Explain how, as an average investor in stock, you might use an option call or put or otherwise use options to?

Question

buy or sell stock? Just use a ficticious company or a real one if you like. I just want to get the hang of it. It sounds like a promise to buy at a lower price later or a higher price later as that advantage might happen to you. Kinda like selling yourself stock shares at a lower price when the price went higher?

Taranto, I am getting older. I am glad that you would share with me in the fantastic way you did, you understanding of something that seemed so complicated to me. I have not been privilidged to meet a person such as yourself that could offer me useful information on investing. Thankyou. You may be getting my vote here....looks like it.

Answer 1

Investors in options rarely exercise the options. They usually sell the contracts instead of exercising them. They can be used to gamble on the price of the stock or to lessen risk.

There are lots of options strategies that make sense. Here are a few:

1. Protective Put. Suppose you own a stock that has gone up in value. You think it will either drop quickly or continue to go up -- but don't know which. You don't want to sell it in case it moves up. You can buy put options. If it goes up in value, you still have the stock & the put becomes worthless. You don't mind, because it wasn't too expensive. But if the price drops, you exercise the puts & force someone to buy at the strike price. You have successfully locked in your profit.

2. Covered Call. You own a stock at $27. You think that if it hits $30 you would like to sell. Instead, you sell a call option with a strike price of $30. You sell it for $2.00 per share. If the price goes up above $30 -- the person you sold it to exercises. You sell it for $30 -- plus the $2 -- so you really get $32 for it. If it stays at $27, you now have stock that is worth $27, you pocket the $2.00 and you can still make another $2.00 by selling calls again.

3. Volatility Play. Suppose you don't own a stock -- but think it will either go way up in value or way down in value. Perhaps there is an event that will cause this. You could buy a put and a call. If the stock moves up, the call becomes valuable. If the stock falls, the put becomes valuable. The only way you lose is if the stock stays where it is. This sounds really risky -- but consider the following scenarios:

a. The company is being sued and the decision is coming in two days -- if they lose, they pay billions & if they win they keep it.

b. The company is PartyPoker and the time is last October. If Bush signs the internet gambling law, they have to stop doing business in the US (their biggest market) -- if he doesn't, then a multibillion dollar market stays open.

c. The time is January 1991 -- one of the few times in history where it was known that a war would start on a specific date. The company is Ratheon. If the war starts & goes well, Ratheon's stock will go through the roof (it did). If the war doesn't stop or it does not go well, then Ratheon's stock will drop.

There are lots of occasions where we know that something will happen -- we just don't know what. Options will allow us to make money.

Answer 2

Taranto gave an excellent answer.

Another example of covered calls is USG. Pays very high premiums, partly due to the Buffett ownership factor.

Another example of the volatility play is ZOLT. They are nefarious for big price moves on the day of earnings. An options spread for the shortest term calls/puts the day before earnings has yielded in excess of 3:1 over EACH of the last several quarters.

Here's another piece of advice. If you did your research look for a company you are bullish about and check to see if substantial amounts of contracts have been written against owned shares. If there aren't alot of contracts out there relative to total shares then that means the institutions are bullish and haven't been writing contracts against their shares. The most notorious example was TIE in Oct. of 2005, where there wasn't much open interest out there but a substantial amount of institutional ownership. Most recent example of this is SRE.

Answer 3

While the people here may give you a very rough idea how to use options to protect your stock and to profit from it, do you have any idea how to do it FOR REAL?

Well, for all these and much much MUCH more things you can do with options, you may wish to visit the hottest and most authoritative option trading website ever at http://www.optiontradingpedia.com . In that site are exact details, pros and cons of every strategy, how to execute each strategy, what options are and more which will definitely help get you started in a way better than just these very rough ideas.

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Answer 4

a call determination is whilst the fee of the inventory is interior the money or on the money for a advance in value or going long. positioned determination is whilst the inventory value is decreased or shifting right down to short the underlined inventory

Answer 5

An average investor would not and should not be using options at all. It is a recipe for financial disaster.