Options, opportunitys in options contacted me

[clavocat]

so this guy contact me..i think it was when i requested an options book...this guy sais for 600 risk he can get me 2100 profit through option trading in unleaded gas...anyone know if this is just a big scam or what not? he called me like 3 times, but im not one to trust others with my money. any suggestions???

[qweewq12]

I trade only options now.. and that is possible... kinda why I trade options lol... it sounds like he is going to trade unleaded gas futures...

options come in contracts of 100 shares... so say an option price is $0.60... you would have to pay $60 for that option contract... now if that option price goes up to $2.7, which is very much so possible and beyond, and you sell it, it would be worth $270... if you buy 10 contracts at $60 each and then sell them back when it hits $2.7..that would net you $2100 ($2700-$600) (10 contracts *100 shares each * $2.70 = $2700)

but, say you pay $0.60 and it tanks to like .10 before you get out.. those 10 options are now worth $100 (10 contracts * 100 shares * $.10 = $100)...loss of $500

good thing about options is it works weather the stock is rising or falling.. you just have to buy a option call or option put, respectively...

As for they guy, i would not give him money... until you know about options more and want to play with them... very high risk and you could lose all of your investment...

[qweewq12]

apologizes... the example I gave is only for stock options...

commodity futures options are a little different...not something I really want to mess with.. always reminds me of the movie trading places...lol
http://www2.barchart.com/support/futs101.asp

[madcowdisease]

Hey roe, I'm no rookie to the market and understand full well how options work. I am cognizant of the practices you've described above and the practice of exercising options upon expration. My question to you is how far out are you buying your options when you trade them and I'll assume you are buying in or at-the-money, correct? Are there any other tips or pit-falls you can educate me about such as volume etcetra?

Thanks for the insight.

[Hanger]

Madcow- I know this may be a little below your trading level, but I think its good reading and I know a majority of people will find this interesting...


The further out you buy your options, the more time value you are paying for. This is where a lot of people lose alot of money.
IE, Buying BBY Sept 06 52.5 Call for 3.50. This option right now is 1 out of the money. Well say that BBY stays relatively flatlined, your option is going to go down, because you lose time value. So if this option is still out of the money in August, it may only be worth .6 or 1.9. The key is to sell it when BBY has 3 good days in a row and get up to say 53 or higher, again not being greedy.

Here are 2 different strategies. One is to find a solid stock, buy an option in or out of the money by 1. Depending on your level of risk/evaluation of the stock. Try to buy it 2-3 months out. You will pay a little premium here because of the time, but it also gives you time to recover from any bad movement. With this strategy it is a great idea to not be greedy. Set 10% as your profit, and set a trailing stop. Although it will probably go up more, if you picked a good stock, your locked in...I know I know, rookie stuff here, just have to put it in there. And then hopefully within 2-3 weeks, although sometimes much shorter you will be able to flip this option for a very nice profit.

The other strategy is to buy say a June option right now. Time value is not as high. So any movement with the stock is going to be mirrorred in the option. A highly volatile stock is what you want here. This is also the riskier of the 2 I provided, because if the stock was to take a hit, ie home builder with bad housing %'s, it very well may be hard to recover money and you will get stop lossed out. This strategy also provides some of the best quick gains, or losses. I have traded options up until Thurs before expiration, and have gotten nice returns.

One of the things I always look at is Open Interest. I like to know where the money is going in this stock. Open interest is just the amount of options not exercised. Look at TIE right now, there is huge open interest for June, and almost nothing for July...Granted alot of this probably has to do that TIE was huge in April....and a lot of people use the 3 month call option strategy.
But anyways, I love seeing high volume on call 3 months out, because well it tells me that there are more people out there, that either are seeing the same thing I am within the chart/fundamentals. Plus its a supply and demand thing, if the open interest is 40, and you own 10....well you know, or they are hedging the portfolio...another story..
The weird thing with options volume is that it is totally different day to day, could be 400 today and 0 tomorrow. It could take you all day to get get filled, especially if your trying to sell durin a major move downward.

One thing with options....never buy on a market order. There are just too many things with options that could put you in a big house of pain..

Ok, I am probably rambling here, and time to stop, just a few key things here, that I always try to live by in options..

[qweewq12]

madcow...

it seems easier to me to find stocks that are heading downward... i usually buy mostly ITM options puts...every now and then ATM...and only OTM when it is close to being ATM and I have strong conviction in it... A few times I have uses some typical vertical spreads, but are not savvy on spreads like iron condor,etc... typically, i just use basic straight calls/puts.

using TA for strong confirmation, I will get in, set the stop and let it alone. usually when I get in an option, I will set the stop at 45% loss...and if/when the stock starts making some worthy profit, I will tighten the stop to a little above profit w/ commission (but not lower than 30%), so if it does crap out I will at least break even. the options i buy are usually 1-2 months out... right now all my options are jun & jul. during option expiration week, i will make a decision to dump the option where it is at, or roll it to the next month.

i find my stocks on the other forum I am on, cramer's "bears", screens and IDB monday edition.

i have been bitten hard when I first started out.. mainly because I didn't set stops.. and I was still learning the whole option thing then...:oops: i do have about 5 different stocks I took hits on and waiting for the right indication to get back in to reverse that loss... ;)

some of current & nicely profitable symbols I own now are:
GOL, HOLX, SIRI, XMSR, SNE :)

[madcowdisease]

Thanks guys, that's good stuff.

[clavocat]

what do u typically make in options? and what have your losses been? just curious, is it something to research and learn?

[NATHAN LLOYD]

I just took the same call. IMO, anytime someone is trying to sell stuff to you over the phone, it's not a good thing. He's probably wanting to get out of some bad options or something. I would NEVER buy what he's trying to sell me.

[qweewq12]

for options, contracts come in blocks of 100 shares.. also you can buy multiple contracts of the same one.... traders buy Calls if they think the stock will rise and puts if they think it will go down... most of the traders make their money trading the contracts themselves... but you can also exercise the contract as long as it it 'In the Money". I don't exercise.. only trade the actual contracts...

also, option contracts have expiration days to them, usually by months that expire on the 3rd saturday...whereas buying the stock itself does not...

remember to times the option price by 100 due 1 contract = 100 shares
as for profits/losses... here are some actual options I current have.
-XMSR 100 JUN 06 20 PUT bought at 3.30 per share, now at 6.60
-SNE 100 JUN 06 50 PUT bought at 3.40, now at 4.60
-HOLX 100 SEP 06 50 PUT bought at 6.40, now at 10.85

so if I sold right now:
xmsr was $330 in.. now $660... = $330 in profit (up 100%)
holx $640 in, $1085 out = $445 profit

but you can loose money fast too...
-MDT 100 JUN 06 47.5 PUT bought at 1.15, now at .225 w/ 23 days left on the contract (JUN) $115 in, $23 out = $92 loss...

and that is only 1 contract... say if you bought 10 contract..$920 loss...

you have to set wide stops due to volitilty... when I start I use 50%..if it drop 50%, I am out and re-evaluating what I did wrong..that give me half that money to go back in or use somewhere else... if it goes up and I start making profit, I will usually lower my stop to about 30% and at least make sure I would break even if something did happen...

great thing about options is you can make some great profits weather the stock is a bull or bear... but you can also lose money extremely fast... and not all stocks have options...

[clavocat]

u did a put, but i thought puts are when they go down?? and ur stocks went up? im confused

[qweewq12]

exactly... I thought MDT would continue a downward trend... however, today is went up in price due to news.. causing my option put price to go down... loosing money... if I would of set a stop, which i forgot to do, i'd be out at 50% loss... but i am still in...however, since I have a june put, I have 23 days to get rid of it... and in 23 days it could drop down to where it was or even better...drop lower and follow the trend of the chart...

MDT is now at $50.17 and my put is 47.5...so it is Out of the Money... meaning worthless.. it has to below the strike price of 47.5 to be worth anything..put wise.. the only way for me to be back in the money is for it to come back down...

xmsr continued to drop and went down another 11%...causing the put price to rise... and increase the profit spread...

[qweewq12]

In options you can buy out of the money options that you think will be in the money... that is where very large gains can occur... but the risk is extremely high... that is why OTM options are so cheap...

say a stock is selling at 23.00 and you think it will go up to at least 25 and prob. higher.... you can buy a call with a 25 strike... and they are usually pretty cheap depending on the time they have left till expiration... maybe .05... 30 cents... etc... per share... = $5-$30 a contract

if that stock goes over 25, it is now In the Money... meaning it is worth something and traders will have interest in buying, thus the price goes up on the option... the more the stock rises, the more the option price rises....

say 25.00 option is .30 cents a share = $30 a contract...and you buy 3 contracts.. $90 in... say that stock hits the strike price and beyond a bit.. making the option price 2.10 a share... = $210 a contract = $630 out

$630 - $90 = $540 = 600% profit (still have commisions though)

but if you buy that OTM option and it never hits the strike before the option expires... your money is gone for good... and most OTM options do expire worthless...

safer bet is to get deep ITM options, set your stops, hope the stock continues to move the way you want and reep the profits...

[speedcrazy1532]

anybody ever seen boiler room? watch it, you'll never buy anything over the phone again.