You are currently browsing the monthly archive for February 2009.

The last post talked about buying a PUT.  Also in a previous post I described how the risk/return graph changes when we take an opposite position. 

Lets use the same INTC March $12 Put (symbol NQOM).  If you buy the Put (Long the Put) your risk/reward at expiration looks like this:

$12 March 2009 INTEL Put

$12 March 2009 INTEL Put

And if you sell the Put (Short the Put) your risk/reward at expiration looks like this:
$12 March 2009 Intel Put - Short

$12 March 2009 Intel Put - Short

For this example I have assumed that you can sell the option for the same price that you can buy it.  In reality, if you look at these bid/ask prices in the previous post, you can sell the option for $0.72, a 3 cent difference.  Also, because the spread is 3 cents, it MAY be possible to buy or sell this option for $0.73 or $0.74. 
Notice that the graph is just mirrored about the x-axis.
If INTC closes above $12 at expiration, you will have a gain of $0.75, if INTC closes at $11.25, you will not gain or lose anything.  As GE goes below $11.25, you will start to have a loss, with the maximum loss being unlimited (to INTC going to $0, which would be a loss of $11.25).  And if INTC closes between $11.25 and $12.00 at expiration, you will have some gain.
If you sell the Put, also known as WRITING a Put, you have an OBLIGATION to purchase the underlying stock, in this example INTC, for $12.00 if the holder of the option exercises the option.  It is the buyer of the Option that has a choice, or option. 
I do NOT recommend writing NAKED options, because the maximum loss is unlimited.  Naked means that you do not have another position that limits the downside risk.  Understand how options work and paper trade them before taking any positions.
To be continued–

I have been reading reviews of the new Kindle 2.

At first I wasn’t sure if I would want one, my friends have convinced me that I need one.  I was able to borrow one for a night and after using it I can see how I would never be without it.  It is very easy to download books and it has plenty of storage.  It is very light and easy to operate.

I wish that it had two things.

    1.  A memory card slot – I think this would make transfering your own documents onto and off of the Kindle much better and secure.

    2. I would like to have the screen able to light up (dimly, or adjustable) – I would like to read in bed without disturbing my wife.  I am considering buying the clip on light, but for the cost of the device this should have been included.  A clip on light is just not elegant.

 I also wish that I could try the new Sony reader so that I could compare them.

If you find this post helpful and are planning to buy a Kindle 2, please click this link.  It helps me cover the cost of my time and materials, and does not cost you any more than normal.  Thank you in advance.

Kindle 2: Amazon’s New Wireless Reading Device (Latest Generation)

Some other reviews of the Kindle 2:

http://www.wired.com/reviews/product/kindle2

http://www.businessweek.com/magazine/content/09_10/b4122000174059.htm?chan=top+news_top+news+index+-+temp_dialogue+with+readers

http://www.msnbc.msn.com/id/29354846/

http://www.foxnews.com/story/0,2933,503365,00.html

There are many more articles, but I found these to answer most questions.

If you buy a PUT option on that stock, you have the right to sell that stock at a certain price by a certain date.  You do not have an obligation to sell the stock, it is your choice.  There are a few variables that go into the price of the put option the same as a CALL option.  The main variables are the Strike Price, the Expiration Date and the Price of the Stock.

Lets look at Intel Corporation (INTC) as an example.  On February 23, 2009 INTC closed at $12.07Bid/$12.10Ask.  The following is a list of near the money Call options that expire in March 2009.

 

Put Options - Intel February 23, 2009

Put Options - Intel February 23, 2009

If you purchased one March $12 Put (symbol NQOM) for $0.75 (plus transaction costs) today, you would have until the March 20th (the third friday of March) Expiration date to EXERCISE the option.  If you exercise the option, you would give your broker 100 shares of Intel (INTC) and your broker would pay you $12/share (plus transaction costs).

Why would you do this?

Perhaps you think INTC is going to announce something that will make the stock FALL between now and when the option expires.  If you think the stock is going to fall, then you can do a few things.  The first would be to SHORT the stock (see earlier posts) or you could purchase a PUT. (There are other things as well that I will discuss later)

If INTC makes an announcement and the stock falls to $10.00/share, you will have a gain of $2.00/share less what you paid for the option ($0.75), for a total gain of $1.25/share (less transaction costs).  If INTC stays above $12.00 you will not exercise the option and it will expire worthless, for a maximum loss of $0.75.  If INTC falls to $11.25, you will break even (not including transaction costs).  If you had shorted the stock, and it rises to $13.00, you would have lost $1.00, and it could go higher.

Lets look at the risk/reward graph, at the expiration date.

$12 March 2009 INTEL Put

$12 March 2009 INTEL Put

If INTC stock is below $11.25 (less transaction costs) the options will produce a gain.  If INTC stock is above $12, the options will expire worthless, and the maximum loss of $0.75 will be realized.  In between $11.25 and $12.00 the options will incur some gain.

If we compare the graph for being SHORT (selling) a stock vs. buying a Put, one can see that we have limited the downside, while maintaining an unlimited upside potential (Not necessarily unlimited as the price of a stock can only go down to $0), by buying a Put.

CONS:  The put option has a time limit.  If we purchased the $12 put (symbol NQOM) for $0.75 and the stock were to stay above to $12.00 the put will expire worthless and we will lose $0.75 at expiration.

Do not be disappointed yet, remember, I am trying to explain the basics before I explain more complex combinations.

To be continued—

The last post talked about buying a CALL.  Also in a previous post I described how the risk/return graph changes when we take an opposite position. 

Lets use the same GE March $5 Call (symbol GEWCE).  If you buy the Call (Long the Call) your risk/reward at expiration looks like this:

$5 March 2009 GE Call

$5 March 2009 GE Call

And if you sell the Call (Short the Call) your risk/reward at expiration looks like this:
$5 March 2009 GE Call - Short

$5 March 2009 GE Call - Short

For this example I have assumed that you can sell the option for the same price that you can buy it.  In reality, if you look at these bid/ask prices in the previous post, you can sell the option for $5.10, a 10 cent difference.  Also, because the spread is 10 cents, it MAY be possible to buy or sell this option for $5.15. 
Notice that the graph is just mirrored about the x-axis.
If GE closes below $5 at expiration, you will have a gain of $5.20, if GE closes at $10.20, you will not gain or lose anything.  As GE goes above $10.20, you will start to have a loss, with the maximum loss being unlimited.  And if GE closes between $5.00 and $10.20 at expiration, you will have some gain.
If you sell the Call, also known as WRITING a Call, you have an OBLIGATION to purchase the underlying stock, in this example GE, for $5.00 if the holder of the option exercises the option.  It is the buyer of the Option that has a choice, or option. 
I do NOT recommend writing NAKED options, because the maximum loss is unlimited.  Naked means that you do not have another position that limits the downside risk.  Understand how options work and paper trade them before taking any positions.
To be continued–

This trade was posted January 27, 2009.

Diagonal Spread Example:

Sell GGBBU            Feb 2009    7.5 Call            $0.35

Buy KDMAZ            Jan 2010   2.5 Call             $4.40

 

Net Cost                      $4.05(+Trading Costs)

 

Maximum Loss            $4.05(+Trading Costs)

 

GGB is trading for        $6.54 at the close on Tuesday 01/27/09

———————————————————————————————-

GGB is now trading for $5.65 at the close on Friday 02/20/09.

 

The GGBBU (Feb 2009 7.5 Call) has expired worthless. The KDMAZ (Jan 2010 2.5 Call) is now trading for $3.50.  We are currently down $0.55 and will wait for another trade.