Trading Options
Hello fellow Bullhunters
Well I am getting my head around all of this and we are nearing the end of The Bullhunters Guide to the US Stock Market which I know you have all downloaded by now. This resource will help you in your endeavour to comprehend what the stock market is about. Today we discuss some more about Options Trading and the reasons why some traders buy calls. So here is the excerpt…
Options Trading
On the other side of things are people who buy options. Someone buys calls because they believe a stock is going to go up. Imagine you were convinced that Microsoft stock was going to have a $5 per share gain by Christmas, but you only had $3,500 to invest. At $28.37 per share you could only buy 123 shares. If the stock went up to $33.37 as you expect, you would only make $635 in profit. Instead, you could leverage your money by buying calls.
You go online and discover that there are several expiration dates for Microsoft options - October, November, January, April. There are even options for January and April of the following year, but thats too far in the future for your Christmas strategy. You decide to look at the January and April calls.
You see that the strike prices are available starting at a low of $15 and going to a high of $37.50. Since Microsoft’s stock price is $28.37, any strike price under that would be considered in-the-money and any strike price higher than that would be out-of-the-money. The Options Clearing Corporation determines what strike prices are available for each stocks trading volume and current price.
You think that Microsoft is going to go up at least $5 to $33.37 so you look at the strike prices near that level. You see that January $32.50 calls are selling for $0.10 ($10 per contract) and April $32.50 calls are selling for $0.30. With your $3,500 you could either buy 350 January contracts or 116 April contracts. Obviously the April contracts cost more because there is greater chance that Microsoft (or any stock) will go up (or down) the longer the duration of the contract.
You decide to go with 350 January contracts. This gives you the power to control 35,000 shares of Microsoft - nearly $100,000 worth - for only $3,500. If the stock fails to reach $32.50, your contracts will expire worthless and you will have lost your whole investment. If it reaches $32.60 or more, you are guaranteed to break even. But the good news is that you don’t need to exercise your option (which would require upwards of $99,000) - you can simply sell it.
Trading for Cashflow
As you can see from this summary of buying calls, it can be a great way for you to produce a monthly cashflow with this trading strategy. It’s all about leveraging your money to make it work for you. So you could choose to make the small profit if the stocks go up or you can mulitply it to give you an even bigger return by buying calls.
This strategy is more advanced and to attempt it you need to be at least comfortable with writing covered calls and have your trading system and emotional intelligence in place to be able to deal with the outcomes of your trades. It is not for a beginner and you can build up to this slowly and gain confidence with every step you take in educating yourself.
Some of the graduates of the Jamie McIntyre homestudy have been very successful in learning how to rent shares (in Jamie speak) and have progressed to this strategy by learning how to cover themselves if things don’t go their way and the market happens to drop. Education for Life is the what Jamie teaches in learning how to become financially free and setting your own goals on how to achieve this.
To Your Success
Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007
August 15th, 2007 at 9:56 pm
[...] The Bullhunters Guide Trading Systems To The US Stock Market « Trading Options [...]
May 25th, 2008 at 11:00 am
I read similar article also named Trading Options, and it was completely different. Personally, I agree with you more, because this article makes a little bit more sense for me