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6:26 am
December 16, 2010
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somrh
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mals, I did happen to look at thinkorswim which was bought out recently. So I may have to check that one out.
Jae, apart from buying calls, there is a strategy known as a synthetic long. You write put options on the stock and then use that premium money to buy a call option. You'll want to use longer term call options as that gives it a chance for the price to appreciate.
Buying calls can greatly magnify your returns. A stock that goes up 5% can result in a substantial increase to your options value.
To give an example, suppose you think INTC is worth at least $25. It currently sells for $21.28. You could fork over $2128 to get 100 shares. And if it hits $25, you've gained 17% which isn't too bad.
Let's suppose instead you buy call options and see that the Jan 2012 $22.50 strike price call option sells for about $1.59. So you could buy 13 contracts for a total of $2067 or for about the same amount of money you'd command 1300 shares instead of just 100 shares. Now let's say it goes up to $25. Then your option contract will be at least worth $2.5 (current price – strike price) and if it's earlier than expiration it will likely be worth more. But now you've made at least 57% on your bet instead of 17%.
The main problem with buying contracts is that they can become worthless fast so they are riskier for that reason. And I've always thought of value investing as a risk reducing strategy. I'm guessing Graham would classify buying options as speculation but he might say they are intelligent speculation if you've done your research. (Did he talk about options anywhere? CBOE was formed in 1973 so I'm guessing he doesn't mention it anywhere.)
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1:14 am
December 16, 2010
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mals
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| Member | posts 14 |
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Jae Jun said:
So say you found a really good company that you want to own and you believe the upside is much greater, how would you use options to increase profits in this case?
This is probably the main types of situations I will come across.
in your situation, using put options is a possible strategy. one could sell PUTs at the desired target price as the PUT strike price.
but all the risks and disadvantages that i outlined in my post below remain.
- you may not be able to buy the stock because stock may go down and come back up (esp if it is a LEAP option)
- if it is not a LEAP option then you are likely transacting for relatively small values (unless you are taking a super big expsoure, i.e. via too many PUTs sold)
- at least in my case, I have observed that I tend to check quotes more frequently when I have options exposure
and due to the above, I am increasingly avoiding the "sell PUT option route". am planning to use this route only when the market (or the stock in question) is in free fall and I have already accumulated the quantity that I am happy with. then if I miss getting more stock, I will not feel bad.
with all the above said, I do currently have options exposure. but on the short side – something I do not do very often. but a short of NFLX appeared very compelling. in my view, the only way NFLX can be as valuable as ~$200 plus is if a CEO buys out NFLX with little regard to shareholder value. otherwise the barbarians are at the date – be it network providers, more importantly the content providers and of course the tough competiters in google and APPL. they will bring down NFLX profitability in a myriad of ways.
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12:58 am
December 16, 2010
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Jae Jun
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So say you found a really good company that you want to own and you believe the upside is much greater, how would you use options to increase profits in this case?
This is probably the main types of situations I will come across.
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8:05 pm
December 13, 2010
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mals
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TDAmeritrade allows options trading. Although I am not sure what their minimum balance for options trading is – they do have a form which they make you fill before allowing options trading and reading that form can give you some idea of what they review before granting such permission.
As to your other questions, I am afraid I do not have the answers. Have not done as much research in understanding options, lots to do before that on the fundamental research front :)
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10:51 am
December 13, 2010
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somrh
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Just out of curiosity, what brokerage firm do you use? Are there brokerage firms that are easier to write put options with? The ones I use seem to be difficult (one requires a $250k account if I'm following it correctly.)
As a side note, I've noticed (and read) that options premiums (relative to stock price) are higher for lower priced stocks than higher priced stocks. Is there any good reason for this? At least when I'm looking for a stock which I plan to write calls on, I go for lower priced stocks because the premium percentage seems to be higher. Plus I get more contracts for lower priced stocks than higher priced ones (keeping transaction cost percentages lower.)
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11:16 am
December 12, 2010
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mals
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my 2 cents on this topic:
for value investors, selling put options can work. esp if you sell put options on businesses you would otherwise invest in at the price of the strike price. so i agree with @somrh's latest post.
with that said, in my personal experience, if you sell an option on a company you do not own, then you should size the put rather moderately. that way even if the price reaches your desired level, and the put is not exercised, you are still able to buy.
in my experience, i have missed an opportunity to invest because i did not want the exposure to be the sum of what i buy and if the put was exercised.
as for me, i now sell put options only if i have already created a reasonable presence of the stock in my portfolio. although even when that is the case, i always wonder if the price is right – the price of the put. when i do sell, my analysis is simple – i evaluate te return if the option is not exercised. and believe that if the option is exercised then the selling of the option was incidental and beneficial in any case.
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on another note, i am trying to practice the "wait for the fat pitch" discipline. of course the practice in that is inaction. all i can say is that it is tough. perhaps a topic in itself for another day.
reason i mention it is that selling put options without the advent of the fat pitch, psycologically takes away from the "fat pitch" approach. selling options causes me to look at the stock quotes way more often.
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5:11 am
December 12, 2010
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somrh
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What prompted this was something that was put together by Motley Fool. If you want it (and can put up with some more email from them), click here and enter your email address for a pdf.
There were some interesting strategies. One I may consider trying is writing put options. Here's what they suggest.
Let's suppose you really like XYZ and you'd like to purchase XYZ but unfortunately it's at $22 and you'd like to get in at $20. You can write a put option for the strike price of $20. You recieve premium for writing the option. If the stock goes down by expiration, you get in at $20. If it doesn't (or if it goes down and then back up) you won't own the shares. In both cases, however, you get to keep the premium you made for selling the option.
Obviously there are some drawbacks. For example, the stock might go down to $18 and then jump back up to $21 and unless the person exercises their rights before the expiration, you miss out on the entry price (but you still get the premium. Althernatively, the stock could go down to $18 and stay there and you get obligated to buy at $20 but you probably had a limit order in anyway so there's no difference (except you earned a premium for selling the option).
In my opinion, the reward (income from writing the options) outweighs the drawbacks so I may have to try it.
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12:20 am
December 12, 2010
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Jae Jun
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I hope somebody can answer this question. I have no idea about options but if done properly and with low risk, then it is a very good idea.
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12:08 pm
December 11, 2010
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somrh
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| Member | posts 336 |
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Anyone here have experience with options or know of any sources that discusses options from a value perspective?
My own experience is limited to writing covered calls. The nice thing is that I can determine my sell price and earn some extra cash on the side for it.
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