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Common Cents Investment Group. Options Monday October 14 th. NASDAQ. Silver ETF. Silver ETF. Stock Options. Options Explained.
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Common CentsInvestment Group Options Monday October 14th
Options Explained • A contract which gives the buyer (the owner of the option) the right, but not the obligation, to buy or sell an asset (i.e. stock) at a certain price on or before a specified date (usually the third Saturday of the month). • The seller or writerholds the obligation to buy or sell the asset if the owner elects to "exercise" the option prior to its expiration date. The buyer pays a premium to the seller for this right. • They are most commonly traded on the Chicago Board of Trade.
Types of Options • A call option gives the owner the right to buyan asset at a specific price. • A put option gives the owner the right to sell an asset at a specific price. • Each type of option can be bought or sold based on the opinion of the involved parties as to whether the assets price will increase, decrease or stay the same.
Pricing • Options are usually sold in “even lots” or 100 share increments. • When the price appears for an option, you need to multiply it by 100 to get the total value of the entire option. • Some brokers offer “mini options” on high priced stocks like AAPL, GOOG etc.
General Option Strategy • If an investor has a positive outlook on a stock (bullish), they would purchase a call option. • If an investor has a negative outlook on a stock (bearish), they would purchase a put option. • The inverse can be used in selling options, but this can create a situation where the investor looses more money than they have, so I do not advise it unless you have LOTS of experience.
Option Spreads • When using spreads, multiple options are bought to control gain or loss and they must be bought with the same expiration date. • Bull Call Spread: An investor buys a low strike price and sells a high strike price. • Bear Put Spread: An investor sells a low strike price and buys a higher strike price.
Kraft (KRFT) is trading at $52.34 and you have a positive outlook (Bullish) • Buy a call at $52.50 and sell a call for $55.00 • If it ends below $52.50: ($40-$140) = -$100.00 • Between $52.50 and $55: (100(Price -52.5)- $100) • Above $55: ($550 - $100) = $450
Getting Experience • To start, sell covered calls on stocks that you currently own. Buy 100 shares and sell a call for a higher price than the current price. • This way, you will make money from the premium that you receive, plus the money that you make from selling the stock at the strike price (above the price that you purchased) and not have the risk of loosing more than you currently have invested.
More Information • Look at the page “Option (finance)” on Wikipedia. • The bottom of the page has multiple approaches as well as more information about options as a whole.
Options and Netflix Austin Gibson
Netflix Basics • Since 1997 • Internet TV and Movie Streaming • Revenue based primarily on monthly subscriptions
January of 2013 • Expected to come out with weak Q4 earnings due to competition from various sources like Amazon’s similar streaming platform causing fewer new users • In reality…. -In October 2012, the Company launched its streaming service in Finland, Denmark, Sweden and Norway -2 MILLION new users in Q4 thanks to Europe -Earnings of $0.73 per share vs. consensus estimate of $0.57
NFLX Options • I entered into $125 and $140 options contracts a few days before earnings • All FAKE money… unfortunately…. • Principle costs of ~$.35 and $.25 per lot (or somewhere close) • In about 2 hours of open.. NFLX spiked from $103 to $146 because of earnings • Both $125 and $140 options now “In the money” • Initial investment of around 10k…. Now worth $1.2 Mln
In Summary • Options are a great way to make a ton of money. • Also a great way to lose a ton of money. (limited to principle costs at least unless you’re really trying to get fancy and write your own naked contracts (*not recommended) • Can be helpful to increase gains or hedge on other investments • Option Spreads can help cover all your bases with minimal $ investment • Risky…
Put as Insurance - Example • Max owns 100 shares of Intel • INTC at $23.45 • Total value = $2,345.00 • Earnings come out 15-Oct • What if the stock drops 10% after earnings? • Buy a Put to protect against losses…
Max buys Put at $22.00 Strike Price • Expires 25-Oct • Pays $0.14×100 • $14.00 • -$14 from my brokerage account • Can’t use until INTC below $22.00
INTC post earnings at $19.00 • Value yesterday = $23.45×100 = $2,345.00 • Value now = $19.00×100 = $1,900.00 • Loss of $445.00 • But wait, I bought a Put! • I have the right to sell 100 shares at $22.00 • Execute option: $22.00×100 = $2,200.00 • Loss of $145.00 - $14.00 = $159.00
Call Example • Max owns 100 shares of Ford • Ford at $17.18 • Total value = $1,718.00 • Max is not very bullish on Ford • He does not think stock will rise much in the next month • Max still wants to make $$$
Call Example • Max sells Call to Rex • Strike price $17.50 • Expires Oct 13th • Profit $0.35×100 = $35.00
Two Possible Results • Ford stays below $17.50 until Oct. 14th • Call option expires • Max made a free $35.00! • Rex loses $35.00 • Ford goes to $18.50 before Oct. 14th • Rex executes Call buys 100 shares at $17.50 • Pays $1,750 but F current value at $1,850 • Rex can sell 100 shares just bought for profit $100.00 • Max forced to sell shares for $17.50 • Still turns profit of ($17.50 - $17.18)×100 = $32.00 • Total profit = $32.00 + $35.00 = $67.00 • Max loses opportunity cost, but still profits
