diagonal
spacer

Stock Tool #1: Options

By Johns Wu on Jul 09, 2005

th_nyse.jpgi'm gonna start a continuing series of posts called stock tools (for the toolbox). over the last 5 months, i've been learning how to trade and invest through books, websites, and forums, and while i continue to learn about the market, i'll post up concepts and tools that i find to be very useful.

in particular, i wish i had known about options trading when i first opened my brokerage account in march. at that time, i had no idea what was going on. i took all my money and bought as many shares of ELN as i could when it was trading at $6.7 (not smart).. at the end of march, i was hit with a paper loss of 50% when the stock tumbled to $3. i held on to my shares b/c i believed that tysabri would be back (i still continue to be very very very bullish on ELN and tysabri). the $3 crash was a perfect buying opportunity, but all my money was already tied up in my shares. if i had understood the leveraging power of options back then, i would have made a HUGE profit buying up OTM $5 calls. if only…

another thing i like about options is buying puts. this gives u the ability to make money on a bearish stock but it isn't as risky as shorting b/c u can only lose what u put in.

finally, there are strategies with options such as hedging and straddles. straddles are interesting. basically, u buy a put AND a call, both at the same strike price. this way, you make money as long as the stock moves up OR down dramatically. i'm still trying to figure out when it would be good to buy a straddle position… it could be good to play straddles before earnings calls? or maybe use straddles to speculate on FDA rejections/approvals in biotech stocks? i'm still looking into that..

so yeah, i definitely find options to be a very valuable tool. this investopedia article does a good job at introducing options. and this smartmoney article describes some more advanced options strategies that i'm still learning about. theyre both good to read if youre new to trading.

spacer
This entry was posted on Saturday, July 9th, 2005 at 11:26 pm and is filed under Market News. You can leave a response, or trackback from your own site.


6 Responses to “Stock Tool #1: Options”


By Anonymous on July 10th, 2005 at 1:06 am

here’s a comment for you. yay!

By Anonymous on July 10th, 2005 at 6:28 am

JWH, you should consider joining this option trading group; optiontradingcoach@yahoogroups.com.I have learned a lot about options strategies and members are posting serious questions and tips. In my opinion, the best way to start with options without knowing much about all possible strategies is to find a sector or a stock you really feel bullish and buy ITM or NTM leap calls (minimum 6 monts out). This way you will protect yourself from short term price fluctuations and time decay. My first move was back in December when I bought OTM July calls for BP, XOM, PBR and PTR. I really did not know what I was doing at the time and for a while I thought I made the biggest mistake ever because I could not even get raid of my calls (lack of volume). I was very bullish on oil and luckily it did pay off big. For example, I purchased 20 XOM July 65 calls at .20 and I sold these calls at $4.20 before the big correction in oil a few monts ago. Needless to say, I don’t care about trading stocks anymore with the potential risk reward of dealing with options. However, OTM calls are really a big gamble and for a while, I thought I was going to loose my investment.

I almost bought calls for ELN when it was at 4 but the news about their drug was just getting worst and worst and I thought this was too risky. Instead, I did focus my attention on other beaten stocks like GM and AIG and it did pay off big.

When you own the underlaying stock, buying puts is the best way to protect your investment and profits. A straddle play would be effective most effective on volatile stocks like GOOG and CME for example. Price can swing big either way which make them perfect candidates for such strategy ahead of earnings. I am really a novice on the whole thing and I am trying to learn more about different startegies. For right now, it is easier for me to focus on a few bullish positions. I am at least 3 months out on all my calls and I am buying puts short term to protect my profits. Option trading has definitely been a nice way for me to stay more focused and disciplined about the intent of my trade or investment. The OE date is my constant reminder.

Good luck. M.

By Wes on July 10th, 2005 at 8:24 am

I’m a stock guy, but this is some cool options commentary.

By Anonymous on July 10th, 2005 at 6:01 pm

Regarding my last post - the XOM calls I purchased back in 2004 were 60 calls (not 65 like previously stated). They were bought in October and sold in March. The call symbol was XOMDL and I believe they were expiring in April (not July). By far my best ROI and hopefully not my last.

BTW, Option Express is a great place to simulate various options strategies and this is free. This will give you a chance to try a few things on paper before making a move. One piece of advice…you will probably feel overwhelmed by all the possible plays and this may paralyse you from making a move. So take a deep breath, relax and try to keep it simple and real. Stay in the money on your first move and if you are bullish on a stock, buy calls at least 3 months before expiration.

My next play is GOOG (September 260 and 270 calls). I expect a run up to 315 to 320 before the earnings release. I have not purchased any puts yet but I am waiting for the August puts to be cheaper. I may also sell half of my position before ER and hopefully let my profit grow. I may be totally wrong about the run up I am expecting in Goog but I guess we will find out soon enough. With the July OE coming up, the next few days should be exciting and extremely volatile. M.

By jwu on July 10th, 2005 at 6:33 pm

hey thanks for telling me about optionsexpress! i’ve been looking for a way to simulate trading options. this is a pretty useful site.

im glad you told me about it. for the last couple months, i’ve been teaching myself about options by “simulating” trading by using a pen and paper to track my trades!!

anyways, ‘M’, thanks for your continued constructive and insightful comments. hope you continue to stick around on my blog. i can set u up with a contributors acct if you’d like. email me if youre interested

By Anonymous on July 21st, 2005 at 12:32 am

JWH, I just saw your post on GOOG message board. I can’t wait for the earnings to be released but there is going to be a lot of action until the very last minute on this one. I am reviewing a few last minute strategies in order to be ready to buy discounted puts and to sell some of my calls at the best possible price. It looks like GOOG will finally trade within my predicted range and I already made a very decent profit by buying September 270 and 260 calls. If everything goes right, I will buy 2 or 3 August 310 puts at around $9. I am also thinking about selling all my September calls when I will feel GOOG will be peaking between 317 and 321(probably around 12:30). I will then purchase a mix of 280 September and December calls when the share price will go back down to 310 (probably between 1:00 and 2:30). I also expect another price swing during the last 45 minutes of trading and the stock should close around 313. Not that it matters much but it is nice to see GOOG up in Europe. The real deal is about to start soon and hopefully I have a good game plan. Good luck. M.

Leave a Comment


Comments: