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re: I'm seeing a bargain with this stock, what am I missing?
Posted on 4/5/13 at 1:45 pm to Vols&Shaft83
Posted on 4/5/13 at 1:45 pm to Vols&Shaft83
quote:
If it doesn't hit $9/share, you lose the $4 on the contracts
So, how do you make money then? And I realize AA is probably a poor example as there seems to be little volatility.
Let's say I bought these contracts today at 0.04, $4. On April 19th, after a strong earning report Monday and a good forecast, AA has been moving up and rest at $8.90/share. Would the cost of my contracts then be worth more? Maybe 0.10?
I don't know, as Russian said, if you think it is going to be at $9 in 15 days, why not buy the shares outright. Seems like a lot of work for minimal gains.
Posted on 4/5/13 at 1:50 pm to OnTheBrink
quote:
So, how do you make money then?
The price has to go above the strike price. Again it give you the option to buy $9 no matter what the price is. So if it goes to $100, you only have to pay $9. You can then sell the share for $100 making $91.
This post was edited on 4/5/13 at 1:51 pm
Posted on 4/5/13 at 1:55 pm to OnTheBrink
quote:Yes, but probably more like $.06-$.08 since there is only one day left before the option expires and AA is, as you said, not very volatile.
Would the cost of my contracts then be worth more? Maybe 0.10?
With AA's lack of volatility, at $8.90/share in your example on April 19, there is only one day left for it to exceed $9/share.
If you want to see volatility in option prices, load AAPL into your options' screen. AAPL option prices will move $10 to $15 per share/contract on a big movement day for Apple.
Posted on 4/5/13 at 2:20 pm to OnTheBrink
quote:
I don't know, as Russian said, if you think it is going to be at $9 in 15 days, why not buy the shares outright. Seems like a lot of work for minimal gains.
Options are a way of making a very healthy % return using very little money.
If an investor buys 10 contracts for $40.00 ($.04 X 1,000 shares) and IF the price of AA went to, say, $9.15 before the expiration date, the option that the investor paid $40.00 for could probably be sold for something like $0.85/contract or $850 ($.85 X 1,000 shares) for a profit of $810 ($850 minus the $40 he paid for the option). This ignores the small amount of possible brokerage fees the investor would pay.
So for an investment of $40 the option buyer makes a return of over 2,000% in 15 days.
Of course, the chance that the price of AA going to $9.15 is very low and if it doesn't the investor loses 100% of his $40 investment.
ETA: serious brain fart on my part. The options would not increase to .85 but to probably only around .13 if the price went to $9.15 just prior to expiration. Still it would be a very nice % return on a small investment.
This post was edited on 4/6/13 at 8:04 am
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