TRADING OPTIONS 101
My First Introduction to Options Trading
It was my ballet teacher, of all people, who first introduced me to options trading. I was as surprised as you are but I became fascinated and just absorbed it all like a sponge. It didn’t make a lot of sense to me then. Helen wasn’t as good at teaching options trading as she was at teaching ballet but she definitely peaked my interest. One or two books and a couple of years later I was re-introduced to options trading by an “angel” supporter of my charity. A very generous and likable man who, in addition to helping my charitable cause, showed me his personal options trading website. It was so exciting to see an account with more that 2 millions dollars to trade with. This man was really enjoying his money and having fun. He was so excited about his hobby that he gave me all the cd’s and material from the options trading course he had taken. The course had cost him well over $10,000 and he happily gave it to me for free. After studying the course material I dove in and had a great time. It was a real challenge too. There is a whole vocabulary built around options. That’s the first thing you want to learn….the language.
So, What’s an Option?
An option is a temporary stake in a company. The option contract you buy is for a limited length of time, it represents 100 shares in a company, and the cost to buy it is based on a small fraction of the “share price” in the company. Options are not available for all listings on the stock exchanges. Companies who are “option-able” are listed on the Chicago Board Options Exchange, www.cboe.com. The wonderful thing about options is you can bet on a rise OR fall of the underlying company’s share price. Unlike owning shares in a company where you purchased them because you believed the stock share price would rise, you can buy an option contract because you believe the underlying company’s share price is going to drop. And if you’re right, you win. Options Trading is most like a game than any of the investment strategies I’ve learned.
Options is a Horse of Another Color
A long time ago, I was a great fan of thoroughbred horse racing. I had taught myself to handicap the horses. I was good at it but it took a lot of time. I spent at least 8 hours prior to each race analyzing the racing forms. I studied the past performances and lineage of each horse, along with the breeder, the trainer and the jockey’s history and current weight. I knew how the horse did on wet or dry, turf or sand and was prepared to make race-day adjustments for track conditions, jockey weight and the sight of a Lasix patch on the horses inside thigh which meant he was on a diuretic. Usually my handicapping was in alignment with the public race predictors whose prophesies were printed in the racing papers. BUT, every now and then you come across a long shot. A horse whose numbers add up to a winner that nobody else seems to see. It was the most exciting race I’d ever seen. I stood to win thousands of dollars at a time when hundreds was lots. The horse was dazzling and took an enormous lead to everyone’s surprise then half a furlong ahead of the pack and just 20 yards before the finish line, the jockey fell off. The horse was disqualified and my head was spinning. What the hell was that?
In 2008 I was in my home office analyzing options possibilities. I had been following the banks and mortgage companies and they were failing fast. I was reading newsletters and financial statements and the future of the financial institutions was bleak. I placed my bets that certain banks were going to fail and I planned to walk away a big winner. Two days before my options contracts expired they announced that the banks were “too big to fail” so the government would bail them out. My contracts expired worthless. The jockey had fallen off again.
“Ballerinas” Image courtesy of sattva at http://www.freedigitalphotos.net
“Stock Exchange Graph” Image courtesy of worradmu at http://www.freedigitalphotos.net
“Horse Racing” Image courtesy of debspoons at http://www.freedigitalphotos.net
“Bank” Image courtesy of Salvatore Vuono at http://www.freedigitalphotos.net