Stock Option

The fixed date is the "expiry date". But then the market suddenly spiked back up again in the afternoon. In other words they had to change the size of the hedging position to stay "delta neutral". The writer receives the premium for writing the option. So far so good. Furthermore, she is a self-taught trader, so she knows how you feel trying to learn stock trading on your own from Youtube. Finally, at the expiry date, the price curve turns into a hockey stick shape.

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Options ramp up that complexity by an order of magnitude. Not just that, but all option strategies - even the supposedly low risk ones - have substantial risks which aren't always obvious.

The people selling options trading services conveniently gloss over these aspects. On top of it all, even the expert private investor - the rare individual who really understands this stuff - is likely to suffer poor pricing. Oh, and it's a lot of work. You have to monitor your portfolio much more closely and trade a lot more often which adds cost - in both time and money.

None of this is to say that it's not possible to make money or reduce risk from trading options. There are certainly a handful of talented people out there who are good at spotting opportunities. Maybe you're one of them, or get recommendations from someone. If you do, that's fine and I wish you luck. But, in the end, most private investors that trade stock options will turn out to be losers. You don't have to be Bill to get caught out.

Let's take a step back and make sure we've covered the basics. Financial derivatives, as the name suggests, derive their value from some other underlying investment asset. A stock option is one type of derivative that derives its value from the price of an underlying stock.

There are two types of stock options: They are defined as follows: A call put option is the right, but not the obligation, to buy sell a stock at a fixed price before a fixed date in the future. That fixed price is called the "exercise price" or "strike price". The fixed date is the "expiry date". The cost of buying an option is called the "premium". So, for example, let's say XYZ Inc. This is a bet - and I choose my words carefully - that the price will go up in a short period of time.

The option will "expire worthless". My example is also what's known as an "out of the money" option. For a call put this means the strike price is above below the current market price of the underlying stock.

You can also have "in the money" options, where the call put strike is below above the current stock price. Finally, you can have "at the money" options, where option strike price and stock price are the same. It gets much worse. Remember, I'm not doing this for fun. I'm just trying to persuade you not to be tempted to trade options. Next we get to pricing. Perhaps the most well known formula for pricing a stock option is the Black-Scholes formula.

It's named after its creators Fisher Black and Myron Scholes and was published in Black-Scholes was what I was taught in during the graduate training programme at S. Warburg, a British investment bank. Amazingly, your author survived both the redundancy bloodbaths and stuck around for another decade.

On top of that there are competing methods for pricing options. One is the "binomial method". Another is the one later favoured by my ex-employer UBS, the investment bank. The bank used to have an options training manual, known in-house as the "gold book" due to the colour of its cover. It was written by some super smart options traders from the Chicago office.

For all I know they still use it. I still have my copy published in and an update from A call option is a substitute for a long forward position with downside protection.

Got all that as well? Everything clear so far? Clear as mud more like. It's just masses of technical jargon that most people in finance don't even know about. Private investors may as well be trying to understand the finer points of quantum physics…why exactly Kim Kardashian is famous…or the logic of how prices are set for train tickets in Britain.

If you've been there you'll know what I mean. By now you should be starting to get the picture. Options are seriously hard to understand. Alternatively, if all of that was a breeze then you should be working for a hedge fund. At least you'll get paid well. Still, it gets worse. Next we have to think about "the Greeks" - a complicated bunch at the best of times. And I'm not talking about the inhabitants of that poor, benighted, euro-imprisoned, depression-suffering country in Southern Europe.

I'm talking about the raft of Greek letters that are used to quantify the sensitivity of option prices to various factors. So let's learn some Greek. Also, an author on Seeking Alpha outlines why the decline following earnings can be viewed as a merely a speed bump in the broader bullish trend.

ADBE has posted impressive gains in the year thus far, and several analysts believe there is further upside. Palo Alto Networks has seen a remarkable rise in its stock price over the last few years and several articles on The Motley Fool suggest there will be further upside. However, a closer look reveals a notable technical break. Although there have been marginal breaches below the level since the stock price initially climbed above it a few months ago, bears have been unable to drive the stock price below it on a sustained basis.

Micron Technology stock has been impacted by negative headline news as of late but these following two articles make a strong case for why this news is not likely to cause bearish pressure for the stock price moving forward. This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways and sometimes the woods.

Allen believes that the 10K Strategy is less risky than owning stocks or mutual funds, and why it is especially appropriate for your IRA.

I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. Neither tastyworks nor any of its affiliated companies is responsible for the privacy practices of Marketing Agent or this website. Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses.

Please read Characteristics and Risks of Standardized Options before investing in options. Vermont website design, graphic design, and web hosting provided by Vermont Design Works.

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