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Old 5th February 2010, 6:47 PM   #1
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Can one of you financially savvy LSers explain Options to me in simple English and how they're different from Stock Futures

I know LS isn't the ideal place to ask these kinds of questions, but I don't feel like registering on another board (especially since I dont have money to invest anyways)
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Old 5th February 2010, 6:48 PM   #2
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You poor baby, not understanding the difference. I feel bad for you.
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Old 5th February 2010, 6:51 PM   #3
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You poor baby, not understanding the difference. I feel bad for you.
They have something to do with having the option of buying or selling a stock at a set price at a future time, but I thought that was a Futures contract and I guess it isn't

I was just a dumb History major
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Old 5th February 2010, 7:06 PM   #4
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Okay, I'll help you even though you don't help me.

The biggest difference is that with a futures contract, you are contractually obligated to complete the contract of taking delivery/paying for the underlying security, at the price dictated on the futures contract.

With stock options, you can allow the option to expire, solely losing out on the premium that you originally paid. It's not necessary for the underlying security to change hands, at the original strike price.

Keep in mind that in this day and age, the underlying asset will be primarily bookbased, when discussing stocks/bonds.

There are other differences but the above is the major one with all the implications and liabilities associated to this.
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Old 5th February 2010, 7:14 PM   #5
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I kind of get it but some of it is still Hieroglyphics

Could you illustrate it with an example

I dont understand what strike price means
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Old 5th February 2010, 7:19 PM   #6
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BTW TBF Ive always admired your knowledge of finance and economics

Its such a fundamental thing in most of our lives, yet so many (like myself) stay in the dark ages
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Old 5th February 2010, 7:24 PM   #7
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Consider these basic examples since there are all kinds of strategies people can play. For ease of single glance calculation, I'm using round numbers v. real examples of percentages, prices, etc:

Stock Future:
Person A agrees to buy 100 shares of ABC minerals on Feb. 5, 2010 at $1/share. Person A will pay x % of this contract upfront like $10 and on Feb. 5, will have to pay the balance $90 and take delivery of the 100 shares.

Stock Option:
Call option - Person A buys 1 contract at the strike price of $1, whereby the underlying security is for 100 shares of ABC minerals at $1/sh with an expiry date of Feb. 5, 2010. Person A pays a $5 premium. When Feb. 5, 2010 comes around, Person A has the ability to let the option expire, losing only $5 or they can exercise their option at any time within the parameters of the rules and regs of option exercising, up to and including Feb. 5. If they choose to exercise the option, they pay $100 for 100 shares of ABC minerals.

Last edited by Trialbyfire; 5th February 2010 at 7:26 PM..
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Old 5th February 2010, 7:28 PM   #8
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BTW TBF Ive always admired your knowledge of finance and economics

Its such a fundamental thing in most of our lives, yet so many (like myself) stay in the dark ages
There's nothing to admire since both are part of what I enjoy, do as a job and also, what I went to school for. But thanks for the compliment.
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Old 5th February 2010, 7:31 PM   #9
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Something I've been doing in the last 6 months or so is selling/writing options on stock rather than buying them.
Buying an option is an easy way to lose your shirt unless you have the time to stay on top of them.

There is always someone out there that will take an option on certain stocks.. Energy stocks for example are easy to write an option on.
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Old 5th February 2010, 7:38 PM   #10
 
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You can also take a look at investopedia website for definitions and many times they have illustrations.

Options can be fun but you really have to keep an eye on your options and keep your options "open."

Be very careful when you get into naked options. If you don't pay attention you can lose a lot of money. Remember options is the right to buy or sell something at the strike price. Also be careful with complex options, collars, strangles, virtual ownership, etc...

If you want to start I will suggest opening an options play account to try before you put your money it.

I also suggest reading the Risk in Options pamphlet, whatever that name of the pamphlet when you add the options trading to your trading account.

Have fun!
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Old 5th February 2010, 7:43 PM   #11
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Calls are less of a risk, than stock futures, by a long shot, since you're only risking the premium v. being held liable for the entire contract, as with futures. With calls, you're in control of having to or not having to buck up for the entire contract, beyond the premium.
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Old 5th February 2010, 7:52 PM   #12
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You can also take a look at investopedia website for definitions and many times they have illustrations.

Options can be fun but you really have to keep an eye on your options and keep your options "open."

Be very careful when you get into naked options. If you don't pay attention you can lose a lot of money. Remember options is the right to buy or sell something at the strike price. Also be careful with complex options, collars, strangles, virtual ownership, etc...

If you want to start I will suggest opening an options play account to try before you put your money it.

I also suggest reading the Risk in Options pamphlet, whatever that name of the pamphlet when you add the options trading to your trading account.

Have fun!
Thanks for all of your answers and that was a really helpful example TBF

And thanks for the suggestion about the virtual account Jerbear. Im reading some of the dummies books right now (Investing for Dummies and next up is Futures for Dummies) and when Im done Im going to try a hand at some of those virtual accounts

I dont have investment money now anyways, but Ive never tried to make myself financially literate before, so now at 35 Im trying to understand

I know guys like me should stick to 401 K's and mutual funds, but I do want to learn some of the riskier and potentially more profitable investment posibilities as well
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Old 5th February 2010, 7:56 PM   #13
 
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Originally Posted by Trialbyfire View Post
Calls are less of a risk, than stock futures, by a long shot, since you're only risking the premium v. being held liable for the entire contract, as with futures. With calls, you're in control of having to or not having to buck up for the entire contract, beyond the premium.
This works with covered calls, covered puts, but not with naked calls or naked puts. You can lose more than your premium.

Sorry, I just wanted to say naked....
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Old 5th February 2010, 7:58 PM   #14
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[rant]Mutual funds and other such basket products, are the gift that keeps on giving to much of the investment world. Everyone takes a cut of the capital gains and if there's capital losses, the investor pays and pays and pays.[/end of rant]

Just my two cents on basket products since not only does the investor pay through the nose, arse and every other orifice but also, has no control with the products that go into the basket.

Having said that, b4r, plse don't get into derivatives as a starting point. The concept of a virtual portfolio is a good one, where you can test yourself against reality, is a good way to learn how to invest in the market. That's how my parents taught me how to invest, by getting me to create a fake portfolio of investments of my choice and then, creating quarterly profit and loss reports.
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Old 5th February 2010, 8:00 PM   #15
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This works with covered calls, covered puts, but not with naked calls or naked puts. You can lose more than your premium.

Sorry, I just wanted to say naked....
Don't be getting into the complexity of it all. That's why I stated in my original post, about the simplistic view.

Hedge tactics can offset nudity!
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