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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.
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.
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.
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)
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.
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)
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
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.
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.
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!
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
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 .
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.
S&P Recap 1.5%
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.
Fri 26 Oct 12 | 10:03 AM ET Apple’s Earnings Disappoint
Apple • Rare Earnings Miss • Earnings surprise: negative • Estimate: 8.75 • Actual: 8.67
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
Apple Stock Performance 1% Down 3.5% midday on Friday
Tue 23 Oct 12 | 03:20 PM ET iPad Mini
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?
Fri 26 Oct 12 | 08:32 AM ET Q3 GDP
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%
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
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
Fri 26 Oct 12 | 08:32 AM ET Fiscal Cliff - Recession Bound?
