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DoubleJ
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Can anyone explain calls and puts to me? Am still new to the game, and am tring to learn
Posts: 18 | From: Baltimore,Maryland | Registered: Mar 2005  |  IP: Logged | Report this post to a Moderator
George
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These are terms used in futures trading. If you are just starting out like me then this is way advanced.

Start here: http://www.allstocks.com/edu/

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If all goes well then great, if not, make it work.

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tntrader
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Options trading..
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SmokingUSA
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Puts and Calls
http://www.trading-options.com/
The most basic option strategies involve put and call strategies (buying calls or puts), depending on your market view.

Calls -
A call is the right, but not the obligation, to purchase an asset at a specific price (the strike price), on or before a specific date (the expiration date).

When you are very bullish on the market, you can buy calls to profit from an upward movement that occurs while you own the option.

Puts -
A put is the right, but not the obligation, to sell an asset at a specific price (the strike price), on or before a specific date (the expiration date).

When you are very bearish on the market, you can buy puts to profit from a downward movement that occurs while you own the option. Additionally, puts can be used to balance risk. If you are somewhat uncertain about the market, but you feel there is a possibility for a strong downturn, you can purchase a mixture of calls and puts to provide balance. Buy puts on overpriced options or options on overpriced assets. Buy calls on underpriced options or options on underpriced assets.

When you are analyzing options to maximize your profits, it is very important to calculate fair value for the option you are considering, so that you know how much over fair value you are paying for the option and determine how much risk you are really taking on. Then it is especially important to have a good options analysis program like Option-Aid. Buy Option-Aid today and increase your trading profits. It can determine fair value for the options you are looking at and calculate the probability of you making a profit or taking a loss. If you pay too much for an option, the underlying asset could move in the direction you predicted, yet you might find your profits disappear as volatilities moderate and option premiums return to more normal values.

Buy Option-Aid Today and Maximize Your Profits!

Money As you start using this valuable option software program and become familiar with the vast amount of information it puts at your fingertips, it quickly becomes an indispensable tool for evaluating option positions.
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Trading-Options

We will start to teach options here with real-time. Option use is the best when the volatility is at high levels and the stop loss point on a particular stock is about the same price as the cost of an option. Also time spreads are also the highest as volatility increases the option premiums. Our first definition is "Call options" as it is a contract giving the holder the right to buy 100 shares of the underlying stock within a certain time frame. The concept is like leasing a car. You have the right to buy this car at the end of the term but instead of paying the whole premium up front like in buying options, you pay it to the financing company by monthly installments. Your lease expires at the end of the term and just like an option, you may exercise it, (buy the car or buy the stock), or just let it expire, (give back the car or do nothing on the options side.) It is that simple. [Sept. 14, 1998]

"Put options" are the opposite as it gives you the right to sell 100 shares of the underlying stock also within a certain time frame and at a certain price. This is like term insurance in that if the stock falls below this price, (called "strike price"), you will be guaranteed to sell at your strike price. Obviously the shorter the time you buy for protection, the cheaper you pay. A one month premium is less expensive than two months and so on. Theoretically, if you want downside protection for an infinite time period, then the premium will equal the price of the stock, (trust us, we do have over 15 years explaining this stuff.) [Sept. 16, 1998]

Both these definitions are for buying puts and calls as the buyer has the right to exercise or sell their puts at any time prior to the options expiration, (the period one has purchased for.) On the flip side, someone has sold these options to you. The seller is "obligated" or will guaranteed the other side of the trade. So if you happened to buy an Intel Nov 85 call option giving you the right to buy 100 shares of Intc at $85 till the third Friday of November, the person that sold you this option has to sell you this 100 shares at $85 at any time you come knocking prior or on the expiration date, (which is once again, the third Friday of the contract month which in this case is November.) Please remember that a buyer has the right while a seller is obligated as this is a very important distinction. [Sept. 16, 1998]

Option pricing depends on several factors. The first factor is time. The longer the time, the more expensive it is. An option with a one year expiration cost more than a one week option. Just as you lease a car for a year, the payments will be more than renting a car for a week. The second is the strike price. The further away you buy a call option from the stock price, the less expensive it is. You will pay more if you buy an option giving you the right to purchase 100 shares at $50 when the stock is at $50 than if you buy an option giving you the right to buy at $60 with the stock at the same $50 level. This is analogous to renting a house with a right to buy. If the house is worth $300,000 and your right to buy is at $300,000, then your option is alot more expensive than if your option gave you the right to buy at $600,000. The reason is that at $300,000 the house could appreciate much quicker, (hence option price goes up), while to get to $600,000 could take a couple of years. And who knows, maybe the time will run out or expire if your option is only good for a year. And similarly, a put option with a lower strike than the market price will cost less than one that is closer to the market price. If someone guarantees to buy your car for $1000 while the car is worth $10,000, this option wouldn't be worth much. Afterall, we all know the car's value cannot slide that fast. But the option that will cost alot more is one that allows you to sell your car at $10,000. It is only fair that the cost is higher as you have the flexibility to sell your car or keep it during the options expiration time frame. This is similar to an insurance policy paying you $10,000 for your car or only a maximum of $1000 if something happened. And the third factor is the volatility of the stock. The higher the volatility, the more expensive the option. Obviously the options on a utility company that hardly moves is much cheaper than a comparable option in both time and strike of an Internet stock as movement with the latter could be at a 10% move in one day while the utility stock could take one year for a similar move. So if money could be made faster, the option will cost more. These are the basis for options pricing. [Sept. 21, 1998]

Continuing with our options update, a strategy that is correct in today's market is selling "naked" put options. As you can remember, buying puts gives you the right to sell 100 shares of stock at a certain strike price within a certain time frame. The seller of these put options that you have bought are "obliged" to buying these shares whenever you decide to exercise this right. For this bullish obligation, (since they are ultimately buyers of stock), they receive a premium which they pocket. Let's say that USWB's close on Friday was 14 3/16 and has a 52 week range of 7 to 39. Suppose Mr. Bear thinks it is going back to 8 and he decides to buy the Nov 12.5, (QWBWV), puts at $1.25. Now only if the stock declines past 11.25, (12.50 strike less 1.25 option premium = 11.25), he will make money. But suppose that are some bulls like us who think that the technicals might take several weeks to work out but after seeing it at 11 last week, figure that 14 is a bit expensive. Well, if we are not going to buy it but are bullish on this stock, then we can sell these Nov 12.5 puts uncovered or "naked." We are then obliged to buy the stock at 11.25, (the same 12.50 less the 1.25 we are now pocketing), and if the stock stays above 12.50, the maximum we can make is 1.25. One and a quarter on four dollars margin we have to put up, (30% margin), gives us a potential one month gain of 30% which in all honesty, is not that bad. But if the stock falls below that level, our cost will be 11.25 and we feel quite alright about buying a stock with positive earnings at these levels. And that is what we mean by selling put options. Obviously, you can do it for any kind of shares but always remember that in options, the key to all option strategies is getting the direction right. Everything else will fall in place. We will sell, (and NOT "buy), a very small token at 1.25 just to illustrate this kind of trade as we are already long the common shares. In options, both covered call writing and selling puts are not considered risky strategies as you are sellers in both cases and only have the same downside risk as in owing the stock. [Oct. 19, 1998]

There are several reasons why we sold USWB naked puts when we did. The most important is that we sold it after the earnings were released. When you sell uncovered or naked puts, make sure earnings are not released during your option time frame. Always wait for the earnings to be released first and don't go against poor earnings. Otherwise any disappointment will really hurt as risk and reward doesn't favor any negative surprises. Another reason for our sale is that the next immediate expiring month after the earnings release has the lowest risk of something unexpectedly going wrong. USWB released its earnings in October and we sold the Novembers. If we would have sold the Decembers, it could be OK for USWB but Intc does have a habit of releasing forward looking statements one month before the earnings report, (in this case, beginning of December for the January release!) So besides from the technicals of the stock, there are other reasons and strategies that are not as obvious but are even more important to tilt risk and reward on your side. [Oct. 26, 1998]

As you have seen here, naked puts are not that hard nor are they risky. We have now closed the USWB trade for a profit of 1 1/8 points per contract, Nov. 2nd. The USWB trade was initiated after the stock jumped on a "High Volume Day" and with good technicals behind you, the success rate will be tilted to your favour. Add on promising fundamentals and the trade will be both manageable and profitable. Selling puts does take more patience but as time erodes away, profits accumulate slowly and surely. [Nov. 5, 1998]

Ninety percent of option buyers lose money. That means option sellers make money ninety percent of the time. Although the latter group has more risk, in that their downside is not a finite and limited amount, it does have time on its side as money is made while the time value, (or Theta, the "official" word used in option models), erodes every day. We are long the DELL Nov 65 calls on November 5th at 3 1/16 average price and even though the stock is up marginally to 66, our option has gone backwards to 2 1/2 to 2 3/4. This is what we mean when we say time erodes away, like a wasting asset on a daily basis. It is like your term insurance coming to an end; there is no more "cash surrender value." We will hold onto these calls for now but please remember, once the earnings are release and if the stock stays here, the option price will lose 50% by Friday's opening as "speculation-on-earnings" premium is currently built into the price. [Nov. 9, 1998]

(As of 10:22am: Bingo! We have sold Intc at 101 3/4 at this morning's opening for a big gain of over 12 points. We have also sold the DELL Nov 65 call options at 9 3/8 for another huge gain of 6 1/4 points at the opening ... The DELL call option was bought last Thursday when we gave you our earnings analysis and indicated that to buy an option was less risky than an outright buy on the stock with a similar stop. And with this strategy, we made over 200% gain in less than a week.) [Nov. 11, 1998]

We have sold the DELL Dec 65 puts for 2 3/8 for a 2 3/8 loss. When trading options, it is essentially like trading the stock so at the price where one would go long the stock, one should be void of all puts. Dell has traded through our high limit of 66 and as per our email, we have sold accordingly. Although we didn't make money here, this put served us well in that we only lost 2 3/8 instead of a $5 stop we would have dropped on a straight short sale. At the end of the year, when we calculate our gains and losses, it is the expiring option at zero that "kills" us as the loss is quite large and the fact that instead of managing our positions properly, we just waited and prayed till expiration. Believe us, the worst loss in options are the ones that we keep, wished and prayed! [Dec. 3, 1998]

When we trade options, we "blow" them out if we feel that we're on the wrong side. If we are long and wrong right now, there is no way we would hold a wasting asset as this is akin to financial suicide. Having said that, most of you out there are option "collectors" and are probably keeping everything until the stocks turn around as you have decided that the risk was limited and the premium paid was the maximium one could lose. This train of thought is not correct as money is money and just because the amount is limited, it doesn't mean you have to lose it. Nevertheless, if you are a call option collector and are right now losing money, one repair strategy that we do suggest is by rolling down strike prices. For example, let's say that we have bought one MU April 60 call at $10.00 when the stock was $10-15 points higher, (MU currently at $57). They are now at $5 with prospects quite dim. The probability of success is only through a lower strike and what we would do now is to sell two of these April 60 calls at $5 and buy one of the April 50 calls for the same money at $10. What we have done is by not spending any additional money, made our long positions into a bull spread with a long April 50 call and a short April 60 call with no additional risk nor margin and maintenance requirements. If the stock closes at $60 by the third week of April, the April 50 calls are worth $10 while the April 60 calls expire worthless as they would have if we didn't employ a repair strategy. This way, we would have got our original money back. Doing nothing would have lost us everything at expiration if the stock was at $60 or lower and anything else between $50 and $60 on the stock is a freebie. And below $50, who cares as an option "collector" is so used to losing all his "limited risk" amounts time and time again. [March 1, 1999.]

The definition of a naked put is found explained above and we will only explain the "why" today. GBLX Oct 22 1/2 puts were sold naked, which is an "uncovered" opening put position, at 2 5/8 yesterday. First, our trusty proprietary HVD told us that the stock is bottoming out. Second, from a high of 64 1/4 on May 13th, the low of this horrendous decline was 20 1/4 on Tuesday. By selling the 22 1/2 puts for 2 5/8, our effective cost if exercised will be 19 7/8, (22 1/2 less the 2 5/8 premium), or close to the recent lows. That is how we choose a strike price as it is somewhat technical. The HVD should be strong enough to support this put position for the next several weeks and that is the reason for the short one-month time duration. Fundamentally, it also needs to stay above certain prices or GBLX will have to dish out even more stock to save the takeover with Frontier, (the Sept. 2 announcement indicated that GBLX would add shares to its $10 billion acquisition bid for Frontier Corp. as the price of its stock fell too far.) So if the stock stays above 22 1/2 or go higher, we will make money as the premium will expire. Otherwise, we will be content to buy stock under 20. Noted is that earnings should be released in late October from preliminary indications off their website. [Sept. 9, 1999]

GBLX is down a bit as the Federal Communications Commission approved Global Crossing Ltd.'s $9 billion acquisiton of No. 5 U.S. long distance carrier Frontier Corp. yesterday while GBLX shareholders approved the merger today. Frontier shareholders will vote tomorrow. We will maintain our naked put and also buy GBLX at 24 1/2 or lower for our core positions as we do see data growth to overtake voice in the next century. The more fiber they lay, the cheaper data and voice transmissions get, and greater volumes will increase revenues. Gary Winnick, Global Crossing founder and co-chairman, said in a statement today that, "Upon our merger with Frontier, Global Crossing will have one of the most advanced fiber optic networks in the United States, connecting Frontier's 20,000 route miles to the rest of the world through the Global Crossing worldwide network." Technically it should be base building here at 24 1/2, plus or minus two dollars. No rush here as we accumulate some low-priced stock. [Sept. 22, 1999]

Maintain all positions on the GBLX naked put as this move for GBLX is that test of the recent lows. Everything looks OK. News after the close has Standard & Poor's determining that GBLX is eligible for inclusion in the S&P 500. Big news here as institutions that mimic the S&P Index will need to own it. And once again, no smoke and mirrors here as we bought for the core at 24 1/2 and it closed at 24 3/8. [Sept. 23, 1999]

GBLX is up over a cool 10% in one day and we must add, "Luck is better than brains." We will guard this core position closely as our expected return, and nothing guaranteed nor promised, should be a double. We will now give back some funds and close our naked put at a 1/4 point for a good profit of 2 3/8. We do expect this put to expire worthless but we have a rule of thumb to close a naked position at 1/4 point or less if there is over two weeks left in the option. We have seen puts come back from the dead many, many times. To summarize this trade, to sell naked puts is easy but getting several things in line makes the probability of success alot higher. Knowing where the technical support area is or when the earnings will be announced, etc., will allow the trader to choose the correct strike and expiration. Most people sell puts because of the computer generated expected return but we sell them to make money with as little risk as we can imagine. The stock has opened this morning at 27 13/16. [Sept. 23, 1999]

The OEX which is composed of the 100 largest capitalized stocks closed yesterday at 663.73. The 200-day moving average stands at 663, a trendline joining the troughs of June 2, August 10 and September 24 is around 663 and our lower limits is also approximately here at 663. If we break this level decisively, Hugh Grant in Mickey Blue Eyes says it best, "Forget about it!" Probability says that we should stage a small bounce from here as we are at the month's end but any short-lived rally today will be an omen for further downside into October. If we are lucky, we will get that bad smash out and the ensuing rally into November December will be a real humdinger. Otherwise, it will be a drawn out affair like the action you've been seeing recently. So please be careful out there as we could be on the verge of a collapse after the next rally, if indeed there is something we can call a rally. Remember, we are still in a downtrend dotted with "relief rallies" and the risk for the next two weeks is a cool 10%. As such, we will throw away a small amount of money on some puts. "Throw away" because alot of things are against you when you buy options. Both time and direction will have to be called correctly as we will be looking at October options that expire in 11 trading days. After the opening, we will look to buy some IBM Oct 125 puts as the best value exist here. (In case you didn't read it right, it is a high risk trade!) [Sept. 30, 1999]

We are long the IBM Oct 125 puts that will expire in 2 weeks. Not for the faint of heart but as IBM is in a downtrend and have the possibility to lead the markets down, we will risk this amount. Market's are just a bit too volatile, up 150 down 150, to sell short as proper stops would have been set at 127 which is just too many points away to be stopped out. But by buying the in-the-money puts, even if IBM runs back over 125, this put could increase in intrinsic value and buffer our losses. Remember, out-of-the money puts retain the premium or intrinsic value alot better than out-of-the money calls while in-the-money calls retain its premium more favorably than in-the-money puts. That was another reason why we bought in-the-money puts as the premium was relatively small in comparison to the 120 puts. And as we expect the next two weeks to be touch and go, we are not afraid of the expiration on October 15 as our position is like a hedged short sale. News recently include Merrill Lynch & Co. removing the company from its "Top 10 Tech" list of recommended stocks on concern about third-quarter revenue growth in IBM's computer hardware unit. (The new list is now composed of: Mercury Interactive, Cisco Systems Inc., Intel Corp., KEMET Corp., Motorola Inc., Nortel Networks Corp., Novellus Systems Inc., Oracle Corp., Sun Microsystems Inc. and Texas Instrument Inc.) [Sept. 30, 1999]

IBMVE puts are moving along and in a market that is on the verge of possibly crashing down, what better way to sleep than to have a position with limited risk. With this head cheese leading the troops, any decline will be welcomed. We will sell this option today at 10 or higher as our range is 10 to 11. Please note that when trading options, although the length of time before expiry or the correct strike price is important, successful option trading is getting the trend right and managing the risk. We have done so here with both cases as the stock trades around 116. [Oct. 1, 1999]

We have sold our IBM put options on Friday at $10 for a quick 3 1/2 point profit which translates to a gain of over 50%. Trading options is very hard as 90% of option buyers lose money. What we wanted to show the class with this trade is that if one is certain of the trend, even buying options with eleven days left till expiration is the right way to trade. Trick is, your technical analysis better be good. Plus remembering the theory that "out-of-the money puts retain the premium or intrinsic value alot better than out-of-the money calls while in-the-money calls retain its premium more favorably than in-the-money puts," makes the selection of the strike price easier. And to get our "throw away" money back with alot more makes these trades all the more rewarding. Once again, no smoke and mirrors here as we paid 6 1/2 Thursday morning while the closing price was lower that day at 6 1/8. [Oct. 4, 1999]

Here's a slow-poke trade that has good potential and could take some time to work. We will take this trade as it is a good illustration of what to look for in the accumulation of bummed-out issues but remember, we will tie up a bit of margin by doing this. Since February, Saks Inc. has dropped from around 40 to the recent lows of 15. This was due to numerous marketing mishaps cumulating to the shares dropping 26% on Aug. 18 after the company said profit for the year would fall short of estimates because of merchandising mistakes at the Saks Fifth Avenue stores and slower-than-expected sales at the recently acquired Mercantile department stores. Things to look for in a bottom is both insider buying and company stock buybacks as both these groups are "in the know." They know if their shares are undervalued and what the potential is if they succeed in turning things around. According to the Washington Service, which tracks buying and selling by insiders such as top executives, board members and key shareholders, several Saks Inc. directors, including two top executives, bought about $2.31 million of stock in September. Vice Chairman Ronald de Waal, Chief Operating Officer Robert Mosco and three other directors purchased 141,000 shares for $15.25 to $16.54 each. Plus the company said recently that it planned to buy back as many as 5 million shares, or 3.5 percent, of the stock outstanding. SKS now trade at 10 times estimated per-share earnings for the year while it is 19 times for rival Nordstrom Inc. and 13.2 times for Federated Department Stores Inc., which owns Bloomingdale's, Macy's and other chains. And on the technical side, the HVD on Aug. 18 should help support the stock as it tries to build a horizontal base by backing and filling. What we will do is sell the Jan. 17 1/2 puts and buy the Jan. 17 1/2 calls for even money and make what is called a synthetic long position. By buying the calls at 1 7/8 and selling the puts at 1 15/16, we will not put up any money but risk getting the shares at 17 1/2 if it is put to us. Obviously, if it happens, then the stock will be under 17 1/2 and the calls will be expiring worthless. If that is the case, we will side with the insiders and wait patiently as if we paid 17 1/2 for these shares. But if we are right and the stock rises, we will make everything above 17 1/2. For each option sold, brokerage firms will need at least 30% margin so it is not a freebie. Please note that SKS is limited in volatility, (unlike GBLX), that earnings will be announced at the close of business on Tuesday, November 16, 1999, and that we are not putting up a penny for this spread. In other words, the put sale price has to be greater than the call price so that it is a positive carry. No targets for this higher risk medium-term option spread as the stock is still basing sideways. [Calls SKSAW; Puts SKSMW] [Oct. 14, 1999]

Option-Aid is a great trading tool for playing out "what-if" scenarios to maximize your profits and minimize your losses. It has many features to give you the Trader's Advantage.

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Disclaimer-my stocks are per the advice of my lucky eight ball, please seek your own professional consultant ....
If at first you don't succeed, then skydiving definitely isn't for you.

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