Stock Option Question?

Question

I've been investing with success for several years and I just opened an margin account with options. I'm looking into getting a small position with options but I have a few questions first.

First I'm having trouble making sense of the Option symbol and strike price. For example when I research EWZ, for a given month and strike price I receive 3 different symbols;
EWZ C JAN 75
WKB C JAN 75
ZYL C JAN 75
I'm guessing the different with them are their expiry dates. Is there any logical meaning behind WKB & ZYL? What the best to get find their expiry?

My second question is the about the strike price. I know that one contract give you the power to buy/sell 100 shares, I just want to confirm that the strike price must be multiplied by 100 to get the per contract price. For example a contract with a strike 4$ would cost 400$ per contract?

Also the reason I'm looking into options is gain leverage for long term position, not day to day trading. Is there any argument to avoid LEAP options?

Answer 1

<< EWZ C JAN 75
WKB C JAN 75
ZYL C JAN 75
I'm guessing the different with them are their expiry dates. Is there any logical meaning behind WKB & ZYL?>>>

The "EZW" options are the "normal" January options and expire in January 2008. The WKB and ZYL options are "LEAPS" (long-term options). The ZYL options expire in January 2009. The WKB options expire in January 2010.

<<>>

I went to

http://www.cboe.com/DelayedQuote/QuoteTable.aspx

entered "EZW" for the underlying, checked the "All exchange option quotes (if multiply listed)" box and selected the "List all options, LEAPS, Credit Options & Weeklys if avail." button to find the expiration dates.

<<
The option is bought and sold for 100 times the premium quoted. If exercised/assigned, the stock is bought/sold for 100 times the strike price.

<<>>

LEAPS are more sesitive to changes in implied volatility (IV), so it is even more important to only buy them when you believe IV will be increasing and not decreasing or, if you are selling them, to only sell them when you believe IV will decreasing and not increasing.

In the money (ITM) LEAPS have a lower delta then ITM shorter-term options, and they cost more than shorter-term options. As a result, you are likely to get less leverage from buying LEAPS than from nearer-term options.

By the way, LEAPS is an acronym for "Long-term Equity AnticiPation Security" and always includes the final "S" even if only talking about a single contract. "LEAP" is not a meaningful expression.

Answer 2

The strategy that you are referring to is called Selling Covered Calls. It was popularized in the late 90's by Wade Cook as a means of supplementing your income. Mr Cook made the strategy seem very easy and without risk. Based upon the fact that his company is now bankrupt and facing countless lawsuits, I would say he was wrong. The strategy works as follows: You first must have a brokerage account with option trading approval. You then would either buy at least 100 shares of a stock or move the shares that you owned previously into the brokerage account. Check yahoo finance or some other source to make sure that the stock that you are using has option chains assigned to it. Let's say for example that you buy your 100 shares at $20 per share. You would check the option chains on your stock and find that there are some strike price 25 options that expire 3 months out that have an ask price of $1.00 per contract. You could then SELL one September 25 Call option against your 100 shares of stock. By doing this you are saying that sometime between now and September, if the stock price reaches 25, you would agree to sell your stock for $25 per share. So now you ask, Where's the secondary income? When you sold that one September 25 Call option for $1.00 you received $1.00 for each share that you own for a total of $100. This is yours to keep and do whatever you want with it. In this scenario, if the stock price did reach 25 before September you would then sell your stock for a $5.00 per share profit. If the stock price doesn't reach $25 by September, you get to keep the $100 that you made and you get to keep the stock. You could then sell another call option against your 100 shares of stock. In theory, you could do this over and over again. I left out commissions and taxes in my discussion but they would have to be factored into the scenario as well. The strategy can work but there is more risk and work involved than Mr Cook led his readers into believing. Good luck and Be careful.

Answer 3

Regarding your second question, the strike price is the the exercise price of the option. It is the price that you have the right (but not the obligation) to buy the underlying security at until the expiration date. The price you pay to buy the contract is different - you have to pay that just to buy that option.

I suggest you use options with extreme caution, they are extremely risky, and the possibility of losing your entire initial investment is substantial.

Answer 4

Read Guy Cohen's book "Options Made Easy"!