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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (4696)	11/11/2001 11:49:04 AM
From: FR1	Read Replies (2) \| Respond to of 99280

There are just too many things happening to give a simple explanation of options. McMillan (Options as a strategic Investment) is considered among the best resources if you really do want to be a option trader. IMHO, options have limited usefulness. You can not even calculate options. When I first started to look at options I thought it would be some kind of easy mathematical calculation based on the Black-Scholes model which I could then plug into my computer. As it turns out there are a lot of calculations that are done, including Black-Scholes, but after all is said and done someone on the floor of the exchange adjusts the price before it is posted based on what they have to do to settle their orders. In general, it is usually accepted that the writer of options has a very slight advantage to the buyer. This is just me, but I only see two times options are useful: 1) When I really want to own the stock long and there is great growth ahead. For example, I wanted to own BRCM long but did not have a lot of cash. So I bought '02 leap calls at 30 some time ago. Once BRCM gets well above 60 I will be allowed to take possession of the stock on margin for free. This tactic only works when the market is real low and we have a considerable recovery ahead of us (like now). 2) If you own a ton of something that pays good dividends. Let's say you own a very large number of shares of a stock that pays a good dividend and your cost basis is so low that you never want to sell the stock (because of capital gains). In this case you can sell calls on a monthly basis that are well out of the money. In the rare cases that the stock creeps up and threatens having you called out, you can buy back your calls. This could make a nice monthly income for those with very large portfolios. I think most of the average players are just gambling because there is no way to know with any certainty which way the stock will move. And straddles do not save you as an option trader. You have to earn two premiums to make that strategy pay off. A straddle would only work in the extreme case where the stock would move violently up or down. If you know that it will, so does everybody else and it is already in the premium.