freeus, hope you don't mind me putting in my 2 cents in here, from a relative newbie to options. There's so much involved, that you really need to do a lot of studying of real-world situations. For example, take one stock, and watch how the pricing changes on options on a daily and intra-day basis (highs and lows). The best site I have found on options pricing (15 min delayed) is lombard.com
Get a stock quote, then click on "Options Chain", then click on the different options.
Re: So the risk is much bigger than buying the stock because I woud have access, or responsibility for more shares. A: No, that's not really where the risk is. The risk is two-fold: 1) The stock moves in a different direction than you anticipate. You loose money quick when this happens. 2) Time is your enemy in options. All options are constantly losing time value. The ultimate time enemy is the expiration of your options.
To demonstrate these risks, Look at this example: If USRX is at $60, and on Monday you buy an option for one contract (100 shrs) of USRX (call option) at 60 ("strike price") with an expiration of say June. Let's say you pay $3.00 per share. So you pay $300 (100 shrs @ $3). Let's say you hold on until expiration (3rd Friday in June). If USRX is at $60 on expiry day, your options don't have any value, because anyone can go out in the market and buy for that price. You loose $300, a 100% loss. If USRX is at $63 on expiry day, you break even. If USRX is at $64, you make $100 (100 shrs @ $4, less your cost of 100 shrs @ $3). Still, at that price, you made 33% profit.
Important notes: The spread (difference between bid/ask in options is quite large, in percentage terms. Once you buy an option, you can't get out for break-even immediately (unless the stock moves in your direction), because of the spread. Use limit orders in options. Sometimes you can get a better deal that the official bid or ask. Watch the "last trade" price to get an idea of what kind of deal. But if the stock is moving down and you want out now, sell at the market and don't worry about the spread, or you will lose even more as the bid/ask plummets as the stock moves down. Also, of course you probably wouldn't want to buy just $300 worth of options, for the same reason you wouldn't do that in stocks: The commission takes too big a % bite.
Re: Have you made money doing this? A: I have, and much more than I would have made just holding the shares. If you have the confidence in your stock to keep holding on during a run up in the underlying stock price, the returns can be phenomenal.
Re: Lost money doing this? A: Yup, lots, and the losses can be fast and deep.
Re: What do you think of it as a strategy in general? A: I think at the right time and in a stock you are intimately familiar with, it is a wonderful strategy. But Kenny Rogers' advice on cards is very applicable to options: "Know when to hold 'em, and know when to fold 'em. Know when to walk away, and know when to run." Options trading is stock trading on stimulants.
Re: If you use it, what is your criteria for a stock for it to be a good stock to do this with? A: My criteria is this: You must know the trading range for the underlying stock, as best you can. Decide in advance what your target price is, and when/if the stock reaches your target, SELL. It's far better to sell too soon than to not sell at all, and then watch an excellent gain disappear fast.
Jeffery, feel free to critique this, and tell freeus if you disagree with something here.
DK |
