| |
-------------------------------------------------------
Speculation With Calls & Puts
-------------------------------------------------------
For investors new to options trading please read the Option section in the Training Center. I want to take a little different approach to discussing speculation with calls and puts in this article. New investors tend to get into options because they see an inexpensive way to buy expensive stocks, or they have a small amount of cash to invest. This is a good way to make your broker rich at your expense!
Your broker will require you to apply for option trading privileges. You must recognize that options trading provide speculation. As we have mentioned many times throughout our web site, the whentobuy.com investment strategy involves finding stocks that have historically demonstrated a cycle of trading between low and high prices over a short period of time. Options are simply another play or another method of investing in range bound stocks.
The underlying stock must have a high “Remaining” dollar amount. For example, a stock that has +10 days remaining in an up cycle with $.75 remaining in the upward swing would not be a good candidate for an options play. For speculative buys the remaining dollar amount should be at last $3.00. Therefore, simply because options are available on stocks within the weekly research does not mean using an options play is a good plan.
Other Things To Consider Options, whether a call or a put, have the following characteristics:
There are other characteristics that apply to options, however those discussed here are most relative to plays involving range bound stocks. The descriptions for these characteristics are as follows:
- Date – specifies the expiration date of the option. There is always a number either in front of the Month or after the month depending upon the service you use to check prices. This number tells you the week of expiration. For example, 3 Apr means on the close of trading on the third Friday in April this option will expire.
- Strike – strike price reflects your expected stock price and the price at which the option could be called or assigned.
- Bid – much like stocks the bid price reflects what willing buyers are offering for the options. This price typically is called “premium”.
- Last - the last price someone paid for the option.
- Ask – the price a willing seller is asking for the option.
- Open Interest – reflects the total number of open options for the underlying stock. This number is critical. Without inventory or interest there cannot be a market! Remember, you must have willing buyers and sellers to make a market. Here you can begin to see that selecting a strike price because the Bid is low is a big mistake if there is not a large open interest.
- Delta – the percentage movement in option price to the underling stock price. For example, .33 means for every $1.00 move in the stock the option moves $.33 or 33% of the stock move. Here is where you can see why we look for at least a $3.00 historical remaining dollar amount in weekly research.
- Black Scholes - a theoretical pricing model developed by Fischer Black and Myron Scholes. A formula including strike price, time to expiration, underlying stock price, current interest rates and the underlying stock volatility.
- Price Ratio – price ratio compares an option's Black-Scholes Value, to its market price in order to determine whether an option is overvalued or undervalued. For example, 1.2 means the option is overvalued by 20% and .8 means the option is undervalued by 20%.
- Stock Beta – indicates how the stock moves with the market. A 1.0 rating on a stock listed on the NASDAQ indicates the stocks moves very close the NASDA Composite Index. A rating above 1. Means this particular stock is used to drive the index up or down.
Cheaper Is Not Always Better As you start to look at option prices using the above oscillators, you will see that while options provides an alternative method to invest in expensive stocks at a smaller price than buying the stock outright, and provides a method to control more shares of a stock than buying the underlying stock outright; options require more research.
There must be a much better reason to buy options simply because they are less expensive than the underlying stock!
While the weekly research identifies twelve stocks demonstrating a range bound pattern there will only be one or two option plays identified from the research. We conduct additional analysis to determine whether speculative calls or puts, or spreads, or straddles would offer a better risk/reward for the identified stock.
Whentobuy.com and this newsletter are provided for educational purposes only. No statement in the documents should be construed as a recommendation to buy or sell a security or to provide investment advice. It is possible at this or some subsequent time, the editors or staff of whentobuy.com may own, buy or sell securities discussed. All investors should consult a qualified professional before trading in any security. Before trading stocks or options you should understand the risks. In addition, anytime a stock or option is purchased or sold, transaction costs including brokerage fees are at risk. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness.
Back
| Vertical Spreads | Speculation Calls & Puts | Price Straddle |
| Bonus Research | Weekly Option Plays | Research Performance | My Options Playbook |
| Weekly Research | My Playbook |
| Order Now | Return Home | Home Business | Digital Economy | Sign In | Disclaimer | Training Center | FAQ | What's New | Contact Us |
|
|
