options:presentation shareclub

[selkirk]

made a presentation to my shareclub in Oct. on options. if you do not understand the first part, explanation, which I got out of an old copy "the Canadian Securities Handbook". do not worry.

just go to the examples. will update how these examples are doing next week. and will update them until they expire Feb, April, June of 2006.

it is not essential to use options are part of your invesments; and many successfull investor avoid this area of investing.


thanks
selkirk

Shareclub : Options

Some terms

Contract = a contract is simply a term that means 100 shares. All option trasactions deal in multiplies of 100.

5 contracts = 500 shares

3rd Friday of the month. All options expire on the third Friday of the month.

Holder or Buyer Seller or Writer

Call Has a right to buy Has an obligation to sell

An underlying interest at a fixed price for a specified time period

Put Has a right to sell has an obligation to buy

An underlying interest at a fixed price for a specified time period

For every dollar traded in stocks 25-27 cents are traded in options (of some form), in US and Europe the ratio is $1 stock = $4.25-$4.50.

In the US and Europe this number is expected to grow to $1-$8.50 in the next five years. The numbers for Asia would be similar.

Some Examples (Sample Trades) Oct 12, 2005.
Puts

1. Sally wants some to invest in energy stock, but is unsure of buying after the recent sell off.

She decides to sell (write) 2 contracts (200shares) of ECA Puts $54 April

ECA Ecana $$60.11 current price
April $54 P $4.25 bid $4.45 ask

Sell 2 April $54 P contracts at $4.25 per share
200 X $4.25 = $850

Sally receives $850 (minus commissions $35) = $815 total.

In exchange Sally agrees to buy 200 shares of ECA until the third Friday of April. If the stock is above $54 the option will expire worthless. No one is going to sell a stock for $54 if it is trading at $56 ect.
If the stock is trading below $54 Sally will buy 200 shares of ECA at $54. Her cost would be $49.92

Calls
2. Mr. Smith

Mr. Smith likes the prospects of Teck, however he is a conservative investor. He does not like the risks involved in buy and hold investing.

He decides to buy 200 shares of Teck at $52.75 = $10,550

Then at the same time (to save on commisions) he writes (sells) two contracts of TEK $56 Feb.

TEK $52.75
Feb $56 $3.20 bid $3.35 ask

So Smith gets $640 for the two calls, 200X $3.20 = $640.
He is now obligated to sell Tek at $56 on the third Friday of Feb.

If the stock is lower the option will expire worthless, if the stock is higher than $56 ie. $60, he will have to sell it at $56.

It should be noted that any dividends paid would go to Mr. Smith as he still owns the shares.

He has lowered his cost price to $49.55 for each Teck share he bought. Also if he losses the stock his return would be 12.2% in just over 4 months.

3. Puts

Conrad is 38 years old, he wants to retire at 42. To do this he has taken the philosophy of 20% a year or failure. The portfolio has a large amount of equities and could suffer in a market downturn.

He decides to buy some insurance in case the market would fall 10-30% in the next 8 months and destroy his gains.

Conrad buys 4 June $60P XIU

XIU is an index that tracks the TSX 60 (60 largest companies on Toronto) and is a main index.

XIU $60.10 current price
June $60P $2.70bid $2.85 ask

Conrad buy 4 put contracts 4P June $2.80 X 400 = $1120
For his investment he can sell the index for $60 up until the third Friday in June.

If the market falls 10% his options will be worth $2400
If it falls by 20% the options will be worth $4800.

If the index goes up or stays flat the options will expire worthless and he losses all of his money?.still cheap insurance.


Final example

Kim is bullish on the market and want to invest some money in higher risk investments. However does not want to invest in small caps as many can be scams.

She buys 4 XIU June $60Calls

XIU $60.10
June $60 C $3.45 bid $3.60 ask

So she buy four contracts at $3.45 $3.45 X400 = $1380

If the market increases by 10% her investment is worth $2440
20% increase $4880

So if the market goes up just 10% in 8 months she almost doubles her money. If it stays flat or goes down she losses it all. Still these options seem cheap?. A good risk/reward.

Links:
www.me.org
then select language. If you want quotes then there is pull down menu, select quotes. Then another pull down menu select (highlight) the stock symbol you are interested in; ie: BNS (Bank of Scotia).

Some other useful info on the site, mainly use it for quotes. Also can get quotes from weekend edition of the Globe and Mail, National Post, also from your discount full service broker.

 

[Captain Crunch]

Great info Sellkirk. I have always wanted to learn more about optioins. I think I would be better off reading it again sometime other than a Sunday morning after a Saturday night of :mj14: though.

Good Luck

 

[dawgball]

Good info, kirk.

I will add that if you are going to use options as a trading strategy, you should have a broker that is options-friendly. Most discount brokers allow options trading, but they don't have certain important features (one example is stop losses for options).

I use OptionsXpress to trade all of my options and highly recommend it.

Compare it to a person who plays teasers, parlays, etc. but gives up worse odds than are offered at other books. It just doesn't make good investing sense.

 

[selkirk]

captain crunch maybe options would make more sense after a saturday night...lol

actually had the annual christmas meal/celebration. the long time tradition (four years... ) get a large group of family and friends together and try to survive the evening/night.

agree dawgball important to know who you are doing business with. started an account with CIBC investors edge. (discount brokergae of CIBC bank)

phoned about a simple question/matter needing resloved and they told me pierre left the office. scary when a national office relies on one person or a few. problem was resolved the next day but the last day used them for options.

in Canada use TD Waterhouse, and a full service brokerage, Waterhouse is good for options in Canada; only made one major mistake in Canada that cost me, and part of the fault was mine.


update
Sally ECA puts are looking good so far, ECA is at $59.81.

she has to buy 200 at $54cdn. ECA until 3rd Friday of Feb.

note: hope ECA does not hedge natural gas like they have the past year.....only thing hate about the company.

I also have puts on ECA Feb $54 (much larger position)...time will tell how it works out.

2. Mr. SMith excellent trade so far.

he bought tek at $52.75 and sold calls to sell it at $56 Feb.
stock trades at $57.15

note:have options (put ) on TEK Feb. May, various prices.

3. Conrad puts which cost $1120 on the XIU June $60, are down.

XIU is at $63.30, it is still cheap insurance.

note: have no puts on XIU but they are cheap, and if Toronto goes up another 10-15% in 3-4 months; will purchase some. CHEAP way to protect a portfolio that would go down on a market correction


4. Kim bought 4 call contracts $60 June.

so she can buy XIU (400 shares) until the third friday in June for $60cdn.

she paid $3.45 X400= $1380

XIU is trading at $63.30.

note: I bought a large amount but sold various call positons after gains of 25%-30%. should have held on....may try the trade.

Kim will wait until end of Jan. will explain in follow up posts. but index is more than 25% oil/gas. Toronto.

so hope for a cold winter, a cheap speculation.


thanks
selkirk

 

[selkirk]

Probably should have done the update yesterday, brutal sell off, but it has been a great run, on Toronto.

1. Sally is down slighly on ECA puts.

she sold $54P for $4.25 they are now trading at $4.75-$4.85. ECA is at $51.89 cdn. share.

so if she wants to close out the position she would lose $100 +commission.


Calls
2. Mr. SMith losses the stock actually counting the dividend paid in Jan - commish his gain will be roughly 13.82%.

$1370 gain (counting half of the div. other half pays for commissions).


3. Puts

Conrad will lose his 1120 in put contracts probably unless the market takes a huge decline. currently trading at .45-.55

paid $2.70-$2.85

would hold, yes very cheap insurance. and like most hope you do not have to use it.


Final example

Kim on her 4 June XIU calls the opposite of Conrad she bought for 400X $3.45= $1380

current price

$7.80-$7.95

400X $7.80= $3120

gain $1740

overall gain/loss on all four option contracts on today prices.

$2070 (could round down to $2000 on commissions)

1. -$100 2. $1370 3. $940 (1120-180 current value= -$940) 4. $1740 gain.

not a huge gain but a decent gain on invested capital.

note:have $54ECa aprils, going to keep them for now, will similar calls on TEK. but they are $56,58. gain should be 19% in five months. own a small position in TEK. and have many puts various strikes and months. all below $60cdn.

going to buy puts on XIU, it is cheap insurance, the cdn. market is 30% oil/gas, if you include metals number jumps to 50%.

so buy some puts very cheap insurance.

had large position in XIU calls in 2005 but sold way to early. missed out on a sure double for a lousy 40% :com: still a good gain.....should have waited.

thanks
selkirk