Hey everyone! In my last post I mentioned I picked up a book that changed the way I looked at the stock market. I think the book was called "Make a Killing with Options" or "Get Rich With Options" or something along those lines. It had a catchy title that made me pull it off the shelf and start reading. What I found was very interesting. Up until that point the only way I knew how to make money in the stock market was to buy something at one price and "hope" at some later date I can sell it for a profit. You know the old saying, "Buy low...sell high." As I was reading, I realized there were ways (lots of ways) to make money in the stock market using these things called options.
Did you know that with options you can make money if a stock rises, falls or doesn't move a penny? Did you know that with options you can "insure" stock positions you own in case the bottom falls out? Did you know that you can actually calculate the probability of a having a winning trade before you put any of your hard earned money on the line? Believe it or not, all these statements are 100% true. And that's just the tip of the iceberg my friends.
Now you're broker or financial advisor may have told you options are dangerous and too risky. I would agree that if not done the right way you can lose your pants pretty fast. But I'm here to share with you what I think the right way......or let me just say the safe way is to use options to reach your financial goals.
Before I go on I think the first thing I should do is explain just what an option is. There are hundreds of books and thousands of web pages devoted to explaining options but I'm gonna try to break it down to the lowest common denominator. Options are simply contracts made between a buyer and a seller on the open market. A "buyer" of an option has the "right" to do something as it relates to..... let's use stock ABC for example. A "seller" has an "obligation" to do something as it relates to stock ABC. In options there is always a buyer and a seller. It's important to understand the basics so I'll use the next few posts to get you up to speed one step at a time.
First things first. There are two types of options. The first type is called well....a "Call". If a trader were to purchase a Call on stock ABC he would be betting that ABC's price was going to rise during a certain time period. The second type of option is called a "Put". When a trader purchases a "Put" he is betting that the price of a stock will go down in a certain time period. Notice I mentioned with both calls and puts the movement of ABC has to take place within a certain time period. One way to look at this is with real estate. When you sign a contract to buy a home you normally promise that you will go to closing within a certain time period right? It's the same with options. A trader who "buys" either a call or put is betting the stock will move (one way or another) within a certain time period. Some option periods last one week, others last a month and some can even last a year or longer.
Did any of you guys see the James Bond movie Casino Royale? The movie gave a perfect example of how options work! The bad guy (Lashiff or something) got all this money from the African guy to invest. Well, remember Lashiff had a plan to blow up that plane right? The reason he wanted to blow it up was because he bought a gazillion dollars worth of "Puts" against the company who manufactured the plane. Lashiff knew that if he blew up the plane the shares of the company would crash and he would make a killing with the "Puts" he bought. As it turned out James Bond thwarted his plan and Lashiff ended up having one mad African hunting him down. Although entertaining, I wouldn't suggest using terrorism to make money with options!
I think this is a good place to call it quits for now. Next time I'll explain more about the "rights" an options buyer has. Stay with me guys! I promise we're going somewhere with all this!
No comments:
Post a Comment