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Message
re: I'm seeing a bargain with this stock, what am I missing?
Posted on 4/5/13 at 1:24 pm to OnTheBrink
Posted on 4/5/13 at 1:24 pm to OnTheBrink
quote:Then the option expires and the buyer of the option loses the 4 cents/share he paid to buy the option.
And if they do not reach $9 by the 20th?
With a strike price of $9/share, the price of AA would have to go over $9.04 for the buyer of that option to be "in the money."
1
Posted on 4/5/13 at 1:26 pm to OnTheBrink
quote:
ETA: How come they are pennies for a share?
That is the price of the options contract for the right to buy @ $9/share
ETA2: Do any of you guys mess with options?
Not very often anymore, I don't have time to keep up with them, I'm more of a buy and hold guy anyway.
Posted on 4/5/13 at 1:32 pm to LSURussian
quote:
LSURussian
So, lets say I wanted to buy 100 shares using options. I put up $4.00? Or I put up $900?
And if it doesnt hit $9, I lose $900 or $4?
BTW, thanks for answering these crazy questions, just trying to understand them a little better. I do not ever plan to trade them.
Also, by looking at that chart, does it not look like investors are a little more bullish on it?
Posted on 4/5/13 at 1:33 pm to Vols&Shaft83
quote:
buy and hold guy
Same here.
ETA: AA has to look like even more of a bargain now right?
This post was edited on 4/5/13 at 1:35 pm
Posted on 4/5/13 at 1:37 pm to OnTheBrink
quote:Other than answering because the Black-Scholes Options Pricing Formula says that is what those options are "worth" (
ETA: How come they are pennies for a share?
), what it really means is there is a very low anticipation that the price of AA will exceed $9/share before April 20. I think you're confusing the option price with the share price.
The option just gives the buyer of the option the RIGHT to buy the shares at $9 on or before April 20. Options are sold in 100 share contracts, so for $4.00 ($0.04/share X 100 shares) the buyer of one option contract is just locking in a price at which he can buy the shares on or before April 20 and that locked-in price, referred to as the 'strike price,' is $9/share.
Of course the only reason the option holder would exercise his option would be if the price went over the strike price. He would not exercise his option to buy the shares at $9 if the current market price was, for example, $8.23, which is what AA can be bought for now as I write this.
Only an Ole Miss graduate would buy something for $9 when he could buy the same thing for $8.23 on the market.
Posted on 4/5/13 at 1:39 pm to OnTheBrink
quote:
So, lets say I wanted to buy 100 shares using options. I put up $4.00? Or I put up $900?
And if it doesnt hit $9, I lose $900 or $4?
You put up $4 for the contracts, then if AA hits $9, you buy 100 shares for $900.
If it doesn't hit $9/share, you lose the $4 on the contracts.
Posted on 4/5/13 at 1:39 pm to LSURussian
quote:
LSURussian
Thanks Russian!
I don't care what Wiki and the other free lovers say about you, you are an alright guy!
Posted on 4/5/13 at 1:42 pm to OnTheBrink
quote:You would pay $4 for the right to buy 100 AA shares on or before April 20, 2013 @ $9/share.
So, lets say I wanted to buy 100 shares using options. I put up $4.00? Or I put up $900?
You would not exercise the option and pay the $900 for the 100 shares if the strike price remains below $9/share before April 20.
quote:Aw, why not? You're an expert now!
I do not ever plan to trade them.
quote:What do you see on that chart that makes you think that?
Also, by looking at that chart, does it not look like investors are a little more bullish on it?
Posted on 4/5/13 at 1:43 pm to OnTheBrink
quote:
I don't care what Wiki and the other free lovers say about you, you are an alright guy!
Haven't you heard, I'm the "worst poster on this board"!!
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 1:46 pm to LSURussian
quote:
Haven't you heard, I'm the "worst poster on this board"
Oh yeah I have seen, unfortunately I have been spending too much time in the bitcoin threads.
Posted on 4/5/13 at 1:47 pm to LSURussian
quote:
LSURussian
It seems like there is a lot of "open interest" for the $9 calls, no?
This post was edited on 4/5/13 at 1:49 pm
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 1:52 pm to C
quote:
The price has to go above the strike price. Again it give you the option to buy $9 no matter what the price is
BUT, it has to go above by April 20th right?
Seems like it would be a waste of money thinking it would go above $9 in 15 days.
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 1:58 pm to LSURussian
C, Russian, V&S, I appreciate the insight guys.
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
Posted on 4/5/13 at 2:28 pm to OnTheBrink
quote:
It seems like there is a lot of "open interest" for the $9 calls, no?
I don't follow AA options enough to know if that open interest amount is unusual or if it is within the normal parameters for contracts expiring in a couple of weeks for that stock.
I'm assuming you know that open interest is not the same thing as volume of contracts bought since the call options for 4/20 started trading.
Posted on 4/5/13 at 3:58 pm to LSURussian
quote:
So for an investment of $40 the option buyer makes a return of over 2,000% in 15 days.
Was gonna put a flashing WARNING sign up for Brink until I read
quote:
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.
Most people don't understand the risks, or don't think losing $40 is a big deal, so they get death by 1,000 cuts. And because it's addicting, guy takes a $40 hit, tries to double up on his next trade, and so on, and so on.
Trading with a plan is fine, but a lot of guys don't, and ruin their lives.
Posted on 4/5/13 at 4:05 pm to Vols&Shaft83
quote:
Was gonna put a flashing WARNING sign up for Brink
No need for the warning, I am just trying to understand... Way too complicated for me even to begin considering messing with them...
This post was edited on 4/5/13 at 4:08 pm
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