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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe -- Ignore unavailable to you. Want to Upgrade?

To: David Lind who wrote (430)	3/13/2002 7:51:53 PM
From: jt101	Respond to of 1064

David, Thanks for your concern. I agree with what you say, one must understand/know the behavior of the underlying stock before attempting options on the particular stock. I have learnt a lot of lessons the hard way, this was also one of those. I am thankful to everyone here who takes the trouble to share their ideas/opinions. Infact I feel lucky that someone is responding to me. This applies to everyone here Dan/JP/Dominick including you and fmikehugo. I know what you are trying to say, but I hope you agree, in their limited role in cyberspace, they are doing their level best to help others. I understand you are trying to help me and I really appreciate that. As you say, I need to have a strong opinion about the direction of the stock movement. Till now I thought, only FA will do, but slowly I am realizing TA is equally important. I hope you understand me... jt

To: David Lind who wrote (430)	3/13/2002 10:01:44 PM
From: Dan Duchardt	Read Replies (2) \| Respond to of 1064

David, I have to assume that since I'm the only one who responded to jt's original question about the CSCO spreads that I'm the one you think has failed to "set him straight". I don't know who around here has appointed themselves an expert, but some of us have taken the trouble to look at options strategies in an attempt to make a realistic assessment of the risks and potential rewards. It is very true that the risk associated with options is not the same as the risk associated with stock ownership, and for that reason financial institutions want to be sure you are aware of those risks. If misused or misunderstood options can be a much quicker road to losing your capital than stocks. On the other hand, when properly used and understood they provide superior protection against loss while providing comparable profit potential to stocks. The purpose of this thread is to help achieve a better understanding of the risks and rewards. jt framed his question as an inquiry about strategies one might employ for a stock that he felt somewhat bullish about. He did not ask anyone to judge wether the stock deserved that opinion, which by the way would not have been in keeping with the stated purpose of this thread. There are other places to go to get help assessing the likely direction or range of movement of any particular stock. So let's focus on the strategy and revisit the scenario. The following are not the prettiest charts in the world, but they show price movement of CSCO and the two options I said I preferred for the diagonal spread: CSCO host.wallstreetcity.com 2003JAN15 call host.wallstreetcity.com JUL17.5 call host.wallstreetcity.com (If you don't look at the chart today, you will have to change to the 6 month time frame to see the entry date) At the time of the analysis, CSCO had just closed slightly above 17, and the debit to enter the spread was $2.55. Five trading days later, CSCO touched 14.25, down nearly $3 from the low and close on the analysis date. In that same time, the long calls had fallen about $2 in value, and the short calls had fallen over $1, so while the stock owner was looking at a near $3 loss, and struggling with with whether to hold on or stop out, the spread owner was down about $1 and starting to think about buying back the short calls at a profit, raising the total risk for carrying the long call to about $3.50 with months to go before those long calls would become worthless, and with the hope of selling those short calls again at a better price. A few days later those short calls could have been purchased for less than $1 and late last week they could have been sold for well over $2, reducing the net cost of the spread to about $1.50, or the long calls could have been sold for about $5 to take roughly a $1.50 profit. So who is better off, the investor who bought CSCO outright and stopped out below 14.50 to protect from further loss, or the option investor who understood how to set up the spread to limit the downside risk and be positioned to realize a profit even if CSCO only manages to hold on to 17? Maybe CSCO will bounce again, and run into the 20s making stock ownership more profitable than the spread, but so far I'd much rather be in that spread than owning CSCO stock. Dan

To: David Lind who wrote (430)	3/14/2002 2:03:58 PM
From: KFE	Read Replies (1) \| Respond to of 1064

David, Based on the tone of your message I am not sure that it is worth replying to you but I cannot let some statements go. I am very ashamed at all the self appointed "experts" on this thread that somebody has not set you straight I don't post here often but maybe you can back that up with some examples. There are many "self appointed experts" on message boards but they are usually trying to sell something and there is none of that here. All the options strategies and knowledge in the world will not save you if you do not have a strong opinion of the direction of the underlying stock Not true. Actually many option strategies will allow you to be slightly wrong on your prediction of the underlying and still be profitable. Other strategies such as straddles can let you profit from a large move in the underlying even if you don't know the direction. and complete confidence in your knowledge of TA and FA I couldn't disagree more but that is not a discussion for this board. Two years ago I lost well over six figures when the market tanked, in options strategies that were advised by very well meaning people on threads like this. First, no one should ever invest based what they read on an internet message board. Maybe it had to do more with your money/risk management ability than with options trading. It is impossible to be successful long term without practicing sound risk/money management. To use your analogy of a blackjack card counter I will give you a real life example of the importance of money management. When Atlantic City casinos first opened the rules were very favorable and a skilled card counter had a 1 1/2%-2% advantage over the house. I played on a team of mostly wall street traders who were very successful but I saw many skilled teams go bust because they did not understand proper money management principles and bet too much for their bankroll. Whether you trade equities or options if you do not practice sound risk/money management you are doomed to fail. There has been some good information on this board and if you took the time to read all the posts and understand them you might have a better understanding that options can be used to reduce risk and formulate a better risk/reward profile than just owning the underlying. Regards and good trading, Ken