You Have Options

Topic: Options Trading
Key Words: Time Horizon, Gambling, A Big Move
Word Count: 485
Tomorrow's Likely Topic: Two Marathons in One Day

A friend at work has introduced me to options trading. With an option, you basically purchase a contract that says you have the right to either purchase or sale 100 shares of stock, at a certain price, at a certain time in the future. Often times, options are available at a fraction of the value of the price of the stock. Why? People almost never claim the option contracts; i.e., they never actually buy the shares. Instead, someone who is bullish on a stock (thinks it will go up) will purchase an option to buy a stock at a price above it's current level, say in one year. They hope, believe, assume that the stock will indeed approach the level of the price of the option. As the stock approaches that price of the option, your option will go up in value.

A "put option" is an option to buy stocks. Say you buy a put on stock X, which is currently at 5 dollars a share, for $7.50 a share, with a time horizon of January 2008. That put might cost you $150. So you have the right, come Jan. 2008, to buy 100 shares at $7.50 a share. If the stock starts to move towards $7.50, the value of your option will increase; you'll make money. If the value of the stock eclipses the value of your option (i.e., the value eclipses $7.50), you option is said to be "in the money", and you stand to make a lot of money as the stock goes up. Of course, if the stock drops, your options is worthless, because who would want to buy a $2 stock at a price of $7.50? What does this lead us to??? Options are a great way to leverage stock for a small amount of money. Unlike stock, you can easily lose all your investment in a short amount of time.

Some say options are basically gambling; be ready to lose all the money you invest. However, if you really believe a stock is set to make a big move (a biotech is about to get a new drug approved, or a patent company is about to win a big lawsuit), options present a cheap way to take a BIG position on the stock. You might be able to leverage 100 shares of stock for a fraction of the current price.

If you have a little bit of money (often times a couple hundred bucks can buy an option), you can start gambling! There's a stock or two that I'm considering purchasing options on ... I'll keep you informed of what I do.

Long run tomorrow morning. About time to call it a night.