Thanks krypt...that helps a ton. I'm definitely gonna read up on it. They seem like fun little gambles that really extend the options (pun intended) available to investors.

one thing I'm confused about though..

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A rule I adhere to with options is to liquidate the contract at least 30 days to expiration because as the time to expiration approaches the value of the option exponentially declines (time decay). So you should sell this call option by December 2012.

This is probably a dumb question..but I don't get why anyone would be buying the option from me at this point? Surely people realize the exponential decline in the option value is inevitable as it nears expiration. I'm able to sell for a big profit..but why exactly would anyone buy it off me for that high price price knowing it would rapidly decline in value in the following weeks? Why wouldn't they just buy the stock?

Last edited by Capitalizt on Sep-29-2010 at 20:10

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Originally posted by Capitalizt Thanks krypt...that helps a ton. I'm definitely gonna read up on it. They seem like fun little gambles that really extend the options (pun intended) available to investors. one thing I'm confused about though.. This is probably a dumb question..but I don't get why anyone would be buying the option from me at this point? Surely people realize the exponential decline is inevitable as it nears expiration. I'm able to sell for a big profit..but why exactly would anyone buy it off me for that high price price knowing it would rapidly decline in value in the following weeks?

Speculation perhaps? The options closest to expiration are the most volatile and thus, the most profitable and risky. Volatility means increased risk, so you can of course make a lot more profit than long-dated options, but at the cost of them being very risky. Try buying a an $30 October 2010 SLV call option for just $0.01 x 100 = $1! Cheap huh? That's because it's probably never going to $30 in just 16 days. But let's assume SLV goes to $30 in the next 16 days by some wild fluke. How much would you make approximately? ($8.50 SLV to $30) x ($0.01 delta) = $0.085 profit. $0.085 + ($0.01 premium) = $0.095 intrinsic value of call option if SLV goes to $30. You'd make 950% profit in just 2 weeks!!!

Has anyone ever done this before? Hell yes, and it was probably insider trading. Someone or a group turned $1.7 million in $270 million in less than 2 weeks betting Bear Sterns would collapse by buying put options set to expire in less than 2 weeks. The stock was at around $61 and they bet it would be less than $30 in less than 2 weeks...http://www.reuters.com/article/idUSN1147350220080811

If you have a lot of call options in an illiquid market, you may not be able to sell. But SLV is very liquid, so unless you have thousands of call options you want to unload all at once, you shouldn't have a problem.

Holy cow.. I never thought about this stuff before because I've used basic cash account for stocks and nothing else, but the whole 'hedging' thing just clicked with me for the first time.. Even if cheap short term puts expire worthless, it's a small price to pay for peace of mind to protect long positions.

I'm giddy about options now.

What exactly are you trying to do? Buy stock with a put option as insurance? Or just trying to profit off the value of the put option itself?

If you just try the put option, then that's pretty simply, buying the put option and selling when you think it's the right time to sell.

If you are buying SLV and a put option to protect you from downside risk, then that is something called a 'covered call'. For it to be complete, you need to, buy 100 shares of SLV and 1 put option at whatever strike you think you need. That is where it gets a little more complicated.

You need to decide how much you are willing to pay for this 'insurance', because that's what put options are basically designed to do. You're basically buying an insurance policy against potential losses to your investment. Look at it in percentages. What percentage of the value of your investment are you willing to pay for insurance? 5%? 10%? 20%? Also, take into consideration that whatever put option you buy, if you let it expire worthless, you must make whatever percentage you paid for the put option in gains to your investment. So if the put option cost you 10% of your investment, that means your investment must make 10% just to break even on the position. You buy SLV at $20 and a put option at $2, which is 10%. That means SLV must get to $22 just for you to break even. This is trade-off to hedging with put options. So you should only buy a put option on your investment if you are certain the value of your investment is going to go down. Don't just buy put options willy nilly, because then you'll just be killing your returns. If SLV is rising in a value, enter in a trailing stop order instead to lock in your profit.

Let me know what you want to do and I can help you construct a trade for you. I do suggest paper trading any strategy first, before you put real money down, so you get the hang of it. I've been wiped out before with stock options and it's not fun. I didn't know what I was doing and hadn't practiced with 'play money'. You can read all you want about stock options but the experience of actually buying and selling them is far more important.

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Originally posted by Comrade Stalin What exactly are you trying to do? Buy stock with a put option as insurance? Or just trying to profit off the value of the put option itself?

Both I'm not planning to sell SLV any time soon..but if it does crash, I'd like to be able to profit off off the decline while still holding the position. In that case, the loss will be cushioned by selling the put.

Some other stocks like UCO that I'm not as committed to long term..I'd like the put purely for insurance..but I see now that a stop loss order might be more appropriate. I guess it's a matter of finding the right balance.

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Let me know what you want to do and I can help you construct a trade for you. I do suggest paper trading any strategy first, before you put real money down, so you get the hang of it.

I'm not really sure what the plan is yet. I'm gonna play around in the virtual account and see how things work for a few weeks. I'll let you know when I need professional advice.

Last edited by Capitalizt on Sep-30-2010 at 13:03

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Originally posted by Capitalizt Both I'm not planning to sell SLV any time soon..but if it does crash, I'd like to be able to profit off off the decline while still holding the position. In that case, the loss will be cushioned by selling the put. Some other stocks like UCO that I'm not as committed to long term..I'd like the put purely for insurance..but I see now that a stop loss order might be more appropriate. I guess it's a matter of finding the right balance. I'm not really sure what the plan is yet. I'm gonna play around in the virtual account and see how things work for a few weeks. I'll let you know when I need professional advice.

If you want to lock in some profits for the next 50 days, you could buy the November 2010 $21 put option for $0.73 x 100 shares = $73. Pretty cheap if you ask me. If SLV goes to $22, you can sell this one for a loss, and buy the $22 put options. You just work your way up the ladder as SLV goes up. If you want more time, there is the January put options, but you'll be paying $1.25 x 100 shares = $125 for the $20 strike.

not a bad idea..I may do that.

I have a new question though.. Check this out.

http://moneycentral.msn.com/investo...nth=1&Year=2012

Lets say I want to by a Jan 2012 call option for a strike price of $7.00

The current price for the option is $1, which means I pay $100, and wherever the stock is trading in Jan 2012, I will have the option to get 100 shares for $700. Lets say the stock is trading at $8 in 2012 and I decide to exercise the option. My total cost is $700 + $100 (option cost), so I basically break even with the trade.

Here's my question. Next to the $7 option, there is also a call option with a strike price of $6 going for $1.30 In other words, it only costs another $30 for the contract, but if I exercise the option, I get to buy the shares at $6 instead of $7, so I make a $200 profit on the stock instead of $100. Given that the option with a strike price of $6 offers a guaranteed $100 profit potential, why does it only cost $.30 more? Shouldn't it be selling for closer to $1 more to reflect the additional gain it offers?

here's the math.

Buying a $7 call = $100
Exercise option in 2012 when stock is at $8
Total cost = $700 + $100
= $0 profit

Buying a $6 call = $130
Exercise option in 2012 when stock is at $8
Total cost = $600 + $130 = $730
= $70 total profit

What am I missing here? The $6 call gives me an extra $1 per share in profit potential, but only costs an extra .30? Given that it will guarantee I can purchase the stock a dollar cheaper, shouldn't it cost at least a dollar more than the $7 call?

Last edited by Capitalizt on Sep-30-2010 at 20:46

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Originally posted by Capitalizt not a bad idea..I may do that. I have a new question though.. Check this out. http://moneycentral.msn.com/investo...nth=1&Year=2012 Lets say I want to by a Jan 2012 call option for a strike price of $7.00 The current price for the option is $1, which means I pay $100, and wherever the stock is trading in Jan 2012, I will have the option to get 100 shares for $700. Lets say the stock is trading at $8 in 2012 and I decide to exercise the option. My total cost is $700 + $100 (option cost), so I basically break even with the trade. Here's my question. Next to the $7 option, there is also a call option with a strike price of $6 going for $1.30 In other words, it only costs another $30 for the contract, but if I exercise the option, I get to buy the shares at $6 instead of $7, so I make a $200 profit on the stock instead of $100. Given that the option with a strike price of $6 offers a guaranteed $100 profit potential, why does it only cost $.30 more? Shouldn't it be selling for closer to $1 more to reflect the additional gain it offers? here's the math. Buying a $7 call = $100 Exercise option in 2012 when stock is at $8 Total cost = $700 + $100 = $0 profit Buying a $6 call = $130 Exercise option in 2012 when stock is at $8 Total cost = $600 + $130 = $730 = $70 total profit What am I missing here? The $6 call gives me an extra $1 per share in profit potential, but only costs an extra .30? Given that it will guarantee I can purchase the stock a dollar cheaper, shouldn't it cost at least a dollar more than the $7 call?

It would be more expensive if demand picked up for that particular call option. This has a lot to do with volatility. The volatility in UNG is rather low, making the options cheaper. If UNG all of a sudden starts making big moves, that spurs the UNG options volume to increase, thus raising volatility, which makes options more expensive. If you get into options, you need to understand volatility because volatility is a huge part of option valuation. The higher volatility is, the more expensive options are. Google "implied volatility" and "option greeks". The reason UNG is seemingly cheap is because volatility in UNG is low. That's basically what it comes down to. Looking at the chart, UNG is rather flat for September, so that also kind of explains it. Thinking more about this, it seems like you want to buy the option when volatility is low, because that implies the option is cheap.

It does seem cheap. I noticed the lower you go on the strike price, the cheaper the overall price will be. Every extra dollar you go down on strike price, the price of the call option goes up less than a dollar..sometimes just .30 or .40 for each extra dollar in profit potential. That just seems odd/irrational to me. A strike price of $1 lower should cost close to $1 more..rather than just .30 or .40.

quote:

Originally posted by Capitalizt It does seem cheap. I noticed the lower you go on the strike price, the cheaper the overall price will be. Every extra dollar you go down on strike price, the price of the call option goes up less than a dollar..sometimes just .30 or .40 for each extra dollar in profit potential. That just seems odd/irrational to me. A strike price of $1 lower should cost close to $1 more..rather than just .30 or .40.

If you want to get into the nitty gritty of option valuation, take a look at the Black-Scholes Model. But I must warn you, it's REALLY complicated. It goes into the rhelm of professional mathematicians, PHDs, and complicated computerized trading systems. Way beyond my capacity but it's an interesting read. Let me know what kind of trade you want to execute and I'll give you my seal of approval

meh, I'll keep it simple and go with my gut. Right now it's telling me that the $4 and $5 Jan 2012 call options on UNG look mighty cheap. The world economy should recover next year boosting demand. Combine that with a devalued dollar = $9 UNG by early 2012.

Time will tell if I'm psychic or not.

Last edited by Capitalizt on Oct-02-2010 at 12:38

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Originally posted by Comrade Stalin If you want to get into the nitty gritty of option valuation, take a look at the Black-Scholes Model. But I must warn you, it's REALLY complicated.

It is also as big a joke as EMH.