An
option is a contract to buy or sell a stock or commodity at a
specified price at a future date.
There
are many different types of options, but let's consider the simple
option that you buy at todays market price in hopes that the
market will go up within the next 30 to 90 days and you can sell
you option at a profit because the difference in the price today
and the price in 60 days or so. You can either sell the option
or you can exercise the option and sell the stock or commodity
at the market price and your profit is the difference in the
price of the stock when you bought it and the market price now
less what you paid for the option and the commissions to your
broker.
The
options game is a great one that many people play but few succeed
in since fully 95% all options expire without any value. Options
also have different quoted values and some of the expertise involved
in option investing is to find the 'cheap' options with the most
opportunity to increase in value. Sometimes an option can be
almost a sure bet except that if all the other folks think so
too... the price will be so expensive that no one can afford
the price in the hopes of the change in value since even if the
price changed as we all seem to think... there would be no profit.
Some
people who own stock will ' write' (sell) an option on stock
that they own in hopes that the buyer will never exercise the
option and they will keep the small amount of income from selling
the option.
Then
in another 30 to 60 days they can sell an option on the same
stock again and collect more option money . The only downside
in this move is that if they must deliver the stock there may
a capital gain and they would be liable for the income tax on
the gain.
One
of the info gurus, Wade Cook, is promoting a 'system' whereby
you buy an option that the stock will go up and one that the
stock will go down. Therefore, when the price breaks out you
are covered either way. That all sounds well and good... but
what if there is no movement and you have purchased two expensive
options and not just one ? Therefore, the need to search for
'cheap options'.
I
am in the process of setting up a computer program which will
identify the cheap options which have a potential to grow. Without
a computer program, the search is extremely tedious. I know,
I have tried.