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esoryram | How is this true about options and shares? A trader might buy the option instead of shares...? |
...A trader might buy the option instead of shares, because for the same amount of money, he can obtain a larger number of options than shares.If the stock rises, he will thus realize a larger gain than if he had purchased shares.
An example would be good. |
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zman492
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Here is an example that demonstrates how it is true.
Assume you are bullish on GE and expect the stock to go up from its current value of $34.59 per share to at least $37.00 per share by the close on 2/15/08. You have $7,000 you are willing to risk on that expectation.
If you bought the stock you could get 200 share for $6,918. ($34.59 x 200)
The call option with a 2/15/08 expiration date can be purchased for $0.87 per share. That would allow you to buy options on 8,000 shares (80 contracts at 100 shares per contract) for $6,960 ($0.87 x 8000).
If you are correct and GE closes at $37.00 per share on 2/15/08 the call options would be worth $2.00 per share, or $16,000 ($2.00 x 8000). If you had used the same money to buy 200 shares those 200 shares would be worth $7,400 ($37 x x 200).
Thus your profit would be
$7,400 - $6,918 = $482 if you had bought 200 shares.
$16,000 - $6,960 = $9,040 if you had bought options on 8,000 shares.
Of course, leverage is a two way street. If the stock did not go up to at least $35.00 per share you would lose your entire $6,960 investment if you bought the options instead of the stock. For the stock purchase to show a profit on 2/15/08 the price of the stock simply has to be greater than $34.59 per share, but for the options to show a profit the stock price has to be greater than $35.87 per share. |
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JP5
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Absolutely true. Call options allow you to lever up. You need to spread you risk though, since options can expire worthless. There are fancy ways to buy and sell options that limit your upside and downside, but let you 'play it safe.'
Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell.
A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price increases over the exercise price by more than the premium paid, he will profit. If the stock price decreases, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can obtain a larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares.
A trader who believes that a stock price will decrease, can short sell the stock or instead sell a call. Both tactics are generally considered inappropriate for small investors. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited. |
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tom
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Many profession traders use options almost exclusively.
Yes there is leverage.
Yes you can get rich quicker but it is not get rich quick.
As you study how they are used on a professional level you will find it is actually more conservative than buying stocks outright.
go to http://www.thinkorswim.com/tos/client/index.jsp
and
http://www.woodiescciclub.com/start.htm
lots of free info on options. |
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Tatnic
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I can give you thousands of examples where that sort of thinking meant losing thousands of dollars. Options were invented to make it easier for wall street to steal your money...its that simple.
The list of sucessful options traders is a short one indeed. You have to be at the top of the heap to make consistent money in options and more importantly, you have to be very conservative to do so. The best ones that make consistent money trading options actually lose money on the options side of the trade. Its called a call writing strategy but you have to lose money on the options side to make a net gain on the overall trade. And more importantly, you have to be 101% correct, 100% of the time to make this work. This requires many years of experience, a huge amount of capital and huge balls. If you have all 3 you can be a star....if you lack any one of those you will lose everything. |
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stephen p
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Here is how this works. Each option is a contract to either buy (call) or sell (put) a stock at a certain price. Each option contract lets you buy/sell 100 shares of stock. So ten options is the ability to buy/sell 1000 shares at a certain price. for an example.
You think company XYZ's stock will increase in the short run. You could by 100 call options to buy at a strike price (price at which the option is redeemable) higher than yahoos price. As XYZ's shares rise the value of the call options will rise. Using this stratagy you can potential control 10,000 shares of XYZ stock at a price way below what it would cost to buy 10,000 shares of XYZ on the exchange. As the price of XYZ stock rose your options will be in the money(strike price below open market price) thus gaining more value. Using options your gains will be magnified by almost 100% so if used correctly you can really bamk it... hope this helps |
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pumpdatiron
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Options can expire worthless. Not for investors to buy and hold. Very risky proposition. I "play" with 10% of my total portfolio. An example....HOV was up 23% today, options that I hold were up 177%......click quotes below......
http://finance.yahoo.com/q?s=hov
http://finance.yahoo.com/q?s=HOVBU.X
1 option contract is leveraging 100 shares of stocks. |
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MM
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true, but realize you don't particularly gain any edge in trading options as opposed to stocks. |
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