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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: chowder who wrote (84793)	5/18/2007 2:53:07 PM
From: Wyätt Gwyön	Respond to of 206325

one simple yet popular option strategy is to invest 10% of your money in calls and the other 90% in T-bills. the calls will approximate the upside of much more than a 10% long-equities portfolio while limiting your potential losses to less than 10% (potential 100% of calls is -10%, but you make say, 4% back on the T-bills). this strategy is called the ninety-ten, so you can guess where this popular poster got his handle: Member 1346235 it is much harder to limit the loss on an indivdual option position like you might when using a stop on an equity position. the spreads on options are huge on a percentage basis, and the moves are much more volatile than equities. if the underlying moves 3% the option could easily move ten times that amount. a gap up or down can wipe out more than 90% of an option's value easily. so stop losses are not nearly as effective as with equities. people hedge option risk in a variety of ways, the simplest being the above ninety-ten. you could also do things like have offsetting long-short positions, a mixture of equity and option positions, etc. it can get very complicated. it's not something people should try to pick up from a post or two on the Internet. McMillan has written some very good books on options, e.g. McMillan on Options. Taleb also wrote a book, but it is supposed to be a very technical book that only people with advanced math skills could understand (i haven't tried to read it and doubt i could understand it).

To: chowder who wrote (84793)	5/18/2007 5:02:19 PM
From: ChanceIs	Read Replies (1) \| Respond to of 206325

>>>Can you lose all of the $6.40? Does that happen if the options expire worthless?<<< Yes and yes. Two key components of any options pricing formula (e.g. Black Scholes) are time until expiry and interest rates. More time until expiry, then higher premiums - he who sold the option has to keep cash tied up longer backing the option. Higher interest rates, then higher premiums - he who sold the option could have been getting more interest parked in cash/T-bills vice the premium from the shorted option. But isn't this just life??? You want to start and operate a business, you have to take more risk - many seem quite good at using OPM however. You better know what your costs will be and when the demand will arrive. Calpine borrowed $19 billion to build power plants - "build them and they will come." At best they sold 50% of the power available. They went belly up. They basically bought options on power. Those options never got into the money. Who paid for the options??? Why the shareholders and bondholder, naturally. Management paid itself well for as long as the doors were open for business - for being an option broker. Do you drive a car??? (Of course.) Do you have car insurance (Of course.) You may not realize it, but you bought an option there. You paid a set amount. It lasts for a set time. The upside is infinite - after the first bent fender you have met the deductible - and if its a ten car pileup you caused, your option will be very, very far into the money. (You will also be banned from the options exchange in the future - or have a very high premium set against you.) Do you pay social security??? (Of course.) If the working population keeps growing faster than the retiree population, then you might get something (this is a time to expiry issue - and currently the retirees grow faster than the workers so the option expiration date keeps getting moved forward). Is the government lying about the inflation rate (this is an interest issue - higher inflation requires higher interest which requires higher SS indexing). The likelihood that your social security option will be in the money when you retire is slim. If you look close enough, life is broken down into a series of little itsy-bitsy options. I will leave it to you to explain to the board why love is an option.