Call and put option premiums for VMW are high right now because of the high volatility of the stock.

When VMW was at $85 I sold 2 contracts (1 contract = 100 shares) at $6.30/share. In doing so I agreed to sell it at $90/share, regardless of the actual price, if it is above $90 when the contract expires next month. More volatility = more risk in specualting = high prices of options.

1/7/2008 4:11:38 PM

I still don't get it, if you sold two contract at $6.30 a share, what's that second part about you agreeing to sell them at $90 a share.

1/7/2008 4:17:00 PM

The contract had a strike price of $90 so if it's above that when the contract expires next month I have to sell it at $90. I was paid $6.30 per share for agreeing to that.

1/7/2008 4:21:27 PM

Yeah, but it's at 73 now, so why is that a good deal?

1/7/2008 4:23:15 PM

I've already made the $6.30 a share and I keep the stock. Option trading is just a way of betting on stock performance.

1/7/2008 4:25:42 PM

But at what price did you buy it?

1/7/2008 4:50:49 PM

I am assuming he bought it at 85, bc it would be risky as crap to sell a naked option.

1/7/2008 5:05:23 PM

Ok, so how much did he pay for it at 85?

1/7/2008 5:30:00 PM

when you sell an option, the buyer pays you the premium (here it was $6.30) and you take the price volatility risk of the underlying. The strike(the price where the buyer of the option has the right to buy the stock from the seller) price was $90.

he actually lost money because he had to hold the underlying security and the P&L is:

(6.3*200) - (85-73*200)

so he made 1260 off of the sale of the option, but if he didnt sell a naked option he lost 2400 on the stock price. So consequently he lost $1140 from holding the underlying so far if he purchased at 85. Even if he purchased the security at a lesser price it is still an loss of $.

The buyer of the option has a worthless option.

if this was a security he had planned to hold for a long period of time it turned out to be a decent hedge, but if he didnt then





[Edited on January 7, 2008 at 6:13 PM. Reason : .]

[Edited on January 7, 2008 at 6:15 PM. Reason : .]

1/7/2008 6:11:19 PM

Could he have sold it before it dropped to 73?

1/7/2008 6:24:57 PM

yes he could have sold the underlying security at any point, but then he would not be covered and he would have sold a naked call which imposes super high risk. with selling naked call options, the investor takes on unlimited risk for the small price of the option

1/7/2008 6:34:41 PM

When can he sell and still be covered?

1/7/2008 6:39:35 PM

never, unless he buys another option to hedge

[Edited on January 7, 2008 at 6:45 PM. Reason : ,.]

1/7/2008 6:45:19 PM

Uhhh, how does he make money if he can never sell it?

1/7/2008 6:49:25 PM

price fluctuations are not always this large between sale and expiry. I mean he still owns the security, so he makes money when/if the security returns back to the price for which he bought it at



[Edited on January 7, 2008 at 6:55 PM. Reason : .]

1/7/2008 6:52:52 PM

But, I thought he couldn't sell it

1/7/2008 6:53:15 PM

he can sell the security at any time, but he wouldnt be covered.

1/7/2008 6:55:35 PM

plus it expires at the contract date right

1/7/2008 7:04:20 PM

Ok, so what kind of scenario has to happen for him to make money

1/7/2008 7:08:28 PM

yup after expiry he can do whatever he wants with the underlying.

1/7/2008 7:08:43 PM

Above you said he made $1200 if he sold a naked option, but you also say a naked option has unlimited risk, and then you go on to say you can only sell the option if it is naked

1/7/2008 7:18:25 PM

dude...go to investopedia and read up on options...pretty much the simplest derivative

1/7/2008 8:22:51 PM

david, i said he could sell the underlying at any point after he sold the option. this would make it a naked option as he would not be holding the underlying

in this case a naked option would have banked him big $. but lets say the stock price went up to 110. he would lose per share (110-90)*200 = $4000 minus the premium on the option 1240, making it a total loss of 2760. you see where there is no limit to the amount of losses here.

[Edited on January 7, 2008 at 9:03 PM. Reason : ,]

1/7/2008 9:00:31 PM

wait.....whats an underlying?

1/7/2008 10:20:22 PM

the underlying of a derivative is an asset (stock, index, another derivative, etc) in this case it was the security VMW

1/7/2008 10:22:43 PM

I thought that's what the option was.

1/7/2008 10:24:03 PM

the option is the derivative product. it is the right to buy or sell a security at a given (strike) price.

when you buy an option you buy a right to buy a secutity or a right to sell a security, etc

1/7/2008 10:25:44 PM

Ok, lets start over at "(6.3*200)" because I understand nothing after that part.

1/7/2008 10:40:13 PM

ok. that is the premium someone paid him for the option that he sold to them.

so he received $1260 for selling the option. but because he held the secuity while it took its downturn, he actually has lost $12 per share so far which is 2400-1260= 1140

1/7/2008 10:42:52 PM

Ok, so he is down 1140, right now?

1/7/2008 10:55:38 PM

i think ^ this guy is messing with you ^^

1/7/2008 11:01:00 PM

So, he isn't down 1140?

1/7/2008 11:01:55 PM

You shouldn't be trying to learn options if you haven't even invested at all before.

1/7/2008 11:23:58 PM

options are a negative sum game just like sports betting or poker. You can beat it but you've got to do it against professionals and serious traders. Stick to your 401k & roth for your retirement goals. Brokerage account for playing the market.

Options are for action junkies.


On the flip side ive been sports betting $2-3k a week for the past month

[Edited on January 7, 2008 at 11:59 PM. Reason : a]

1/7/2008 11:59:12 PM

he is down 1140 since selling the call option

[Edited on January 8, 2008 at 12:04 AM. Reason : .]

1/8/2008 12:04:08 AM

new CEO for SBUX

1/8/2008 1:12:01 AM

Hopefully he's not foolish enough to mess with a business model that convinces yuppies to pay 5$ for a cup of coffee.

1/8/2008 1:31:05 AM

SBUX shares have been absolutely hemorrhaging (sp?) for a good while now. he'd better do something.

__________________


OK...do I buy XTO Energy (XTO) or Cemex (CX)? I'd like to snag both, but I only have $700 available for trading in my acct (which is already smaller than the ~$1000 I usually like to work with), and I won't accumulate enough money in the account to make my next purchace for 2-3 more months.

1/8/2008 3:08:24 AM

Quote :

"he is down 1140 since selling the call option"

How long does he have to make that up?

1/8/2008 9:23:38 AM

This has got to be a troll. How fucking hard is it to type "options" into fucking wikipedia




[Edited on January 8, 2008 at 9:39 AM. Reason : .]

1/8/2008 9:31:09 AM

Have you been following the thread the past year? I do plenty of investing, just never in options.

1/8/2008 9:45:55 AM

Then there is no excuse for you not understanding the hundreds of sites that break down options with clear, concise explanations and pictures. You're just being lazy, and you're past the point of forbearance.




[Edited on January 8, 2008 at 10:00 AM. Reason : .]

1/8/2008 9:59:40 AM

Boobs didn't seem to mind breaking it down for me. Get off your high horse.

1/8/2008 10:02:48 AM

If I buy some stock at $30 and some more at $50 and then sell some of it at $40 how is it determined if I have to pay tax on it or not?

1/8/2008 11:22:19 AM

upL and apc for natural gas


i'm looking into getting into oil personally at current prices.

i've been watching COP for about 2 months but lately XOM has had a slight drop and i think it might be more of a buy

[Edited on January 8, 2008 at 11:33 AM. Reason : a]

1/8/2008 11:33:03 AM

"Natural gas? Play the Rocky Mountain high": I added Ultra Petroleum (UPL, news, msgs) to Jubak's Picks on Sept. 21, 2007, because the new Rocky Mountain Express natural-gas pipeline, expected to go into service in early 2008, would enable natural-gas producers in the Rocky Mountain region, the fastest-growing source of natural gas in the United States, to finally get their product out of the relatively small local market and into the bigger markets of the eastern U.S. That would gradually wipe out a discount that saw natural gas selling for $3.37 per million cubic feet less in Wyoming than in Louisiana.

Well, the Western stage of that pipeline, Rex-West, is set to open for service just about on time Feb. 1. Virtually all pipe had been bent as of mid-December, and 98% had been welded. Hydrostatic testing had been completed on 56% of the line. Pipeline operators have received commitments from natural-gas producers, including Ultra Petroleum, for almost all of the pipeline's capacity of 1.8 billion cubic feet per day. A second stage, expected to start partial service in December 2008 and full service in June 2009, will deliver gas to Ohio.

As of today, I'm raising my target price for Ultra Petroleum to $85 a share by October 2008.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/ProfitFromaStupidEnergyPolicy.aspx?page=3

1/8/2008 11:36:01 AM

i bought the nat gas etf UNG in the fall

i will get out as winter's end nears

1/8/2008 1:05:52 PM

another thing: the 10yr-5yr yield curve is steepening/the delta is increasing. this has historically boded well for small caps due to increased access to short term debt.

any of you econ guys want to comment on that?

1/8/2008 2:01:35 PM

Quote :

"If I buy some stock at $30 and some more at $50 and then sell some of it at $40 how is it determined if I have to pay tax on it or not?"

If I remember correctly you can either

1) Do first in, first out. That is the price for the first set of share you bought become the basis for the first set of stocks you sell

or

2) You can identify exactly which shares you bought and sold based on serial number. Not really practical in the digital age.

or

3) You can do a weighted average price as the basis. But I am less certain about this last option.

Quote :

"another thing: the 10yr-5yr yield curve is steepening/the delta is increasing. this has historically boded well for small caps due to increased access to short term debt. any of you econ guys want to comment on that?"

I have hard time with that particular narrative because I don't think the yield curve is the primary determinate of credit access. The discount spread on commercial paper I think gives a better sense of the availability of credit to less established firms in general.

However, I would expect a steeper yield curve to be better for small caps because it implies faster growth and in general small caps have a larger Beta.

Right now though the overall yield curve is flat to inverted with the 90 day trading above the two a five year. In addition, Funds Rate is above the 10 year which is the measure I think of as an inverted yield curve though strictly speaking its not.

So in general that should not bode well for small caps.

Now, that having been said the financials are large caps and some of the big technology names are priced to perfection so I could see the small caps actually suffering less in this downturn.

1/8/2008 2:31:26 PM

I thought you could only do #3 with certain types of mutual funds.

1/8/2008 2:35:32 PM