OK options on SOSS here we go, I will use the numbers as of July 20th the day I posted on
SOSS, naturally as time go's buy and the stock price changes the profit/loss picture also changes,
so using todays numbers would be a whole new picture. I will also leave out commission costs as
they are about the same (at least for me they are, the commission on the options are slightly
higher, usually around $8 per transaction) this is just for example sake.
Lets say I have $5,700 to invest, SOSS interest me and is trading at $19 a share and I have a $25
a share target 3 to 6 months from now, but the stock market is in a state of confusion and I am a
little concerned about going long on anything right now so I look at the options on SOSS to
possibly find a way to limit my immediate risk and still make a play. So instead of buying the
stock outright (300 shares at $19 for $5700) I buy 3 February $17.50 call options (at $4 a piece
for $1200, giving me the right to purchase 300 shares of SOSS at $17.50 anytime before
expiration)
First lets see what could have happened when during the first two weeks when the price went to
$21 a share. If I had bought the stock outright at $19 and sell for $21 I have a 10% profit on
$5,700 ($570) in less then two weeks. If I had bought the Feb. calls I find I could now sell them
at $5 and have a 25% profit on $1,200 ($300). However if I had taken the $5,600 of the $5,700
and bought 14 Feb. call options instead of only 3 and sold them for $5 I have a 25% profit on
$5,600 ($1,400). This last example is very very risky and only stated because I am only trying to
point out the mechanics of the trade.
Now lets see what would have happened if I decided not to sell when it went to $21 and is now at
$15 3/8. I would have a 19% loss on $5,700 ($1,083) on my stock purchase and could sell and
take my loss or hold on for a rebound. If I had bought the Feb. calls which I find are now at 1 7/8
I would have a 53% loss on $1,200 ($636). I would still have 6 months left till expiration and
could sell and take my loss or hold on for a rebound. I must also add that if I went the very very
risky route and bought 14 of the Feb. options I would have a 53% loss on $5,600 ($2,968) and 6
months still to expiration, again I could sell and take my loss or hold on for a rebound.
Now lets see what could happen if the stock hits the target of $25 in 3 to 6 months.
On the stock purchase outright I would have a 31% profit on $5,700 ($1,767)
On the Feb. calls I would have somewhere in the area of a 94% (depending on when it hit the
target) profit on $1,200 ($1,128)
If I had taken the very very risky route I would have somewhere in the area of a 94% profit on
$5,600 ($5,264)
Again this is just for example sake and I am in no way implying the use of options is a good thing
I am only trying to better understand them and possibly help someone else who may be interested
also and is a novice like myself. Options are very risky and offer different trade offs then outright
stock purchase. The greater the risk the greater the rewards.(I hope I'm making some kind of
sense)
Joe |
