Stock Markets Exposed
making more money using stock options?
Hello I know about stock investing but i have never bought an option. Can someone please explain exactly how you use them and how they work. Also can you make more money using them?? Say a stock is at 100 it goes to 120 i only make 20% but can options make you more?? thank you
Public Comments
- yes you can make money with options. I would search the internet and reach books (library or book store) about it. It's very complicated and risky.
- Options are very complicated and most brokerage houses will not let you open an option account unless you have a history of investing with them, there are many ways to lose a lot of money if you dont know what you are doing. I have various FINRA licenses, but I cant explain options to you in a paragraph or two
- Options come in two types: Calls, which when purchased, give you the right, but not the obligation to buy a stock at a certain strike price during a certain time period (called the expiration) and puts, which when purchased, give you the right, but not the obligation to sell a stock at a certain strike price during a certain time period. Options are essentially bets that a stock price will either increase or decrease within the time period of your option. Calls are bullish bets, puts are bearish bets. Each option essentially controls 100 shares of stock, and therein lies the leverage that you speak of. However, this leverage comes with a price. You could also lose your entire investment if your timing is wrong and your option expires before the stock price has moved in the direction that you wanted. In addition, with options you do not receive any dividends that are paid on the underlying stock. Options are sold with a premium. For example, a stock could be selling at $100 per share. To buy the call option, at the strike price of $100 for expiration in May 2008, the price could be $3 (the total price would be $300 because you multiply the option price by 100). The price of each option depends on the volatility of the stock price. For you to profit from this position, the stock would have to rise to $103 by expiration in May. You could have made the right decision about the direction of the stock price, but your timing could be off by 1 day, resulting in a complete loss. Options can also be used to obtain insurance for your investments. For example, you could buy a put option to insure against a loss in the stock price (or a call option to protect against a short sale position). Most options have available expiration months each month with strike prices ranging every $5 ($2.50 for lower priced stocks). Longer term options, called LEAPS, have expiration dates going out several years. These LEAPS are good stock alternatives because the time for expiration is much longer; however you will pay a larger option premium for these. One strategy is to buy LEAPs and invest the money that you save in Treasury bills. There are several other strategies for employing options. Keep in mind that professionals study options and use mathematical formulas to determine the correct pricing of options. In other words, it's hard to beat the pros. The bid and ask spread can also be large on a percentage basis compared to the average spread on stocks.
- try this link to start your education. http://biz.yahoo.com/opt/education.html
- Using the textbook explanation of how stock options work would turn off anyone. The following is the explanation on how stock options behave on the street. So you have a stock that went from $100 to $120. A call option on that would make lots of money, IF the stock really did go from $100 to $120 and you closed your position (sold out) after that. Depending on the popularity of the stock, the price of the option would vary wildly. Say when the stock is at $100, you expect by its chart that its soon going to cross $105. If this now is May, I would look for an option expiring in June or July. June's option would be lower priced but would expire sooner. The month of the option means the option would expire to nothing at the end of trading on the third Friday of that month. So, suppose you find an option called a June 105 call for $1.50 each, you would open a position (buy) 100 of them or 1 contract, or $1500. June is the strike month of the option. As the stock price increases past $105, your June 105 Call increases in value $1 per $1 the stock goes upward past $105, provided the beta of the option is 1, they are usually 0.6 to 0.9. In this case, $105 is called the strike price of the stock. As the stock approaches $105 (out of the money), the $1.50 option will increase in value also. As the strike price ($105) is passed by the stock price (in the money), the option value will increase faster. The lower the initial price of the option, the more leverage you have. I would never buy an option that was close to $2, too little leverage. Options priced at $0.1 are rare on good stocks but the leverage is incredible. I usually end up getting in with options costing between $0.7 to $1.3. If you open positions (buy) with Puts, it works exactly as with Calls, but upside down. With Puts, you are betting the stock will go down. Its dangerous to ride an option within a few weeks of its expiration. They tend to get lethargic and unresponsive to stock price moves. Best to keep your positions a few weeks from there. And of course, options have a natural tendency to loose value as they approach their expiration day. When looking for options, it is imperative that you first find a stock that has a long history of going up. The stock charts at finance.google.com is a perfect place to verify that. finance.yahoo.com is an excellent place to create free test portfolios to track any number of stocks over any period of time. Some excellent places to get free option quotes. http://www.marketwatch.com/tools/quotes/options1.asp?symb=cf http://www.cboe.com/DelayedQuote/QuoteTable.aspx
