Saturday, August 18, 2012

what are my options?

I've been recently re-reading my older posts and as frightful as this may sound, my blog is becoming more of a journal rather than a helpful hand getting into the markets leading you to eventual financial freedom.  I had been hoping to avoid this, but I too have been growing both my assets as well as my investing knowledge.

It's now led me to the wonderful world of "options."  Please note, your options do NOT include fries and a drink.  This is a money blog!  At the same time, it shouldn't really include "under the mattress" either... Well... Not for all your money.  Seriously though, these are not the same options you might get as an employee of a big company.  These are contracts that trade on the derivatives market.  These contracts have a value unto themselves and are affixed to a specific stock or index.  Like a contract for employment they have terms and conditions, but unlike a contract for employment the money is paid up front.  (Unless you're a lawyer those people always want the money up front.)

I could prattle on and on as to how they work, but that's best described by other info sites since it's somewhat confusing at first as to why anybody would want to do this.  So lets skip forward to the good stuff! What have I done?  I've written several covered calls to enhance my returns. So far, my returns have been very small as I need to shake up my holdings a bit as I currently do not have too many holdings that are option-able.

So far I've been very modestly successful and collected a tiny bit of option premium for my efforts.  Only time will tell if I get "called away" from my positions, but since I've been dutiful selecting the term and conditions for these contracts I will only walk away richer than I am now.  I could lose only if the underling holdings completely explode.  Which isn't possible, but it's very very remote for the companies and options I've traded.

Trade activity: (number of contracts, strike prices and duration have been omitted)
sold - call(s)
sold BAC - call(s)
sold  F - call(s)
sold  SU - call(s)

Minus my commissions this added up to a hill of beans.  A small hill of beans mind you and not a hole in the ground.  If I get called away then great.  I've made money on that too!  If I don't, then I'll re-write new contracts on these positions and start the process over again.  It's extra money on top of positions I'm happy to hold for the next little while.

Now, why would anybody do this?  If you think the market is going to take off, then you can BUY (a call) and set your entry price and only get in if/when things start to move.  If it doesn't move, you don't hit the trigger price (strike price) and you don't wind up buying the stock.  This just cost you your premium but it prevents you from buying the stock that's not going up anyway.

Or, alternatively you can SELL (a call) to collect the premium.  If the market doesn't go up then you keep the stock and the premium, then repeat the process.  If however the stock price does go up to hit your strike price, then you *may* get "called away" (and get the face value) AND keep the premium.  Either way, you get the money up front.  If the stock doesn't go up much past the strike, you may not get called away either.  It all depends on how much the buyer paid for the contract.  Since with options you are buying/selling the RIGHT, but NOT the obligation to call away or put to somebody else.

Stay hungry my friends!

Do what I do at your own peril.  I've done my homework.  Have you?  If you don't want to stand up and take responsibility for YOUR actions what makes you think I should take responsibility for YOUR actions?   Don't make me say, "I told you so....  loser!"

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