Thursday, December 27, 2007

The bearish put spread

Initiating a bear put spread involves the buying of a put option on an underlying stock, while at the same time writing a put option on the same underlying stock and expiration month, but with a lower strike price. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly called as a "vertical spread". A family of spreads involving options of the same stock, same expiration month, but different strike prices. They can be made with either all calls or all puts, and be bullish or bearish. The bear put spread, as any spread, can be executed as a "all or nothing" in one single transaction, not as separate transactions. For this bearish vertical spread, a bid and offer for the whole package can be requested through your brokerage firm from an exchange where the options are listed and traded. Brokerages which specialize in options would be best for this.

An investor often employs the bear put spread in moderately bearish market market conditions, and wants to capitalize on a minimul decrease in price of the underlying stock. If the investor's opinion is very bearish it will generally prove more profitable to make a simple put purchase.
An investor will also turn to this spread when there is uneaseiness with either the cost of purchasing and keeping the long put alone, or with the confidence of his bearish market opinion.

The bear put spread can be thought of as doubly hedged strategy. The cost for the put with the higher strike price is partially offset by the money received from writing the put with a lower strike price. Therfore, the investor's investment in the long put and the risk of losing the entire premium paid for it, is reduced or hedged.

Wednesday, November 7, 2007

Stock option Put and Call example

The first way that I got started investing som 30 years ago was with stock options. I found the use of puts and calls as the best way to put my knowledge of how I thought a stock could move (or not move) to use. For the novice, I will use an example of the stock GRMN. On Tuesday it had a price of around $100. For about $4 you could buy a november call (the right to buy the stock) at the $100 dollar strike price any time in the next 2 weeks. So if the stock rose to say $107 on friday, you could then sell for a $3 profit! Conversely, If the stock only moved to 102, the call would be worth about $2. Therfore producing a loss of $2. You do not have to hold an option until expiration, you may sell or buy at any time you wnat to. By the way, each stock option controls 100 shares of stock. So an option with a cost of $4 would cost $400 plus a $7-10 commision to the broker.

A Put is the opposite of a call. It is the right to sell a stock. Aside from straddles, this is the way I got started trading. I bought puts onoverextended stocks. In my experience, stocks tend to fall much faster than they rise. This is great for the use of puts. One of the problems with buying and holding of stocks is that you can only makemoney if a stock goes up. Puts allow you to profit whena stock goes down as well. In the above example of GRMN, a november 100 put cost about $4 on tuesday. If the stock moves below $96 anytime time in the next 2 weeks, you will have a profit.

I mentioned that I got started with straddles. A straddle is simply buying a put and and call at the same time. It is a very simple way to take advantage of a stock you think is ready to move!
Take and add GRMN to your watch list for the next 2 weeks. I feel confident it will move more than $8 dollars from $100. It may even move on both sides of 100, making both the put and call possibly in the green. Another stock I am keeping an eye on is GSF. I put a straddle with a cost of $3.10 at the strike price of $85 yesterday.

One subject that Investools teaches is knowing when to sell. I believe this is very important and often overlooked. Everybody talks about when to get into a trade. Knowing when to get out will make you a very sucessful trader. That is something which I will stress throughout this blog!

Have a great day!

Wednesday, October 31, 2007

Options basics

One of the basics of any sucessful investing strategy is the use of options. Options allow you to capure the profit potential of a stock at a fraction of the cost. Some say that options are too risky. I believe that if done right they are no more risky than buying a stock. Just look at a stock like Apple (AAPL). It is very volatile. Using options correctly in a stock like AAPL can be very lucrative.

Options are very versatile. They allow you to adapt to up, down or flat market conditions with ease. Options can be as conservative or risky as you want. Since options can be risky if you want them to be they come with the following standard disclaimer:

"Options involve risk and are not suitable for everyone. Invest only with risk capital."

In upcoming posts I will go into the basics of Options using examples. Topics covered will include:

  1. Calls and Puts

  2. Straddles

  3. Strangles

  4. Spreads

  5. In the money vs. Out of the money

  6. Options premium

  7. Volatility

  8. Greeks (gamma, beta etc.)

Have a great day!

Saturday, October 27, 2007

Investools review

Investools is intended for the novice to experienced investor. Investools recuits people with a free 2 day seminar to get people motivated. The trick is that this seminar could end up costing you two grand. Unfortunately, the 2 grand is just a start. The continued Investool scam bundles come in three packages.

  1. Associated course - $5,000
  2. Masters Course - $11,000
  3. PHD Course - $23,000

From my conversations with trader, while Investools is overly diligent in selling you additional materials, they so offer some good advise along the way. Thruth be told, all the info they teach you can be found for free on the internet. It is my hope to teach you some of these things in this blog.

On way around the Investools scam is to make sure that you keep all the materials that they give you on the first day. You can turn the materials in at the end of the first day. Make sure you tell them you will not be returning for the second day. This way you will not be charged for the course. Investools will try for the hard sell on there other programs and other seminars.

Friday, October 26, 2007

My First Post

The purpose of this blog is to give an impartial review of the Investools program. Is it worth the cost? Does it help the novice investor? Does it help the experienced investor. These are the questions I hope to answer. I hope you like it and find it useful.