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Continuing the series on options:
This is another in a series on understanding options. Previously I wrote about put options and call options (click on each to read the previous articles). I also wrote an article last week on using puts to limit losses when owning a stock that is going down. This article describes leap options, also known as leaps. Leaps allow you to buy a stock at a fraction of the cost and still benefit from the same rise (using a call option leap) or fall (using a put option leap) in price.
What is a leap?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock (click on the links above to learn more about call and put options). A leap is nothing more than a call or put option that has an exercise date many months or years into the future. It is a way to participate in a stock’s price move without paying full price to own the stock outright.
Critical things to know as an investor in leaps:
1) Leaps are exercised in the same way as call and put options since they are call and put options with a long timeframe before their exercise date. Therefore, each leap controls 100 shares of the underlying stock.
2) Leaps cost the most since the odds of reaching the exercise price over a long timeframe are greater, especially if the current stock price has a lot of variance.
3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.
Understanding the leverage associated with leaps:
If you are interested in owning shares of stock in a company, but either don’t have the funds to buy 100 shares or don’t want to risk those funds, leaps are a great investment vehicle to consider. Leaps let you participate in stock price changes over a long period of time without the risk of paying funds to buy 100 shares of the stock.
An example showing how a call leap option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.
I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1, 2008 the price of xyz corporation stock is trading at $50 per share. I decide to purchase a January 2010 call option with a $75 strike price that expires the third week of that month. This call is trading at $10 which means I pay $1,000 ($10 price x 100 shares of underlying stocks) to buy the call option.
By January 15, 2010, the price of xyz stock rises to $125 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $75 each for a total cost of $7,500 ($75 x 100). I can then sell these 100 shares of xyz stock on the market for $12,500 ($125 price x 100 shares of stock) and have just pocketed a $5,000 profit ($12,500 - $7,500 purchase cost). However, I paid $1,000 for the call option so my net is $5,000 - $1,000 = $4,000. This is a 400% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.
The leveraging comes from only paying $1,000 to get a $4,000 profit, which equates to a 400% return on investment. The alternative would have been to pay $5,000 on October 1, 2008 to buy 100 shares of stock and then selling them for $12,500 on January 15, 2010 for a profit of $7,500, which equates to only a 150% return on investment. If the stock has risen much more over the long period of time, then the return against the $1,000 purchase price of the leap would be even more dramatic since every $10 increase in the price of the stock equates to another 100% return on my investment in the option ($10 per stock x 100 shares is $1,000 increase in those stock verses the $1,000 investment in the leap).
What is the potential loss with a leap?
The main benefit of using a call option leaps to make money on stocks with rising prices instead of buying the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($1,000 in the above example). If the stock price never went higher than $75, then the call would expire worthless and the investor would loose the $1,000 investment. If I had bought the stock instead, my full $5,000 investment would have been at risk verses only $1,000 to buy the leap. Similarly, the use of a put option leap limits your investment loss only to the purchase of the leap.
The other benefit was the ability to participate in the increasing price of 100 shares of a $50 stock by only paying $10 per share through the leap to get the associated increase in value. I paid 1/5th of the stock price to control the same 100 shares of stocks over a long period of time.
Summary:
The use of a leap (call or put) is another way of making money when the stock price is going up or down over a long period of time without having to put the full amount of funds at risk that would be required to actually purchase and hold the stock. However, the price of leaps tend to be much higher than shorter term options due to the potential of a stock to reach the strike price over the longer period of time. Don’t invest too much on leaps in any one company. Diversify and use leaps as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sphere: Related Content
Saturday, October 25, 2008
Saturday, October 18, 2008
Options: Using put options to insure stock from loss
Refresh understanding of a put option:
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. A previous article described what a put option is. As a summary, a put option forces someone to buy stock at a set price from the buyer of the put option if that option is exercised. The desire of a put holder who chooses to exercise the option is that the price has dropped. In this case, the put holder buys stock at the current lower market price and sells it at the higher put option price to the seller of the put. Read the previous article for more details.
Holding a stock can be very scary these days.
With all of the tremendous volatility in stock prices recently, it is no longer safe to hold stock of big strong companies long term. Who ever thought GM and other large corporate stocks would return to prices not seen since the 50’s and 60’s. That means fifty years of appreciation has evaporated in only a matter of weeks.
How can I insure my stock from large losses due to big price drops?
If you own the stock of a company where you are worried about the price dropping, put options can act like an insurance policy protecting you from loss. Since the put forces the seller of the put to buy stock at a set price, you can buy a put option that has an exercise price at or near the current market price for the stock. If the current market price drops through your put option exercise price, then it makes sense to exercise the put option forcing the put seller to buy your stock at the exercise price. Alternatively, you can sell the put option at a profit to someone else before the exercise date, allowing you to continue holding your stock. Either way, the put becomes more valuable as the stock price drops, which compensates you for the associated loss in price on the stock you continue to own.
An example showing how a put option protects you from the drop in price of your stock
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.
I own 100 shares of xyz corporation stock that has been going down in price lately. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November put option with a $45 strike price that expires the third week of November. This put is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the put option.
By November 15th, the price of xyz stock drops to $30 and I tell my broker to exercise the option. I then force the put seller to buy my 100 shares at $45 each for a total of $4,500 ($45 x 100). Since the stock was at $50 per share on October 1st and were sold for $45 per share on November 15th, I have limited my loss to only $5 per share ($50 October 1st price - $45 received per share = a $5 loss per share). My total loss for the 100 shares is $500 ($5 per share x 100 shares). Had I not purchased the $45 November put option, my loss would be a much higher $20 per share ($50 October 1st price - $30 November 15th price = a $20 per share loss). In that case, my loss would be $2,000 ($20 per share x 100 shares). Again, using the put option, I have limited my total loss to $500 instead of what would have been a $2,000 loss. If the stock price had dropped lower than $30 by November 15th, then the put option would have protected me from a much larger loss.
Why doesn’t every stock owner always buy put options for protection?
Put options cost money. The closer the exercise prices to current market prices, the more it will cost to buy the put option since the probability of the option “going into the money” is high. If you were to continually buy put options close to market prices, then the cost of all the put options you buy will themselves cumulatively act like a loss against your stock’s value. However, in uncertain times or before earnings or other news announcements where there is a strong possibility of bad news coming out on your stock, it may make very good sense to buy a put option. Another strategy could be to buy a way out of the money put option with a strike price far below current market prices. These type of put options will be very cheap, but you will have a much higher vulnerability to loss for the difference between current market prices and the much lower put option strike price. That strategy would be good for protection against a dramatic drop in stock price.
Summary:
The use of put options is one strategy used by seasoned, sophisticated, and some accredited investors to protect their portfolio of stocks against large price drops in uncertain situations. If you own stocks and worry about price drops, consider purchasing put options as a form of insurance protecting you from large losses.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sunday, October 12, 2008
Options: Understanding Calls - making money when a stock price goes up
Options: Understanding Calls - making money when a stock price goes up
Setting up for future option strategy articles:
Last week I described put options. This article describes call options. I must establish what these two options are before discussing various strategies used by sophisticated investors to control and sometimes eliminate most risk from the movement in the price of a stock. Now, lets get into understanding what call options are.
What is a call option?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. There are put and call options (I covered put options in last week’s article). When exercised, call options force the seller of a call to sell stock at a set price. As the buyer of a call, you hope the stock price goes higher than the call exercise price. If it does, then you can buy the stock at the call exercise price and sell at a higher market price or keep the stock.
A call (or put) option controls 100 shares of the underlying stock:
Critical things to know as an investor in options:
1) One call option controls 100 shares of the underlying stock. Therefore, when one call option is exercised by the call buyer, the call option seller must sell 100 shares of the underlying stock at a set price (an example below will help explain this).
2) Calls (and puts) are priced on a per share basis or 1/100th of the actual cost to buy or sell a call. So, if you see a call trading for $5, it will actually cost $500 to purchase that call option ($5 call option x 100 shares = $500 total cost). These two things can throw new option investors off until they get used to the leveraging inherent with trading options.
3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.
How can you make money with call options when the stock price goes up?
As mentioned above, a call option can be exercised to force the seller of the call to sell the underlying stock at a set price for the buyer of the call option if he/she chooses to exercise the option. The desire is to force the call seller to sell 100 shares of a stock to you at a lower price than the current market price you would have had to pay to buy the 100 shares of stock.
An example showing how a call option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.
I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November call option with a $55 strike price that expires the third week of November. This call is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the call option.
By November 15th, the price of xyz stock rises to $70 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $55 each for a total cost of $5,500 ($55 x 100). I can then sell these 100 shares of xyz stock on the market for $7,000 ($70 price x 100 shares of stock) and have just pocketed a $1,500 profit ($7,000 - $5,500 purchase cost). However, I paid $200 for the call option so my net is $1,500 - $200 = $1,300. This is a 650% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.
Another example showing the tremendous leveraging potential in options:
An alternative to exercising the stock purchase would be to sell the call option before it expires to another investor at a profit. If xyz stock is trading at $70 per share on my $55 call option, then there is a $15 profit potential for each of the underlying 100 shares of xyz stock. Keeping in mind the price quoted for a call option is in reference to a single share of stock, then the call should be trading closer to $15 and possibly more if the stock price is continuing to rise. That means I could sell the $2 call for $15 and pocket the difference. In that case, I will have paid $200 to buy the call ($2 call price x 100) and sold the same call now worth $15 for $1,500 ($15 call price x 100) for the same profit of $1,300 ($1,500 - $200). Again, this would be a 650% return on the $200 investment to initially buy the call. In reality, there would be a broker fee to buy the call and again to sell the call. However, you don’t have the extra fees of buying and selling the underlying 100 shares of stocks that would be incurred if the call option was exercised as in the previous example.
What is the potential loss with call options:
The main benefit of using call options to make money on stocks with dropping prices instead of shorting the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($200 in the above examples). If the stock price never went higher than $55, then the call would expire worthless and the investor would loose the $200 investment.
Summary:
The use of call options is another way of making money when the stock price is going up. They are especially good to consider when a stock has been unfairly beaten down in price and set to rebound. However, the price of such call option can be much higher since many investors likely expect the price to return back up and pay a premium for the option. You need to be careful since stock prices can change very quickly in the opposite direction causing your call to expire worthless. Don’t invest too much on calls in any one company. Diversify and use calls as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Setting up for future option strategy articles:
Last week I described put options. This article describes call options. I must establish what these two options are before discussing various strategies used by sophisticated investors to control and sometimes eliminate most risk from the movement in the price of a stock. Now, lets get into understanding what call options are.
What is a call option?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. There are put and call options (I covered put options in last week’s article). When exercised, call options force the seller of a call to sell stock at a set price. As the buyer of a call, you hope the stock price goes higher than the call exercise price. If it does, then you can buy the stock at the call exercise price and sell at a higher market price or keep the stock.
A call (or put) option controls 100 shares of the underlying stock:
Critical things to know as an investor in options:
1) One call option controls 100 shares of the underlying stock. Therefore, when one call option is exercised by the call buyer, the call option seller must sell 100 shares of the underlying stock at a set price (an example below will help explain this).
2) Calls (and puts) are priced on a per share basis or 1/100th of the actual cost to buy or sell a call. So, if you see a call trading for $5, it will actually cost $500 to purchase that call option ($5 call option x 100 shares = $500 total cost). These two things can throw new option investors off until they get used to the leveraging inherent with trading options.
3) Call (and put) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your call option’s value on or before expiration day to prevent buying the stock automatically.
How can you make money with call options when the stock price goes up?
As mentioned above, a call option can be exercised to force the seller of the call to sell the underlying stock at a set price for the buyer of the call option if he/she chooses to exercise the option. The desire is to force the call seller to sell 100 shares of a stock to you at a lower price than the current market price you would have had to pay to buy the 100 shares of stock.
An example showing how a call option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.
I do research to find the stock of a company – xyz corporation - with a high probability of going up in price. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November call option with a $55 strike price that expires the third week of November. This call is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the call option.
By November 15th, the price of xyz stock rises to $70 and I tell my broker to exercise the option. The call option forces the call seller to sell these 100 shares to me at $55 each for a total cost of $5,500 ($55 x 100). I can then sell these 100 shares of xyz stock on the market for $7,000 ($70 price x 100 shares of stock) and have just pocketed a $1,500 profit ($7,000 - $5,500 purchase cost). However, I paid $200 for the call option so my net is $1,500 - $200 = $1,300. This is a 650% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the call option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.
Another example showing the tremendous leveraging potential in options:
An alternative to exercising the stock purchase would be to sell the call option before it expires to another investor at a profit. If xyz stock is trading at $70 per share on my $55 call option, then there is a $15 profit potential for each of the underlying 100 shares of xyz stock. Keeping in mind the price quoted for a call option is in reference to a single share of stock, then the call should be trading closer to $15 and possibly more if the stock price is continuing to rise. That means I could sell the $2 call for $15 and pocket the difference. In that case, I will have paid $200 to buy the call ($2 call price x 100) and sold the same call now worth $15 for $1,500 ($15 call price x 100) for the same profit of $1,300 ($1,500 - $200). Again, this would be a 650% return on the $200 investment to initially buy the call. In reality, there would be a broker fee to buy the call and again to sell the call. However, you don’t have the extra fees of buying and selling the underlying 100 shares of stocks that would be incurred if the call option was exercised as in the previous example.
What is the potential loss with call options:
The main benefit of using call options to make money on stocks with dropping prices instead of shorting the stock is that your maximum loss of investment is limited to the total purchase paid to buy the call ($200 in the above examples). If the stock price never went higher than $55, then the call would expire worthless and the investor would loose the $200 investment.
Summary:
The use of call options is another way of making money when the stock price is going up. They are especially good to consider when a stock has been unfairly beaten down in price and set to rebound. However, the price of such call option can be much higher since many investors likely expect the price to return back up and pay a premium for the option. You need to be careful since stock prices can change very quickly in the opposite direction causing your call to expire worthless. Don’t invest too much on calls in any one company. Diversify and use calls as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Sunday, October 5, 2008
Options: Understanding Puts - making money when a stock price goes down
Stock prices are dropping these days:
You would have to live in a remote village somewhere to not know about the dropping stock market. You hear about how there was over a trillion dollars of value lost from the 778 pont on day drop in the dow this past week. The media focuses on how much money was lost. What they don’t tell you is that many other investors made tons of money that day when prices dropped by using put options and by shorting stocks (see a previous article explaining shorting of stocks).
What is a put option?
Options are a contract between a seller and a buyer on what specific price they will buy or sell the underlying stock. There are put and call options (I plan to cover call options in a future article). When exercised, put options force the seller of a put to buy stock at a set price.
Using leverage - a put (or call) option controls 100 shares of the underlying stock:
Critical things to know as an investor in options:
1) One put option controls 100 shares of the underlying stock. Therefore, when one put option is exercised by the put buyer, the put seller must buy 100 shares of the underlying stock (an example below will help explain this).
2) Puts (and calls) are priced on a per share basis or 1/100th of the actual cost to buy or sell a put. So, if you see a put trading for $5, it will actually cost $500 to purchase that put option ($5 put option x 100 shares = $500 total cost). These two things can throw new option investors off until they get used to the leveraging inherent with trading options.
3) Put (and call) options on stocks expire at the end of the third week of the associated month. If not traded or exercised by the investor before then, it may expire worthless, or if there is still value in the option - the broker may exercise it automatically. Be careful to know your option’s value on or before expiration day.
How can you make money when the stock price goes down?
As mentioned above, a put option can be exercised to force the seller of the put to buy the underlying stock at a set price from the buyer of the put option if he/she chooses to exercise the option. The desire is to force the put seller to buy 100 shares of a stock from you at a higher price than the current market price you pay to buy the 100 shares to sell.
An example showing how a put option works and the associated leveraging potential:
For this simplified example, I will not include the fees charged by your broker to trade options or stocks.
I do research to find the stock of a company – xyz corporation - with a high probability of going down in price. On October 1st the price of xyz corporation stock is trading at $50 per share. I decide to purchase a November put option with a $45 strike price that expires the third week of November. This put is trading at $2 which means I pay $200 ($2 price x 100 shares of underlying stocks) to buy the put option.
By November 15th, the price of xyz stock drops to $30 and I tell my broker to exercise the option. I then buy 100 shares of xyz stock on the market for $3,000 ($30 price x 100 shares of stock) and force the put seller to buy these 100 shares at $45 each for a total of $4,500 ($45 x 100). I have just pocketed $4,500 income - $3,000 cost of the stocks = $1,500 from this transaction. However, I paid $200 for the put so my net is $1,500 - $200 = $1,300. This is a 650% return on investment. In reality though the return would be less since there is usually a fee from the broker to buy the put option, buy the 100 shares of stocks, and to sell the 100 shares of stocks.
Another example showing the tremendous leveraging potential in options:
An alternative to exercising the stock purchase would be to sell the put option before it expires to another investor at a profit. If xyz stock is trading at $30 per share on my $45 put option, then there is a $15 profit potential for each of the underlying 100 shares of xyz stock. Keeping in mind the price quoted for a put option is in reference to a single share of stock, then the put should be trading closer to $15 and possibly more if the stock price is continuing to drop. That means I could sell the $2 put for $15 and pocket the difference. In that case, I will have paid $200 to buy the put ($2 put price x 100) and sold the same put now worth $15 for $1,500 ($15 put price x 100) for the same profit of $1,300 ($1,500 - $200). Again, this would be a 650% return on the $200 investment to initially buy the put. In reality, there would be a broker fee to buy the put and again to sell the put. However, you don’t have the extra fees of buying and selling the underlying 100 shares of stocks that would be incurred if the put option was exercised as in the previous example.
What is the potential loss with put options:
The main benefit of using put options to make money on stocks with dropping prices instead of shorting the stock is that your maximum loss of investment is limited to the total purchase paid to buy the put ($200 in the above examples). If the stock price never went lower than $45, then the put would expire worthless and the investor would loose the $200 investment. In the case of shorting a stock, the investor has no limit on the potential loss of the stock price should dramatically increase before the stock can be purchased back to close out the short (again – refer to my previous article on shorting stocks).
Summary:
The use of put options is making many investor very rich in today’s falling stock market. However, you need to be careful since stock prices can change very quickly in the opposite direction causing your put to expire worthless. Don’t invest too much on puts in any one company. Diversify and use puts as one investment tool among many as part of your investment strategy.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
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