Stock Options Get Surreal

By STEVEN M. SEARS 
 

SOME PHOTOGRAPHS OF Salvador Dali show him studying a classical painting for inspiration and then painting an image so surreal that it defies imagination.

It's kind of like that now in the options market.

 
If a surrealist painter were to delve into options trading, he might paint a bull nervously navigating a stream by hopping from one ticking time bomb to the next while throwing bags of money to the safety of the shore. A menacing swirl of options symbols would substitute for translucent blue water. The painting would sum up the options-market trend of nervous investors using stock-replacement strategies to safeguard stock profits without forfeiting future gains.
 

Indeed, the week began with trading desks quietly mentioning clients who were selling stocks, pocketing profits, and maintaining control with calls that cost but a fraction of the price of the underlying shares. By week's end, similar action was cited across the market. Now, faster than sales traders can say "equity-options volatility is cheap and stock prices are expensive," a thematic trade is born.
 

The strategy will probably gain momentum since the Reserve Bank of Australia's interest-rate increase activated simmering fears that emerging markets would recover before developed nations. Australia's central bank increased interest rates by 25 basis points (one-quarter of a percentage point) to 3.25% during the week, citing economic strength of Asian trading partners. The connection may surprise some people, but Australia is rich in commodities needed by fast-growing Asian markets. For U.S. investors, the increase crystallized fears that developed economies, including America's, will suffer from a low-growth hangover and inflation caused by the Federal Reserve printing money to save the country from the credit crisis.

So, because many investors have minted bags of money as the Standard & Poor's 500 Index surged higher from the March low, the idea of taking profits without truly selling is extremely appealing.
 

CURRENT CONDITIONS IN THE OPTIONS market are also conducive to a tax strategy, known as "doubling up," that is used to record investment losses without losing control of favorite stocks. The time-honored way to double up is to buy additional stock, wait 31 days to avoid violating the Internal Revenue Service's "wash-sale rule," then sell the fallen shares you bought at a high price.
  

Consider Citigroup (C) which has ranged this year from $1 to $19.30. Investors who own shares at higher prices can double-up by buying Citigroup's $5 call that expires in 2011, instead of the stock. Oppenheimer's Michael Schwartz says the call is a stock substitute because it expires in more than a year, and can be exercised into stock.
  

The one caveat is that Nov. 30 is the last day anyone can use the strategy without violating the "wash-sale rule." If you like the strategy, get action. Earnings season is under way and it will increase options volatility, which will increase the price of many call options.

Source:
          BARRONS

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Recession takes toll on Ameritrade

Omaha-based online brokerage TD Ameritrade said today that fourth-quarter and full-year profits dropped in a recessionary environment that included struggling stock markets and interest rates near zero, but it had strong trading and account growth.

Net income for the quarter ended Sept. 30 was down 9 percent to $157 million, or 26 cents a share on $658 million in revenue, compared with $172 million or 29 cents a share on $650 million in revenue in the same period last year.

For the year, net income declined 20 percent to $644 million, or $1.10 per share on $2.4 billion in revenue, compared with $804 million or $1.33 per share on $2.5 billion in revenue in fiscal 2008, TD Ameritrade officials said.

However, average trades per day hit a record 372,000 for the year, a 23 percent increase over the previous year. In addition, company officials said clients opened 737,000 new accounts, an increase of 14 percent over 2008.

"We have leveraged our strong financial position and client-centric business model to deliver record organic growth, despite a very challenging market environment," said Fred Tomczyk, president and CEO.

Earnings for fiscal 2010 should be $1.10 to $1.40 a share, depending partly on interest rates, company officials said.

TD Ameritrade used 70 percent of its net income over the last year to repurchase more than $450 million in stock. It also acquired options trading and financial education leader thinkorswim GROUP Inc.

The company finished the year with more than $1 billion in cash equivalents.

Tomczyk said that for 2010 the company is considering additional acquisitions, share buybacks or paying a dividend.

"We are weighing all of our options and when we are ready to make a decision we will let people know," he said.

Contact the writer:

444-1117, joe.ruff@owh.com


Source:
          Omaha
.

See also www.dantemayor.com

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Options As Power Tools for Every Investor

by: Kevin Cook

I took my first class on options from Sheldon Natenberg, author of the trader’s bible Option Volatility and Pricing and one of the top instructors in Chicago. One of his favorite analogies is stuck in my mind, and I try to apply its wisdom every day in trading. To paraphrase:

Options are power tools, and that power has risks as well as rewards. Just as we can use a saw to either cut a piece of wood precisely, or cut off our hand, we can use options to control assets for profit, or create more risk for ourselves.


I bring this up because I’ve lately found myself explaining more complex option strategies, such as calendars and diagonals. I think options trading is fascinating and so I always enjoy working with a variety of its tools in different market environments. But, I also want to make sure every trader that listens to me understands all the risks of any strategy I’m talking about.

What makes options power tools? A combination of four things:
• High Leverage
• High Versatility
• Lower Cost (relative to their underlying stocks)
• Lower Risk (relative to… Oh, just see below)

This last point needs further commentary. Options give you “lower risk” relative to conventional long or short positions in stock, IF you are in a limited risk strategy, say when you buy a call or buy a put spread.

Even then, you must weigh that defined risk against what you are trying to accomplish with the stock and see if you have achieved the balance of risk and potential reward (or hedging) you’re after. Paying too much for an option or a spread with a low probability of success may create more risk than if you had done nothing—even if you were right about the direction and magnitude of the stock move.

The Probabilities of Risk and Fun

What makes options endlessly fascinating? Endless combinations. And the three-dimensional complexity that comes from managing stock risk across the spaces of time, price, and volatility.

Some people love casino games, like poker or craps, because betting on random outcomes is fun. And it’s even more fun when you think you can gage probability accurately in card games, where a gaming edge is actually possible, as opposed to roulette where the probabilities are stacked against you from the start.

Options markets offer even more opportunities and variety to search for trading edges. There are nearly 2.6 million five-card poker hands while the combinations of stock option strategies easily puts the possibilities in the tens of millions.

Just thinking conservatively, 2,000 stocks x 10 strikes (figure five each for puts and calls) x 4 months = 80,000 options to chose from. Multiply that by 40 (10 strikes x 4 months) and you get the idea of the combinatory possibilities as we just stuck our head above three million without even trying.

Something for everybody, in all risk and time frames. Plus, since options trading thrives on the “stock stories” underneath them, they deliver a whole lot more interesting and variable outcomes than 52 cards ever could.

And before you enter a single one of these million-plus trade ideas, you get to evaluate them for their risk and reward characteristics and potential. How? By simulating the position in a P&L Calculator or Risk Viewer like the ones at OptionsHouse.com. Even if you’re just learning a strategy, I can think of no better way to understand its risk profile than to see it visually in these calculators and tools.

So, if you haven’t made options part of your investment tool box, now’s the time. The tools available today to the self-directed investor to learn and trade and manage risk are so powerful and easy to use, option pros only dreamed about them 10 years ago. If you don’t have an options trading account, talk to your broker or investment advisor and see if you’re ready.

Then check out the tools we use every day at OptionsHouse to learn and teach option strategies. Even if you’re not ready to trade, it costs nothing to open a free virtual account and learn how to use the tools that help you make use of the ultimate financial power tools—options.

Source:
          Options News Network

.

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My Option Trades: Buying DV for call

According to the charts that we examine with the AXIS TRADES trading instructor, base on the 10-year history of DV, it will goes up this week or next. And since  I have a little money left in my account in TD AmeriTrade, I bought call for DV last Friday October 23, 2009 strike 65.

The last two days that past showed that DV dived to $54 from $55. The 10-year history chart showed that buying calls for DV during this time is indeed the right thing to do. And because of this, I am still hoping that my Options Trade will still give me a little money.

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TD Ameritrade says 4Q profit fell 9 pct

OMAHA, Neb. — TD Ameritrade Holding Corp. said Tuesday investors kept its online trading operations busy in its latest quarter as the markets improved but lower interest rates and rising expenses sent its profit down 9 percent compared with a year ago.

Ameritrade said it handled 35 percent more trades per day on average and its trading-based revenue soared almost 38 percent in its fourth fiscal quarter.

The company's acquisition earlier this year of options-trading specialist thinkorswim helped it top trading numbers from last fall's panicked selling during the turmoil around the bankruptcy of Lehman Brothers. And retail traders stayed engaged in the improving market.

The average number of trades it handled soared to an average of 410,576 trades per day in the quarter.

But Ameritrade said low interest rates drove its asset-based revenue, which includes money earned on its customers' deposit accounts and various investment products, down 29 percent. The net effect was a slim 1 percent increase in overall revenue.

It said higher expenses — mostly associated with the thinkorswim acquisition — also hurt its profit.

Ameritrade earned $156.7 million, or 26 cents per share, in the quarter that ended Sept. 30, down from $172 million, or 29 cents per share, a year ago. Revenue edged up to $657.9 million from $649.2 million a year ago.

Analysts surveyed by Thomson Reuters expected earnings of 22 cents a share on $630.48 million in revenue.

Its shares slipped 21 cents, or 1.1 percent, to close at $19.27 Tuesday. Its shares are still closer to the high end of their 52-week range of $9.34 to $20.93.

Over the past year, Ameritrade has tried to limit its costs, boosted advertising to attract more business and acquired thinkorswim.

"We couldn't control the markets and we couldn't control interest rates, so we focused on the things we could control," said Fred Tomczyk, Ameritrade's CEO and president.

The Omaha-based company expects to earn between $1.10 and $1.40 per share in fiscal 2010. Analysts are looking for $1.29 a share.

Credit Suisse analyst Howard Chen said in a research note that he thinks Ameritrade has performed well, but he expects a pullback in trading activity that will hurt the company's prospects.

"Management has executed soundly and fundamentals have remained strong for the AMTD franchise in a difficult operating environment," Chen wrote.

Tomczyk said when the Federal Reserve does begin increasing interest rates, Ameritrade is likely to benefit significantly because it will generate more revenue on its asset-based fees. The company estimates that for every quarter-point increase in the federal funds rate, Ameritrade's earnings per share will increase by 7 cents.

Tomczyk said he is cautiously optimistic about the economy, but he thinks any significant bad news could still send the stock market down.

"I think any recovery here is going to be slow and over a long period of time," Tomczyk said in an interview. "I don't expect us to rocket back here."

Ameritrade continues to hold onto a substantial amount of cash and other liquid assets to help it weather the recession. The company had about $1.1 billion on hand at the end of September.

Company officials said between $260 million and $320 million of that cash will be used to purchase auction-rate securities from investors as part of a previously announced settlement with government investigators.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions. They were sold as being as safe as cash, but the market for them fell apart in early 2008.

.
The Source:
          The Associated Press
.

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Why Buy Calls When You Can Sell Puts?

by Kevin Cook

A great question came to the ONN.tv virtual mail bag recently regarding iron condors and other credit spread strategies:

Do ITM debit spreads = OTM credit spreads? I notice a lot of traders have a preference for credit vertical spreads & iron condors. Aren’t ITM debit spreads synthetically equal to OTM credit spreads (e.g., AAPL 200/205 bull call spread & AAPL 205/200 bull put spread) and iron condors = to long condors? If that is the case – how does one choose which one to go with – i.e., the credit side or debit side?

I love this question because it really gets new option traders thinking about the basic mechanics of risk/reward with spreads, and about option synthetic relationships. On Oct. 27, I pulled up a quote chain for December Apple (AAPL) options so we could use real prices for the examples. With the stock trading around $197.50, the bid/ask premiums for puts and calls at the 190- and 195-strikes were:

190 Strike: call 13.50 ask; put 5.75 ask

195 Strike: call 10.50 bid; put 7.75 bid

Now let’s construct the in-the-money (ITM) debit call spread vs. the out-of-the-money (OTM) credit put spread. Both are bullish strategies with identical risk/reward characteristics and payoffs. In both, we want the underlying shares to stay higher than $195 to achieve max profit and avoid losses:

190/195 bull call spread debit is $3.00

Potential return on risk is $2/$3 = 67%

190/195 bull put spread credit is $2.00

Potential return on risk is $2/$3 = 67%

The fact that the spread premiums create precisely the same return is not surprising, even though traders may be able to get into these spreads for slightly better or worse prices that will affect which one they prefer. That said, they are still synthetically equivalent (a property of put-call parity relationships) and thus virtually identical in terms of risk/reward.
So, if the strategies are essentially equivalent, which is what makes synthetic option relationships work, which do you choose? It may simply depend on what type of trader you are. Here are a few reasons different traders choose among equivalent credit or debit strategies:
• For option traders who are only approved for buying options and spreads, they have few choices. Their broker or type of account may not allow any short or credit strategies. This may seem unfair if the strategies are equal, but that’s how options are treated to protect account holders and brokers.
• For active option traders, especially institutional professionals, it comes down to efficient use of capital. They are able to sell more OTM spreads and iron condors because they collect premium upfront, have minimal and/or offsetting margin collateral requirements (i.e., portfolio margining), and can earn meaningful interest on balances. Additionally, professional traders are often trading these synthetically equivalent strategies against long and short stock positions, capturing arbitrage profits from conversions, reversals, and boxes.
• For traders who focus on volatility strategies, they may prefer selling spreads and profiting from “overvalued” options and time decay, while trying to avoid ever paying up for options volatility. Theoretically, this volatility issue shouldn’t matter that much in equivalent spreads. But because they think “selling is better,” it dominates their strategies.
A final issue affecting all traders to various degrees is commissions from exiting spreads, or from exercise and assignment at or before expiration. If you sell the 195/190 bull put spread and it stays OTM as you had hoped, your options expire worthless with no additional commissions. But the 190/195 bull call spread staying ITM will require you to either exit before expiration and pay commission(s), or pay the commissions from exercise and assignment at expiration.

How to Practice for Free

Understanding option synthetic relationships and equivalent spreads launches your options trading expertise to a new level. If you still struggle with the concepts, you could pick up a book that explains put-call parity and synthetics.  You could also read my article in SFO Magazine from January of this year called, “The Balancing Act of Put-Call Parity.”
The best way to learn this stuff is to practice putting together the spreads yourself with tools that let you simulate their risk/reward profiles. For that, I can recommend no better tools than the OptionsHouse trading platform, which I use every day to build spreads and break down their dynamics. If you don’t have an active options trading account with OptionsHouse, at least open a free virtual one to try the great tools.
The Profit&Loss Calculator let’s you quickly assemble spreads just by clicking on the bids and offers in an option chain. It builds the graphs for you and allows you to watch their progression through time and changes in volatility. You can also quickly eliminate and add option legs and stock to the same graph.

When it comes to understanding the value and risks of options and spreads before you trade them, this kind of practice is priceless.

Source:
            Options News Network TV (ONN)

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OptionsXpress 3Q Pft Down On Low Rates, Lower Trading

NEW YORK (Dow Jones)--OptionsXpress Holdings Inc.'s (OXPS) third-quarter profit plunged by roughly a third as low interest rates and declining trading volumes offset an increase in option contracts per trade.

With interest rates near zero, optionsXpress' net interest revenue and fees dropped 66% to $4.2 million in the quarter.

The Chicago online brokerage's results also reflect a shift away from a surge in the trading of beaten-down financial stocks in late summer. That trend had boosted trades across the online brokerage industry, but activity in September shifted away from those names into more normal patterns, including options trading.

Overall, optionsXpress posted third-quarter earnings of $16.3 million, or 28 cents a share, down from $24 million, or 40 cents a share, a year earlier.

Revenue dropped 7% to $62.3 million.

However, results beat Wall Street estimates, as optionsXpress benefited from a higher average retail commission and the opening of 6,600 new accounts in the quarter, a 13% increase year-over-year.

Analysts polled by Thomson Reuters had expected, on average, earnings of 26 cents a share on revenue of $61.6 million.

OptionsXpress said its daily average revenue trades, or DARTs, a figure closely watched by analysts, fell 12% year-over-year to 42,000.

In an interview with Dow Jones Newswires, optionsXpress Chief Executive David Fisher said the company is seeing a pullback in the trading of low-priced financial stocks such as Citigroup Inc. (C), Fannie Mae (FNM) and Freddie Mac (FRE), which accounted for roughly 30% of the equities trading volumes in July.

Fisher said that while optionsXpress' equities DARTs were flat in September, the company's options trades increased 11% over the previous month.

During a conference call with analysts, Fisher said options as a percentage of total retail trades climbed to 58.5% from 56.6% in the second quarter and reached their highest level since the third quarter of 2008.

While options trading has picked up, Fisher said optionsXpress is "looking at a couple of difficult year-over-year comparisons" over the next couple of months given the surge in retail trading volumes during the panic of the financial crisis.

Fisher said the low interest-rate environment is "bad news" for optionsXpress and the online brokerage industry but added that "the good news is that they can't go any lower. So there's only upside from here, and we're likely to start seeing upside in 2010."

Fisher also said that optionsXpress plans to be active on the deal-making front as M&A activity picks up in the online brokerage space.

"I absolutely expect more deals. We are aggressively looking for deals and think it's a great use of the over $200 million in cash we have our balance sheet."

OptionsXpress' client assets increased 20% year-over-year to $6.3 billion, which Fisher said is the highest in the company's history.

The company is also beginning to see the benefits from its May acquisition of Optionetics, an investor-education firm.

"We are starting to see a steady stream of customers come from Optionetics, which is a great sign for the future," adding that those clients trade more options than the company's current customers.

Shares of optionsXpress recently traded up 47 cents, or 2.5%, at $18.74. The company's stock is down about 48% over the past year but has climbed about 22% in the past three months.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com 

Source:
          The Wall Street Journal

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The Three Questions You MUST Ask Before Trading Options

It’s funny how quickly attitudes can change. Just a few years ago, most casual investors wouldn’t touch stock
options with a 10-foot pole. Now the airwaves and Internet are clogged with offers to teach the secrets of “options investing.”

That kind of talk is just plain dangerous.

Despite my success with options, I would never be vain enough to call my work “investment advice.” When you’re dealing with options, you shouldn’t use the word “investment” at all. It’s speculating. And if you don’t understand the difference, you’re setting yourself up for a massive failure.

You “invest” in things like stocks, bonds, mutual funds, even real estate. You focus on the long-term. Successful investing is like planting acorns and watching them turn into oak trees.

*******************************

You Could Get Rich Investing in Scientifically Selected Penny Stocks

My CXS Money-Multiplier Strategy helps me find enormous gains. And I’ve made it incredibly easy. I do all the work, telling you when to buy and sell.

The profits can be awesome. You’ll HATE Yourself if You Miss This One!

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Speculating, on the other hand, is like playing with fireworks on a rainy winter’s evening. You light the fuse, and seconds later, it’s either fizzled out or a huge colorful explosion high up in the sky has illuminated the whole world.

It may sound like gambling. And for people who don’t know what they’re doing, it usually is.  But smart traders know how to bend the odds in their favor. Doing that means having a healthy respect for a speculator’s best friend — and worst enemy — leverage.

Leverage is the magic that turns small price movements into large profits...or losses. It is found in many different guises, but the fundamental design is always the same. The leveraged speculator uses OPM (Other People’s Money) in an attempt to make more money than would otherwise be possible with nothing but his own funds. In other words, you augment your position with borrowed money.

It sounds dangerous...and if not managed prudently, it can be bad for your wealth. BUT, if leverage can be applied to situations with strictly limited risk, it takes on a more sensible aspect. It becomes...superleverage.

Superleverage is the art of profiting from changing prices, with limited risk. No margin calls, no demands for additional funds, no forced liquidations.

The instruments of superleverage are exchange-traded stock options.

Options are tradable contracts that give you the right to buy or sell a specific underlying instrument at a specific price within a set time period. Their value closely follows the ups and downs of the stock they cover…yet they usually sell for a fraction of the stock’s price.

That means a small move in the stock’s price can become a huge move in the option’s price.

On the downside, options are wasting assets. They have strict expiration dates. And if the underlying security doesn’t move enough to give you real value, your options will expire worthless. That is your risk.

It was once calculated that 90% of all options expire worthless. That doesn’t mean you have a 90% chance of losing money...a winning options trader will offset one or two spectacular winners against eight or nine losers...and still have money left over. The trick to always coming out ahead is to develop a strategy and stick to it.

My dad, legendary options trader Paul Sarnoff, explained it best: “Every trader with imagination and talent goes into a specific commodity armed with a trading plan.” With his help, I developed a system I call my Complete Game Plan for Trading Success. Followed correctly, it can be a powerful tool to make sure you don’t get in over your head.

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“Get My Next 24 Recommendations FREE, if I Hear from You Soon!”

With an average maximum return of 94% per recommendation, $5,000 a time into just 24 recommendations could bank you as much as $112,800…

*******************************

It starts with some simple calculations Just ask yourself the following questions before you risk a single cent:

1. How much am I willing to pay for the option?
As I said, you can lose 100% of the money you put into an option. So never bet more money than you can afford to lose. Once you’ve set your limit, stick to it. Don’t chase an option that’s more expensive than you want to pay. Either wait for the price to drop, or look for another one to buy.

2. What will I do if I’m right?
Have a profit target in mind for each option you buy, and an idea of how long the move will take. Be realistic — what you honestly think will happen, not what you hope will happen. (If you can’t do that, don’t buy the option.) Again, stick to your plan — give the option some time to reach your goal. If you meet your goal, sell right away.

3. When will I get out if I’m wrong?
This one’s tough. No one wants to admit they’re wrong. And everyone hopes they’ll eventually be proven right. But that’s where another benefit of options trading comes in — with options, you have always known and strictly limited risk. Or, said a different way, you never stand to lose more than you put up. If you invest in stocks, you may have to worry about where to set stop losses so that you don’t lose your fortune. But with options, your stop loss is already built in. They’re the only sensible way to speculate.

You should always speculate based on what you can lose, not what you can gain. Be prepared to handle trading losses. Never add to a losing position. That is how many players get knocked out of the game. You want to be in there when the market goes your way. You, or your broker, must monitor your positions closely. They don’t ring a bell when it’s time to get out, so make sure you have an exit strategy in place for each trade.

It may sound like a lot of work — but believe me, it’s worth it. I’ve seen options skyrocket 210% in three weeks…472% in less than a month…even 260% in eight days…

Of course, I’ve also seen a good number of trades go nowhere. But following the Complete Game Plan for Trading Success, the odds are good you’ll still come out ahead.

Just never make the mistake of thinking that you’re “investing.”

Sincerely,

Steve Sarnoff



P.S.:
To help get you started on your very own Complete Game Plan for Trading Success, I’m offering my next 24 explosive options recommendations absolutely free.




SOURCE:
         HOWESTREET
.

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Options Spread Trading Explained: How to Make Triple-Digit Gains From Double-Digit Opportunities

by Karim Rahemtulla, Options Expert

Thursday, October 15, 2009: Issue #1116


“Why would I want to trade options? They’re too complex and scary. I’ll lose all my money.”
If I had a dollar for every time I’ve heard this from investors, I’d be kicking back on a Caribbean beach right now.
I actually love getting questions like this. It gives me a chance to bust a few myths and educate the person on why they should add options trading to their investment arsenal.
Simply put, options give you greatly increased leverage and several different ways to make money. What’s more, any investor can – and should – use options.

Three Return-Boosting, Risk-Reducing Option Strategies
Compared to stocks, which limit your ability to either play the upside or downside, options give you greater flexibility to manage both your returns and your risk.
Here’s how…

• Covered Calls: This is one of the most basic options trades. As the name suggests, you sell call options against an existing share position in order to “cover” yourself. Because there are 100 shares in an options contract, you must own at least 100 shares of a company to execute a covered call trade. When you do, you receive a premium from selling the call option, which essentially reduces the price you paid for the shares. But you also maintain a healthy upside. This enhances your return potential, while reducing your risk at the same time.
• Put-Selling: My colleague, Lee Lowell, has highlighted the excellent double benefit that comes from selling put options. Here, you try to buy a stock at the price you want (i.e. at a discount to the current price) and get paid for it, too.
• LEAP Options: This allows you to bet on a company’s long-term outlook – be it positive or negative. The additional duration of these options gives you more time to be correct with your call, and by buying LEAPS, you only use 15-20% of the cash required to hold the actual shares.

Time to bust another myth: Options trading is not gambling. When I use options – and recommend options trades to my readers – I don’t gamble. Quite the opposite, in fact. My goal is always to lower risk…

The Options Spread Trade: Putting You in the Driver’s Seat
So I come up with ways that put me in the driver’s seat, rather than just going along for the ride and “hoping” for a particular outcome – which includes one of my favorite option strategies that can generate significant wealth – the options spread trade.

Spread trading takes you one step beyond average investors and puts you in a position to generate the kind of returns you normally only see in advertisements. It works like this…
A spread trade requires two simultaneous transactions. For some reason, this is where most people decide to tune out. Their loss. It’s this extra step that can make the difference between making 20% and 200%, or 2,000%. I know that if someone offered me a chance to add a few zeros to my returns, I’d be all ears!
For the sake of simplicity, I’ll use a bull spread for this example…

Feeling Bullish? Rise to the Occasion with Spread Trading
A bull spread implies that you expect the price to rise.
Take gold, for example. If you think gold prices will shoot to $1,500 or $2,000 over the next 30 months, you can use a bull spread to play your prediction.
We’ll do it using one of the biggest gold producers – Goldcorp (NYSE: GG).

Regular investors would play it by simply buying Goldcorp shares for $40 a pop. For 1,000 shares, that’s a hefty outlay of $40,000.
Smarter investors, though, could buy the 2012 $40 Goldcorp call options (LGX-AH). This gives you the right to buy GG for $40. And for it, you only spend $13.30 ($13,330 if you want to control those same 1,000 shares – $13.30 multiplied by 1,000 = $13,330).
Let’s say you have a $60 target price for GG shares by 2012.

• The Stock Buyer: If you buy GG shares outright, you’d make $20 – or 50%. In dollar return terms, that would be $20,000 on a $40,000 investment.
• The Option Buyer: If you bought the LEAP option and Goldcorp rises to $60, your return would be $6.70 ($60 minus $40 minus $13.30 -the amount you paid for the option). That’s a dollar gain of $6,700 on $13,330 invested.

Not too bad at all. But if you take this one step further, you’d not only reduce your risk substantially, but boost your returns substantially, too.

Here’s what to do…
“Spreading” the Wealth
Having bought the $40 call option for $13.30 and ponied up $13,330 for 10 contracts (1,000 shares), I’d then sell the January 2012 $60 call option against it (LGX-AL).
When you sell an option, you first get money back for selling the option. It also limits your upside to the strike price of the option that you sold ($60).
The $60 call option is trading for $7.30. So…

• Buy the January 2012 $40 option. Cost: $13,330
• Sell the January 2012 $60 option. Receive: $7,330
• Net cost of the trade: $6,000 ($13,330 minus $7,330)

By doing this, we’ve entered into a spread.

• The Spread: The spread is the gap between the price at which we can buy GG and where we have to sell GG. In this case, the buy price is $40 and the sell price is $60. So the spread is $20.
• The Profit: In dollar terms, our maximum upside is $20,000 ($60,000 minus $40,000 based on 10 contracts or 1,000 shares), with a cost of $6,000. This means if Goldcorp hits $60 or more, we can make $14,000 net profit on a $6,000 outlay. That’s 233% ($14,000 divided by $6,000 cost).
• The Risk: What’s more important, though, is that our maximum risk here is limited to the cost of the spread – $6,000. That’s just 15% of the amount that a regular shareholder would have at risk if he bought the shares outright ($6,000 divided by $40,000) and probably much less than the stop-loss that most people would institute on the trade.

I’d much rather risk $6,000 to make $14,000 than $40,000 to make $20,000 in any market, especially this one. And if you dump the $34,000 that you saved by executing the spread trade into an account that earns just 2% interest, you’d offset your cost by a further $900 or so, too.
The Best Spread Trading Candidates
Next time you see a stock that you want to own, consider using this spread strategy to both reduce your cost and increase your upside at the same time. This is the exact same trade I used in my 400 Report service recently to make 166% on Petrobras (NYSE: PBR). And while we could have held the position for two years, we cashed out in less than six months (yes, you can close out these trades early if you’re sitting on a handsome profit).

You can execute spread trades on any stocks that have options available. But the most popular stocks for spreads are volatile and expensive ones. Companies like Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Research In Motion (Nasdaq: RIMM) are ideal candidates.

Next time: Turning it up a notch into quadruple-digit profit territory.
Good investing,
Karim Rahemtulla


Editor’s Note: Karim Rahemtulla is the Investment Director of the Xcelerated Profits Report – an advisory that shows any investor how to “invest like a pro,” using the same high-level, yet easy-to-execute strategies that today’s top traders employ. For just $49 a year, you’ll see exactly how these powerful strategies work in real life, with Karim and the team issuing specific wealth-building recommendations each month on stocks, options and commodities. For more information, take a look at this report. Find more information on Karim’s LEAP options service, The 400 Report.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… Rank: wait… Traffic: wait… Price: wait… C: wait…

(Australian Stock Market Blog, 8/26/09)

Source:
          Investment U
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Stock Options - What You Need To Know.

Call and What?

An option is a “legal financial contract”. The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. This is to be done at a price that has been predetermined which is called a strike price. It is also to be accomplished on or before a specific date.

There are just two basic types of stock options, the European and the American. An American stock option is a contract that can be exercised between the purchase date and the expiration date.

Each stock option is designated by the following:

• Name of the stock

• Strike price

• Expiration date

• The premium that was paid for the option plus the broker’s commission

Two of the most popular types of stock options are Calls and Puts. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. If an option expires, it is useless and worthless.

The other most common stock option is the PUT. This is almost the exact opposite of a Call. If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option.

How in the world do people trade these stock options? Stock options traders will rarely exercise their option and purchase (or sell) the underlying security. Instead, they will buy back or sell the option. This saves on commissions.

Options officially expire on Saturday following the third Friday of the month in which the option expires. Shares of stock have a 3-day settlement interval but option settle the very next day. The option has to be traded by Friday in order to settle on Saturday.

Another thing you may hear about with regards to stock options is volume and open interest. Volume is the number of contracts that are traded on any given day. The open interest figure is the number of contracts that are outstanding at any given time.

For those who are curious, a Put-Call theorem has been formulated which defines the following relationship for the price of puts and calls:


P=C-S+E+D

• P= the price of the put
• C= the price of the call
• S= the stock price
• E= the present value of the exercise price
• D= the present value of the dividends

An ordinary investor will see a violation of the put-call parity from time to time. This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired.

If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.

There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.

Stocks Explained If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock options.

Source:
          ARTICLE MANIAC

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