Tuesday, July 10, 2012

The Basics of Understanding Stock Options

A stock option is a derivative product that gets its life from a publicly traded stock. The value of this derivative is derived from the underlying stock price plus the value of time to expiration.
Options that expire next month are more expensive than options that expire this month. Additionally, options that are in-the-money (ITM), Apple Inc. (AAPL) shares at $590 and call options at the $580 strike price will be more expensive than the out-of-the-money (OTM) $610's, $620's, and so on. 
When you buy shares of AAPL for cash you can hold it forever as long as it doesn't go bankrupt; whereas an option has a strict expiration date (traditionally the 3rd Friday of every month yet today there are expanded expirations offered), thus an option has a shorter lifespan than a stock.  Options are riskier than stocks but the rewards can be much bigger.
There are also options on currencies, indexes and interest rates, but POTC will limit this write-up to stock options.
A distinguishing factor of a stock option is that is a depreciating asset in the sense that it has a limited time horizon and thus you have a smaller window to be right on direction. You can make money when a stock goes up (call options), or down (put options).
 And you have to take action (book profits or losses) before the expiration date. As time passes the option value erodes in value/price as it moves closer to its expiration date.
When we speak of options in terms of volume, we refer to contracts instead of shares.
One (1) stock option contract is equivalent to 100 shares of stock. And two (2) contracts are equal to 200 shares of stock, 20 contracts; we are talking about 2,000 shares, 100 contracts 10,0000 shares, etc. etc.
Equivalent Amount of Option Contracts  Equivalent Amount of Shares 

You have to understand the dollar cost of options before deciding on trading. When an option is quoted at $1.00 per contract, the investor must realize that the $1.00 represents a price of $1.00 per share, not per contract.
Please understand that each contract is worth 100 shares. This means that if you bought y a single (1) option contract at a quoted price of $1.00 your total cost would be $100.00 (1 contract x $1.00 per share x 100 shares per contract). If you bought 10 contracts for $1.50 per contract your total cost would be $1,500.00.
Use this basic formula when calculating total dollar cost of the option.
Total Dollar Cost of Trade = Amount (#) of Contracts x Price per Contract x 100
Option contracts are a sales agreement between two parties. The parties are the buyer (or holder) and the seller (or writer). When you buy an option contract you are long the option. When you sell an option contract you are short the option. This assumes you had no previous position in the said option at time of entry.
Thank You,

Monday, July 9, 2012

Game On for LinkedIn (LNKD); Facebook (FB) Challenge is Official

We sent a volatility Trade Alert (TA) for LNKD this morning, did you receive it?

Remain Psyched as Q2 is Upon Us,
The Psychology of the Call team (POTC)

Sunday, July 8, 2012

Obama is Not 'Wynning- Over' Risk Takers; Audio Stream Included

Capitalist Pig Bob says that this current Administration is the most anti-private sector the U.S. has ever faced. 
Many fear that too many have tilted away from Individualism and to a blue state mentality of Community, Unions, Collectivism, and Entitlement. Yet the failed attempt to recall Wisconsin's Governor Scott Walker offers some hope for 'Change'. 
Our resident Pig also thinks that revenue and earnings streams in most of the Banking, Energy, and Health Care stocks will be dismal through 2012, and then it will depend on who wins the election on November 6. 

The arteries of free-market Capitalism have been clogged, the blood that is risk capital cannot flow freely if the U.S. continues to over-regulate nearly every frickin' industry. POTC agrees with the Pig that we are literally one left field event away from socioeconomic paralysis, where Big Brother would have us on life-support indefinitely.  
Bob thinks that today's global growth quandary is due to the 90%+ of anti-business U.S. Govt agencies in combination  with the negative synergies caused by the overreach of bailouts, stimulus, and Quantitative Entanglement(s) (QE).
Since early 2008, POTC has declared several times 'Long Live Wall Street', and though WS was and never will be perfect, it has directly contributed to creating more sustainable Capital, Wealth, and Labor than any U.S. Govt agency.  
Click this audio stream as proof that 'Obama is Not Wynning' over American risk takers.
Thanks for sharing this message with family and friends as we enter the most critical election stretch in our nation's history,
Pig Bob.

Thursday, July 5, 2012

J.P. Morgan Chase & Co (JPM) and CEO Jamie Dimon will report

Q2 earnings on Friday, July 13, before market open.

We are studying the possibilities here and may send an educational Trade Alert on either JPM or an indirect play like Goldman Sachs (GS).

GS is set to release their Q2 results on Tuesday, July, 17, before market open.  

Subscribers know how we feel about JPM since last week and our thoughts have not changed.

With out trusted microscopes on, we will let you know by Sunday, July 8, whether we will perform any Trade Alerts: before (PFF ratio) or after Friday the 13th. (PETA). 

Thank You,

Monday, July 2, 2012

Bernanke's Date with the Senate Banking Committee: Tuesday, July 17

Ben Bernanke will appear before the Senate Banking Committee on July 17, for his semiannual report.

 The Fed chief is required under the Federal Reserve Act to testify before the Senate Banking and House Financial Services Committees twice each year.

This year’s appearances come as the Fed is weighing whether to launch another full-scale program to help boost the economy.

Last month, the central bank chose to extend its current program, known as “Operation Twist,” through the end of the year. The Fed has maintained since January that it expects to keep short-term interest rates near Zero at least through late 2014.