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Yankees338

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Jul 24, 2007
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Does anybody here have experience with puts and calls? I'm interested in at least learning about them, and possibly investing in them shortly. What are the pros and cons of them as opposed to say, common/preffered stocks? How do they work and are they easily traded? Thanks.

P.S. Any information regarding the topic of stock options is more than welcomed here. I'm just trying to get this started with some questions.
 

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royemunson

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Jul 24, 2007
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Leverage is the first word you hear when you think options.

There are basic puts and calls and there are spreads and other avenues you can take.

Options are shorter term typically and if you think a market is going to be volatile and your timing is jnuimum n n(sorry that's my son typing). accurate you can be successful.

Many great books out there on options and websites.

I am a fan of futures and trading options with futures/commodities.

Much more leverage, volatility, and management must go into this.

Options give you the right to buy the underlying stock at a certain price. You pay a premium for this upfront.
There is a time value and intrinsic value and your typical goal is to get rid of the option, makign a spread on
your premiums before the option expires.


That's just a start. Can help answer questions from there.

Joe
 
Last edited:

MJ DeMarco

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Jul 23, 2007
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Best book out there for option beginners is Getting Started With Options by Michael Tommasett.

I have some experience with puts and calls and actually like them better than regular stocks due to being highly leveraged.

PROS: You can double your money quickly and make huge gains on small positions. For example, its not unusual to turn $2K into $4K. Right before the Subprime implosion, I made a call on another forum to buy PUTS on NFI (Novastar Financial) -- if I recall the position was worth $1.75 when I bought them and when it was all said and done, they were worth $11.80 (674% gain) - to put it to numbers, a $17,500 buy would have turned to $118,000 in just several weeks.

Another PRO is when you buy puts/calls -- there is limited downside risk while upside is unlimited. You buy some calls for $1000, max loss = $1000.


CONS: Highly leveraged = highly risky. Options expire worthless most of the time so if you spend $XX, you lose the full amount.

Illiquid market -- they aren't traded as often as stocks and as a result, there are high bid/ask spreads resulting in higher prices and inflated time premiums.

Good luck ... the book I mentioned can be found anywhere.
 

kidgas

Contributor
Jul 25, 2007
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Indiana
I agree with the book rec. Options can be used in many different ways with many different purposes from conservative to aggressive. You can purchase calls/puts or sell them. Definitely get the book and come back to ask any specific questions you may have. I have traded options in one way or another since 1999. Not an expert but I am now starting to feel like I am getting better at it.

MJ -- thanks for the alternative forum.
 

kimberland

Bronze Contributor
Jul 25, 2007
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The Options Industry Council
( http://www.888options.com )
have some of the best seminars and online courses
that I've seen (and its absolutely FREE).

I enjoyed them so much
(I did the in person versions
which not only were free
but came with binders full of info) that
I reco'd it to friends and...
gasp... even my financial advisor
(he sent new staffers including his admins).

: )
 

Peter2

Fastane Legend. RIP.
Aug 2, 2007
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CONS: Highly leveraged = highly risky. Options expire worthless most of the time so if you spend $XX, you lose the full amount.
One of the most common mistakes for losing money on options is holding on to them for too long. Never hold on to an option in the hope that it will go back up. Losing 50% is better than losing 100%. When it's time to sell, it's time to sell.
 

kidgas

Contributor
Jul 25, 2007
532
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Indiana
RacerX,
I have given up covered calls and will never do them again...sort of. I have been involved with them since 1999 and made some money, but lost plenty as well. Instead since October 2006, I have been using collars. A collar is essentially a covered call with a protective put attached. The biggest problem I found with covered calls is loss of capital. You need to find some volatile stocks to get a decent premium. Of course, if those stocks decline by a wide margin, you still lose a bundle. If they go up, you are called out. So you have violated the first law of money management...let your winners ride and cut losses short.

Go to the internet...type in stock collar and JDSU in google. You will find an article about collars. This is the article that convinced me that I will never sell a covered call without the put. Then come back and ask some questions. I am involved with some collar discussions on RDPD forum and will probably get one up and running here as well since I think the technique can be useful for certain sets of circumstances. It works well for me.
 

RacerX

New Contributor
Aug 2, 2007
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Thanks I made some decent returns years ago doing CC and then lost all my gains on one play. What u advise above makes perfect sense.
 
OP
OP
Yankees338

Yankees338

Bronze Contributor
Jul 24, 2007
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Yankees,
What have you learned about puts and calls so far?
Right now, I just know the basics. Puts - betting on the stock to go down. Calls - betting on it to go up. I've also learned a basic strategy of stocking up on whatever you really believe will happen, and then buying up some bargain options in the event of the prices going in the opposite direction of what you'd expected.
 
OP
OP
Yankees338

Yankees338

Bronze Contributor
Jul 24, 2007
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This is a very good book, and I would recommend reading it if you haven't already.
I'll probably give it a look. The thing is, though, I'm not quite sure if stocks/options are right for me. I like to have my money in assets I can control, like a business or stock. However, I think I'll still read this when I get the chance just to keep my options (no pun intended) open.
 

NerdSmasher

New Contributor
Aug 31, 2007
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Concerning stock options....

Do you guys think it is unrealistic to think that I can gain somewhere around 100% or more returns per month? Mind you, I'm not going completely blind in this, I can usually tell, with pretty good accuracy, which direction a stock is going to go. I'm just looking at using options as a way of incredibly increasing my returns. And I'm only using about $2,500 to invest, so I don't think it'll be any problem that options aren't traded as much as stocks; still plenty to invest in for me!
 

kidgas

Contributor
Jul 25, 2007
532
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Indiana
The biggest problem that I can envision is that, no matter how good your system of picking stocks, how good will you be at managing money? You need to have some way of protecting your capital so that you can stay in the game. How will you do that? Assume that you have 10 losing trades in a row. What will you have left?
 

NerdSmasher

New Contributor
Aug 31, 2007
153
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Now that's an interesting point. With my strategy, I was generally assuming at least a 50% success rate, as I would divide my money up 5 ways and use about $500 per stock. But, 10 losing trades, I'd be out of money :(

That's the one thing that I dislike about options, if you're wrong, it'll probably expire worthless.

I suppose that's why this is a bit of a more aggressive plan.

If it comes down to 10 losing trades in a row, I will be done, but only if it is my first 10 that lose. After I get one or two winners, I should have enough money to take 10 losers, and still have some money left over, which will hopefully go into other winners, etc. etc.
It's hard to protect the capital with the way I plan on investing in options, but I think that the returns will end up outweighing the losses overall, and I should get pretty substantial gains. :)
Only time will tell. I just recently opened an optionsxpress account, and once I get my money in there, we'll see how it goes. Besides, even if I lose all the money, I'm sure I'll learn a LOT, just like I did with my first stock experiences.
 

kidgas

Contributor
Jul 25, 2007
532
49
33
Indiana
If you start with $2500 and put in $500 per stock, only 5 losing trades in a row would wipe you out. So, using Bayes Theorem, the odds of that become 1 out of 2 to the 5th power or 1 out of 32.

Besides, even if I lose all the money, I'm sure I'll learn a LOT, just like I did with my first stock experiences.
That is the best attitude overall. It took me 8 years to really develop my own system that I feel comfortable with. And that was after losing $80,000 in borrowed money in 2000 after the market starting falling. But I did learn alot and had $80,000 in losses to offset gains on my taxes. There is always a silver lining
 

NerdSmasher

New Contributor
Aug 31, 2007
153
16
31
If you start with $2500 and put in $500 per stock, only 5 losing trades in a row would wipe you out. So, using Bayes Theorem, the odds of that become 1 out of 2 to the 5th power or 1 out of 32.
I like those odds! And, I think that I should do pretty well, as I imagine I should get at least 100% returns out of any of my stocks that do win. Probably more out of some, and possibly less out of others, but generally that's what I'm going for.

And, yes, I realize that, with statistical calculations, that would mean that I'm going to lose 50% of my trades (with what I said before), and gain 100% on the ones I win, so I should go nowhere. Well, that's not exactly my plan, but it's certainly a good place to aim for while you're learning :)

Once I get a better feel for options, or if I do better than that, then I'll start making money. First, I want to be sure not to lose it all instantly. But I think that they can be an incredibly profitable entity, and I hope I'm right!
 

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