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Ray,
well said and good advise.
<FONT face=Tahoma
size=2>-----Original Message-----From: Ray Raffurty
[mailto:r.raffurty@xxxxxxxx]Sent: Thursday, March 14, 2002 1:53
PMTo: realtraders@xxxxxxxxxxxxxxxSubject: Re: [RT]
Options are confusing me..............
Hi Sean,
There have been several good but perhaps
confusing responses to your query. Options require study in it self and
there are many excellent books (particularly those by Lawrence
McMillan) and web sites that can help you.
To answer your question as simply as possible
here, for the maximum leverage (and maximum risk) you would
buy the call closest to your target price. INTC has options at
2.5 strike intervals so you could but an April 32.5 call (INQDZ) for
1.5 ($150.00). As pointed out in another post, you can reduce your risk
(and leverage) by going down in strike price say to an April 30 call (INQDF)
for 2.9. This reduces your risk since the call is already "in the
money", the stock price 31.5 is already above the strike price 30.0. As
you can see you can buy (2) 32.5's calls for nearly the price of (1) 30 call,
thus increasing your leverage (and risk).
Someone else here mentioned buying options with a
high Delta. Delta is the amount the price of the option will move
per 1 point move in the underlying stock. It is expressed as a decimal
between 0 and 1. An option that is deep in the money has a Delta of 1
(example: April 20 call has a Delta of 0.995) meaning that it will move
0.995 ($99.50) for each point INTC moves but it will cost you 11.5 ($1150.00
per contract). If Intel does go to 33.5 you would make $200.00 or
17%.
An option that is "at the money" (stock price the
same as the option strike) will have a Delta of approximately 0.5.
The April 32.5 call has a Delta of 0.463 meaning that for the same 2
point move the option would gain $92.60 or 61.7% on you
$150.00 investment. These numbers are not exact since the Delta will
increase as the stock moves up, but you get the idea. Buying 100
shares of INTC stock at 31.50 ($3150.00) would give you a
6.3% gain for the same move.
Options that are deep "out of the money" (stock
price below the call option strike) have a Delta at or near 0.0 meaning
the move very little at first. They also sell for very little. If
your system can reliable predict larger moves say 10 points you could
buy an April 40 call (INQDH) with a Delta of 0.104 and a price of 0.15
($15.00). If your right and INTC goes to 40 you would make about $270.00
per contract or 1800% but at a very high
risk. Buying 100 shares of INTC stock would give you a
26.9% gain for the same move.
As you can see a lot depends on your tolerance
for risk. All this information is available for free at <A
href="https://www.optionsxpress.com";>https://www.optionsxpress.com
You also need to understand that options decrease
in value over time if the stock does not move. So understand when the
stock is likely to move. It does no good to have the stock move in 2
weeks when the option expires in 1 week.
A brief word about the R word... RISK.
All professional traders reduce risk at the expense of potential gains.
They do this by selling options (vs. buying) and using various spread
strategies. Study these strategies and know how and when to apply
them. When you do buy options keep your trades small as a percentage of
your total at risk money (10% or less) or you may blow out in 1 or 2
trades.
Good luck and good trading,
Ray Raffurty
<BLOCKQUOTE
style="PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Sean
Cassidy
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Wednesday, March 13, 2002 11:11
PM
Subject: [RT] Options are confusing
me..............
I have a stock trading system that has done a
very good job of picking stocks for me. Most trades generally last from 3 to
8 days. But........as I have mentioned here....I dont have enough cash to
turn these stocks into real money. So i was thinking options are a good way
to go. Cany anyone advise me of the best way to trade them.....in a simple
easy to understand way?
For example my software is currently telling me
that INTC is a buy if it gets above 31.55...this is an actual signal.
assuming this play works....the stock will rise to 33.55 or so in the next
few days if it gets up to this price. What is the best way to play
this....please keep in mind I am looking for the maximum leverage. I have
been using the system for a year or so and feel comfortable with the
risk.
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