Options

[df21084]

Hello everyone,

I have zero experience with options, so I'm hoping we can start a thread that discusses the basics of options.

Any input regarding this subject would be appreciated.

Thanks.

[spikefader]

Great idea for a thread topic. There are some very clever people on these boards and I'd be interested to hear if and how they trade them.

There sure are many very tricky concepts associated with options that 'calls' (excuse the pun ) for a very patient and intelligent mind to grasp. I've traded them for over four years now, and I must admit it has been with a fairly limited understanding of the complexities. Frankly, I love the KISS theory and get sleepy when I have to study and options can get way beyond KISS I'm certain that every time I get handed an education on options, it's due to my impatience/dislike for complex study which I think detailed options analysis is. I mean just look at the glossary at http://www.cboe.com/LearnCenter/Glossary.aspx and words like Delta, Beta, Box spread, Vega, Diagonal Spread, Vertical sprea........zzzzzzzzzzzzz ..... doh, see!!

Anyway, I'm not sure how helpful my experience will be to others, but my tips are as follows:

1. Don't trade options unless you are fully aware of the consequences and have a fairly broad understanding of them. Understand the difference between buying and selling call options. As a newbie, stick to buying them to limit your risk.
2. Papertrade them to see that actual premium price movement relative to stock price movement. Many times a fast moving stock price will cause some wild movement in the option premium. This can mean great profits, but the flip side is if you get it wrong you can lose your premium pretty quickly.
3. Careful of swimming in the ocean cuz there's sharks around. The ask price you see is often an inflated price. You are much better off not using market orders unless you know what you're doing, and the volume and liquidity is there. Just be patient and use a limit order and look for a 'bargain'.
4. Thinly traded stocks are are deep dark ocean - the place where very big fish and other scary things hang out.
5. Be patient with your entries. Do not chase price. If ever buy support and sell resistance was true, it is even more true with options. If you miss a move, chasing it is unwise and you will learn the hard way that you should buy calls on a pull back in price rather than a run up in price. Same for puts (same as shorting). When you buy a put option you are going short. Make sure you buy those puts into stock strength at resistance and not at support.
6. Don't sell options as a newbie. You are open to LOTS more risk than simply buying them. Buying them, your downside risk is limited to the premium you paid, which is a great thing. Selling them on the other hand, you can lose a lot more than just the premium you were paid for any options you sell. Say you SELL a call (effectively going short) and get the premium (let's say $120 for 1 call option) from a trader credited to your account - great. All rosey at this stage. But say that the stock takes off upwards - skyrockets. You are in deep doo doo since to exit the position you will have to bid much higher than what you actually got paid by selling the call, perhaps $700 or $2000 or perhaps higher, dependant entirely on how much the stock price took off, how emotional the call bidders get (bid price) and how greedy the call sellers get (ask price). The buyer of that option from you is laughing and you are crying because you only got $120 but have to pay $700, so you've lost $580 on one simple little call selling exercise. So careful in the ocean folks!
6. Options are a great way to hedge your longs. Study them and uncover the world of safe hedging. Cheap out of the money puts don't cost much. And if you pick some up when the market is displaying weakness and at heavy resistance and your longs are about to suffer a bit, then those puts will protect those much sought after profits your longs may have established. Timing is obviously critical with hedging longs because if you get market direction wrong then the plan you made is working against you as far as the put premims go - but it's ok since they were cheap, right? Your longs continue to grow while your put downside risk is only limited to what you paid for them. If they expire worthless it's no biggy since you didn't pay much for them. You've effectively paid that premium as insurance for your longs at a time in the market when you weren't so sure of its strength.

[New-born baby]

Siri

Dfxxxxxxxxx

(How's that for protecting your identity?).

I know a man who bought call options for SIRI. He purchased them in Janurary 04, to be exercised in January 05. He paid .11 for them . . . .

[spikefader]

Dfxxxxxxxxx

(How's that for protecting your identity?).

I know a man who bought call options for SIRI. He purchased them in Janurary 04, to be exercised in January 05. He paid .11 for them . . . .

This will be a great example of just how profitable options can be. New-born, which ones did he get? What's the premium now? Just how good is this Cinderella story?

[New-born baby]

Correction

Spike,

He bought Jan 05 call options at a strike price of .11 per share. Sorry for the ambiguity of my last post.

[mimo_100]

Simple call example

Thanks for your post, Spike. Here is my 2 cents.



Options are traded on many different exchanges. I am most familiar with the CBOE (Chicgo Board of Options ). My comments refer to this exchange. www.cboe.com.

You must understand the terms strike price, expiration, exercise, open interest, premium, discount, in the money, out of the money, call and put.


One option contract controls 100 shares of stock.


Each option has its own symbol, much as a stock does. For example,

The IBM JAN 85 CALL (the symbol is IBMAQE) is now trading at $10. That means you will pay $1000 plus commission to purchase one of these call contracts. (To make things confusing, the option is quoted per share, not per 100 shares. You have to multiply the price by 100 to get your actual cost).

This contract gives the call buyer the ability to purchase 100 shares of IBM anytime between now and the Saturday following the third Friday of January for $85 per share.

(January options expire Saturday, Jan 22, so Friday, Jan 21 is the last day they will trade).

IBM (the stock) is currently trading around $94.82. So, should you buy IBM on the open market at this price, or buy the option and exercise it, or what really happens, wait for the call to increase in price as IBM goes up, then sell the call for a profit?

Theoretically, the option should sell for $9.82 if there were no premium, since $85.00 plus $9.82 equals $94.82.The premium is 18 cents ($10 - $9.82) since we are so close to expiration. The IBM FEB 85 is $10.60. It has a 78 cent premium since expiration is further away.


From the call buyers standpoint, options are continually wasting assets if the price of the underlying stock declines or stays the same. The stock must go up in order to profit.


That is a simple example on the call side. There is much, much more.



Tim

[stocks54]

Options

df21084,

Great idea. I just started trading options. Look forward to learning more...

Regards,

[New-born baby]

open interest

Mimo,

Please talk about open interest for us "dummies."

[Jaws57]

Great thread!!! Hopefully we can keep this going with ideas to play with.

You can make some good money with options. I have done much better by keeping it simple like Spike said. I now buy puts or calls usually out of the money. Its been awhile since I last traded one.
Where I lost money was with selling covered calls and doing strangle strategies. Guess who got strangled!

My advice is to take money you can afford to lose (like gambling money) and try it out. The paper port idea is probably better.

Jaws57

[Jaws57]

Tasr

Im sure there are many others, but how bout TASR?

In the last 2 weeks it has ranged from $33 to 14. Now 20.80.

The Jan05 22.50 call is .65c to .80c. A move to 25 could mean $3.00 real quick about 400% profit. Of course this needs to happen fast before the option expires next Friday. I am not looking at doing this just making an example, the other side is that it goes down ( if you think this is going to happen you can buy the Put Jan05 20.00 at 1.00.). Also the stock could decide to get real quiet and trade sideways in a small range (this is bad also)

I'm now looking at the Feb options, now I'm getting fired up again.

Jaws57

[mimo_100]

Mimo,

Please talk about open interest for us "dummies."

As in most cases, a lot of stuff seems difficult until you understand it. Then,
once you understand it, it is difficult to understand why you didn't understand it in the first place. Or at least that is what my millionaire buddy Jim told me.

Here is a link to the CBOE quotes,

http://www.cboe.com/DelayedQuote/QuoteTable.aspx

Enter the letters IBM, then scroll down to the table. Calls are on the left side, Puts on the right. There is a column labeled Open Int. For the IBM JAN 85 CALL the value is 11172. That is the number of contracts open for this option contract (the open interest). If you are reading this after the market opens, the value may be different.

If you were to buy one call contract, the value would change to 11173. When you closed it out, it would revert to 11172. Does that make sense?

[stocks54]

Options question

Hello,

What happens if I have options for Company A (2007 call) and company A merges with other company (Say B) or gets acquired by company B?

Regards,

[mimo_100]

Hello,

What happens if I have options for Company A (2007 call) and company A merges with other company (Say B) or gets acquired by company B?

Regards,

You would have to consult the details of the merger agreement.

Below is what happened when LENNAR split 2-1 in 2004. After you read thru all of the mumbo jumbo, what happened if you owned, for example, one FEB 60 CALL? On the ex dividend date, you would own 2 FEB 30 CALLS.
=====================
Lennar Corporation has announced a 2-for-1 common stock split of its Class A ("LEN/XFF/YTT & adj. XCC") and Class B ("LEN.B") shares. The payable date is January 20, 2004, to shareholders of record January 6, 2004. The ex-date for the Class A and Class B stock split is Wednesday, January 21, 2004.

Please be aware that the adjusted XCC option contract currently represents 100 shares of Lennar Corporation Class A ("LEN") Common Stock and 10 shares of Lennar Corporation Class B ("LEN.B") Common Stock. Please refer to CBOE Research Circular #RS03-140, dated April 9, 2003, for more information on the previous XCC contract adjustment.


Contract Adjustment

Pursuant to OCC rules (Article VI, Section 11), all outstanding LEN/XFF/YTT & adj. XCC option series will be adjusted to reflect the 2-for-1 stock splits on Wednesday, January 21, 2004, at 8:30 A.M. Chicago time. The OCC will issue one additional contract for each open contract on the ex-date. Also on the ex-date, each LEN/XFF/YTT & adj. XCC series will have an adjusted exercise price equal to one-half of the exercise price rounded to the nearest 1/8 of a point for each LEN/XFF/YTT & adj. XCC series existing on the business day immediately prior to the ex-date. The option symbols will remain the same. Adjusted exercise prices are shown below. [Any FLEX series that may exist will be adjusted in a similar manner to the standardized option.]

Tim

[stocks54]

mimo_100,

Thanks for the information.

Regards,