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Options Lesson one: Option Basics and Buying Calls.

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Options Lesson one: Option Basics and Buying Calls.

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  1. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION DISCUSSED DURING HAWKTRADE MEETINGS.  Past performance does not guarantee future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost. Investing in any financial instruments does not guarantee that an investor will make money, avoid losing capital, or indicate that the investment is risk-free. There are no absolute guarantees in investing. HAWKTRADE and its members do not bear any responsibility for losses or gains made by members trading on their personal accounts based on analysis from HAWKTRADE meetings.

  2. Options Lesson one: Option Basics and Buying Calls.

  3. Options 101 • Options are a financial contract that allows an investor to speculate in assets that he/she doesn’t own. • Options can be used to predict the direction of stocks, currencies, commodities, or stock indexes as a whole.

  4. Options 101- Option Features • Strike Price- The price the trader thinks the stock will go to, either above, below, or at the current market price. • Expiration date- How long the option contract is good for; anywhere between a week to over a year.

  5. Options 101- Option Prices • Options are priced based on their intrinsic value (how close to the strike price they are) plus their time value (How long do they have until they expire) • The farther away the expiration date the more expensive the time value aspect is. • The farther away (either up or down) the strike price is from the current (spot) price the less it costs b/c the stock is less likely to move that much before the expiration date.

  6. Stock Vs. Options 1 Stock = • With a stock, you only have two choices, you can buy it (hope it goes up) Or short sell, (hope it goes down)

  7. Stock Vs. Options Options = • With an option, you can buy the right to own just the half of the stock you think will happen next, • It costs much less than actually buying the entire stock.

  8. Types Of Options There are 4 positions you can take with options: • Buy a Call (Bullish on stock) • Buy a Put (Bearish on Stock) • Sell a Call (Neutral/Bearish on stock) • Sell a Put (Neutral/Bullish on stock)

  9. Buying a Call Option • A call option is a contract that gives the holder the right, but not the obligation, to purchase shares of the underlying stock. • Use this strategy when you think the stock will go up. • One options contract equals 100 shares of the underlying stock. • If option costs $1.50, then it is equal to $1.50 * 100, or $150

  10. Buying a Call Option- Example • XYZ Company is trading at $23 • You believe the stock could rally to $27 by December so you buy the Dec 25 call option for $1.00, or 100 bucks. • Gives you the right to buy the stock at $25 any time up until December expiration.

  11. Possible Outcomes • At Expiration: • If the stock finishes below $25 the call expires worthless • If the stock finishes at $25 the call expires worthless • If the stock finishes above $25 the call is worth the stock price minus 25.

  12. Stock Finishes Above strike price • At Expiration if stock is at $27 • The call option is worth $2 • 27-25=2 • You buy 100 shares at $25 and would then be able to sell those 100 shares at the current market price of $27 • Profit would be $1.00($2 gained from stock - $1 option cost.) 100% gain on a 17% gain in the stock!

  13. Stock is trading at $23 1 Call option with a strike price of $25 costs $1, or ($100) to buy. Max loss= $100, the cost of the option Max Profit= Unlimited Buying a Call Option Profit Stock Price (spot) Loss

  14. What about before Expiration? • Rather than pay $2500 to buy the 100 shares, you could at any time before expiration offset your position by taking the opposite position. • Say the stock went to $27 on Nov 15th, and the option price went up from $1.00 to $2.00. • Simply sell the option for $2 and make your $100 profit now instead of waiting until Dec. 21st .

  15. Option Stats • About 30% of options expire worthless • About 10% of options are actually exercised (Stock is actually bought or sold) • About 60% of option positions are offset • Easier, quicker, and cheaper than waiting until expiration.

  16. S&P Recap 1.5%

  17. Last Week Headlines • Home sales up • GDP numbers released • Apple has negative earnings surprise and lowers expectations • Microsoft releases windows 8 and tablet • Facebook up huge after seeing a 22% increase in mobile revenue.

  18. Fri 26 Oct 12 | 10:03 AM ET Apple’s Earnings Disappoint

  19. Apple • Rare Earnings Miss • Earnings surprise: negative • Estimate: 8.75 • Actual: 8.67

  20. Apple Continued • iPhone strong, iPad weak • Only 9 selling days of iPhone 5 last quarter • Outlook disappoints • EPS estimates for next quarter almost $4 lower than expected

  21. Apple Stock Performance 1% Down 3.5% midday on Friday

  22. Tue 23 Oct 12 | 03:20 PM ET iPad Mini

  23. Apple Discussion • Will Apple continue to see earnings drop as they lose market share? • Will the iPad Mini cannibalize other segments or create a new market? • Can Apple create the next big thing?

  24. Fri 26 Oct 12 | 08:32 AM ET Q3 GDP

  25. GDP • Real GDP Growth – 2% annual rate • Expected – 1.9% • Last quarter – 1.3% • Helped by improvement in housing market • About 1/3 of the data is estimated for the final months data. • If you take out a temporary defense spending spike the number would be 1.5%

  26. Fiscal Cliff - Expectations • “We are seeing new contracts and investment decisions being delayed.” –CFO Verizon • “As I talk to business people, they’re all basically sitting on their hands.” –CEO BB&T • “We don’t think it’s going to happen. …They just haven’t figured out how to solve it.” –CEO United Technologies

  27. Fiscal Cliff - Expectations • Many businesses are slowing down contracts and productions in anticipation • They want to wait and see what decision will be made • As year end gets closer there will be more news and firmer expectations which will materialize

  28. Fri 26 Oct 12 | 08:32 AM ET Fiscal Cliff - Recession Bound?

  29. Presidential Election – Approval Ratings

  30. Approval Ratings – Recent Changes

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