Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Dealer who wrote (21705)	12/3/2000 5:23:02 PM
From: Voltaire	Respond to of 65232

Well, come the 19th, we are going to get a turn one way or the other. V

To: Dealer who wrote (21705)	12/3/2000 5:27:58 PM
From: Dealer	Read Replies (1) \| Respond to of 65232

8 Myths About Stock Options For years, the options market was shrouded in mystery as transactions took place with obscure options dealers who set the prices and terms of options contracts. The Chicago Board Options Exchange (CBOE) created "listed options" that became the standard, and option prices were set in an auction market nearly identical to the stock exchanges. For the first time, this allowed the option holder to choose to sell his contract on the open market before it expired. Trading volume in listed options has exploded and option trading on more than 1,900 different equities and indices now accounts for the equivalent of 70 million shares of stock trading each day. But many of the myths associated with options have lingered. Unfortunately, these myths have caused many investors to remain on the sidelines while they could be utilizing options profitably or for reducing risk. Myth #1: 90% of Options Expire Worthless. This "statistic" is often bandied about by those who have no experience trading options. According to the CBOE, about 30% of all options expired worthless -- a far cry from 90%. Myth #2: Options are Much Riskier Than Stocks or Mutual Funds. This assumes that the investor is trading options with the same amount of capital that he would devote to stocks or mutual funds. On a "dollar for dollar" basis, options are riskier. Here at Schaeffer's Investment Research, we never recommend trading options in this manner. Instead we show our subscribers that options are a cheap way to reduce their overall risk. How? First, by limiting their total dollar exposure to a fraction of what they would invest in stocks or mutual funds. Second, by diversifying their options portfolio among different underlying equities. And third, by purchasing both call and put options, since put options are profitable when the underlying stock declines in prices. Myth #3: Option Sellers Make Profits at the Expense of Option Buyers. Unlike the gambling casino (or the lottery or the race track) which has built-in percentage advantages for the "house," option trading is a "zero sum game" in which option sellers and buyers are always at a standoff in total. Option buying and selling differ only in the distribution of their outcomes, not in their relative profitability. Although option buyers can have more losing than winning trades, they never lose more than their original investment and their profit potential is unlimited. Option sellers profit most of the time but their potential losses are unlimited. Schaeffer's Investment Research has always been dedicated to maximizing profit potential through option buying -- by taking full advantage of the unlimited profit potential and limited risk of this strategy. Myth #4 The Big Losses in the 1987 Crash Were Suffered by Option Buyers. The big losses in the 1987 crash were suffered by those who sold put options. The unfortunate put sellers in 1987 experienced losses of such great magnitude that many of them could not meet their obligations. Many put option buyers, on the other hand, scored big profits in 1987. Myth #5 Options are Too Complicated. Nonsense! Anyone who is familiar with stocks can easily learn how to trade options. The approach to option trading that we use at Schaeffer's Investment Research is very simple. If we are bullish on a stock, we advise you to buy a call option on that stock. For a fraction of the underlying stock price, you "rent" any appreciation in the stock above a particular price for a specified time. If we are bearish on a stock, we advise you to buy a put option. Here you "rent" any decline in the underlying stock below a particular price for a specified time. It's that simple! Myth #6 Stockbrokers Don't Understand Options and are not Interested in Options Business. While this may have been a problem 10 years ago, the brokerage landscape has significantly changed for the better. A number of brokerage firms now specialize exclusively in options. Many large discount brokers have become "option trader friendly." Some traditional full-service firms have developed expertise in options and the desire for options business. While we do not recommend any specific firm, Schaeffer's Investment Research subscribers receive a list of firms that are interested in options business and have the expertise to meet the needs of option traders. Myth #7 You can't Beat the "Option Pricing Model." Since options are a "zero-sum game," and option prices are based upon a mathematical "option pricing model," some say it is impossible to profit from buying options in the long run. WE STRONGLY DISAGREE. First, prices for exchange-listed options are set in the marketplace by buyers and sellers, although the computerized pricing models do exert a strong influence. But more importantly, these models are based upon the mistaken assumption that all stock price movement is "random." Clearly, there are always certain stocks that are moving in well-defined price trends, as opposed to moving randomly. If you can identify those stocks whose price trends are likely to continue, you can beat the option pricing model! Much of our research has been devoted to developing indicators to determine stocks that will continue moving in such price trends, so our subscribers can profit from buying undervalued options on these stocks. Myth #8 Options Trading Requires Too Much Time. Amateurs are rarely successful trading options because they don't have the time, information, expertise or the discipline to compete in this fast-moving market. But Schaeffer's Investment Research subscribers have a big edge over these amateurs. First, our staff of professionals here at Schaeffer's Investment Research have the information and expertise to make you a successful options trader. And second, we give you the disciplined trading rules that help you make big money and also minimize your time commitment to your options trading! We tell you how much to pay, when, and at what price to sell. And you can often leave these instructions with your broker, so your options portfolio can appreciate on "automatic pilot!"