VGStockz: General Questions

[Ail]

aori said:

Options are great fun, especially in a volatile market. If you're expecting a change in price due to some announcement but don't know the direction, you can use options to do a straddle, where you have a put and a call at the same strike price.
This ensures profit regardless of the direction, provided the volatility is there. Less profit than outright choosing a direction though of course.


For example with Bank of America, I expected their price to move moderately up from the low on the 12th (Share price was at $7.95 or so) So I put a call at 8.00 for Friday 17th. The option price was 10 cents at the time. By today the share price was around $8.14 so the options increased in price to around 21 cents. Unfortunately there was a dip that triggered my stop loss I had put on them of 18 cents, so I missed that big jump 35 cent jump at the end.

However you could have feared that the stress test would reveal major problems with them and the stock price would drop. Or not known what would happen, just that something would. In that case you could have used a straddle.

The options chain for today
Call 8.00 0.51 +0.38
Put 8.00 0.03 -0.12

If you had put a call and a put at strike price of $8 for 10 contracts each.
You would have paid 0.13*10*100 + 0.75*10+12 = $150 for the call
and 0.15*10*100 + 0.75*10+12 = $170 for the put
= $320 in total
Your call would now be worth $510
and your put $30
so you would have made $540- $320 = $220

Similarly if the new have been negative and the share price had dipped to say $7.60
Your call would be worth 0.03*10*100 = $30
And your put would be worth 0.45*10*100 = $450
so you would have made $450- $320= $130

Obviously you could have just put a call for $150 and made $510-150 = $360 today but that's far greater risk if you don't have indication of direction.



I've learnt the general trading terminology is rather complex but the actual things themselves are fairly simple.
Options I find are slightly risky and require a fair bit of baby sitting but the multitude of different things you can do with them are quite enjoyable.
The major downside I find is it's a great deal more time consuming working out what exactly you should do than position trading. Unless you have a job with a decent amount of free time (lol don't we all wish), it's not really feasible.

Of course Buffett is a strong proponent of position trading and probably the most consistent earner in history so naturally that makes options seem dangerous. But if you're young and want something exciting and can stand the increased risk/reward, I say go for it.

Whew that post was too long, I'm just gonna shut up for now until happydolphin comes back:P

Thanks for the overall explainations ;)

I'm 40 so no longer young but not old either..

I'm still going to stick to position trading as I can only stomach so much risks and position trading should still allow me to reach my retirement goal ;)

On a side note, I think I was lucky and picked the right Bank when I went into financials. Citi failed the stress test and is taking a dip and noone actually expected Bank of America to actually pass it with flying colors so the stock is up again..