Melissa -
Your explanation about options is simplistic, if not downright bizarre. Below is an alternative explanation.
1) Options are a zero sum game. You have 3 participants: Buyer, Seller, and Intermediary.
The intermediary essentially takes a commission from the transaction. The commission is the difference between bid and ask. We can consider that the buyer and the seller are each paying 50% of the bid ask spread to compensate the intermediary for making a market and taking the risk of holding some inventory of contracts. To make things simple, we can disregard the intermediary.
Excluding the intermediary commission, the result of any simple options contract (calls or puts) is that any gain in the value of an options contract benefits one party at the expense of the other party in equal amounts. This is basically the definition of a zero sum outcome with 2 participants.
Your feelings that most options players are simply gambling and lose their money may come from the fact that there are alot of unsophisticated investors willing to give options a roll. But always keep in mind that there are two parties to the transaction - a winner and a loser, if you will. Both parties can be considered "options players". One reason that you might think most people lose is that, indeed there are relatively few sophisticated investors and lots of unsophisticated investors - in other words there might be 1 really intelligent and informed investor that writes 10 options contracts and 10 really uninformed investors that each buy 1 of the contracts. If the "smart" one prevails, we essentially have 1 winner and 10 losers, but for each individual transaction there is a winner and a loser - again, zero sum game. All of this is true regardless of whether its a call or a put, and regardless of whether the winner bought or sold (wrote) the contract.
Now, I am not Dr. Laura of the stockmarket, but if I were you I would be really concerned about your ability to differentiate your purchase of options from the rest of the stockmarket peasants, when it really is somewhat clear that your grasp of options is not complete. This is not intended to be too sarcastic, but hopefully it might motivate you to take a more objective approach.
Cheers. Rick.
A couple more points:
1) The better informed investor will always take advantage of the less informed investor. Unless you have very sound understanding and basis for purchasing options (or individual stocks, for that matter), it is best not to play the game. Furthermore, while I am giving free advice: Don't challenge Tiger Woods to a golf match for money.
2) Options activity, though not a perfect indicator, is very valuable information to the informed investor. I don't have time to get into detail at the moment, but if you do any short or intermediate term investing you may want to explore the topic.
3) Regarding whether Peoplesoft will hold in the 40's in February, I am not certain but was only stating my best guess based on my information and analysis. As you indicate it is a volatile stock. However, I suggest you take your own advice and look at the history. It is up 18 times in the last 5 years, and there have been numerous thresholds that it has cleared, never to return, during the phenomenol runup - check it out.
Oh, one last thing. No problem regarding the "rain", it turned out it was just a little fog. The parade went on as planned. |
