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Options
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KiLrOy
Master |
21-Sep-2007 19:02
Yells: "I buy only what I can see." |
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And here's the technicalities.. An option is a contract that gives the owner the right, but not the obligation, to buy or sell a security at a particular price on or before a certain date. Investors buy and sell options just like stocks. There are two basic types of options:
The Call OptionThe call option is the right to buy the underlying security at a certain price on or before a certain date. You would buy a call option if you anticipated the price of the underlying security was going to rise before the option reached expiration. For example: Company XYZ in trading at $25 per share and you believe the stock is headed up. You could buy shares of the stock or you could buy a call option. Say a call option giving you the right, but not the obligation, to buy 100 shares of XYZ anytime in the next 90 days for $26 per share could be purchased for $100. If you are right and the stock rises to $30 per share before option expires, you could exercise your option and buy 100 shares at $26 per share and sell them for an immediate profit of $3 per share ($30 - $26 = $4 - $1 for the option = $3 per share profit). You could also simply trade the option for a profit without actually buying the shares of stock. If you had figured wrong and the stock went nowhere or fell from the original $26 per share to $24 per share, you would simply let the option expire and suffer only a $100 loss (the cost of the option). The Put OptionThe put option is the right to sell the underlying security at a certain price on or before a certain date. You would buy a put option if you felt the price of a stock was going down before the option reached expiration. Continuing with out XYZ example, if you felt the stock was about to tank from $25 per share, the only way to profit would be to short the stock, which can be a risky move if you?re wrong. |
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KiLrOy
Master |
21-Sep-2007 18:59
Yells: "I buy only what I can see." |
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Theresa hopes the article below helps. 5-Second Option Strategies for the BeginnerIn the world of the small speculator, options are used, customarily, in an attempt to capture large gains with little capital investment. One way to use derivatives in an investment operation, however, is to write put options for an issue in which you want to build a position.
Writing Put OptionsYou want to buy shares of a fictional company, Acme Pharmaceuticals. After reading the annual report and analyzing the financial statements, you have come to the conclusion that, in order to earn your required rate of return, you can pay no more than $25 per share. Today, the stock trades at $30 per share.Instead of sitting around and waiting for the stock to fall to your desired price, you could write put options for the shares at $25. In essence, you would sell a ?promise? to another party (it could be a bank, mutual fund, corporation, or individual investor) that if the shares of Acme fall below the threshold during the life of the option, the purchaser will have the right to require you to purchase those shares at $25. Why would you agree to do this? In exchange for this promise, the buyer of your put options will pay you an ?insurance? premium. The amount of this premium depends on a number of factors but for our purposes, assume you are paid $1.12 per share to take on this risk. If you wrote ten puts (remember that options are for round lots of 100 shares), you would receive $1,120 (10 puts x 100 shares = 1,000 shares x $1.12 premium = $1,120). If the option expires and is never exercised, you keep this money free and clear. If the option is exercised, it serves to effectively lower your cost basis. If, for example, the price of Acme fell to $15 per share, the buyer of your put options is going to exercise their right to require you to purchase the shares at $25. Your actual cost, however, would only be $23.88 ($25 cost of shares - $1.12 premium = $23.88 net cost.) The Bottom Line (Here's the best part .. *wink*)For the value-investor, it is a win-win situation: if the stock doesn?t fall to your desired price, you keep the premium payment. If it falls significantly, you don?t mind paying for the shares at a higher-than-market price because you had originally planned on purchasing them at that price, regardless. |
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scotty
Senior |
16-Sep-2007 15:00
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You can go for a course to learn more about Options. Check out the one offered by Freely. But it is very very expensive... I have not attended it before so I am not able to tell you the effectiveness of it. |
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tanglinboy
Elite |
14-Sep-2007 22:34
Yells: "hello!" |
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Options give you the right to buy or sell a stock at a set price. In Singapore, warrants are like options. They have an expiry date and can only be excercised on that day. Risky instruments if you are not familiar with it. |
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Theresa
Member |
14-Sep-2007 22:24
Yells: "I am still learning ......" |
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Can anyone tell me what is options? How can I use this trading method to trade in the share market? I hv been told that with this trading method, whether the shares goes up or comes down, I will still earn money, is that true? Thank you for the above reply. |
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