expiration, you make nothing.

There are lots of ways to play it, but in general if you are buying a call (you would be long in the trade) you want to the stock to go up high and fast.

[steelman]

If you buy a call with a strike price of $125, you need the price to go as high as possible above $125. You don't really make any money until the price goes above $125 PLUS whatever you paid for the option. So if you paid $5.00 you would really like the price to go above $130 which would be your break even point.

Generally, I don't think many people let their options go to expiration. Most sell the option if it is above $125 (in the money) prior to expiration I think.

If your stock ends up at $124.99 on the date of expiration, you make nothing.

There are lots of ways to play it, but in general if you are buying a call (you would be long in the trade) you want to the stock to go up high and fast.

Gogi,

That's kind of what I thought. So you DO actually have to sell your Long Call option before expiration if you are in the money? I am switching from Scottrade to thinkorswim because they make it easier to trade options, but I want to understand them a little more before I start in those. I am taking an online class In January for basic options that lasts about 3 months. I have been doing well with the stock trades but they are slow. The leverage with options seem to make growing a little to a lot much quicker. Of course, it's a double edge sword.

[gogi]

I have never purchase calls (I will sell them, and sell puts... but I am not a buyer) but if your purchased call is in the money at expiration most brokers will automatically purchase the stock for you I think.

If you just left it to die, you would loose your profit. I know my broker will execute a buy order at the strike price even if the stock is $0.01 ITM.

I mostly use options to sell puts, I read a book about options (I can't remember the name) but it was by a retired guy who started selling put options as a way to generate income after he retired and no longer had an income to use to purchase stocks.

I thought the idea was so stupid, I put the book down after a few chapters. I went back to it later and finished the book. I have been selling leaps and shorter term put options very successfully since then.

[ninner]

hmmm i heard selling puts or calls is a good strategy...dont know much about that ...i know how the buying of calls and puts works..in fact i bought a few POT puts at 13.30 and they are currently just over 19...so im doing well on them and POT is doing an abc down to the 85 to 90 handle(or so it appears at this point) and if they get down there i should be up HUUUUGE....but selling puts and call maybe a good strategy if u find the name of that book let me know


cheers

[gogi]

hmmm i heard selling puts or calls is a good strategy...

I personally have sold covered calls, but I would not sell naked calls. Too risky, of any option transaction I think naked short calls are the most dangerous.

[steelman]

Most of these instructors that teach this class, all have said once they learned all the option strategies, they never went back to stocks. They know the play in any market direction and change in direction. They also said it takes about 2 years to master everything in the option world. They are doing these things called straddles, vertical spreads and iron condors which seem crazy. It seems no matter what direction the underlying stock goes, they win. ANyway, I will keep you all posted on the progress with options. For now, I will keep trading stocks.

[gogi]

I read Volatile Markets Made Easy, which is all about options. The author goes over straddles and strangles.

I did my first straddle the other day, your hoping the stock moves in one direction or the other - as quickly as possible. Your fighting against time decay, so if the stock does not move the value of the options reduces to nothing.

I tried it just for fun, as you really can't full grasp all aspects until you try it. I did it with only one option for each leg, one thing that stands out is the brokerage charges. You need to buy and sell 4 trades as you never hold until expiration with these systems. Most people would be looking at brokerage charges for over $40 to get in and out even with a discount broker.

You really would need to put a lot of money into a trade (maybe 10k?) to make the brokerage fees small enough that you are not fighting against the brokerage fee and time decay with a straddle/strangle.

So, I've tried it but am not so excited yet and it will probably not become a major trading technique for me anytime soon.

One thing the author does talk about is watching the stock patterns for flags and then trading the straddle or strangle trades when you find one in the stock charts.

Of course, he is actually trying to up sell you to buy his service. The guy sells a service that finds flags for you or something. One part of his book he gives the URL to a website and says you can go there to get the formula's to find your own flags. I went to the URL, but did not get what was promised - it was just high pressure sales to get you to buy his flag service.

I still like my put selling, works nice for me.

[gogi]

Oh, one more comment about that book.

At one point the author warns to never purchase calls with less than 1 month to expiration - the reason is the time decay is so bad in the last month he warns you will never make money.

When I read that I thought back to this statement a bookmaker told me once (a bookie, if you don't know what a bookmaker is).

He said people would call and ask the odds on specific teams, when told the odds they might say no that is no good, that is not a good bet. They wanted to bet on a specific team, and when the odds for their team were no good they did not want to place the bet.

The bookie told me, if they don't like the odds in the direction of the bet they want to make - then the odds must be good if they take the reverse bet right?

Same is true what this author is saying, he says never buy a call with less than 1 month to expiration as you have little chance of making money. Would the opposite not also be true? If you can't make money buying a call, then you should be making money selling the call.

[steelman]

I read Volatile Markets Made Easy, which is all about options. The author goes over straddles and strangles.

I tried it just for fun, as you really can't full grasp all aspects until you try it. I did it with only one option for each leg, one thing that stands out is the brokerage charges. You need to buy and sell 4 trades as you never hold until expiration with these systems. Most people would be looking at brokerage charges for over $40 to get in and out even with a discount broker.

I switched my brokerage account from Scottrade to Thinkorswim. Thinkorswim charges $5 a trade for up to 400 or 500 shares, then $7.95 up to 5000 shares. They also charge $1.50 for option contracts. One of the examples given was ....i think a buy, sell, put, call in both directions, which seemed like 4 orders, so $6 in fees. Would you recommend that book?

[gogi]

They also charge $1.50 for option contracts. One of the examples given was ....i think a buy, sell, put, call in both directions, which seemed like 4 orders, so $6 in fees. Would you recommend that book?

Options are usually at different rates than stocks, I took a look at the rates on their site and it is not 100% clear to me. But I seriously doubt they let you do 4 trades and charge you for only one. The trade you speak about to me looks like $9.95 + (1.50 x 4) which is actually quite good.

I suspect if you did the trade you would find it would be 9.95 + 1.5 per contract plus the same to get out of the trade.

That book I mentioned in the above posts was OK, but I don't think I would buy it again. Not having read many books like that I don't have much to base it on, it was OK but not great.

[gogi]

Since we are on the option topic, lets look at the first straddle I have ever done.

The best is to find an option on a stock that is trading ATM (At The Money), and buy a call and a put with the same expiration date.

I found Capital One Financial, which I personally think is going down.

I bought a call and a put JUN10 @ 40.00, the stock a the time was $40.01 or something like that so it could not have been more perfect.

I bought a single contract of each, the put was $5.00. I was being a hard ass and did not want to pay the ask price so I missed the call at $5.00 and ended up having to pay $5.30 for it.

So with the stock ATM, there is no intrinsic value - only time value in the price.

So with my buy, I don't care if the stock goes up or down (in theory) as long as it makes a move quickly.

Today the stock is $38.23 so it has gone down. But here are the current option prices:

Put $5.50 +7.6%
Call $3.65 (32.5%)

Even if I got the call option for $5.00 (If I had not been a cheap bugger) the call side would be down about 28%.

So both legs were purchased ATM, yet as the stock moves away from the strike price they option values are not moving at the same rate. The result is I am under water on the trade.

Go figure...