OneOnian Money Talk

Mon 27 Aug 2007

---

2 Responses to “ Guest Page ”

Comments:

1. danielson says:
   August 27th, 2007 at 12:48 pm

   Understanding options.

   One of the biggest reasons why people don’t invest in options is because they don’t understand them. Although I have never traded options either, I’m about to get started real soon. The following are two scenarios on separate stocks that I plan to put into action very shortly. Each operation has its separate purpose, and if executed correctly, each could put me into the positive. Let’s take a look.

   The first option is on YGE. For all prices, go to http://www.cboe.com and type in the ticker symbol. Since this stock recently IPO’d, it has yet to trade options but has them priced on there. I think it will begin to trade shortly. I currently own 75 shares, and plan on buying 25 more for a total of 100, i.e. one contract. I’m looking at DEC 07 calls, and I was looking at selling a covered call at Strike price 20 and also buying a call at strike price 15. YGE is a solar company, and with volatility I can possibly just trade the options or wait until options expiration to get a gain.

   I have a hunch that YGE will reach 20 or above by DEC 07. If this is the case, I gain big. I sell my covered call contract for approximately $125 (pricing of 1 contract) locking in a profit of (400 +125 = 525). I pay $230 for the right to buy 100 shares at 15 per share, and now my newly purchased 100 shares are valued at over 20 per share. Thus, outcome is 525 – 230 = 295 plus at least 500 in unsettled trades for a gain of 795 in about 3 months time. The most I would have invested in any day is ~ 1725, so 795/1725 = 46% gain.

   What if YGE is not over 20? Say it’s between 15 and 20. I sell the covered at 20 and buy the reg call at 15. The price per contract difference here is approximately $100. This would mean at expiration, as long as the price per share is above 16.00, I win, and now own 200 shares for approximately 16 per share.

   If the value falls below 15, the most I can lose is 100 because of the difference in contract prices.

   Downside ~ -$100, upside ~ $800.

   Also, YGE is Chinese, so it must have Yuan’s blessing.

   My second scenario is used to limit current loss I have. When I heard about the SIRI and XMSR merger, I was all about it. It was the next best thing since sliced bread. Well, not exactly. Now, the price of SIRI has been caked down because people didn’t think the merger was going to go through. I have already sold half for a loss and still own 1000 shares which I purchased around 3.40 per share. Currently, SIRI sits at about 2.80 per share, so I have 600 in losses on unsettled trades.

   SIRI has a 52 week low of 2.66, so the current market price is 14 cents from 2.80. SIRI will not go bankrupt until at least 2008, so we do not have much downside left. Now, I want to sell 500 shares to free up cash, but I came up with this idea instead to possibly put me in the positive. I am planning on purchasing 500 more shares at or around 2.80, which will lower my cost per share to around 3.20. Then I plan on selling 10 SIRI contracts for MAR 08, which price at .50, which would give me a gain of around 500. That means I would pay around 900 for 500 shares.

   If in March of 08, SIRI is above 3.00 per share, I will sell 1000 shares, taking a 200 loss but now having 500 for selling contracts. I’m actually up on the investment, having made 300 overall. This is approximately 300 / 4200 (a measly 7 percent gain, not one to be proud of, but better than a loss and better than a money market account).

   If in March 08, SIRI is below 3.00 per share, I have 1500 shares and have $500 in the bank. The only way I can lose money here is if I sell 1500 shares at less than ~ 2.90 per share. Thus, I have just eliminated my loss. I still have 500 shares in case the merger goes through, and doubles to 6.00. I win.

   The moral here is options can be fun, and exciting. I am looking hard into several highly volatile stocks that have heavy floats. Any positive news can swing the company high, because people have to cover shorts. I think options are a good trade on highly floated short sold stocks. A few I am looking at are any solar company, CLWR, FRPT, JSDA. These are possible good ‘long’ term investments, but for a quick short term gain consider trading options on these.

2. oneonian says:
   August 28th, 2007 at 3:26 pm

   Good write up on options. But I have to admit options is not my game. The only legitimate use is what you mentioned, buying it like a piece of insurance. but the bigger picture of whether the cost insurance justify the underlying value is a post in itself.

Leave a Reply

You must be logged in to post a comment.